Effectiveness of securities in insolvency proceedings: how to make the right choice?

A debtor's default threatens your claims. Collective procedures - safeguard, reorganisation, judicial liquidation - limit your rights to take legal action. In this context, not all securities are created equal. Some stand up, others fall apart.

One thing is clear: most creditors recover less than 10% of their debts in a compulsory liquidation. Choosing the right security becomes crucial. This choice determines your position in the creditor hierarchy.

The impact of insolvency proceedings on security interests: general principles

Insolvency proceedings profoundly change the rights of creditors. They impose four major constraints:

1. A freeze on individual prosecutions. You can no longer take individual action against the debtor.
2. Ban on payments. Claims arising prior to the opening judgment are frozen.
3. Compliance with a payment order. The law establishes a strict hierarchy between creditors.
4. Sprawl plans. The court may impose time limits of up to 10 years.

These rules overturn the traditional hierarchy of creditors. The theoretical rank gives way to the specific treatment of collective proceedings.

The fundamental distinction is between:

• Preferential sureties: they confer a simple priority ranking
• Exclusive sureties: they assign a specific asset to the creditor

The latter are more resistant to collective procedures. They partially escape collective constraints.

Personal sureties in insolvency proceedings

Personal sureties are affected differently by insolvency proceedings.

The fate of the natural person guarantor

Individual guarantors enjoy considerable protection:

• In safeguard proceedings: it can invoke the plan (deadlines, discounts)
• In receivership: it benefits from the plan's deadlines
• In liquidation: it remains bound, but can invoke the impossibility of recourse

Article L. 626-11 of the French Commercial Code expressly extends the safeguard plan measures to natural person guarantors. This protection weakens the effectiveness of the guarantee.

A key point: the main debtor must be given formal notice to pay within one year of the opening of the accounts. Failing this, the guarantor is discharged.

The independent guarantee: efficiency preserved

The autonomous guarantee is remarkably resistant to insolvency proceedings. Its independence protects it:

• The guarantor cannot invoke procedural defences
• The obligation to pay persists despite the procedure
• The plan does not affect the guarantor's commitment

This resilience explains its success for major commitments. It remains effective in all procedures.

The impact of safeguard and recovery plans

The plans modify the personal surety system:

• Deadlines imposed: maturities can be spread over 10 years
• Possible rebates: the plan can reduce the amount of claims
• Suspension of proceedings while the plan is being implemented

The treatment differs according to the nature of the security. Autonomous guarantees largely escape these constraints. Surety bonds are subject to these constraints in the case of natural persons.

Classification of the effectiveness of security interests in movable property

Movable securities present varying degrees of resistance.

Effective right of retention: a privileged position

An effective right of retention is the ultimate weapon. It allows the creditor to retain the asset until it has been paid in full. Its advantages:

• Opposition to all other creditors
• Continuation during insolvency proceedings
• Obligation to pay to recover the property

Article L. 622-7 of the French Commercial Code preserves this right even during the observation period. The retaining creditor is not subject to the freeze on proceedings.

A pledge with delivery benefits from this right. It places its holder in a position of strength.

Ownership-security: retention of title and trust

Property-based mechanisms offer superior protection:

• Retention of titleThe seller remains the owner until full payment has been made. He may claim his property within three months of publication of the opening judgment.
• The security trustThe asset is no longer part of the debtor's estate. It escapes the insolvency proceedings. In the event of default, the creditor becomes the definitive owner or has the asset sold.

These mechanisms make it possible to avoid competing with other creditors. They escape the principle of equality.

Non-possessory pledges and pledges: limits

Non-possessory pledges and collateral are more strongly affected by these procedures:

• The fictitious right of retention is unenforceable in safeguard and reorganisation proceedings
• Completion is blocked during the observation period
• The plan may impose significant deadlines

These securities retain a preferential right, but their effectiveness is considerably weakened in the face of insolvency proceedings.

Assignment of receivables

Assignments of receivables remain highly effective:

• The Dailly assignment: transfer of ownership enforceable against the procedure
• Assignment of claims under ordinary law: maintaining the rights of the assignee
• Assignment of sums of money: similar protection

These mechanisms enable creditors to partially escape collective proceedings. They are more resilient than simple pledges.

Real estate securities put to the test in insolvency proceedings

Property collateral also shows varying degrees of resilience.

The property trust: a protective mechanism

A real estate trust offers maximum protection:

• The property is no longer part of the debtor's assets
• It escapes collective proceedings
• The beneficiary creditor can realise its guarantee despite the procedure

The only limit concerns the assets necessary for the business. Article L. 622-23-1 of the French Commercial Code can delay completion during the observation period.

The mortgage: strengths and weaknesses

Mortgages are more subject to the constraints of insolvency proceedings:

• Prosecution freeze during the observation period
• Impossible to sell the property without judicial authorisation
• Compliance with plan deadlines

The mortgage retains its priority ranking. It remains effective during liquidation. But it temporarily loses its force during the company's rescue phases.

Pledging property: the advantages of dispossession

The pledge of immovable property (formerly antichrèse) has a major advantage: dispossession. It confers an enforceable right of retention throughout the proceedings.

This mechanism allows:

• Collection of rent during the proceedings
• Maintaining possession despite the proceedings
• A stronger negotiating position

This little-known security offers significant advantages in the event of debtor insolvency.

Optimum protection strategies for creditors

Faced with these disparities in effectiveness, a number of strategies are needed.

Combining complementary securities

Maximum security is based on a combination of securities:

• Ownership + personal guarantee
• Mortgage + joint and several guarantee
• Pledge with delivery + collateral

These combinations compensate for each other's weaknesses. They maximise your chances of recovery.

The importance of accurately drafted contracts

The effectiveness of security interests depends on how they are drafted:

• Early repayment clauses
• Precise definition of cases of default
• Detailed implementation procedures
• Conditions for implementing the commissary agreement

Every word counts. Rough wording can destroy your protection.

Essential due diligence

A number of precautions need to be taken before security is granted:

• Verification of the debtor's correct civil status
• Control of ownership of the collateral
• No pre-registration
• Legal capacity of the settlor

These simple checks will prevent any disastrous surprises during the construction phase.

Reflexes at the first sign of trouble

Responsiveness often determines your recovery rate:

• Immediate notice
• Action before the commencement of proceedings
• Claim within three months of judgment
• Declaration of claim within the legal time limits

Time is of the essence. A delay of just a few days can cost you your rights.

Our team can put its expertise at your service to help you develop a strategy for protecting your receivables that will stand up to insolvency proceedings. Contact us before it's too late.

Sources

• Civil Code, articles 2284 to 2488
• Commercial Code, Book VI on business difficulties