Beyond the sale: contribution to the company and guarantees on the business

Goodwill is not just an asset that can be bought or sold in the traditional way. Its value and legal nature make it a versatile economic tool. It can be the central element in the structuring of a business, in particular through a contribution to a company. It can also be used as collateral to secure financing or deferred payments. For an in-depth understanding of what goodwill is and what its essential elements are, see our reference article.

Understanding these other transactions, as well as the main guarantees that can 'encumber' (i.e. legally affect) a business, is essential for any entrepreneur. Whether you are planning to set up a company, sell your business on credit, or obtain a bank loan to develop your business, these legal mechanisms are of direct concern to you. This article explores two important aspects: the contribution of your business to a company and the most common guarantees - vendor's lien and conventional pledge - as well as certain common rules that apply to them.

Transferring your business to a company

Rather than running a business on your own (as a sole trader), you often transfer your business to a company (SARL, SAS, or their single-member forms EURL, SASU, etc.). This operation, which is different from a simple sale, meets specific objectives and follows its own rules.

Why bring your business into the company?

The main advantage of the contribution is that it transfers the business to a new company. new legal entity the company. The company becomes the owner and operator of the business. For the entrepreneur (who becomes a partner), the main advantage often lies in the separation of assets. In limited liability companies (SARL, SAS, EURL, SASU), the partner's personal assets are, in principle, separate and protected from the company's assets. If the business runs into financial difficulties, the company's creditors can normally only seize the company's assets, and not the partner's personal assets (with certain exceptions, such as mismanagement or personal guarantees). A partnership contribution is therefore a way of limiting risk. It is also a structure that can facilitate the future transfer of the business or the entry of new investors.

Forms of contribution

The contribution of a business can take various forms:

• Transfer of ownership : This is the most common case. The company becomes the full owner of the business.
• Contribution in right of use : Rarer and technically more complex, the contributor retains ownership of the business but only grants the use and right to operate it to the company for a fixed period.
• Outright contribution : The contribution is remunerated exclusively by the allocation of company rights (shares) to the contributor.
• Contribution for valuable consideration or mixed : If, in return for the contribution, the contributor receives something other than company rights (a sum of money, for example) or if the company assumes some of his personal liabilities, the transaction is legally analysed, in whole or in part, as a sale and no longer as a simple contribution. This has important tax and legal consequences, particularly for creditors.

Formalities and obligations

The contribution of a business must be recorded by writesThis is usually set out in the company's Articles of Association or in a separate deed of contribution. A precise valuation of the assets contributed is required, often carried out by a contributions auditor (compulsory in certain cases) to guarantee the real value of the contribution to the other partners and third parties.

Concerning information to be providedIt should be noted that the formal obligation to include the information set out in the former article L.141-1 of the Commercial Code (origin, past sales figures, etc.) has been removed for contributions made to a EURL or SASU where the contributor is the sole shareholder. However, the need for full and fair disclosure remains, based on ordinary contract law.

The contributor, like a seller, has theobligation to deliver the fund to the company and guarantee against hidden defects and eviction.

Protection of the contributor's creditors

When a business is contributed to a company, it leaves the contributor's personal assets. To protect the contributor's personal creditors (those whose debt is not linked to the business or is not assumed by the company), the law (articles L.141-21 and L.141-22 of the Commercial Code) has provided for a specific mechanism:

1. Disclosure of the contribution : The contribution must be published in the BODACC, in the same way as a sale.
2. Declaration of claims : Within 10 days of this publication, the contributor's personal creditors must declare the amount of their claims to the registry of the competent commercial court.
3. Option for the company and the partners : If debts are declared, the company (or its shareholders) has 15 days to apply to the courts for the contribution to be cancelled, or even for the company itself to be cancelled, if it considers that the liabilities declared are too high.
4. Solidarity : If cancellation is not requested or obtained, the company becomes jointly and severally liable with the contributor for the payment of personal debts that have been duly declared to the registry. This is an important consequence: the company may find itself having to pay its contributor's previous debts.

The vendor's lien: a guarantee for payment on credit

Let's go back to the classic sale. When a seller grants payment terms to his buyer (vendor credit), he is taking a risk. To secure his claim, the law automatically grants him a powerful guarantee over the business sold: the vendor's lien. For a complete understanding of the obligations and precautions to be taken when selling your business, we invite you to consult our detailed guide.

