The pledge of a securities account is a powerful and flexible guarantee mechanism, widely used in business to secure financing or a transaction. However, it must be set up in accordance with a precise set of formalities, each stage of which determines its validity and effectiveness. A simple error or omission can deprive the creditor of the security expected. This article details the steps involved in setting up a guarantee, an essential aspect covered in our complete guide to securities account pledging. It is aimed at managers and entrepreneurs who want to understand how to implement this security correctly and robustly.
The legal foundations of the constitution
Prior to 1996, the taking of security over financial securities was fragmented and complex, with each type of security having its own regime. The Financial Activity Modernisation Act introduced a major reform by creating a unified system, now governed by a central text of the law on securities.
Article L. 211-20 of the Monetary and Financial Code
This text is the cornerstone of securities account pledging. It defines the mechanism, its basis, the conditions under which it is created and how it is realised. Codifying the principles of the 1996 law, this article has been modified over time, in particular by the reforms of security law in 2006 and 2021, to clarify and strengthen its effectiveness. It enshrines a security interest that no longer relates to individually identified securities, but to a dynamic whole: the account itself, conceived as a universality.
Distinction from the former pledge of securities
The pledge of securities accounts has replaced the former pledge of securities, which was very rigid. The main contribution of the reform was to introduce considerable flexibility. Previously, the pledge related to specific securities and fixed the composition of the portfolio. Any sale or substitution required complex new formalities. The modern pledge, on the other hand, relates to the account. This means that the contents of the portfolio can change through real subrogation (the proceeds from the sale of a security are automatically included in the collateral) or through additions, without calling into question the initial collateral. This innovation has made the guarantee compatible with active management of the securities portfolio.
Declaring a pledge: a mandatory formality
The heart of the pledging process lies in a single document: the pledge declaration. It is this document that gives rise to the security and makes it enforceable against everyone, including the company issuing the securities and other creditors.
Mandatory content of the declaration
To be valid, the declaration, signed by the account holder (the pledgor), must be dated and include a series of mandatory details defined in article D. 211-10 of the French Monetary and Financial Code. It must be explicitly entitled "Declaration of pledge", refer to article L. 211-20, and precisely identify the parties (settlor and creditor). Above all, it must describe the secured claim, either by its amount or by information that enables it to be identified unambiguously. Finally, it must list the nature and number of the securities that initially form the basis of the guarantee and the identification details of the account in which they are registered.
Legal value and enforceability against third parties
The strength of the system lies in the simplicity of this formality. Simply signing the declaration is enough to constitute the pledge. There is no need to notify the company that issued the securities, as the Court of Cassation has confirmed on several occasions. Once the declaration has been signed, the security interest is validly formed between the parties and immediately becomes enforceable against third parties. The date of the declaration determines the starting point of the guarantee and its ranking in relation to any other security interests.
Opening a special account or deep identification
For the pledge to be effective, the pledged securities must be isolated from the other assets of the pledgor. This is achieved either by recording them in a special account or, in the case of more modern securities, by computer identification.
The role of the account keeper
The securities are registered in a "special account" opened in the name of the settlor, who retains ownership of the securities. This account is actually a sub-account of the ordinary securities account. It may be held by different parties: the issuing company itself (for pure registered securities), a financial intermediary (a bank, an investment firm) or a central depository such as Euroclear France. The role of the account keeper is to act as custodian, ensuring that the securities held in the special account are not transferred without the creditor's consent, unless an agreement authorises this.
Specific features of the fruit and produce account
By default, the pledge covers not only the securities, but also the "fruits and proceeds" arising from them: dividends, interest, redemption or sale proceeds. An associated cash account, often called a "fruits and proceeds account", may be opened to collect these proceeds. Its use is optional and can be arranged by agreement. If the holder of the securities account is not authorised to receive funds (this is often the case for non-bank issuers), the cash account must be opened with a credit institution. The sums paid into this account are then deemed to have been part of the guarantee since the date of the initial declaration.
Identification of securities via a shared electronic recording device (deep)
Technology has changed the way securities are represented. The Order of 2017 validated the registration of certain financial securities in a DEEP, a distributed ledger similar to a blockchain. For these securities, registration in the DEEP "takes the place of book entry". The pledge is not constituted by the opening of an account, but by an "identification by a computer process" that marks the securities as being pledged. All the securities marked in this way are legally assimilated to the pledged account and follow the same rules. This technology, which modernises the transfer of securities, raises specific questions that are addressed in our article on the challenges of securities account pledging in the age of deep.
The advantages of a pledge agreement
While the declaration is the only compulsory legal formality, the drafting of a pledge agreement between the pledgor and the creditor is highly recommended. This contractual document organises the life of the security and sets out the rules for its operation. The agreement is the ideal tool for defining the rules applicable to management and development of the pledged portfolio.
Essential clauses to include
But why draw up an agreement if it isn't compulsory? Because it allows many situations to be anticipated. The parties can set out the conditions under which the settlor can manage his portfolio (sell securities on condition that the proceeds are reinvested), or on the contrary stipulate total inalienability. They can also set out the terms and conditions of an additional guarantee ("watering down" clause) if the value of the securities falls. It is also in the agreement that a "commissory pact" can be inserted, an essential clause that authorises the creditor, in the event of the debtor's default, to appropriate the securities without going through a public sale or a court decision. The time limits for realising the guarantee can also be arranged.
Notification to the account holder in the event of an agreement
Where the agreement authorises the pledgor to dispose of the pledged securities, the account keeper must be informed in writing. The account keeper then becomes the guarantor of compliance with the rules laid down by the parties. In practice, the account keeper often intervenes directly in the agreement to formalise its own commitments and ensure that the instructions are clear and applicable.
Successive pledges on the same account
A frequently asked question is whether it is possible to pledge a second time a securities account that has already been assigned as collateral. The answer is yes, and this option has been expressly confirmed by law.
Legality and procedures for creating second-ranking pledges
It is perfectly possible for a pledgor to grant a second or even third-rank pledge on the same account. This is useful when a securities portfolio has a much higher value than the first secured claim, thereby freeing up additional credit capacity. The creation of a second-ranking pledge follows the same procedure: a new pledge declaration must be signed. The ranking of creditors is determined by the chronological order of their declarations. The second-ranking creditor can only exercise his rights once the first-ranking creditor has been paid, either by payment of the debt or realisation of the collateral.
Pledging a securities account is a legal act whose effectiveness depends on its formal precision. Each stage, from drafting the declaration to negotiating a tailor-made agreement, has implications that must be mastered. To secure your guarantees and benefit from a assistance from an expert lawyer in setting up your securities and guaranteescontact our office.
Sources
- Monetary and Financial Code, in particular Articles L. 211-20 and D. 211-10 to D. 211-14-1.
- Civil Code, in particular articles 2340 (successive pledges) and 2348 (commissory agreement).
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities.
- Order no. 2017-1674 of 8 December 2017 on the use of a shared electronic recording device.
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