The pledge of financial instrument accounts is an essential guarantee tool for companies seeking to obtain credit or secure market transactions. Particularly effective and relatively flexible, this security makes it possible to mobilise a portfolio of securities without losing ownership. However, its implementation is based on a technical legal system that must be mastered to guarantee its validity and effectiveness. This is a special form of security, the mechanisms of which need to be understood beyond the simple and obvious. fundamental principles of pledging under french law. This article explains the rules governing this guarantee and the practical implications for both creditors and debtors.
Understanding the pledging of financial instrument accounts
A pledge of a financial instruments account, sometimes still called a "securities account pledge" in the old terminology, is a non-possessory security interest. In practice, the holder of an account in which securities (shares, bonds, etc.) are registered pledges them as security for the payment of a debt. The creditor thus obtains a preferential right over the account in the event of default by the debtor.
Its rules are mainly defined by article L. 211-20 of the French Monetary and Financial Code. This provision was designed to meet the needs of the financial world for speed and security. It has become a preferred instrument for guaranteeing business financing and bank loans, and for hedging the risks associated with financial market transactions. Unlike a sale, the pledgor (the debtor) retains ownership of the pledged securities, but his right of disposal is limited in favour of the creditor.
The strength of this mechanism lies in its balance: it offers a robust guarantee to the lender while allowing the borrower to continue managing its portfolio of assets. It is a modern financing solution, adapted to the dematerialised nature of financial assets.
The basis and instruments covered by the pledge
One of the main advantages of this pledge is the breadth of its scope. It can be applied to a very wide range of assets, as long as they are registered in a securities account. These include
- Shares and other equity securities or securities giving access to the capital (warrants, etc.).
- Debt securities, such as bonds issued by companies or public bodies.
- Units or shares in undertakings for collective investment (UCITS), such as SICAVs and FCPs.
- Forward financial instruments traded on regulated markets.
This guarantee differs from pledge of sharesA pledge on a securities account, which concerns the shares of unlisted companies (SARLs, non-trading companies), is subject to different disclosure and realisation rules, particularly with regard to shareholder approval. Pledging of securities accounts, on the other hand, concerns assets that are fungible and liquid by nature.
The fundamental concept is that of the floating charge. The guarantee does not relate to individual securities, but to the account as a whole. Article L. 211-20 of the French Monetary and Financial Code states that "the financial instruments in the pledged account, those that are substituted for them or supplement them in any way whatsoever [...] are included in the basis of the pledge".. This means that movements on the account (purchases, sales, arbitrages) do not affect the guarantee, which constantly adapts to its content. This flexibility is essential for an active portfolio.
Distinction between pledge and collateral for cashless assets
The terminology can be confusing. Since the 2006 reform of the law on securities, the term "pledge" has been reserved for tangible movable property, while "pledge" applies to intangible movable property. Financial instruments, which are simply book entries, are intangible assets. Legally, they should therefore be referred to as "pledges".
However, the French Monetary and Financial Code continues to use the word "pledge". This historical peculiarity has no major practical impact. Jurisprudence and legal doctrine are in agreement in applying the specific regime set out in the Monetary and Financial Code, which derogates in many respects from the general law on security interests. The important thing is to understand that an economic value attached to intangible assets is guaranteed by a simple and effective mechanism.
The inclusion of fruit and products in the guarantee base
Unless otherwise agreed, the pledge automatically extends to the income generated by the pledged financial instruments. For example, dividends on shares or coupons on bonds. In principle, these sums must be paid into a special account, often called a "fruits and proceeds account", in order to remain within the scope of the pledge.
The Order of 15 September 2021 reforming the law on security interests has provided welcome flexibility on this point. Firstly, it explicitly allows the parties to exclude fruits and proceeds from the scope of the security by means of a clause in the agreement. Secondly, the formalities for opening the special account have been simplified. It can be opened at any time up to the date of realisation of the security. This clarification offers greater flexibility, particularly in international contexts where opening an account can be complex.
Formalities for pledging: declaration of pledge
The simplicity of creating a securities account pledge is a decisive advantage. The formalities are reduced to what is strictly necessary to ensure the legal certainty of the transaction, without the cumbersomeness that characterises other securities.
