Launching a business as a sole trader is a stimulating adventure, but it entails considerable risks for your personal assets. Unlike a company, which has its own legal personality and therefore, in principle, its own assets separate from yours, a sole proprietorship directly involves the entrepreneur. Your personal assets can therefore be seized to pay business debts. This is a reality that is often overlooked or underestimated.
Fortunately, French law has put in place an essential protection mechanism: the unseizability of certain property assets that are not used for business purposes. The aim of this system is to protect part of your private assets from the hazards of your business. For some years now, two systems have coexisted: automatic protection for your principal residence and protection on declaration for your other personal property. Understanding how this exemption from seizure works, its conditions and its limits, is fundamental to securing your personal situation. This article explains the key points you need to know.
Understanding the principle: why are your personal assets at stake?
The starting point is a fundamental principle of French law: all persons are liable for their debts against all their present and future assets. This is known as the general pledge of creditors, and is enshrined in articles 2284 and 2285 of the Civil Code. For a sole trader, this means that there is no watertight separation between assets used for business purposes and private assets (home, private car, non-business bank accounts, etc.). In the event of financial difficulties relating to the business, business creditors may, in theory, seek payment from all your assets, including your family home.
It was precisely in order to mitigate this rule, perceived as a brake on individual initiative, that the legislator introduced and strengthened the mechanism of unseizability. This is a legal exception that makes it possible to protect some of your personal property from the legal action of your business creditors. The idea is to protect an essential part of your private assets, without forcing you to set up a company.
Automatic unseizability of your principal residence: basic protection
Since the so-called "Macron" law of 6 August 2015, the protection of your principal residence has become automatic. Article L. 526-1 of the French Commercial Code states that the rights of a natural person who is registered (or who carries on an agricultural or self-employed activity) in the building in which their principal residence is located are automatically exempt from seizure by creditors whose rights arise in connection with the professional activity.
What does this mean in practice? If you are a sole trader, craftsman, farmer or self-employed professional, and you own your main home, it is automatically protected against your business creditors, without you having to do a thing. This is a considerable advance on the previous system, which required a notarised declaration.
However, this legal protection only applies to business claims arising from after the publication of the law of 6 August 2015. For business debts incurred prior to this date, the main residence remains subject to seizure, unless you made a declaration of non-seizability under the previous system..
The concept of "principal residence" is essential. It is the place where you actually live on a regular basis. In the event of a dispute, it is up to you, the entrepreneur, to prove that the property in question is indeed your principal residence at the time when the protection is invoked, in particular on the date of a ruling opening collective proceedings.. The situation can become complex in the event of separation or divorce. For example, if the judge awards the use of the family home to your spouse and you live elsewhere, the property loses its status as your principal residence, and therefore the automatic protection attached to it..
What about mixed-use premises, where you live and work? The law simplifies matters for the main residence: even if part of the property is used for professional purposes, the part not used for this purpose is automatically exempt from seizure, without the need for a descriptive statement of division.. Similarly, the simple fact that your company is domiciled at your personal address does not prevent the entire premises from being exempt from seizure..
Extending protection: declaring your other property unseizable
The automatic exemption from seizure is limited to your principal residence. However, you may own other property that is not used for your business: a second home, a rental property, land, etc. These assets are, by default, exposed to legal action by your business creditors.
To protect them too, the legislator has maintained the possibility of carrying out a declaration of unseizability. This voluntary approach is provided for in the second paragraph of Article L. 526-1 of the French Commercial Code.. It allows you to exempt from seizure your rights to "any property, whether built or unbuilt, that [you have] not allocated for [your] professional use"..
What assets can you protect?
The declaration can relate to any property (house, flat, bare plot of land, premises, etc.) that is not used for your professional activity.. If you have several assets of this type, you can choose to protect one, several or all of them.
It is imperative that the declaration precisely describes each asset concerned and indicates whether it is your own property, common property (if you are married under a community regime) or undivided property (if you own it with other people).. A general designation is not valid. This requirement for precision is sanctioned by the nullity of the declaration..
Protection can also apply if you only hold certain rights in the property, such as usufruct or bare ownership.. Be careful, however, if you own an undivided property: although the personal creditors of an undivided co-owner cannot seize his share directly, they can bring about the division.. A declaration of non-seizability can increase your protection if the property is allocated to you when it is divided, but initially it will only cover your undivided share..
