Liens: securities granted by law to certain debts

Privileges are securities that the law confers on certain creditors because of the particular quality of their claim - not because of a contract, not because of a court decision. When an employee is not paid after his employer files for bankruptcy, when the State claims tax from a company in liquidation, when a garage owner refuses to return the car he has repaired as long as his bill remains unpaid, when a landlord wants to recover his rent on the furniture in the premises: they all use the same mechanism, the lien. This legal security is neither contractual nor judicial - it is imposed by the sole will of the legislator, who felt that the special quality of certain debts justified their being paid before others. Discreet, often hidden and sometimes formidable, liens are the hidden skeleton of creditor competition. Their structure, which was radically overhauled by the’order no. 2021-1192 of 15 september 2021, These days, the debt collection strategy and credit risk analysis are the key to success.

Definition and legal source of the lien

The Civil Code gives an apparently simple definition of a lien: «a lien is a right that the quality of the claim gives to a creditor to be preferred to other creditors, even mortgagees» (art. 2324 C. civ.). Three elements structure this mechanism and make it a fully-fledged category of security law.

The first element is the foundation. Privilege arises from quality of the claim, In other words, the nature, cause or social or economic nature of the debt. The legislator identifies certain claims as particularly legitimate - salaries, legal costs, vendor's price, conservation costs - and attaches a preferential right to them. The lien is thus radically different from other securities: mortgages require a notarial deed, pledges require a written document, and pledges require dispossession or publicity; liens, on the other hand, require nothing more than the existence of the qualified claim.

The second element is the exclusively legal source. A lien can never result from a contract. This is one of the cardinal rules of the law of sureties, and it has an immediate practical impact: no contractual clause can create a lien that the law does not provide for, and no negotiation can give a claim preferential rank if the law does not recognise it. This legal exclusivity has a dual justification. It protects other creditors against the uncontrolled creation of causes of preference by private agreement, and it reserves to the legislature the power to arbitrate between the interests involved - which is, by its very nature, a choice of economic and social policy.

The third element is the occult nature. Unlike mortgages, which require registration with the land registry, and business pledges, which require registration with the registry, most liens are not advertised. This discretion makes them dangerous for third parties who contract with the debtor, believing that his assets are free of any encumbrance. It has another, more technical but essential consequence: it paralyses the right of resale. In application of’article 2276 of the Civil Code, If the debtor sells the encumbered asset to a bona fide purchaser, the latter is protected and the preferential creditor loses its security over the asset no longer owned by the debtor. This fragility clearly distinguishes the movable lien from published security interests.

General and special privileges: the 2021 reform rethinks the distinction between them

For a long time, French lien law was based on a two-tiered approach: firstly, depending on whether the security encumbered movable or immovable property, and secondly, depending on whether it related to all the debtor's assets (general liens) or to one or more identified assets (special liens). Four categories were derived from this grid - general movable liens, special movable liens, general immovable liens and special immovable liens. The ordinance of 15 September 2021, which came into force on 1 September 2021, has been amended to take into account the new situation.^er On 1 January 2022, the last of these categories disappeared, reshaping the entire landscape.

The contribution of the Order of 15 September 2021

The reform has simplified the legal framework. All the special real estate liens that appeared in the former Civil Code - liens of the seller of a building, the lender of funds, the joint owner, the syndicate of co-owners, the architect and the contractor - have now been simplified. transformed into special legal mortgages. The legislator has therefore removed the «preferential» status of these creditors, while retaining the economic substance of their guarantee in a new form: a mortgage which the law grants automatically, without notarial intervention, but which is now subject to the rules governing the registration of mortgages. This has two consequences. Firstly, the enforceability of these securities is now subject to their publication, which puts an end to their hidden nature. Secondly, their rank is determined by the date of publication, which makes them subject to the principle of «priority".« prior tempore, potior jure »which governs mortgages.