The declaration: validity and enforceability against third parties
The cornerstone of pledging is the "declaration of pledge". This is a written document signed by the account holder (the pledgor), formalising the pledge. This single document performs a dual function: it establishes the security between the parties and makes it enforceable against all third parties from its date, including the company issuing the securities and the debtor's other creditors.
There is therefore no need to serve the company, publish it in a public register or go through any other complex formalities. A simple declaration is all that is needed, unlike the sometimes more cumbersome formalities applicable to the legal framework for pledging receivables of common law. The date of the declaration determines the rank of the secured creditor.
However, this apparent simplicity must not mask the need for precision. Article D. 211-10 of the French Monetary and Financial Code lists the compulsory information that must be included in the declaration, failing which the guarantee will be null and void. These include the identification of the parties, the secured claim, the amount of the security and the identification of the pledged account. An error or omission on any of these points can completely wipe out the creditor's rights. The assistance of a lawyer is therefore strongly recommended to ensure the security of this essential document.
The special account: a formality or a simple computer identification?
In theory, pledged financial instruments must be transferred to a special account, opened in the name of the holder but identified as pledged. The purpose of this measure is to ensure that the assets are earmarked for collateral purposes.
However, the law offers a much more practical alternative. The transfer to a special account is not necessary if the financial instruments are identified as pledged by a computerised recording process at the account holder's premises. In practice, this identification by computer "marking" is the most commonly used method. It allows the pledgor to keep his securities in his usual management account, which greatly facilitates monitoring and day-to-day transactions. The special account formality is therefore more of a possibility than a strict obligation.
The effects and realisation of a securities account pledge
Once constituted, pledging produces powerful effects, both during the life of the contract and in the event of the debtor's default. It gives the creditor a privileged position.
The right of retention and its primacy in collective proceedings
The pledgee has a right of retention over the financial instruments and sums held in the account. This right, expressly provided for by law, is fundamental. It means that the creditor can oppose any disposal of the pledged assets without his or her agreement. In practical terms, the account keeper cannot execute a sale or transfer order from the account holder without the creditor's authorisation.
This right of retention confers a considerable advantage in the event of the opening of collective proceedings (safeguard, reorganisation or judicial liquidation) against the debtor. The pledged creditor is treated as a retaining creditor, which allows him to escape the competition of other creditors and to be paid in preference to the value of the pledged assets. He takes precedence over most other creditors, including preferred creditors.
Terms and conditions: sale or allocation without judicial intervention
If the debtor defaults when the secured debt falls due, the creditor can realise its security. The procedure is particularly fast and effective. After sending a simple formal notice to the debtor, and on expiry of a period of eight days (or any other agreed period), the creditor can take action without having to obtain a court order.
They then have a choice:
- Sale of shares : he may ask the account holder to sell the financial instruments on the market. The proceeds of the sale are then remitted to the account holder, up to the amount of the claim.
- Allocation of ownership : he can ask for the securities to be transferred directly to him in full ownership. The value of the securities is then estimated by an expert and applied to the debt.
This option of extrajudicial enforcement is a guarantee of efficiency and speed that considerably strengthens the creditor's position.
Multiple pledges on the same securities account
It is perfectly possible to grant several successive pledges over the same securities account. This possibility, enshrined in the 2021 reform, enables the account holder to mobilise the value of his portfolio with different creditors.
In this case, the ranking of the various pledged creditors is determined by the chronological order of their pledge declarations. The first creditor to have pledged its security will be the first to be able to realise it. However, the parties (i.e. the successive creditors and the debtor) may depart from this rule by signing a ranking agreement that organises a different priority. This type of agreement is common in complex financial arrangements and requires careful negotiation and drafting.
The pledge of a financial instrument account is a modern form of security, recognised for its flexibility and effectiveness. However, its validity depends on compliance with precise formalities, particularly in the drafting of the declaration of pledge. To secure your financing or guarantee your operations, the assistance of a lawyer is essential to audit, draft and put in place a suitable and unassailable guarantee. For any analysis of your project, our lawyers, experts in security and guarantees, are at your disposal.
Sources
- Monetary and Financial Code (in particular article L. 211-20 and articles D. 211-10 et seq.)
- Civil Code (provisions relating to security law)
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities
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