For mixed-use property (other than the principal residence), if only part of the property is for personal use, it can only be declared exempt from seizure if it is clearly identified in a descriptive statement of division.. This is a significant difference from the simplified scheme for principal residences.
What steps do I need to take?
Unlike de jure unseizability, a voluntary declaration is a formal act.
Firstly, it must be received by a notary, otherwise it will be null and void.. The notary will ensure that the deed contains all the required information, in particular a detailed description of the property..
Secondly, to be enforceable against creditors, the declaration must be rigorously publicised:
- Publication in the land registry (or land register in Alsace-Moselle) of the place where the property is located. It is this publication that marks the starting point of the enforceability against subsequent professional creditors.
- If you are registered in a professional register (Registre du Commerce et des Sociétés, Répertoire des Métiers, etc.), the declaration must be mentioned there.
- If you are not required to register (e.g. certain self-employed professionals), an extract from the declaration must be published in a legal gazette in the département in which you operate.
Until these formalities have been completed, the declaration has no effect vis-à-vis the creditors..
Which creditors are affected?
Herein lies a fundamental difference with the automatic unseizability of the principal residence. A voluntary declaration has effect only in relation to professional creditors whose rights arise from after its publication.
This means that :
- All creditors non-professional (personal debts, family debts, etc.) retain their right to seize all your assets, including those declared unseizable.
- Creditors professionals whose claim has arisen before The date on which the claim arose is decisive, not the date on which it became due. The date on which the claim arises is decisive, not the date on which it falls due. For example, if a business loan contract was signed before publication, even if the outstanding instalments are later, the bank will be able to seize the property declared exempt from seizure.
This temporal distinction creates a breach of equality between professional creditors themselves.
The practical effects of unseizability: what really happens?
The main effect of unseizability (by operation of law or by declaration) is to prevent the professional creditors concerned from seizing the protected assets.. This means that they cannot force the sale of your principal residence (for business debts arising after 6 August 2015) or of other assets declared unseizable (for business debts arising after the declaration). Their right of lien is reduced.
On the other hand, non-business creditors, as well as business creditors prior to the declaration for declared assets, retain intact their right to seize these same assets.. In a way, they have de facto priority over these assets.
A delicate issue concerns the possibility for creditors who are "blocked" by the fact that the property is unseizable to nevertheless take security over the property, in particular a mortgage. The Court of Cassation has accepted that a judicial mortgage registration conservatory could be taken against property declared exempt from seizure, as it is not yet an enforcement measure. However, the possibility of taking out a conventional mortgage or converting a conservatory mortgage into a definitive mortgage is more uncertain, as some rulings consider that assets that are exempt from seizure (or inalienability) are not in the legal trade.. Moreover, even if a mortgage were registered, the creditor could not use it to bring about the sale as long as the unseizability lasted..
Unseizability in bankruptcy (collective proceedings)
The real effectiveness of unseizability can be measured above all when the entrepreneur is experiencing serious financial difficulties and is the subject of collective proceedings (safeguard, receivership or compulsory liquidation).
Case law has clarified a number of key points. The Court of Cassation has affirmed that a declaration of unseizability duly published before the opening judgment can be set up against the collective proceedings, despite the rule that the debtor in a judicial liquidation is divested of his rights.. The asset in question is not included in the assets that will be realised for the benefit of all creditors.
Consequently, the liquidator, who normally acts on behalf of the collective interest of the creditors, cannot request the sale of the unseizable property for the benefit of the general body of creditors.. Nor can he act to divide an undivided asset declared unseizable by the debtor prior to the proceedings.. Initially, the Cour de cassation had even ruled that the liquidator could not challenge the enforceability of the declaration (for example, for failure to publish it), as this would only benefit certain creditors (former or non-professional creditors) and not the collective interest..
However, in 2016, the Court of Cassation made a major U-turn on this last point (ruling of 15 November 2016).. It now considers that the liquidator a quality to challenge whether the declaration of unseizability has been properly publicised. If publication has not been carried out correctly, the declaration cannot be set up against the collective proceedings, and the liquidator may then seek to reinstate the asset in the joint pledge of creditors.. This solution restores the power of control to the insolvency authorities. However, it does not call into question the enforceability of a declaration of bankruptcy. regularly published.
What about creditors for whom the unseizability is not enforceable (non-business creditors, or business creditors prior to the declaration)? Judicial liquidation leads to a halt in individual proceedings. However, these creditors retain the right to take action against the unseizable property. They must obtain a writ of execution if they do not have one, and may seize the property, even after the judicial liquidation has been terminated for lack of assets, because the property was not included in the joint pledge..
