The financing of companies and the securing of commercial receivables are based on a range of legal tools, the effectiveness of which is a key factor in the confidence of economic players. Among these instruments, the pledge of tangible movable property is a fundamental security, enabling a creditor to protect himself against the risk of non-payment by obtaining a direct right over the debtor's property. Its flexibility and relative simplicity make it a popular mechanism, but its implementation requires a precise knowledge of the rules governing its creation and enforcement. This article provides a detailed analysis of the rules governing this security, an essential aspect of our legal system. a complete guide to the law on movable securities.
Legal nature and purpose of pledges of tangible movable property
A pledge is an agreement that gives a creditor a right over a debtor's movable property to guarantee payment of a debt. Its nature and scope have been modernised to meet the needs of business life.
Legal definition and function (art. 2333 C. civ.)
Under the terms of article 2333 of the French Civil Code, a pledge is an "agreement by which the pledgor grants a creditor the right to be paid in preference to his other creditors on a present or future movable asset or group of movable assets". Its primary function is therefore to provide a guarantee of payment. The pledgee has a preferential right, which enables it to be paid in priority from the sale price of the pledged asset in the event of the debtor's default.
Object of the pledge: present or future tangible movable assets
The scope of the pledge, i.e. the assets to which it may apply, is broad. It can cover any tangible personal property, including, for example, stocks of goods, machinery, vehicles or equipment. A key feature of the modern pledge is its ability to cover future assets. A company can thus pledge future production in order to obtain financing, which is an important economic lever. The only condition is that the assets, whether present or future, are identified or can be made identifiable in the deed.
Nature of the secured claim
A pledge may secure any form of obligation, whether civil or commercial. The debt secured may be present or future, provided that it is determinable. It is therefore possible to create a pledge to secure a credit facility or line of credit for which the final amount has not yet been determined, provided that the pledge deed specifies the elements that will enable it to be evaluated.
Conventional security interest and indivisibility
A pledge is a "real" security because the creditor's right relates directly to an item (the pledged asset) and not to the debtor's overall assets. It is also a "contractual" security, as it arises from a contract between the pledgor and the creditor. Finally, the pledge is indivisible by nature. This means that each part of the pledged asset guarantees the entire debt, and that the asset as a whole guarantees each fraction of the debt. In practical terms, even after partial repayment, the creditor retains his right to the entire asset until full payment has been made.
Dispossession or publicity (art. 2337 C. civ.)
To be effective and enforceable against other creditors or potential purchasers of the asset, the pledge must be publicised. The Civil Code offers an alternative: either the asset is physically handed over to the creditor or to an agreed third party (a dispossessory pledge), or the pledge is entered in a special register (a non-possessory pledge). This choice has major practical consequences, particularly for the debtor, who may, in the second case, continue to use the pledged asset for his business.
Removal of the civil/commercial pledge distinction
A major reform in 2006 unified the civil and commercial pledge regimes. Previously, the rules differed, particularly in terms of proof and enforcement. Today, a single set of rules, incorporated into the Civil Code, governs all pledges of tangible movable property, making them simpler and clearer for practitioners and businesses alike.
Creation of a pledge of tangible movable property
The validity of the pledge is subject to compliance with specific formal and substantive conditions designed to protect the parties and ensure the legal certainty of the transaction.
Status of the parties (pledgee, grantor)
The pledge contract unites two parties. The pledgee is the party in whose favour the security is established. The pledgor is the person who pledges the asset as security. Most often, the pledgor is the debtor himself, but it may also be a third party who agrees to pledge one of his own assets to secure the debt of another. In all cases, the pledgor must have the capacity to dispose of the asset, i.e. be the rightful owner.
Formalities of the pledge: written document required (art. 2336 C. civ.)
The law requires the pledge contract to be evidenced in writing, on pain of nullity. This writing, which may be a private document or a notarial deed, is a condition for the validity of the security. The purpose of this formal requirement is to formalise the agreement of the parties and prevent disputes over the existence and terms of the security.
