Classification and hierarchy of security interests: who comes before whom?

When it comes to credit, not all creditors are in the same boat. When several creditors come forward at the same time to be paid, the question of ranking becomes decisive. The ranking of movable securities is one of the most technical issues in security law - and potentially one of the most costly to ignore.

Classification outside collective proceedings

Exclusive rights outside the competition

Certain security interests give the creditor an exclusive right that places him outside the competition. Two powerful legal mechanisms are at the top of the hierarchy.

The right of retention allows the creditor to retain the asset until full payment has been made. Although the legal nature of this right has been challenged by the Court of Cassation (Com. 20 May 1997, no. 95-11.915), it is highly effective. Its holder can enforce this right against anyone, including creditors with preferential security.

Ownership retained or assigned by way of security offers similar protection. A seller with a retention-of-title clause can reclaim his property without the interference of other creditors. This effectiveness is explained by the very nature of these rights: they are exclusive and not subject to the claims of other creditors. simple preferential rights.

The hierarchy of privileges

Article 2332-1 of the Civil Code lays down a clear rule: "unless otherwise provided, special liens take precedence over general liens".

Ordinance no. 2021-1192 of 15 September 2021 limits the number of special moveable liens to four:

• the lessor's lien
• curatorial privilege
• the lien of the seller of furniture
• the privilege of the salaried employee of a homeworker

These liens are not listed in any particular order. Their classification varies according to the chronology of the appearance of the conservator's lien and the lessor's knowledge of the existence of other liens.

Article 2331 of the Civil Code also lists four general liens:

• legal fees
• funeral expenses
• salaries and similar allowances
• sums due to certain agricultural producers

Other general liens exist, such as those of the Treasury and social security funds, whose rank varies according to their nature.

Ranking of pledges and collateral

Under article 2332-4 of the Civil Code, a pledgee's preferential right is exercised "in the same rank as the lessor's preferential right", unless otherwise provided.

For the pledging of intangible movables, article 2355, paragraph 5 of the Civil Code provides for the application of the rules governing pledges, excluding the right of retention. Pledging of claims, on the other hand, benefits from a specific regime. Article 2363 gives a pledgee who has given notice of its pledge a fictitious right of retention, enabling it to avoid any competition.

Classification in the event of collective proceedings

A new hierarchy

Collective proceedings radically change the order of creditors. Article L. 643-8 of the French Commercial Code, enacted by Order no. 2021-1193 of 15 September 2021, establishes a precise and imperative order.

Exclusive rights retain their force, as the text states: "Without prejudice to the right of ownership or retention enforceable against the insolvency proceedings...". This legislative confirmation reinforces their privileged status.

The order of priority established by the 2021 ordinance

Article L. 643-8 provides for fifteen ranks of creditors. The first ranks are occupied by :

1. Unpaid executive subsidies
2. Employee superprivilege
3. Legal costs incurred after the opening judgment
4. Receivables from agricultural producers
5. Claims guaranteed by the conciliation privilege

The article establishes a cascade of priorities reflecting the legislator's economic and social policy objectives.

Traditional securities relegated to the background

Claims secured by traditional security interests are relegated to a lower rank:

• Payroll receivables rank 7th
• Treasury privileges ranked 12th
• 13th-ranking pledge and lessor's lien

This relegation illustrates the preference given by the legislator to employees and creditors who helped the company during its period of difficulty. As Professor Simler notes, this downgrading of traditional security interests reflects a desire to favour the rescue of the business more than the protection of previous creditors.

How to secure your creditor position

Several strategies can be considered:

1. Favour exclusive securities: the retention of title clause or the right of retention offer maximum protection.
2. Combining security interests Combining a security interest with a personal guarantee can circumvent the limits of each.
3. Oversee publicity: for non-possessory pledges, registration in the Personal Property Securities Register (Decree no. 2021-1887 of 29 December 2021) is essential.
4. Anticipating insolvency proceedings: there are a number of preventive measures you can take to strengthen your position before proceedings are initiated.

A prudent creditor will not be satisfied with a standard security, but will choose the one that gives him the best possible ranking in the specific situation of his debtor.

Are you wondering about the best strategy for securing your debt? Consulting a lawyer specialising in security law will enable you to optimise your legal position and avoid unpleasant surprises if your debtor defaults.

Sources

• Civil Code, articles 2329 to 2332-4, 2355, 2363 and 2365
• French Commercial Code, Article L. 643-8
• Order no. 2021-1192 of 15 September 2021 reforming the law on securities
• Order no. 2021-1193 of 15 September 2021 amending Book VI of the Commercial Code
• Decree no. 2021-1887 of 29 December 2021 on the register of transferable securities
• Cass. com. 20 May 1997, no. 95-11.915
• Philippe Simler, "Sûretés sur les meubles - Présentation générale et classement", JurisClasseur Civil Code, Art. 2329 - Fasc. unique, 2023