Selling an unseizable asset: is this possible and what happens to the protection?
Unseizability does not make the property unmarketable. You retain the right to dispose of your property, even if it is exempt from seizure by law or by declaration.. You can sell them, give them away or mortgage them (subject to the uncertainties mentioned above for certain creditors).
The key question is: what happens to the protection if you sell the property? The legislator has provided for a specific mechanism, but limited to the main residence. Article L. 526-3 of the French Commercial Code provides for a system of "reinvestment".. If you sell your main residence (which is exempt from seizure by law), the sale price obtained remains exempt from seizure by the professional creditors concerned, on two conditions:
- You must use these funds within one year to acquire a new property that will become your new principal residence.
- The deed of purchase for this new residence must contain an express declaration that the funds will be reinvested.
If these conditions are met, the exemption from seizure is transferred to the new principal residence, with effect from the initial protection.. If the price of the new residence is lower than that of the old one, the surplus becomes seizable again.. If you do not meet the conditions (time limit exceeded, no declaration of re-employment, purchase of another type of property), the sale price of the former residence can again be seized.. Careful tracking of funds during the one-year period.
It is important to note that this reinvestment mechanism does not appear to concern that the main residence. If you sell another property that you have declared exempt from seizure (second home, land, etc.), the sale price is not protected. It can be seized again immediately by all your creditors, including professional creditors made after the declaration who could not seize the property itself.. This is an important limit to bear in mind.
The end of unseizability: when does protection end?
The protection afforded by unseizability is not necessarily eternal. Several events can put an end to it.
La disclaimer is the leading cause. You can decide at any time to waive your right of unseizability, whether by operation of law in respect of your principal residence or by virtue of a declaration to the contrary.. This renunciation must comply with the same formalities as the declaration: notarial deed and publication (land registry and/or professional registers/legal gazette).. It can be total (covering all protected assets) or partial (covering only a specific asset)..
A special feature introduced in 2008 is the possibility of waiving for the benefit of one or more designated creditors. In practical terms, this allows a professional creditor (often a bank requiring a guarantee) to regain the right to seize the property, while other subsequent professional creditors remain bound by the non-seizability clause. Although this option is practical for obtaining credit, it creates a hierarchy between professional creditors and may seem contrary to the initial spirit of global protection.. The law even specifies that if this beneficiary creditor assigns his claim, the new creditor (assignee) also benefits from the waiver.. It is also possible to revoke a waiver, again by published notarial deed, but this revocation will only apply to creditors whose rights have arisen after publication of the revocation. The system can quickly become complex!
Le death of the entrepreneur also puts an end to unseizability, but not immediately. Previously, death meant the end of protection.. Since the 2015 Act, Article L. 526-3 provides that the effects of unseizability (by operation of law or by declaration) continue after death. until the estate is settled. This offers temporary but welcome protection to heirs during the division process..
La cessation of activity (for example, if you sell your business and retire) does not put an end to your career. not end to unseizability. Protection continues for business debts incurred during the period in which it was applicable.. This is a logical solution, as debts do not disappear when the company ceases trading.
Finally, in the event of dissolution of the matrimonial property regime (divorce, change of regime), the fate of the unseizability depends on the allocation of the property. If the protected property is assigned to you, the exemption from seizure remains in force.. If it is assigned to your ex-spouse, the unseizability disappears because there is no object on this specific property..
Navigating the rules on unseizability can be complex, and the consequences of taking the wrong approach or misunderstanding the rules can be significant for your personal assets. For a personalised analysis of your situation and to ensure that your assets are effectively protected, our team is available to provide you with personalised support.
Sources
- French Commercial Code: Articles L526-1 to L526-3
- Civil Code: Articles 2284, 2285 (General right of pledge); Article 815-17 (Joint ownership); Article 1415 (Joint tenancy); Article 1321 (Assignment of receivables)
- Law no. 2015-990 of 6 August 2015 for growth, activity and equal economic opportunities (known as the Macron Law)
- Key case law from the Cour de cassation (Commercial Chamber), including :
- Ruling of 28 June 2011 (no. 10-15.482) on the enforceability of the declaration against the judicial liquidation.
- Judgment of 15 November 2016 (no. 14-26.287) on the liquidator's standing to challenge the regularity of advertising.
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