Credit is an essential driver of business, but it depends on the creditor's confidence in the debtor's ability to honour its commitments. To secure a debt, the law of movable sureties offers an arsenal of guarantees enabling movable property to be allocated to the preferential payment of a debt. These mechanisms, at the heart of financial strategy and the commercial lawhave been radically overhauled. This article provides an overview of the pledge and collateral regimes, clarified by the 2021 reform, and directs you to our detailed content for a more in-depth look at each aspect.
Introduction to chattel security law
Definition and role of movable securities
A security interest is a guarantee granted to a creditor over movable property (as opposed to immovable property). Its purpose is simple: to ensure that the creditor is paid the value of the collateral before other creditors of the same debtor (known as unsecured creditors). For a company, granting a security interest may be a condition for obtaining financing. For a creditor, such as a bank or supplier, it is a tool for reducing the risk of non-payment.
The legislative framework: the 2006 and 2021 reforms
Security law, long perceived as complex, has undergone two major waves of modernisation. The 2006 reform first simplified and rationalised the legal landscape. More recently, the Order of 15 September 2021 completed this work. It came into force on 1 January 2022, with the aim of making the law on security interests clearer, more efficient and more attractive, in particular by clarifying the systems and introducing new guarantees to promote inter-company credit.
Distinction between pledge and collateral
The fundamental distinction between pledges and collateral lies in the nature of the asset used as security. A pledge applies exclusively to tangible movable property, i.e. property that can be touched and moved (equipment, stocks of goods, vehicles). Pledging, on the other hand, applies to intangible movable property, which has no material existence (receivables, company shares, goodwill, patents).
The general pledge system (tangible movables)
A pledge is undoubtedly the most tangible form of security for an entrepreneur. For a full analysis of its mechanisms, please consult our article dedicated to the detailed legal regime for pledges of tangible movable property.
Legal nature and purpose of the pledge
A pledge is a contract by which the debtor (the pledgor) grants a creditor (the pledgee) the right to be paid on a tangible asset in preference to other creditors. The pledged asset may be present or future, provided it is clearly identifiable.
Creation of the pledge (parties, formalities, basis)
For a pledge to be valid, it must be in writing, setting out the claim secured and a precise description of the pledged asset. This document may be a private agreement or a notarial deed. The basis of the pledge, i.e. the asset concerned, must be determined carefully to avoid any subsequent dispute.
Enforceability of pledge (publicity, dispossession)
For the pledge to be effective against third parties (other creditors, a potential purchaser of the asset), it must be made public. The law provides for two methods: either dispossession, where the asset is physically handed over to the creditor, or, more frequently in practice, registration in a public register. This is known as a non-possessory pledge.
Rights of pledgees (retention, preference, realisation)
The pledgee has strong prerogatives. They have a right of retention over the asset if they are in possession of it. Above all, they have a preferential right to priority payment from the sale price of the pledged asset. In the event of non-payment, he may apply to the courts for the asset to be assigned to him or for it to be sold by compulsory sale.
Expiry of pledge
A pledge is an accessory to the debt it secures. Logically, therefore, it expires when the debt is repaid in full. It can also be terminated if the creditor renounces his guarantee or if the pledged asset disappears.
General pledge regime (intangible movables)
Pledging is an essential tool for companies whose value lies less in physical assets than in intangible assets. Read our more on pledging intangible movable property to master all its aspects.
Definition and specific features of pledging
Pledging is the intangible asset version of pledging. A company can pledge its business, trade receivables, company shares or software. As dispossession is physically impossible, it is always publicised by entry in a register.
Creation of a pledge of receivables
The pledging of receivables is very common. It enables a company to secure a loan using its outstanding customer invoices. As with pledging, a written contract is required, identifying precisely the receivables secured and the receivables pledged.
