When a claim appears to be under threat, creditors have a number of legal tools at their disposal to guarantee future payment. Within the overview of judicial sureties in french lawThe pledge of a business is a particularly effective measure. It makes it possible to take security over one of the most important assets of a debtor, its business, even before obtaining a final court decision ordering the debtor to pay. The aim of this preventive procedure is to prevent the debtor from organising his insolvency. However, it is subject to precise formalities and confers rights and obligations on both the creditor and the debtor. Understanding its mechanisms is essential if you are to anticipate its consequences. For all steps aimed at securing a debt, legal support for your seizure and security procedures by an expert lawyer is a condition for success.
The business: elements included and excluded from protective pledges
The protective pledge does not relate to the business as a whole, but to a specific intangible asset: the business. Defining the perimeter of the pledge, or "basis", is therefore a fundamental step. The law defines the items that are automatically included in the guarantee, unless a clause in the registration form expressly excludes them. The rationale is to capture the economic value of the business, which is based above all on its components that are attractive to customers. This approach is in line with the general logic of the pledging as a powerful security interestwhich aims to seize a valuable asset without dispossessing the owner.
Scope of the pledge: trade name, customer base, leasehold rights
By default, the pledge covers the intangible elements that make up the core value of the business. Article L. 142-2 of the French Commercial Code lists the assets included in the pledge, unless otherwise stipulated. These must include the trade name and sign, which are the rallying signs of the customer base. The customer base itself, as well as the goodwill, although difficult to materialise, are considered to be the central element of the business and are therefore included in the collateral.
The right to the lease is another pillar of the pledge. It represents the trader's right to remain on the premises and to have his commercial lease renewed. Its value can be considerable, particularly in areas with a strong commercial appeal. The secured creditor thus acquires a right over this asset. If the debtor were to sell his leasehold rights, the creditor could claim the sale price. Other intangible items such as patents, licences, trademarks or designs must be expressly mentioned in order to be included.
Special cases: equipment, tools and branches
A clear distinction must be made between intangible and tangible items. Equipment and tools, i.e. movable assets used in the operation of the business, are in principle excluded from the scope of the pledge. The legislator considered that these assets could be the subject of other types of security, such as a pledge, and that they were also necessary for the continuation of the business. For them to be included in the pledge, an express declaration must be made in the deeds. Goods, on the other hand, are always excluded from the pledge of a business.
The question of branches is also important. A pledge taken over a main business does not automatically extend to its branches. These constitute separate businesses, with their own customer base and, often, their own leasehold rights. Consequently, if the creditor wishes his guarantee to also cover a branch, he must register a specific pledge for each business concerned with the registry of the commercial court responsible for that branch.
Formalities for provisional publication of the protective pledge
The "protective" nature of this pledge implies a two-stage procedure. The first phase consists of taking out a provisional guarantee, simply with the authorisation of the judge, to surprise the debtor and prevent him from hiding his assets. This provisional registration is subject to strict publicity formalities to ensure that it is effective and that third parties are informed.
Filing of forms at the commercial court registry
Once the order of the enforcement judge (or the president of the commercial court) has been obtained, the creditor must act quickly. He has three months in which to proceed with the provisional registration. This is done by filing two forms with the registry of the commercial court within whose jurisdiction the business operates. This filing is an administrative step, but it is of major importance. It is the act that formalises the taking of the guarantee and gives it a definite date.
After checking that the documents are in order, the registrar keeps one of the forms and gives the second to the creditor, with a note of the date of filing and the registration number. This formality makes the pledge public and accessible to anyone wishing to consult the list of registrations on the business.
Mandatory information and importance of the date of filing
Schedules cannot be drafted in an approximate manner. The French Commercial Code and the French Code of Civil Enforcement Procedures require mandatory information to be included, failing which the registration will be null and void. These must include the full identity of the creditor and debtor, the creditor's election of domicile within the jurisdiction of the court, an indication of the judicial authorisation (or title) under which the registration is made, and the amount of the secured claim in principal and ancillary sums.
The date of registration determines the creditor's ranking. Where there is more than one pledge on the same property, creditors will be paid according to the adage "prior tempore, potior jure": the first in time is first in right. A registration made in the morning takes precedence over one made in the afternoon. This precedence is decisive, not only in relation to other pledged creditors, but also in relation to the seller of the business or creditors with other types of lien.
Effects of provisional publicity on the business
Provisional registration, although temporary, has immediate and powerful legal effects. It does not paralyse the debtor's activity, but severely restricts his ability to dispose of the value of his assets, thereby protecting the creditor against any manoeuvre.
Opposability to third parties and continued alienability
The main effect of publicity is to make the pledge enforceable against everyone. No one can ignore the existence of the security. This means that any potential purchaser of the business, or any other creditor, is deemed to be aware of the registered creditor's preferential right. However, the pledge does not make the business unavailable. The debtor retains the right to sell or lease the business. The pledge is a right over the value of the asset, not a right of ownership. The business remains alienable, but the creditor's right "follows" the business into whatever hands it passes.
