Pledging is an essential legal mechanism for securing financing, but its complexity can confuse entrepreneurs and managers. Pledging is a powerful form of security, whereby a debtor transfers an intangible asset, such as a claim or company shares, to a creditor to secure a debt. Understanding how it works is a crucial step in negotiating a loan or structuring a financial transaction. This article provides an overview of the principles of pledging, its various forms and the issues involved. To find out more about each mechanism, our dedicated articles are at your disposal. For a legal advice on securities and guaranteesOur law firm is at your service.
What is pledging? A definition for practitioners
Article 2355 of the Civil Code defines a pledge as follows "the assignment, as security for an obligation, of present or future intangible movable property or a collection of intangible movable property".. In practical terms, this is a security in rem, i.e. a guarantee that relates to an asset rather than a person. What makes it special is that it applies only to assets that the law describes as intangible: those that do not have a physical existence. Examples include receivables, company shares, business assets and industrial property rights.
It is important to distinguish between pledges and collateral. Since the major reform of the law on security interests, initiated by a major law amending the Civil Code, the term pledge has been reserved for security interests in tangible movable property (a stock of goods, equipment or a vehicle). This distinction is fundamental because the rules for creating and realising security differ. The law on pledges has itself been modernised, notably by an ordinance of 2021, an important piece of legislation whose every provision aims to strengthen its effectiveness as a tool at the service of trade and credit.
Formalising the pledge: formalities not to be overlooked
For a pledge to be valid and effective, it must comply with specific substantive and formal conditions. The law imposes a formal requirement that protects both the creditor and the debtor.
The pledge contract or deed: an essential written document
Any pledge agreement must be evidenced by a written document, failing which it is null and void. Whether it is a private document or a notarial deed, this document is the cornerstone of the transaction, its constitutive act. The contract must specify the secured debt (amount, maturity) and the intangible asset or assets pledged. This agreement materialises the obligation of the pledgor (the debtor or a third party) to the creditor.
Registration and publicity to make the security effective against third parties
The effectiveness of the security against the debtor's other creditors depends on the completion of publication formalities. These formalities make the pledge effective against third parties. The form of this disclosure varies according to the nature of the pledged asset. In most cases, the pledge will be entered in a public register, for example at the commercial court registry of the place where the business is registered in the case of a pledge of a business, or in the trade and companies register in the case of company shares. In the case of a claim, publicity may take the form of notification to the debtor of the pledged claim. A provisional registration may be made as a precautionary measure, before a court ruling makes it final. The registration is valid for a limited period and must be renewed or cancelled when the debt is extinguished. Proper registration is a prerequisite for creditors to be able to assert their rights in complete security.
What intangible assets can be used as collateral?
The legislator has provided for a general regime and a series of special regimes, with each type of asset being subject to a special legal provision, in order to adapt to the diversity of intangible assets that a company may wish to develop. This flexibility makes it possible to mobilise resources that are often under-exploited in order to obtain financing.
Pledging receivables: cash flow leverage
The pledging of receivables is a widespread technique that enables a company to secure a loan using its trade receivables. There is a common law system, but the law also provides for special mechanisms such as pledging of trade receivables, simplified by the use of a slip. This tool, inspired by the Dailly Act of 2 January 1981, is particularly appreciated by credit institutions and the banking sector for its flexibility. The delivery of this slip is a key stage in this type of business financing. For an in-depth analysis of this mechanism, see our article dedicated to the pledge of receivables.
Pledging of shares and financial accounts
Holders of financial securities can use them to secure a debt. This area covers, in particular, the pledging of company shares, the formalities for which vary depending on the form of the company (SARL, société civile). You can find more details on the pledge of shares in our special guide. In addition, the pledge of financial instrument accounts is used to secure a loan with a portfolio of securities (shares, bonds) or the balance of a pledged account. It is a sophisticated financial instrument, widely used in market financing and the banking sector.
Pledging of specific assets: goodwill and intellectual property
Certain high-value intangible assets are subject to special pledges. The pledge of the business is a classic tool that enables a trader to obtain credit without being dispossessed of his business assets, i.e. his working tools; it is a typical example of a non-possessory pledge. Its basis may include the right to a lease. Registration with the commercial court registry is an essential condition. There are other, more specific types of pledge, such as pledges of a craft business's assets, including industrial property rights (patents, trademarks), tools and equipment, and software, illustrating the constant adaptation of the law to the intangible economy.