Contents of the deed and basis of the pledge (alienable movables)
In order to be valid, the written instrument must contain certain mandatory information. It must specify the debt(s) secured. It must also identify the assets pledged, specifying their nature, quality and quantity. The aim is to define unambiguously the basis of the security. Only goods that are commercially available and can be sold (alienable) may be pledged.
Enforceability of a pledge of tangible movable property against third parties
The mere existence of a pledge contract between the creditor and the pledgor is not enough. For the creditor to be able to assert his rights over the property against all parties, the security must be made effective against third parties.
Principle and methods of perfection (publication in a special register or dispossession)
As mentioned above, a pledge can be enforced in two mutually exclusive ways. The first, the non-possessory pledge, is the most common in commercial practice. It is based on the completion of a publicity formality. The second, a pledge with delivery, involves the physical delivery of the asset into the hands of the creditor or a third party.
Advertising terms and conditions (registration, national portal)
A non-possessory pledge is enforceable by registration in a special register held at the registry of the commercial court within whose jurisdiction the pledgor is registered or domiciled. This entry must be made on the basis of the pledge deed. The information is centralised on a national portal, enabling any interested party to check whether an asset is encumbered by a pledge.
Effects of registration (enforceability, duration, amendments, cancellation, liability of registrars)
The registration takes effect on its date and makes the pledge enforceable against third parties for a period of five years. It may be renewed before it expires. Any modification affecting the pledge (for example, a change in the secured debt) must be recorded in an amending entry. Once the debt has been repaid in full, the pledgor may request that the registration be cancelled. The registrars are liable for any errors or omissions made during registration that may cause prejudice.
Terms and conditions of perfection by dispossession (timing, duration, substitution, terms)
In the case of a pledge with dispossession, perfection arises from the actual delivery of the asset to the creditor. This dispossession must be real, continuous and unequivocal throughout the term of the pledge. The pledgor must no longer have free disposal of the asset. It is possible to agree that the asset will be held by a third party, who will then act as custodian on behalf of the creditor.
Management of pledged property in the event of dispossession (creditor's liability, cash pledge, insurance, costs)
When the creditor holds the property, he assumes the responsibility of a guardian. He must look after it like a good father of the family. The creditor may not use the asset without the consent of the grantor. If the pledged asset is a sum of money (cash pledge), the creditor must keep it in a separate account. The debtor is responsible for any costs incurred in safekeeping the asset. The creditor must also ensure that the asset is adequately insured.
Management of pledged property in the absence of dispossession
In a non-possessory pledge, the pledgor retains the use of the asset. However, he cannot dispose of it without the creditor's agreement. The pledgor is obliged to keep the asset in good condition and to maintain its substance. The creditor may ask to inspect the condition of the pledged asset at any time. The pledgor may be held liable for any act that diminishes the value of the asset.
Rights of the pledgee
Once the pledge has been validly constituted and made enforceable, the creditor is granted a number of prerogatives that form the core of its security.
Right of retention (prerogative, force in collective proceedings, field)
The right of retention exists only in a pledge with delivery. It authorises the creditor to refuse to return the asset until it has been paid in full. This right is particularly powerful, including in the event of insolvency proceedings against the debtor. The liquidator cannot seize the asset and sell it without first paying off the pledgee.
Resale rights
The right of resale is the pledgee's right to claim the pledged asset from whomever it is held. This right is particularly relevant to non-possessory pledges. If the debtor sells the pledged asset to a third party in breach of his obligations, the creditor may, thanks to the enforceability conferred by the registration, exercise his right of pursuit against the purchaser to enforce his security.
Preferential right
The preferential right is the very essence of the security. It entitles the pledgee to priority payment from the proceeds of the sale of the pledged asset, ahead of unsecured creditors (those who have no specific security). The rank of the pledgee is determined by the date on which the pledge became enforceable (date of registration or dispossession).