Duty on the value and deposit of the price in the event of a sale
This is where creditor protection comes into play. If the debtor sells his business, the secured creditor has a right of resale and a preferential right. The preferential right entitles the creditor to be paid the sale price before unsecured creditors (those who have no security). To make this right effective, the law requires the purchaser of the business to deposit the sale price. He cannot pay the seller directly. The price is blocked with a receiver (often the Caisse des Dépôts et Consignations) while the registrations are purged. Registered creditors, including the holder of the provisional pledge, can then lodge an objection to be paid from these sums.
Debtor protection measures: discharge and reduction
Protective pledging is an aggressive measure, taken without any debate on the merits of the claim having taken place. To counterbalance this power, the law provides debtors with remedies to challenge a pledge that they consider unfounded or disproportionate.
Conditions and procedure for requesting release
The debtor may request the release of the provisional pledge at any time. This request must be made to the enforcement judge who authorised the measure. To be successful, the debtor must prove that the legal conditions for the protective measure are not (or are no longer) met. The debtor can show, for example, that the claim asserted by the creditor is not founded in principle, or that the creditor cannot justify circumstances likely to threaten its recovery. If the court grants the creditor's request, it will order the cancellation of the registration, which will then be cancelled retroactively.
The procedure requires precise legal argumentation. You need to know which court to apply to. The application for release or reduction must be brought before the enforcement judge, and it is essential to determining the territorial jurisdiction of the JEX for the procedure to be admissible.
Reducing the basis of pledge: evidence of excessiveness
If the guarantee is justified in principle but excessive in scope, the debtor may ask for it to be reduced. This is the case, for example, if a creditor pledges €50,000 against a business with an estimated value of €500,000. The debtor can then ask the court to limit the effects of the pledge to a fairer sum or to reduce its scope by excluding certain items. The burden of proving that the measure is excessive lies with the debtor, who must provide concrete evidence (balance sheets, expert reports) to support his claim.
Definitive publication of the protective pledge
The provisional nature of the registration means that it must be confirmed. The creditor must obtain a writ of execution (a final judgement, for example) to be able to transform the protective measure into a definitive guarantee.
Time limit for completion and sanction for lapse
The creditor does not have an infinite amount of time. Once they have obtained a writ of execution, they have two months in which to make the final publicity. This period runs from the date on which the order becomes final. If this period is missed, the penalty is severe: the provisional registration lapses. It loses all effect, and the creditor loses the rank conferred by his initial diligence. He can no longer rely on his pledge, even if he later obtains payment of his claim.
Final registration formalities and return to ordinary commercial law
Final publication is effected by a new entry at the commercial court registry. The creditor files forms indicating the enforcement order obtained. This new registration replaces the provisional registration. It ranks retroactively from the date of the provisional formality. This is the whole point of the procedure: the creditor retains the benefit of the earlier registration. Once the final registration has been made, the pledge is no longer a precautionary measure. It becomes a pledge of a business under ordinary law, governed by articles L. 142-1 et seq. of the French Commercial Code.
Interferences between protective pledges and insolvency proceedings
The situation becomes more complex when the debtor is the subject of safeguard, reorganisation or liquidation proceedings. In such cases, the rules governing collective proceedings take precedence over security law.
Suspension of registrations and invalidity of the suspect period
The opening of insolvency proceedings automatically entails a prohibition on the payment of any previous claim and a prohibition on new registrations. A creditor who has not registered his protective pledge prior to the opening judgment may no longer do so. In addition, if the registration was made during the "suspect period" (the period preceding the date of cessation of payments), it may be cancelled if the creditor was aware of this state of affairs. The interaction between a security and a bankruptcy raises complex issues, illustrating the importance of anticipating the interaction between the two. precautionary measures and collective proceedings.
Statement of claim in insolvency proceedings
Holding a pledge, even a definitive one, does not release the creditor from his or her obligations under the insolvency proceedings. They must declare their claim as a liability of the proceedings within the statutory time limits (generally two months from publication of the opening judgment). When making this declaration, you must mention the existence of your pledge. If he fails to declare his claim within the time limit, his claim is extinguished and his security, which has no cause, disappears. If the creditor declares his claim but fails to mention his security, he will be considered as a mere unsecured creditor and will lose the benefit of his preferential right.
The protective pledge of a business is a formidable legal weapon for a creditor, but its implementation is subject to precise stages and strict deadlines. Each phase, from defining the basis of the pledge to converting it into a definitive guarantee, involves issues that can be decisive. To secure your rights effectively or to defend yourself against such a measure, the assistance of a lawyer is essential. Contact our firm for an analysis of your situation and a tailor-made strategy.
Sources
- Commercial code
- Code of civil enforcement procedures
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