Solidarity in commercial matters: understanding its sources and system

When we talk about business relationships, the notion of 'solidarity' comes up frequently, especially when it comes to debts. Far from being a mere technical term, passive solidarity, i.e. the solidarity that binds several debtors to the same creditor, plays a fundamental role in commercial law. It contrasts sharply with the principle applied by default in civil law, that of the division of debts. Why this difference and how does this mechanism actually work?

In essence, joint and several liability allows a creditor to demand payment of the entire amount owed from just one of his co-debtors, or for each creditor to demand payment in full from the joint debtor in the (rarer) case of active joint and several liability. It is a powerful tool, often seen as a guarantee for the creditor, facilitating recovery and securing transactions. French commercial law gives it a special place, going so far as to presume it in many cases. This article sets out to demystify commercial solidarity: we will explore where it comes from - this famous presumption, but also the law or a contract - and then we will detail how it works in practice, its concrete effects between the various parties involved and the possible remedies once the debt has been paid.

The civil principle: each to his own

Before delving into the specifics of commercial law, it is worth recalling the general rule in French civil law. Article 1309 of the Civil Code lays down the principle of the division of an obligation when it binds several persons: "An obligation binding several creditors or debtors is automatically divided between them". In practical terms, if two people together owe a creditor €1,000, the creditor must, in principle, claim €500 from each of them. Each debtor is only liable for his or her share. Conversely, if two creditors have a joint claim of €1,000, each can only claim its share, i.e. €500.

Solidarity is therefore a major exception to this rule of division. It is an exceptional mechanism which, in commercial matters, is tending to become the norm in practice, mainly in its passive form (between co-debtors) to protect the interests of the creditor. Other exceptions exist, such as the obligation in solidum (often in delictual matters) or indivisible obligations, but joint and several liability is the most emblematic of business relationships.

Where does solidarity come from in commercial law?

Unlike civil law, where joint and several liability must be explicitly provided for by law or contract in order to exist, commercial law gives it a much broader scope. It can derive from three distinct sources: a presumption based on case law, an express legal provision or a contractual clause.

The presumption of joint and several liability: the exception that has become the rule in commerce

This is undoubtedly the most original and most debated source. While article 1310 of the Civil Code clearly states that "Solidarity is legal or contractual; it is not presumed", French case law has long accepted a major exception for commercial debts.

• Basis and scope: a long-standing and tenacious practice As early as 1920, the Cour de cassation recognised the existence of a constant practice in commercial matters whereby passive joint and several liability between co-debtors is presumed, even if the contract does not explicitly mention it (Req. 20 Oct. 1920). This practice, justified by the need to promote credit and the security of commercial transactions, was considered sufficiently established to derogate from the civil rule. Important point: this is a presumption simple. This means that the presumption can be overridden if the parties prove that they intend otherwise, for example by means of a specific clause in their contract. Despite the rewriting of the texts of the Civil Code by the Ordinance of 2016, which did not formally incorporate this presumption into the law, case law and the majority of legal writers consider that this usage continues.
• Strictly: passive solidarity only We must be very clear on this point: this legal presumption does not apply to than passive solidarityThis is the case when there are several debtors liable for the same commercial debt. It never applies to active solidarity (several creditors). The Court of Cassation has reaffirmed this unambiguously (Com. 26 Sept. 2018, no. 16-28.133): active solidarity can never be presumed, even in commercial matters. The reason is logical: presuming active solidarity would expose each co-creditor to the risk that the debtor might pay the entire debt to another co-creditor, who might then turn out to be insolvent. The presumption is therefore entirely aimed at protecting the single creditor against the risk of insolvency of one of his debtors.
• Determining criterion: the objective commercial nature of the transaction How do you know if the presumption applies? The criterion used by case law is that of the objective commerciality. Passive joint and several liability is presumed if the obligation (debt) arose from a act of commerce by its nature or form. It does not matter whether or not the persons making the commitment are themselves traders. For example, the transfer of shares in a controlling commercial company is considered to be an objective commercial act, giving rise to a presumption of joint and several liability between the co-debtors (the transferees or transferors, as the case may be), even if they are private individuals. The parties' status as traders (subjective commerciality) is therefore, in principle, irrelevant.
• Discussion points This criterion of objective commerciality is not without its difficulties. Firstly, it can sometimes be tricky to classify a transaction as a commercial act. Secondly, some judgments have appeared to use the presumption of joint and several liability extensively, going so far as to apply it in situations where the very existence of a joint obligation between several persons was not obvious from the outset, on the basis of concepts such as "joint commercial operation" or "co-exploitation". Such an extension remains open to criticism because it goes beyond the simple question of mode (joint or divided) to affect the very existence of the debtor. link obligation.