Enforcement of a pledge of tangible movable property
When the debtor defaults, the creditor can use its guarantee to obtain payment. The law provides several mechanisms for enforcing the pledge.
Reform of the "voie parée" (art. 2346 C. civ.)
The creditor can have the pledged asset compulsorily sold. The procedure, formerly known as "parrying", has been simplified. The creditor can proceed eight days after simply notifying the debtor, without needing to obtain a writ of execution. The sale must be public, i.e. carried out at auction by a court commissioner, a notary or a sworn goods broker. This procedure allows the assets to be realised quickly.
Pacte commissoire (art. 2348 C. civ.)
It is possible to include a clause in the pledge contract, known as a "commissory agreement", which stipulates that if the debtor defaults, the creditor will automatically become the owner of the pledged asset. This clause is only valid if it is included in the pledge deed from the outset. At the time of transfer of ownership, the value of the asset must be determined by an amicably or judicially appointed expert. If the value of the asset exceeds the amount of the debt, the creditor must pay the difference (the balance) to the debtor.
Judicial sale
Instead of a quick public sale, the creditor can always opt for the traditional legal route. The creditor applies to the court to order the sale of the property. This method is more formal and often takes longer. The proceeds of the sale are then distributed among the creditors, with the pledgee benefiting from its preferential right. The sale and payment mechanisms are also central aspects of the realisation of assets and the distribution of funds in a compulsory liquidation.
Judicial attribution of the pledge (art. 2347 C. civ.)
The creditor may also ask the court to award him ownership of the property in payment of his claim. As with the pacte commissoire, an expert appraisal is required to determine the value of the asset and ensure that the debtor is not prejudiced. The judge will award the property if the application is deemed legitimate.
Liability of a negligent pledgee
The creditor must act with diligence in realising his pledge. If he delays taking action and the property loses its value, or if he organises the sale under conditions that are prejudicial to the debtor, he may be held liable. He could be ordered to compensate the debtor for the loss of value suffered.
Impact of collective procedures (safeguard, reorganisation, liquidation)
The opening of collective proceedings (safeguard, reorganisation or judicial liquidation) against a debtor has a major impact. The principle is that individual lawsuits are stopped. The pledgee can therefore no longer initiate new enforcement proceedings. They must declare their claim and security to the court. However, they retain their specific rights. In liquidation, he will be paid from the sale price of the pledged asset according to his rank. The relationship between security interests and insolvency proceedings reveals complex balances where the pledgee, although constrained by the procedure, has a privileged position over unsecured creditors.
Extinction of a pledge of tangible movable property
As a guarantee, a pledge is intended to expire once its purpose has been fulfilled or if certain conditions are no longer met.
Ancillary extinguishment (reimbursement)
The most natural cause of extinction of a pledge is full payment of the debt it secures. As the pledge is an accessory to the debt, it disappears with it. The pledgor is then entitled to demand the return of the asset if it has been dispossessed, or to request that the entry be deleted from the commercial register.
Main extinction (voluntary restitution, loss, forfeiture)
The pledge may also be extinguished for reasons of its own, independently of the fate of the debt. This is the case if the creditor voluntarily returns the asset to the pledgor in a possessory pledge, as this constitutes renunciation of the security. The total loss of the pledged asset, for example in a fire, also extinguishes the pledge, as it has no object. Lastly, the creditor may forfeit his right of pledge if he misuses the asset, for example by attempting to sell it without right or by allowing it to deteriorate.
Setting up a pledge of tangible movable property, although commonplace, is a legal act with significant implications for both the creditor and the debtor. Drawing up the deed of pledge and complying with the formalities governing its enforceability are crucial to the effectiveness of the security. To secure your financing transactions and benefit from assistance in drafting or enforcing your securities, you can call on Solent Avocats' support in commercial law.
Sources
- Civil Code
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