Pledging: a security interest in intangible assets

When a manager wants to finance his business without mortgaging his premises, when a borrower wants to secure a bank loan with his life insurance policy, when a supplier wants to secure a business debt: they all use the same mechanism, the pledge. This security interest relates to intangible assets - receivables, business assets, securities accounts, insurance policies, company shares - which are often the most valuable part of an individual's or company's assets. An understanding of the system, which has been radically overhauled by the’order no. 2021-1192 of 15 september 2021, has become a prerequisite for any financing operation.

Definition and legal basis

Pledging is defined by’Article 2355 of the Civil Code as «the assignment, as security for an obligation, of a present or future intangible movable asset or group of intangible movable assets». This definition brings together the three fundamental characteristics of security: it is real, that is to say, it relates to an asset and not a person; it is movable, Unlike mortgages, it is intangible, which distinguishes it from a pledge.

The distinction with pledges is central and often misunderstood. Since the’order no. 2006-346 of 23 March 2006, the term "pledge" is reserved for security interests in movable property bodily - stock, equipment or a vehicle. Pledging, on the other hand, covers only intangible assets: those that have no physical existence but an economic value. This duality of vocabulary has practical consequences: the formalities, publicity and enforcement procedures differ profoundly depending on whether the security relates to tangible or intangible property.

Article 2355 also provides for two methods of pledging. Pledging conventional arises from an agreement between the debtor (or a third party grantor) and the creditor; it represents the overwhelming majority of security interests in practice. Pledging judicial, This is a rarer procedure, ordered by the court as a precautionary measure when a creditor whose claim is well-founded in principle fears that the debtor is planning to become insolvent. It takes the form of a provisional registration that the creditor must subsequently confirm by obtaining an enforceable title.

The reform of 15 September 2021 modernised the whole system. It unified the pledge and collateral regimes around the common law of the Civil Code, created a single national register of movable securities, replaced service (by a court commissioner) with simple notification to make the pledge of a claim enforceable against the assigned debtor, and abolished a number of securities that had become obsolete (hotel warrant, pledge of tools and equipment). The move towards simplification is clear, but it is accompanied by a strengthening of the protective formalism of the written document, which is now required on pain of nullity in almost all cases.

Pledging of receivables: the ordinary law system

The pledge of receivables is the reference model. The articles 2356 to 2366 of the Civil Code These provisions govern the system from start to finish, and it is by reference to them that the other pledges find their rules in the absence of a special text. Mastering this system means holding the thread that binds the entire subject.

Constitution: written form as a condition of validity

L'article 2356 The pledge must be in writing, failing which it will be null and void. The deed must specify the secured claims (amount, due date, principal debtor) and the pledged claims (identity of the assigned debtor, amount, cause). This precision is not a mere formality: without it, the pledge has no specific purpose and is void. Banking practice uses very detailed standard deeds, sometimes with an appendix listing the invoices or contracts that are the source of the pledged receivables.

Pledging may relate to receivables present or future. The possibility of pledging flows of receivables that do not yet exist - for example, future lease payments or future invoices under a framework contract - makes pledging a particularly flexible instrument for business financing.

Opposability: the double mechanism

The enforceability regime distinguishes between two phases. With regard to third party - i.e. the other creditors of the pledgor - the pledge «takes effect between the parties and becomes enforceable against third parties on the date of the deed» (art. 2361 C. civ.). No publicity is required: simply dating the writing is sufficient to establish the rank of the secured creditor.

With regard to the debtor of the pledged claim on the other hand, enforceability is subject to the notification which is made to him or to his intervention in the act (art. 2362 C. civ.). As long as notice has not been given, the assigned debtor can validly discharge himself in the hands of the grantor: in other words, he can pay the grantor and this payment extinguishes the debt. For the secured creditor, the consequence is clear: notice must be given without delay. Prior to 2021, this formality took the form of service by a court commissioner; since the Order, simple notification - by registered letter or by any other convincing means - is sufficient. This simplification reduces the cost of the security while preserving the protection of the assigned debtor.

Effects: an exclusive right to payment

Once notification has been given, the pledged creditor acquires a powerful right: he alone is authorised to receive payment of the pledged claim. This is the direct recovery, This takes precedence over any subsequent seizure and is more resistant than other securities to the opening of insolvency proceedings against the grantor. The assigned debtor must now pay into the hands of the secured creditor, and any sum he pays to the grantor after notification will have no discharge effect.