When the law requires solidarity

In addition to the presumption, a large number of legal texts directly impose passive solidarity in specific business situations. As set out in article 1310 of the Civil Code, solidarity may be legal. These cases are varied, but can be grouped according to their main purpose:

• Guaranteeing the creditor and facilitating credit : This is the most common purpose. Here you will find :
  • Joint and several liability of persons acting on behalf of a commercial company prior to its registration for acts performed during that period (article 1843 of the Civil Code).
  • The joint and several liability of general partners (SNC) for company debts (article L. 221-1 of the Commercial Code). The same applies to general partners in limited partnerships.
  • Joint and several liability of SARL shareholders for the value of contributions in kind, for a period of five years, if no contributions auditor is involved or if the value adopted differs from that proposed by the auditor (article L. 223-9 of the Commercial Code).
  • The joint and several liability of the signatories of a bill of exchange, promissory note or cheque to the bearer (articles L. 511-44 and L. 512-3 of the French Commercial Code; L. 131-51 of the French Monetary and Financial Code).
  • Joint and several guarantee of the assignor of a business debt in the context of a Dailly assignment (article L. 313-24 of the French Monetary and Financial Code).
  • The lessor of a business is jointly and severally liable for the debts incurred by the lessee-manager up to the publication of the management lease (article L. 144-7 of the French Commercial Code).
  • Joint and several liability of persons acting in concert to acquire or exercise voting rights in a company (article L. 233-10 of the French Commercial Code).
• Ensuring efficient debt collection (particularly tax collection): For example, under certain conditions, tax law provides for the transferor and the transferee of a business to be jointly and severally liable for the payment of tax (article 1684 of the General Tax Code).
• Penalising a fault or shared risk :
  • The founders or first managers liable for the nullity of a company (SARL, SA, etc.) are jointly and severally liable for the damage caused (e.g. L. 223-10 C. com.).
  • The vendor of a business and intermediaries who are aware of the inaccuracy of the compulsory information in the deed are jointly and severally liable for the loss suffered by the purchaser (L. 141-3 C. com.).
  • The producer of a defective product incorporated into another product is jointly and severally liable with the person who incorporated it (article 1245-7 C. civ.).

Solidarity born of an agreement: the will of the parties

Finally, the most obvious source of joint and several liability, in commercial as in civil matters, is quite simply the contract. The parties may decide to include a joint and several liability clause in their agreement, as permitted by article 1310 of the Civil Code.

