Creditors' general right of lien: what you need to know

"`html

When it comes to creditors' rights, the general right of lien constitutes their minimum protection. This essential but limited mechanism helps us to understand why some creditors seek additional guarantees. These guarantees, such as mortgages, have specific implications for the parties, such as the exploration of rights and obligations of the owner of a mortgaged propertywhich protect the creditor beyond the simple general pledge.

The legal basis

The Civil Code defines this right in two fundamental articles:

• Article 2284: "A person who has undertaken a personal obligation is bound to fulfil that obligation in respect of all his movable and immovable property, both present and future".
• Article 2285: "The property of a debtor is the common pledge of his creditors; and the price is distributed among them by contribution, unless there are legitimate causes of preference between the creditors".

These "legitimate reasons for preference" include, in particular general property liensThese are legal securities that confer a preferential right over the debtor's real estate, thereby derogating from the common pledge rule.

This right arises automatically with the debt, without any particular formality.

Key features

The general right of lien has a number of special features:

• It concerns all the debtor's assets
• It requires no advertising
• It does not give any right of resale

This last feature is crucial: unlike security interests (such as mortgages), the general right of pledge does not allow a property sold to a third party to be pursued. The debtor remains free to dispose of his assets. To better understanding mortgages and their preferential and resale rightsSee our article on this subject.

A practitioner recently explained to me that "this lack of resale rights is the main weakness of the general right of lien".

Assets excluded from the general pledge

Some assets are not covered by this common pledge:

Property legally exempt from seizure

Article L. 112-2 of the Code of Civil Enforcement Procedures lists these exceptions:

• Clothes
• Foodstuffs
• Heating equipment
• Professional work tools
• Certain sums of money (in particular part of salaries)

Protection for sole traders

The law protects the main residence of sole traders:

• Legal unseizability of the principal residence
• Other non-business property can be declared exempt from seizure
• Protection maintained after dissolution of matrimonial property regime or death

Exercise of the general lien

To exercise his right, the creditor must :

1. Hold an enforceable title
2. Seizing the debtor's assets
3. Take legal action to sell these assets

The creditor can also take specific action:

• Oblique action (article 1341-1 of the Civil Code): exercising rights neglected by the debtor
• Action paulienne (article 1341-2): to have the debtor's fraudulent acts revoked

The law of concurrence between creditors

This rule, set out in article 2285 of the Civil Code, requires the price of seized assets to be distributed proportionally among all unsecured creditors (without special security). For more information, visit understanding the order of priority of property security interestsIt is crucial to know that the general right of pledge is at the bottom of this scale of preferences.

Example: if a debtor owes €20,000 to A and €10,000 to B, and the sale of his assets yields €15,000, A will receive €10,000 and B €5,000.

There are exceptions to this rule:

• Legal set-off between reciprocal debts
• Right of retention
• Direct action by certain creditors

The weakness of the general right of lien explains why creditors often require specific guarantees (mortgages, sureties, etc.) that give them preferential ranking. To go beyond this minimum right and secure your receivables effectively, don't hesitate to consult a lawyer specialised in mortgages.

Sources

• Civil Code, articles 2284 to 2285
• Code of Civil Enforcement Procedures, article L. 112-2
• Commercial Code, articles L. 526-1 et seq.
• "Droit bancaire et financier", JurisClasseur, Fascicule 767
• "JurisClasseur Roulois", Fascicule 1680
• "JurisClasseur Notarial Répertoire, Fascicule 50

" `