Sale of the assets of a company in difficulty: what consequences for your security interests?

Imagine you have a mortgage on a building or a pledge on a company's business as security for a major loan. Unfortunately, the company runs into serious difficulties and is subject to insolvency proceedings. Then you learn that the asset on which your guarantee is based is going to be sold, either as part of a global sale of the company (sale plan) or as part of the liquidation of its assets. What happens to your beautiful guarantee in all this turmoil? Will you be paid? Will your right to "follow" the asset in whichever hands it passes (the famous droit de suite) survive?

Selling the assets of a company in difficulty is a frequent and often necessary step in insolvency proceedings, but it has major and sometimes confusing legal consequences for secured creditors. The rules differ considerably depending on whether the sale is part of a disposal plan designed to save all or part of the business, or whether it is part of a compulsory liquidation. This article explains the mechanisms involved and their impact on your securities.

Sale of the business (sale plan): specific rules for secured creditors (Art. L.642-12 C. com.)

When a sale plan is approved by the court, the aim is to transfer the business (or a branch of the business) to a buyer (the transferee) in order to ensure its continuity and safeguard jobs. The assets required for the business, including those over which you have a security interest, are transferred with the company. L'Article L. 642-12 of the French Commercial Code organises a special payment regime for creditors holding special security interests (special lien, pledge, hypothec) over these assigned assets.

Payment via a share of the sale price: often a limited priority

Forget the idea of being paid directly from the full sale price of the property that constituted your guarantee. The law provides for a more complex mechanism:

1. Allocation of a share : When the court draws up the sale plan, it determines a share of the overall sale price for each asset subject to a special security. In plain English, a fraction of the total price paid by the buyer is theoretically earmarked for the asset that guaranteed you.
2. Calculation of this share : Since a 2014 order, this calculation is no longer left to the discretion of the court. The share must correspond to the ratio between the market value of the encumbered asset (estimated during an inventory) and the total value of all the assets transferred.
3. Exercise of the preferential right on the share : You will exercise your preferential right (your priority of payment) only in respect of the share allocated to the property.
4. Priority creditors : That's where the problem often lies. Before you can receive your share, even if it is limited to this quota, other creditors, deemed to have priority by law, must be paid. These include employees for their super-privileged claims (certain salaries owed before the judgment), legal costs incurred for the proceedings, the creditor who benefited from the "conciliation" privilege (if an amicable procedure had preceded), and subsequent creditors benefiting from the procedural privilege (article L. 622-17 or L. 641-13).

The result is that very often the share allocated to your secured asset is largely, if not totally, absorbed by these priority creditors. The pledgee or mortgagee may therefore end up with a tiny share of the price, or even nothing at all, despite its initial guarantee.

The special (and powerful) case of the right of retention

There is, however, one important exception. If your guarantee is a right of retention (for example, a dispossessory pledge where you physically hold the asset, or a non-possessory pledge benefiting from notional retention, such as a car pledge, agricultural warrant, securities account pledge, or even a stock pledge since 2008), the situation is radically different.

Constant case law, confirmed by thearticle L. 642-12 in fineconsiders that the quota-share mechanism does not apply to the retaining creditor. The latter retains the right to demand full payment of his declared claim as a condition for delivery of the asset to the assignee. The assignee cannot take possession of the retained asset without paying the retaining creditor in full. This is an extremely effective means of exerting pressure which ensures that the retaining creditor is paid before anyone else, and for the full amount of his claim secured by the asset.

Legal assignment of debts: partial compensation for certain loans (Art. L.642-12 al. 4)

The legislator has provided for another specific mechanism, which can partially compensate for the dilution of the preferential right via the share. However, it only concerns creditors whose security guarantees a credit granted specifically to finance the asset to which the security relates (earmarked credit).

Imagine a loan granted to finance the purchase of a specific machine, secured by a pledge on that same machine. If the company is sold and the machine is included in the sale :

• Resumption of future maturities : The transferee (the buyer) is legally bound to take over payment of the outstanding instalments on this loan from the date of transfer of ownership of the property. He will pay the creditor directly for the future.
• Release of the original debtor : Since an order was issued in 2021, the original debtor (the company undergoing the procedure) has been released from the obligation to pay these future instalments, which have been taken over by the assignee.
• Maintaining security interests : The security interest guaranteeing this credit (the pledge on the machine in our example) is maintained and follows the asset to the transferee. It is not "purged" by payment of the sale price. The creditor will therefore be able to exercise it against the transferee if the latter fails to pay future instalments.
• Terms and conditions: This mechanism only comes into play if the credit is clearly used to finance the asset sold (proof must be provided in the loan agreement) and if the creditor has declared its claim in the proceedings. An agreement between the creditor and the assignee may provide for different terms and conditions.
• Fate of arrears : Please note that this assignment of debt only covers due dates. future. For unpaid instalments before on transfer of ownership, the creditor will still have to seek payment from the famous share of the sale price, in competition with the other creditors.

This arrangement therefore ensures that the creditor will continue to receive payments from the transferee in the future, but does not resolve the issue of previous arrears.

Resale rights: do they survive a sale under insolvency proceedings?

The right of resale is an essential feature of many security interests (mortgages, pledges over businesses, motor vehicle pledges, etc.), enabling the creditor to "follow" the encumbered asset in whichever hands it passes and have it seized in order to be paid its price. What happens to this right when the asset is sold as part of insolvency proceedings?

General principle in the event of the sale of a business (sale plan)

The rule laid down by thearticle L. 642-12, paragraph 3 is clear: full payment of the sale price by the buyer entails purge of registrations on the assets included in the transfer.