L'article 2376 of the Civil Code, The new structure is set out in a pithy formula: «liens on immovable property are granted by law. They are general». In other words, since 2022, there have been only two property liens, and both relate to all the debtor's real estate - legal costs and wages.

A three-entry grid rather than a four-entry grid

Positive law now distinguishes three main categories of lien. The special liens relate to one or more identified items of movable property (the premises rented, the vehicle repaired, the goods sold); they remain the most numerous and the most diverse. The general moveable liens encumber all of the debtor's movable property; they mainly protect social security and tax debts. The general property liens, These liens, which are also general moveable liens, affect all assets, but are only exercised over immovable property on a subsidiary basis. This structure should not obscure the fact that other creditors continue to benefit from preferential rights which do not bear the name of lien but which produce the effects of a lien: the super-privilege of employees, the conciliation lien and the procedural lien, discussed below.

Special moveable liens: the most diverse category

Special movable liens have a common feature: they relate to identified movable property, and their basis is always rational. Classical doctrine groups them into two families according to this basis - those based on the idea of an implied pledge and those based on the enrichment of the debtor.

Privileges based on the idea of tacit pledge

The most emblematic of this category is the building lessor's lien, provided for in’Article 2332, 1° of the Civil Code. To guarantee the payment of rent and charges, the law grants the lessor - whether in the case of a residential or commercial lease - a preferential right over all the movable property in the rented premises. The mechanism is based on a fiction: the law presumes that the tenant has tacitly pledged the furniture that he brings into the premises. The guarantee covers rent that has fallen due and, where the lease has a date certain, rent yet to fall due. It even extends to goods that do not belong to the tenant, provided that the lessor could legitimately have been unaware of their ownership at the time they entered the premises. The lien is supplemented by the right to seize and reclaim furniture that has been moved without agreement - a right of resale limited in time, a notable exception to the principle that there is no right of resale.

On the same model, the law protects the hotelier on the effects brought by the traveller to his establishment, and the carrier on the goods being transported. In both cases, the physical possession of the goods - on the creditor's premises or for the performance of the contract - is treated as a tacit pledge. In practice, these liens are not very spectacular, but their effectiveness remains real in current litigation concerning hotel or logistics collections.

Liens based on the enrichment of the debtor

Another family of special privileges is based on a logic of equity: the person who has enriched the debtor's assets - either by adding value or by preserving existing value - must be paid in priority out of that value. Without his intervention, other creditors would not be able to rely on this asset.

Le furniture vendor's lien, provided for in’article 2332, 4° of the Civil Code, is one of the oldest in French law. It allows an unpaid seller to obtain payment by preference from the price of the item sold, as long as it is still in the buyer's possession. Three conditions must be met: the sale must be complete, the price must be due, and the item must remain in kind in the debtor's estate. The lien is lost if the thing is transformed to the point where it is no longer identifiable (wheat becoming flour), if it is incorporated into an immovable (becoming an immovable by destination), or if it is resold to a purchaser in good faith. In addition to the lien, the unpaid seller still has a formidable weapon: the resolutory action, which enables him to obtain the annulment of the sale and the return of the property, in application of article L. 225 of the Civil Code.’article 1224 of the Civil Code. In practice, the seller of capital goods often prefers to use the retention of title clause, which gives it a much more powerful guarantee, since it survives the insolvency proceedings.

Le conservation fee privilege, referred to in’article 2332, 3° of the Civil Code, This right protects anyone who has incurred expenses to preserve a movable asset belonging to someone else. The most telling illustration is that of the garage owner who repairs a vehicle: his expenses have helped to maintain or increase the value of the property, and it is only fair that he should be paid first out of that value. The lien only covers expenses that are essential to the survival of the asset - not unnecessary improvements. Above all, it is coupled with a right of retention It is a particularly effective form of security, allowing the custodian to refuse to return the property until it has been paid, and resisting the opening of collective proceedings. This combination of lien and retention makes it one of the most powerful securities under French law.