• Nature : This is a legal security, a preferential right that entitles the unpaid vendor to priority payment of the price if the purchaser resells the business (or in the event of a forced sale).
• Strict conditions for obtaining : This lien is not automatic in its effects. For it to be valid and enforceable against third parties (the buyer's other creditors, sub-purchasers, etc.), the seller must comply with specific formal conditions:
  • The sale must be recorded by a written document (authenticated or under private seal) and registered.
  • The lien must be the subject of a registration at the registry of the commercial court where the business is operated. This registration must be made within a strict deadline of 30 days following the date of the deed of sale (this period was 15 days prior to a 2021 reform). Late registration would be ineffective vis-à-vis third parties.
  • It is compulsory for the deed of sale and the registration at the registry office to include the following information different prices for the three components of the business: intangible items, equipment and goods. Without this breakdown, the lien may be considered null and void.
• Protective effects :
  • Preferential right : On the resale price of the business, the preferential seller ranks ahead of the buyer's unsecured creditors and ahead of creditors who have registered a guarantee (such as a pledge) after him. Registering within the 30-day period even gives him priority over registrations made by the buyer's creditors during the same period.
  • Resale rights : This is a very strong right. The lien "follows" the business. If the buyer resells the business to another person, the original seller, if still unpaid, can have the business seized and sold to the new owner (sub-purchaser) to recover what is owed.
• Resolutory action : In addition to the lien on the price, the unpaid seller retains the right to apply to the courts for thecancellation of the sale (action résolutoire) to recover its funds. For this action to be effective against third parties (buyer's creditors, sub-purchasers), it must be expressly mentioned in the registration of the lien at the registry, and the lien itself must still be valid (not expired or struck off).

Conventional pledging: using the fund as collateral

Goodwill can also be used by its owner as collateral to obtain credit or secure another debt. This is known as conventional pledgingThis is a very common form of security, used in particular to guarantee bank loans to finance the acquisition or development of a business.

• Definition: This is a contract by which the owner of the land (the grantor) pledges his land as security for the payment of a debt to a creditor (the pledgee). The owner retains possession and operation of the business (this is a security interest). without dispossession).
• Items covered : The pledge may relate to intangible assets (brand name, name, leasehold rights, customer base, licences, trademarks, patents, etc.) and to equipment and tools used in the business. On the other hand, goods are always excluded the basis of the contractual pledge of a business (Article L.142-2 of the French Commercial Code).
• Formalities : To be valid and enforceable against third parties, the pledge must comply with the same formal requirements as the vendor's lien: a written document (authenticated or under private seal), registeredand a registration with the registry of the commercial court in the 30 days of the date of the deed (this period will also be amended in 2021).
• Rights of the secured creditor : If it is duly registered, the pledged creditor enjoys the same essential rights as the preferred seller: a preferential right on the sale price of the business (its ranking in relation to other registered creditors depending on the date of registration) and a resale right allowing him to sell the business even if it has changed ownership.

Common points and additional guarantees for registered creditors

Whether you are a preferred seller or a secured creditor, registration with the registry is the formality that makes the guarantee effective vis-à-vis third parties. These "registered" creditors benefit from common rules and additional protections.

• Publicity and duration of registration : Registration makes the guarantee public. It is valid for 10 years from its date. If the guaranteed debt is not extinguished by this deadline, the creditor must request the renewal of its registration before the end of the 10-year period, otherwise its guarantee will lapse. The cancellation The registration can only be cancelled (removed from the register) if the debt is paid in full or with the express agreement of the creditor (by authenticated deed).
• Resale rights : This right ensures that registered creditors are not prejudiced by any resale of the business. They can have the business seized from any successive buyer. This is why any potential buyer must consult the list of registrations at the registry before making a commitment.
• The purging procedure : Conversely, a purchaser who buys land encumbered by registrations may seek to "purge" these registrations in order to secure the property. This is a crucial step for the buyer, who must also pay attention to all the other essential precautions when acquiring a business. This is a complex procedure in which the buyer notifies the registered creditors of the price he is prepared to pay to free up the business. The creditors can either accept and be paid out of this price (which extinguishes their right to follow), or refuse and initiate an auction if they consider the price to be insufficient (the "surenchère du dixième").
• Ancillary guarantees against depreciation of the pledge : The law offers additional protection to registered creditors against events that could reduce the value of the fund:
  • If the fund is moved (transfer of the business to other premises) : The owner must notify the registered creditors of his intention at least 15 days in advance. If he fails to do so, or if the transfer is likely to reduce the value of the business, the registered claims may become immediately due and payable (Article L.143-1 C. com.). Creditors may then request immediate payment or demand a new registration at the registry of the new place of business.
  • If the lease is terminated : If the landlord wishes to terminate the lease (whether by amicable agreement, legal action or the application of a resolutory clause), he is obliged to notify your intention creditors registered on the business. These creditors then have a period of one month in which to react: in particular, they may pay the rent or perform the lessee's obligations in his place in order to prevent the termination and thus preserve their security, which is often largely based on the continuation of the lease (Article L.143-2 C. com.). Failure by the lessor to comply with this notification would render the termination unenforceable against the registered creditors.

Bringing your business into a company, selling it on credit or pledging it as collateral have major legal and financial implications. Mastering the rules relating to guarantees (lien, pledge) is essential to securing your transactions and financing. To structure your transactions as effectively as possible and defend your rights as owner or creditor, the expertise of a lawyer is essential. Our firm is here to help you with all aspects of business transfers.

Sources

• Commercial Code (in particular articles L.141-5 to L.141-9, L.141-21, L.141-22, L.142-1 to L.142-5, L.143-1, L.143-2, L.143-12 et seq)
• Civil Code (general principles of contracts, securities, companies)