Scope and effects of the pledge
Once the pledge has been created and published, the debtor can no longer dispose of the pledged debt without the creditor's agreement. For example, the debtor may no longer grant a debt waiver to his own customer. The pledged creditor, on the other hand, acquires an exclusive right over the pledged claim.
Enforcement of collateral
If the secured debt is not paid on the due date, the pledgee can notify the debtor of the pledged debt (the customer of its own debtor) of the pledge and demand payment directly from him, up to the amount of its own debt.
Specific pledges and collateral: developments and particularities
In addition to the general systems, the legislator has created special securities adapted to certain goods or sectors. For a complete overview, see an overview of special pledges and collateral.
Inventory pledges (after repeal of the special regime)
The 2021 reform simplified the inventory pledge regime by bringing it into line with the common law on non-possessory pledges of tangible movable property, thereby unifying the rules on disclosure and enforcement.
Pledging of motor vehicles
A pledge on a vehicle is a security widely used to guarantee the purchase of a car on credit. It is declared to the prefecture and prevents the vehicle from being sold without the creditor's agreement.
Pledging a securities account
This security is used to guarantee a debt by allocating a portfolio of shares or bonds. It is created by a simple declaration signed by the account holder.
Cash pledge or assignment by way of security of a sum of money (new in 2021)
The reform has clarified and enshrined two highly effective mechanisms for guaranteeing financial obligations. Cash pledges involve blocking a sum of money in an account for the benefit of the creditor. Assigning a sum of money as security involves a temporary transfer of ownership.
Assignment of receivables as security (new in 2021)
Inspired by the trust, this new security allows the debtor to transfer ownership of receivables to the creditor, who is responsible for returning them once the debt has been paid. It is a particularly robust guarantee.
Pledging a life insurance policy
A life insurance policy can be pledged to a creditor, usually a bank as part of a loan. In this way, the creditor secures its repayment against the surrender value of the policy.
Warrants (agricultural, oil, hotel: state of play)
A warrant is a special type of pledge that allows goods or equipment to be pledged without moving them, by issuing a document of title representing them. There are specific regimes for certain sectors, such as agriculture or the hotel industry.
The impact of insolvency proceedings on transferable securities
The opening of safeguard, reorganisation or compulsory liquidation proceedings changes the set of guarantees. For a detailed analysis of this complex subject, please read our article on the new balance between creditors and debtors in insolvency proceedings. In short, the rights of pledgees and secured creditors are temporarily frozen. They must declare their claims and security, and generally cannot take individual legal action to recover their debts during the observation period.
The creation or proper management of movable securities is an ongoing challenge for the financial security of a company. Our firm has recognised expertise in advising you on the choice and implementation of these guarantees. Contact our team for an analysis of your situation.
Frequently asked questions
What is a security interest?
A security interest is a guarantee of payment granted to a creditor over a movable asset (tangible or intangible) belonging to the debtor. It enables the creditor to be paid first against the value of the asset in the event of default.
What is the difference between a pledge and a collateral?
A pledge relates to a tangible asset (equipment, stock), while a charge relates to an intangible asset (a receivable, a business). The nature of the asset secured is the essential distinguishing criterion.
Why has security law been reformed in 2021?
The aim of the 2021 Ordinance was to simplify, clarify and modernise the law on securities. Its aim was to make guarantees more effective and easier to understand, thereby facilitating access to credit for businesses.
Is it possible to pledge a motor vehicle?
Yes, pledging a motor vehicle is a very common form of security, particularly to guarantee the credit used to finance its purchase. It is subject to specific registration with the prefecture.
What happens to a pledge if the company goes into receivership?
When insolvency proceedings are opened, the rights of pledgees are frozen. They must declare their claim and their guarantee and can no longer act individually. The fate of his guarantee will depend on the outcome of the proceedings (safeguard plan, reorganisation or liquidation).
Is a written document required to create a pledge?
Yes, the law requires a written contract to be drawn up for the pledge to be valid. This document must precisely identify the debt being secured and the asset being used as collateral.
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