The effects of pledging for the creditor and the debtor
Once a pledge has been validly constituted, it grants important rights to the creditor, while having consequences for the debtor. The nature of these effects distinguishes conventional pledging, which arises from an agreement, from judicial pledging, which may be ordered by a judge on a provisional or final basis as part of proceedings. If the debtor defaults on payment, the pledged creditor may realise its security. The pledgee mainly has a preferential right and sometimes, depending on case law and legislation, a fictitious right of retention, which enables it to be paid first against the value of the pledged asset.
Under certain conditions, the creditor may also have a right of resale, enabling him to enforce his security even if the property has been sold to a third party. The collateral may be realised by compulsory sale of the property or, if the contract contains a commissory agreement (the terms of which have been made more flexible by law), by allocation of the property to the creditor in payment. The law strictly regulates these procedures, particularly in the event of insolvency proceedings against the debtor, in order to maintain a balance between the rights of the creditor and the protection of the business. There is an analogy with mortgage law on this point.
Setting up a pledge requires precise drafting and compliance with the formalities that make it effective and valid. To help you secure your financing operations and choose the most suitable collateral, a assistance from a lawyer specialising in security law is a major advantage.
Frequently asked questions
What is the difference between a pledge and a collateral?
The difference lies in the nature of the collateral. A pledge relates to tangible movable property (equipment, stock), whereas a pledge relates to intangible movable property (a receivable, a business, shares in a company). In contrast, for real estate, a pledge is called an antichrèse, but the most common form of security is a mortgage, which is a type of real estate pledge without dispossession.
Is a written contract required for a pledge?
Yes, a written deed is required for any conventional pledge to be valid, on pain of nullity. The deed must precisely identify the debt secured, in particular the amount of the claim, and the intangible asset pledged.
Is it possible to pledge an asset that does not yet exist?
Yes, the law allows it. Article 2355 of the Civil Code expressly authorises the pledging of future assets. A company may, for example, pledge receivables arising from future contracts. The security will take effect when the asset comes into existence.
What happens if the debtor defaults?
In the event of non-payment, the creditor may realise his security. If he has a writ of execution, he can bring about the forced sale of the pledged asset to pay himself out of the price, or apply to the courts, by means of a court order, for the asset to be assigned to him in payment.
Is commercial collateral different from civil collateral?
A pledge is classified as commercial if the debt it secures arises from a commercial transaction. The law (via a dedicated chapter of the Commercial Code) provides for practical consequences, particularly in terms of proof and enforcement of the security, which are often more flexible and quicker to meet the needs of business life.
Can I sell a pledged asset?
It is still possible to sell, but pledging generally gives the creditor a right of resale, an advantage similar to that of a mortgage. This means that the creditor's guarantee is transferred to the property, even in the hands of the new owner, who could be forced to pay the debt or have the property seized.
What is a judicial pledge?
This question concerns many creditors. A judicial pledge is not the result of an agreement, but of a court decision. It is a protective measure that a creditor can obtain from a judge (for example, the president of the judicial court) over the intangible assets of his debtor. This authorisation allows a provisional registration to be made to guarantee the creditor's rights until a final writ of execution is obtained.
What is the duration of a pledge registration?
The duration of registration varies according to the type of collateral. For example, for a business, it is ten years. For others, such as pledges of company shares, the period is five years. This period is often specified by decree. It is vital to renew the registration before it expires, otherwise the security will lose its rank. The final registration must be made within a specific period of time after an enforceable decision has been obtained.
Can I pledge a life insurance policy?
Yes, this is a common practice, particularly in the banking sector, to guarantee repayment of a property or business loan. The life insurance policy is given as collateral to the bank. This operation is governed by a special provision of the Insurance Code, which concerns the delivery of the endorsement to the creditor and the rights of the various parties.
What is a pledge of tools and equipment?
This is an example of a non-possessory pledge, governed by a special law and a dedicated chapter of the French Commercial Code. This special security allows a company to guarantee a bank loan to finance its equipment, while retaining the use of the tools and equipment that are essential to its business. It is recorded in a special register kept at the court registry.
What is land registration in this context?
Land registration does not directly concern pledges, which relate to movable property. It is the mechanism by which rights over immovable property, such as mortgages, can be enforced against third parties. A parallel is often drawn, as the registration of a pledge in a public register plays a similar role to land registration: informing third parties of the existence of the security.
Is pledging still relevant in the face of new guarantees?
This issue is at the heart of legal debates. Although new forms of security (such as the security trust) have emerged, pledging remains a fundamental and much-used tool. Case law and legislative reforms (such as the Ordinance of 2021) continue to modify and adapt it.
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