• Usefulness in commercial matters : Even if passive joint and several liability is often presumed, an express clause can have the advantage of confirming it without any possible discussion. Above all, it is essential for establishing solidarity where it would be neither presumed (because the act is not objectively commercial, for example) nor imposed by law. It is also the only means (along with the law) of creating active solidarity between co-creditors.
• Form of clause : While prior to the 2016 reform, case law required an "express" stipulation, the new wording of the texts does not use this term. It is now considered that a contractual joint and several liability may be tacit, provided that it arises from certainly and unequivocal the intention of the parties and the terms of the contract. To be on the safe side, you are strongly advised to use clear terms such as "jointly and severally", "held for each other", "each debtor is held for the whole", etc.
• Common examples:
  • La joint and several guarantee clause very common in commercial lease transfers, whereby the transferor (the former tenant) jointly and severally guarantees payment of the rent and charges owed by the transferee (the new tenant).
  • Le joint and several suretyIn this case, the guarantor waives the benefit of discussion (asking the creditor to sue the principal debtor first) and the benefit of division (if there are several guarantors, asking the creditor to divide the proceedings between them). This joint and several liability may be "vertical" (joint and several liability with the debtor) or "horizontal" (several joint and several liability guarantors). Please note: for guarantors who are natural persons, the law imposes strict protective formalities, in particular a specific handwritten statement acknowledging the waiver of these benefits (article 2297 of the Civil Code).
  • Le joint bank accountThe opening agreement generally provides for active joint and several liability (each co-holder can dispose of the funds) and often passive joint and several liability (each co-holder is responsible for the debit balance).
• Legal limits : Contractual freedom is not absolute. Certain laws may prohibit or neutralise joint and several liability clauses. A notable example is article L. 642-7 of the French Commercial Code, which renders unwritten any clause in a commercial lease requiring the transferee (the person taking over the lease in the context of a compulsory liquidation) to be jointly and severally liable for the debts of the transferor (the company in liquidation).

How does commercial solidarity work on a day-to-day basis?

Once the existence of joint and several liability (presumed, legal or contractual) has been established, we need to understand its practical effects. A distinction is traditionally made between the relationship between the creditor and the debtors, and the relationship between the debtors once the creditor has been paid.

Relations between creditors and joint and several debtors

This is where passive solidarity has its most significant effects in favour of the creditor.

• The main effect: full payment by a single This is the very essence of passive solidarity: the creditor has the right to claim payment from the debtor. in full of debt to a single of the co-debtors, the one of his choice, without having to divide his proceedings. As article 1313 of the Civil Code states, "The creditor may request payment from the joint and several debtor of his choice". Payment in full by this single debtor then discharges all other co-debtors vis-à-vis the creditor. The creditor may sue one debtor and then another if he is not paid in full. There are, however, some exceptions to this total freedom to sue; for example, in the case of an SNC debt, the creditor must first put the company on notice before being able to sue a partner (art. L. 221-1 C. com.).
• Side effects: one for all... In addition to the obligation to pay in full, joint and several liability creates a kind of mutual representation between co-debtors for certain acts. The main "secondary effects" are :
  • Interest on arrears : A claim for interest made against a single joint and several debtor causes interest to accrue in respect of all the others (article 1314 of the Civil Code). All that is required is a formal notice addressed to one debtor.
  • Interruption of prescription : An act that interrupts the limitation period in respect of a single co-debtor (for example, a writ of summons or an acknowledgement of debt) interrupts the limitation period in respect of all other co-debtors (article 2245 of the Civil Code). However, specific rules apply to commercial instruments (bills of exchange, promissory notes, cheques), where the interruption is only effective against the party to whom the interrupting instrument relates.
  • Other effects exist, such as a decisive oath given to one which benefits the others. On the other hand, questions remain, for example about the res judicata effect of a judgment against a single co-debtor in relation to the others, or about the need for a separate writ of execution against each joint and several partner in order to be able to seize his own assets.
• Defences (opposable exceptions) Can a joint and several debtor sued by a creditor defend himself? Yes, but the nature of the defences (called "exceptions") that can be raised varies. Article 1315 of the Civil Code distinguishes between :
  • Common exceptions : They are linked to the debt itself and can be invoked by any of the co-debtors. Examples: nullity of the initial contract, rescission of the contract, payment already made, prescription of the debt.
  • Personal exceptions : They are specific to the situation of a single debtor and can, in principle, only be invoked by that debtor. Typical example: the granting of a personal payment extension by the creditor.
  • Simply personal" or "mixed" exceptions: These exceptions are personal to a debtor, but have the effect of extinguishing his share of the debt. The other co-debtors can then avail themselves of these exceptions, not to be fully discharged, but to have this extinguished share deducted from the total amount claimed. Examples: set-off between the debt and a personal claim by that debtor against the creditor, or a debt remission granted personally to that debtor.
• Option to waive: the solidarity discount The creditor may always decide to waive the benefit of joint and several liability, either for all the co-debtors (in which case the obligation becomes divisible once again), or for just one of them. In the latter case, the others remain jointly and severally liable, but if the creditor receives a partial payment from the debtor "released" from joint and several liability, the amount owed by the others will be reduced by that portion. Remission of joint and several liability (renunciation of the mechanism) should not be confused with remission of the debt (extinction of all or part of the claim).