The pledgee then has three options in the event of default by the principal debtor. The first is the cover classic: collect the receivable when it falls due and offset it against the guaranteed debt. The second is the’judicial award The second is to apply to the court, by way of an action, for ownership of the claim to be assigned to him. The third is the commissory agreement, This is authorised since 2006 and made more flexible in 2021: the contract can stipulate that in the event of non-payment, the pledged debt will automatically become the property of the creditor, up to the amount guaranteed.

In addition to this common law regime, the Dailly law of 2 January 1981 - codified in the Articles L. 313-23 et seq. of the Monetary and Financial Code - offers a special regime for business receivables. Dailly pledges or assignments are made simply by handing the assignee a slip containing strictly defined information. Its ease of use and effectiveness make it the preferred instrument of credit institutions for short-term business financing.

Pledging a business

The pledge of a business is probably the most familiar to the general public. Its special rules are set out in the Articles L. 142-1 et seq. of the French Commercial Code, These are supplemented by articles L. 143-1 to L. 143-20, which govern registration and discharge. Its economic function is central: to enable a trader or commercial company to obtain credit by pledging its business as collateral, without losing the right to use it.

A legally defined base

Article L. 142-2 of the French Commercial Code strictly defines the basis of pledge. Three elements are included by operation of law, and their absence would render the pledge worthless: the customers, l’sign and trade name, and the leasehold rights. Without a customer base, there is no business. Without a lease, the business loses most of its resale value. These three elements form the core of the guarantee.

Other items may be included, but only if the pledge agreement expressly mentions them: plant and machinery, patents, trademarks, designs and licences. Conversely, two categories are excluded: the goods (which circulate and change constantly) and the buildings by destination (which follow the fate of the building in which they are incorporated).

Formalities and registration: a critical one-month deadline

The pledge is created by a written document, either authenticated or under private seal, which must precisely identify the business and the secured debt. But the crux of the matter lies elsewhere: registration with the registry of the commercial court within whose jurisdiction the business is run.

Article L. 143-17 of the French Commercial Code requires the pledge to be registered within the deadline of’one month from the date of the deed. The penalty for failure to register has changed: previously null and void, it is now subject to a penalty of’not enforceable other creditors since the 2021 reform. The distinction is not purely theoretical: a pledge that is not registered within one month remains valid between the parties, but cannot be set up against competing creditors - which is practically tantamount to depriving the pledged creditor of any useful ranking in the event of difficulties on the part of the debtor. Registration is valid for a period of ten years, renewable.

La production of the security, in the event of the debtor's default, is achieved by the forced sale of the business at public auction, following an attachment procedure. The sale price is then distributed according to the rank of the registered creditors. The pledged creditor has a limited right of pursuit: if the debtor sells the business to a third party, the pledge follows it, and the third party purchaser is obliged to purge it.

Pledging of financial accounts

When the collateral relates to a securities portfolio, a life insurance policy or a savings product, special regimes derogate from ordinary law. What they have in common is that they offer the creditor particularly effective protection, resisting the opening of collective proceedings against the grantor. In practice, this makes them the most popular forms of pledge.

Pledging a securities account

Governed by the’Article L. 211-20 of the Monetary and Financial Code, The pledge of a securities account is the most effective security instrument under French law. It is remarkably simple to create: one signed declaration by the account holder is sufficient, without any notification to the account holder being required.

What makes it unique is the nature of its basis. The pledge does not relate to identified securities but to the account itself, considered as a fluctuating universality. Incoming and outgoing securities pass through the system, and the collateral is applied automatically by subrogation in rem: the price of a security sold is substituted for the price of the security, which is itself included in the collateral. This flexibility allows the settlor to continue to actively manage his portfolio - arbitrate, sell, buy back - without losing the ranking of the security. Unless otherwise stipulated, the fruits and proceeds (dividends, coupons, interest) are also included in the basis of assessment.

The practice has developed watering clauses, These are clauses under which the settlor undertakes to register additional securities in the event of a fall in the value of the portfolio. The Ordinance of 2021 expressly confirmed the legality of these clauses. It also introduced the possibility of creating several successive pledges on the same account, ranking them according to the chronological order of the declarations.

But the real strength of securities account pledging lies in two unique mechanisms. First, the simplified production In the event of default, the pledged creditor may, after formal notice, directly appropriate the sums in the account or sell the listed securities on the market, without judicial intervention. Secondly, and most importantly, the creditor benefits from a statutory right of retention can be enforced even in the event of collective proceedings against the settlor, which enables him to avoid collective discipline and the involvement of other creditors. For details of the formalities involved in setting up a company, see our article dedicated to the practical constitution of a securities account pledge.