• Suspension then extinction : As soon as the judgement approving the sale plan is handed down, the creditors' right of pursuit against the transferee is suspended. They lapse definitively once the transferee has paid the agreed price in full. At that point, registrations (mortgages, pledges, etc.) may be cancelled, even without the agreement of the registered creditors, by decision of the official receiver (article R. 642-10). The transferee acquires the property free of these charges.
• Limited financial year before payment : As long as the price has not been paid in full, the law provides that creditors may only exercise the right of resale if the assignee itself resells the asset sold to a sub-purchaser. However, this possibility is limited by the fact that the assets transferred are often declared inalienable by the court until the price has been paid in full (article L. 642-9), unless specifically authorised by a court.

The exception of security interests transferred to the assignee

Logically, the rule that droit de suite is extinguished by payment of the price does not apply to security interests that are maintained and passed on to the assignee under the legal assignment of debts (assigned credits, see above). Since the assignee must continue to pay the credit, the security attached to it (and the right to follow that goes with it) must remain. The creditor will therefore be able to exercise his resale right against the assignee if the latter defaults on repayment of future instalments. Recent case law even seems to exempt the creditor from having to register an amendment in the name of the assignee in order to preserve the effectiveness of its security.

Sales in compulsory liquidation (excluding sale plan)

When the assets are sold separately as part of a compulsory liquidation (i.e. without the aim of the business being continued by a buyer), the rules governing resale rights are closer to ordinary law:

• Sale of real estate : The resale right of registered creditors is preserved.
  • If the sale is made by auction (judicial or amicable), the auction "emporte purge", but this effect is only complete with the payment of the price by the successful bidder (article L. 642-18, para. 4). Until payment is made, the right of resale subsists. Creditors may also one-upmanship to try and get a better price.
  • If the sale is by mutual agreement (with the authorisation of the juge-commissaire), there is no automatic purge. The purchaser must carry out a voluntary purge (by notifying its offer to the registered creditors) to free itself from the right to follow. The creditors then retain their right to make a higher bid.
• Sale of furniture :
  • The sale by public auction is generally considered to be a purge after payment of the price, extinguishing the resale right.
  • A notable exception is the sale of over-the-counter sale of a business. As in the case of immovable property, the purchaser must complete the formalities for voluntary purging in order to extinguish the right of resale of creditors registered on the land, and the latter retain the possibility of filing a claim against the purchaser. one-tenth higher bid (Article L. 143-13 of the French Commercial Code).

Judicial liquidation: realisation of assets and creditors' rights

When the company is not sold but liquidated, the objective becomes the sale of the assets to repay the creditors as best as possible.

The role of the liquidator and the (limited) resumption of proceedings

In principle, only the liquidator has the power to sell the debtor's assets. The prohibition on individual lawsuits applies to secured creditors.

However, theArticle L. 643-2 of the French Commercial Code provides for one exception: if the liquidator has not undertaken the sale of the assets subject to a special security (or the Treasury for its preferential claims) within a period of three months after the liquidation judgment, the creditor concerned may recover its right of individual prosecution. The liquidator may then initiate or resume seizure proceedings. Note that this resumption of proceedings must be authorised by the official receiver and is done on behalf of the creditors as a whole: the proceeds of the sale must be remitted to the liquidator to be distributed according to the legal order. It is therefore not a way for the creditor to be paid directly and in priority.

Terms of sale and impact on security interests

The liquidator, under the supervision of the official receiver, chooses how the assets are to be sold:

• Real estate (Art. L. 642-18) : Sale by public auction (judicial adjudication), amicable adjudication before a notary, or private sale. As mentioned above, the auction purges the securities after payment of the price; the private sale requires the buyer to purge the securities voluntarily.
• Furniture : Sale by auction or by mutual agreement. Auctions require payment to be made. The sale of a business by mutual agreement requires voluntary purging.

Price distribution: order of payment takes precedence, with some exceptions

Even if you are a secured creditor, when the sale price of the assets in liquidation is distributed, you will only be paid after the creditors who legally have priority over you:

1. Employees (superprivilege for wages due in the 60 days preceding the judgment, and certain compensation).
2. Legal costs subsequent to the opening judgment (since 2008 reform).
3. Conciliation privilege (if applicable).
4. Privilege of claims that are later "useful" to the proceedings (article L. 641-13).
5. Only then do creditors with special security interests come into play, according to their respective rank (for example, a first-ranking mortgage before a second-ranking mortgage). Important note special real estate securities take precedence over procedural liens of article L. 641-13, whereas special securities take precedence under this article.

The only way for a pledgee or secured creditor (except for real estate or business assets) to potentially escape this order and the competition is to request judicial attribution of the pledged or hypothecated property (article L. 642-20-1). If he obtains this from the official receiver, he becomes the owner of the property in payment of his claim, thus bypassing the price distribution procedure.

The sale of the assets of a company in difficulty raises complex questions about the fate of guarantees. Preferential rights and resale rights are often affected by the specific rules of insolvency proceedings. To best defend your rights as a secured creditor in this context, it is essential that a lawyer analyse your situation in detail. Contact our firm for a personalised analysis.

Sources

• Commercial Code: articles L.143-12, L.143-13, L.622-17, L.626-22, L.641-13, L.642-7, L.642-8, L.642-9, L.642-11, L.642-12, L.642-18, L.642-20-1, L.643-2, L.643-8, R.143-1 et seq., R.642-10, R.642-20, R.642-22, R.642-23, R.642-38, R.643-3, R.643-4, R.643-8
• Civil Code: articles on droit de suite (2454 et seq.), purging mortgages (2461 et seq.), judicial attribution (2347, 2365)