Relations between co-debtors after payment

Once the creditor has been paid (in full, by one or more of the co-debtors), solidarity has fulfilled its external role. All that remains is to settle the accounts between the co-debtors. This is the contribution to debt.

• The principle: internal division of the load While each debtor was liable to the creditor for the whole, the final burden of the debt must be shared between them. Article 1317 of the Civil Code sets out the principle: "Joint and several debtors shall contribute to the debt only their respective shares". How is this share to be determined? Unless the law or the contract provides otherwise (for example, unequal shares provided for in a partnership agreement), the division is made by equal shares (application of article 1309 of the Civil Code). If three co-debtors were jointly and severally liable for a debt of 9,000 euros, the share of each in the final contribution is 3,000 euros.
• Recourse by the payer ("solvens") The co-debtor who has paid the creditor more that his personal share has recourse against the other co-debtors. He can claim reimbursement from them for what he has paid in excess of his own contribution, in proportion to the share of each of the others. For example, if A paid 9,000 euros when his share was 3,000 (two other co-debtors B and C also had a share of 3,000), A can claim 3,000 euros from B and 3,000 euros from C. This recourse may be a personal recourse, or it may be based on legal subrogation (the payer takes the place of the disinterested creditor).
• The risk of insolvency of a co-debtor What happens if, at the time of the contribution claim, one of the co-debtors (say C in our example) is insolvent and cannot repay its share? The law provides for a mutual guarantee: the insolvent party's share is shared between all the other co-debtors. solventThis includes the person who initially paid the creditor (article 1317, para. 3 C. civ.). In our example, C's share (3000 euros) would be divided between A and B. A would therefore ultimately bear 3000 (its share) + 1500 (half of C's share) = 4500 euros, and B would have to repay A 3000 (its share) + 1500 (half of C's share) = 4500 euros.
• Special cases:
  • Co-debtor not interested in the debt : Sometimes a person becomes a joint and several debtor purely as a guarantee, without actually being involved in the business that gave rise to the debt (for example, a parent jointly and severally signing the commercial lease of his or her entrepreneurial child, without actually running the business). Article 1318 of the Civil Code provides that if the debt really concerns only one of the co-debtors, that co-debtor alone is bound to bear it definitively. If he pays, he has no recourse. If it is the "uninterested" co-debtor who pays, he has recourse against the other co-debtor for the full amount paid.
  • Co-debtor responsible for non-performance : If the initial debt has been transformed into an obligation to pay damages as a result of the wrongful non-performance attributable to only one of the co-debtors, it is this co-debtor who must bear the final burden of this compensation in the relationship between the co-debtors (article 1319 C. civ.).

Solidarity is a frequent and sometimes complex mechanism in business relationships. If you are a creditor and wish to secure your commitments, or if you are a co-debtor and are wondering about the scope of your obligations and recourse, our team is at your disposal for a personalised analysis.

Sources

• Civil Code (in particular articles 1309 to 1319, 2245, 2297)
• Commercial Code (in particular articles L. 141-3, L. 144-7, L. 145-16-1, L. 145-16-2, L. 221-1, L. 223-9, L. 223-10, L. 233-10, L. 511-44, L. 512-3, L. 642-7)
• Monetary and Financial Code (in particular articles L. 131-51, L. 313-24)
• General Tax Code (in particular article 1684)