Pledging of life insurance

L'article L. 132-10 of the Insurance Code allows policyholders to use the surrender value of their life insurance policy as collateral for a loan - typically a mortgage. This technique, which is common for in fine, This has the advantage of avoiding the need to register a mortgage, which is more costly, and simplifying the release of the mortgage at the end of the loan period.

The creation of a pledge requires an amendment to the insurance contract, the agreement of the insurer and, where the beneficiary of the beneficiary clause has already accepted its benefit, his agreement as well. This last condition is often overlooked and is a frequent cause of nullity.

The pledgee acquires an exclusive right to payment of the surrender value of the policy. The Court of Cassation has ruled that this right takes precedence even over a third-party notice issued by the Treasury (Cass. 2^e civ., 2 July 2020, no. 19-11.417), making it one of the most protective forms of security against tax risk. On the other hand, the secured creditor has no power to manage the policy's investment vehicles: he or she can neither switch between the euro funds and the unit-linked policies, nor change the allocation. Their rights relate to the value of the contract, not its management.

Pledging of shares

The pledge of company shares enables a partner to guarantee a personal or company debt by pledging his shares as collateral, without renouncing his status as a partner. The 2021 reform radically altered the’article 1866 of the Civil Code, which now governs the pledging of shares in non-trading companies by simply referring to the general law on pledges and collateral.

For the civil partnerships, If there is more than one creditor, the pledge must be recorded in writing and published in the register of transferable securities (article R. 521-2, 2° of the French Commercial Code), which determines the ranking of creditors in the event of more than one creditor. For shares in SARL and SNC, the special rules of the French Commercial Code remain in force: the company must be notified of the pledge and the approval clauses in the articles of association must be complied with.

The main practical difficulty is compliance with the’intuitus personae. A civil or commercial company is often formed for personal reasons between partners who have chosen each other. The prospect of a secured creditor being able, in the event of default, to sell the shares to a foreign third party runs counter to this logic. The approval clauses in the articles of association must therefore be carefully examined before any company is formed. For a detailed discussion, see our article on pledge of shares and, on the conservatory variant, our article on the protective pledge of shares and securities.

Effects and implementation of the pledge

Over and above the specific features of each pledged object, pledging produces a range of common effects that underpin its effectiveness as a guarantee tool.

The pledged creditor first benefits from a preferential right. In the event of compulsory realisation of the pledged asset, it will be paid before unsecured creditors, up to the amount of the secured claim. The ranking of this preferential right depends on the date on which the security was created and, where applicable, the date on which it was entered in the appropriate register.

Then, in certain cases, it benefits from a resale right If the pledgor has disposed of the pledged property, the creditor may enforce its security against the third party purchaser. This right of pursuit applies in particular to the pledging of a business, where it obliges the purchaser of the business to purge the registrations.

Le right of retention, The right of retention, on the other hand, is only recognised for pledges of securities accounts and certain insurance policies. This is a decisive advantage in the event of insolvency proceedings: the holder of the right of retention escapes the freeze on individual proceedings and can assert his right in full independence. A creditor pledging a business or an ordinary claim, on the other hand, must undergo collective discipline and declare his claim within the legal time limits.

La production of safety in the event of failure can take three routes. The first is the forced sale In this case, the creditor obtains a writ of execution, sells the pledged asset and is paid from the price in accordance with its rank. The second is the’judicial award In this case, the creditor applies to the court for the property to be assigned to him in proportion to his claim; this option is not available for business assets. The third is the commissory agreement, For a long time prohibited, it is now authorised for most pledges since the 2006 reform.

La release takes place when the secured debt is extinguished. It takes the form of a written deed from the creditor, which must be presented to the organisation holding the registration register for cancellation. This formality is essential: as long as the pledge is not cancelled, it continues to encumber the property and to appear in the registers consulted by third parties, which can paralyse a resale or a new financing operation.

Links with collective proceedings deserves particular attention. The opening of a safeguard, reorganisation or judicial liquidation suspends individual proceedings, freezes the preferential right during the observation period and requires the claim to be declared within the legal time limits. With the exception of pledges of securities accounts and life insurance - which resist thanks to their right of retention or their exclusive right to payment - the ranking of other pledges has been significantly downgraded: they are outranked by legal costs, the super-privilege of salaries, the conciliation privilege and the procedural privilege. To understand the overall architecture of the field, consult our complete guide to securities and guarantees.

Drawing up a deed of pledge and implementing it requires a detailed knowledge of the rules specific to each object pledged. An error of characterisation, a failure to register within the time limit, or poorly executed notification are enough to deprive the security of its effectiveness at the moment when it should have produced its effect. To structure or contest a pledge, the’assistance from a security lawyer is a prerequisite.