General privileges: a smaller core after the reform

While special privileges are numerous and varied, general privileges have become rare and concentrated. Since the 2021 reform, they have essentially been reduced to two: the privilege of legal costs and the privilege of salaries. But this concentration should not be misleading: it is precisely these two liens that dominate the ranking and that dictate, in practice, the order in which creditors are paid.

Legal costs privilege

The legal costs privilege guarantees the costs incurred for the preservation, liquidation and realisation of the debtor's assets. These costs - court fees, seizure costs, costs of seals and inventory, costs of sale and distribution of the price - have a common characteristic: they were incurred in the interests of all creditors. Without them, the property would not have been retained, sold or distributed. The logic of the lien is therefore retributive: the person who has enabled others to pay themselves must be paid before them. To benefit from this treatment, the costs must be useful to the mass creditors; costs that have benefited only one creditor are not privileged. This privilege is one of both general movable and general immovable property privileges: it applies to all of the debtor's assets, first movable, then immovable.

Salary privilege and its super-privilege

The wage lien, covering the last six months’ pay, protects employees as a particularly vulnerable category of creditor. L'article 2377 of the Civil Code sets out the scope: salaries as such, holiday pay, compensation in lieu of notice and redundancy pay. It also extends to royalties due to authors and artists for their last three years of exploitation. Like the legal costs lien, it applies to all assets, movable and immovable. This «ordinary» lien is doubled, in collective proceedings, by a super-privilege which will be analysed in detail in the section on collective proceedings.

The principle of subsidiarity

A technical but essential rule governs the exercise of general liens on both movables and immovables: the principle of subsidiarity. L’Article 2378 of the Civil Code states that «where the lien also relates to the general movables of the debtor, it is exercisable over immovables only in the absence of sufficient movables». The preferential creditor must therefore first pay on the movable property; he may only reach the immovable property if the movable property is proven to be insufficient. This rule protects mortgagees, who are only encumbered by general liens if the movables are insufficient. In practice, the preferred creditor does not have to prove this inadequacy himself: it is up to the other creditors to establish, where applicable, fraud or abuse of process.

The super-privilege of employees and the privileges specific to insolvency proceedings

Insolvency law has forged its own privileges, not all of which appear in the Civil Code, but which dominate the classification of insolvency proceedings. Three mechanisms dominate: the super-privilege of employees, the conciliation privilege and the procedural privilege.

Employee super-privilege: the top priority

When insolvency proceedings are initiated, employees benefit from a super-privilege on salaries for the last sixty days worked - ninety days for sales representatives. This super-privilege, organised by the Articles L. 3253-2 to L. 3253-4 of the Labour Code, This is capped at twice the monthly social security ceiling per employee. It is paid in addition to all other receivables, It is based on a twofold principle - the maintenance nature of the employee's claim and consideration for the risk that the employee necessarily assumes in the company's business. It is based on a dual principle - that the employee's claim is for maintenance and that it is compensation for the risk that the employee necessarily assumes in the company's activities.

In practice, it is the’AGS - the Association pour la gestion du régime de garantie des créances des salariés - which advances sums due to employees when the employer is unable to pay. The AGS is then subrogated to the rights of the employees and, as such, enjoys super-privilege in the distribution of the price of the assets. The Court of Cassation has confirmed this subrogation on several occasions (Cass. com., 11 June 2014, no. 13-17.997).

The conciliation privilege: rewarding new money

The legislator wanted to encourage the rescue of companies in difficulty by rewarding those who provide new support. L’Article L. 611-11 of the French Commercial Code grants a specific privilege to creditors who make a new cash contribution or supply a new good or service as part of an approved conciliation agreement. This privilege - known as the new money »This is one of the major innovations in contemporary insolvency law, and one of the tools used by practitioners to make insolvency proceedings credible. This is one of the major innovations of contemporary insolvency law, and one of the tools that practitioners use to make insolvency proceedings credible. prevention.

The procedural lien: paying those who keep the business going

During the observation period of insolvency proceedings, the debtor continues to operate - suppliers have to deliver, employees have to work and service providers have to be involved. Claims arising after the opening of the insolvency proceedings for the purposes of the proceedings or in return for a service provided to the debtor benefit from the procedural privilege, organised by articles L. 622-17 (safeguard and recovery) and L. 641-13 of the French Commercial Code (liquidation). These receivables must be paid when due, and when they are not, they are given preferential ranking in the final distribution. The logic is clear: without this protection, no supplier would agree to supply a company in receivership, and the observation period would lose all substance.

Creditor classification and lien conflicts

The multiplicity of competing liens and security interests makes conflicts inevitable. The classification differs depending on whether one is in civil law - i.e. in individual enforcement proceedings, outside collective proceedings - or in collective proceedings. This duality is one of the classic pitfalls of security law: a creditor whose position seemed excellent in theory may find itself at the bottom of the ranking as soon as collective proceedings are opened.

Civil law classification

Outside collective proceedings, the payment order combines several layers. At the top are the exclusive rights, These are ownership-security (retention of title, trust-security) and the effective right of retention. Their holders are «outside the ranking» - they can retain the property or claim ownership of it without being subject to the law of competition. Next come general property liens, which take precedence over even previously registered mortgages, in the order set out in Article 2377 (legal costs then wages). The mortgages These are then ranked according to the date of publication at the Land Registry Office. Finally, the unsecured creditors share the balance in proportion to their claims. A derived rule is worth remembering: the creditor of a previous owner takes precedence over the creditor of the current owner, by virtue of the principle that no one may transfer more rights than he has himself - a rule from which only the lien for legal costs escapes, due to its collective nature.

Classification as a collective procedure: Article L. 643-8 of the Commercial Code

The opening of a safeguard, reorganisation or judicial liquidation overturns the civil law order. L’Article L. 643-8 of the French Commercial Code establishes the hierarchy applicable to the distribution of the liquidation proceeds. This hierarchy responds to a rationale that is no longer that of civil law - based on the anteriority and quality of the claim - but to an economic and social rationale: to encourage the rescue of the company and protect employees.

The lesson of this hierarchy is a practical one. A hypothecary creditor, who in civil law would come just after the privilege of legal costs and the privilege of wages, finds himself in insolvency proceedings behind the super-privilege of employees, legal costs, the privilege of conciliation and all subsequent privileged claims. The guarantee remains real, but it can be degraded to the point where it no longer produces anything in liquidations marked by significant company liabilities. Special moveable liens, on the other hand, retain their rank on the encumbered asset, but can do nothing against the claims that precede them in the hierarchy of article L. 643-8.

The fate of special liens in the context of collective proceedings

Not all special liens react in the same way to the opening of collective proceedings. Those that are accompanied by an effective right of retention - the conservator's lien is the typical example - are the most resistant. The liquidator cannot seize the property without paying off the retaining creditor, whose right is transferred to the sale price. Conversely, liens that are not backed by physical control of the property are more fragile. The vendor's lien, for example, is subject to an action for revendication, which must be brought within a very short period of time - three months from the opening judgment - otherwise the vendor will be treated as a mere unsecured creditor. Lastly, the suspect period does not directly affect preferential claims, which are legal in origin and not «constituted» by the debtor. However, it may indirectly affect the underlying transaction - the sale, the service - that gave rise to the preferential claim, where this transaction was entered into in fraud of the rights of other creditors.

Linking liens with other security interests - mortgagethe pledgethe surety bond - and anticipating the classification applicable to a given situation requires a detailed analysis, which is by no means academic: it is the analysis that determines, in practice, whether a guarantee will be paid or not. To structure a guarantee scheme or defend a creditor in a complex distribution, the’assistance from a security lawyer is a prerequisite.