When a creditor seeks to secure the recovery of its debt, the rights that its debtor holds in a company are a prime target. The protective pledge of company shares or securities is an effective procedure for 'freezing' these assets pending a court ruling. This measure, which is part of the broader framework of judicial suretiesoffers a solid guarantee to creditors. However, its implementation is technical and is subject to precise formalities. It requires a detailed understanding of the rules governing shareholders' rights to avoid pitfalls. For any problems relating to these guarantees, the assistance of a lawyer is invaluable to navigate between procedural imperatives and defending your interests.
Protective pledge: company shares and securities
Before taking such action, it is essential to correctly identify the nature of the rights held by the debtor. The applicable legal regime is not the same for company shares as it is for securities. This distinction determines the procedure to be followed and the effectiveness of the guarantee. Generally speaking, these assets fall into the category of intangible rights, the treatment of which is governed by specific rules. For an overview, it may be useful to refer to our article on seizure of intangible rights.
Distinction between shares and securities
The fundamental difference between these two types of security lies in the nature of the company issuing them. Company shares are the securities representing the capital of partnerships, such as limited liability companies (SARLs), general partnerships (SNCs) or civil partnerships (sociétés civiles). By their nature, they are not freely negotiable. Their transfer is often subject to approval by the other partners, as they represent a strong link between the partners (intuitu personae).
Conversely, securities are financial instruments issued by limited companies, mainly public limited companies (sociétés anonymes, SA) and simplified joint stock companies (sociétés par actions simplifiées, SAS). They include shares, bonds and other securities giving access to capital. Their main characteristic is that they are negotiable and, in the case of listed companies, fungible. They can therefore be bought and sold on a financial market, which facilitates seizure and pledging.
Scope of the pledge: securities concerned and exclusion of certain intangible rights
The protective pledge may relate to all securities and shareholder rights belonging to the debtor, as set out in article L. 521-1 of the Code of Civil Enforcement Procedures. This includes not only the securities themselves (shares), but also the pecuniary rights attached to them. In practical terms, the pledge covers future dividends, liquidation surpluses in the event of dissolution of the company, and any sums distributed to shareholders.
However, this does not apply to all the rights that a shareholder has against the company. It is important to distinguish between pledging, which is a security interest, and seizure. To find out more about the latter, see our article on seizure of securities and partnership rights. The pledge cannot apply, for example, to sums credited to the debtor's shareholder current account. This current account represents a separate claim that the shareholder has against the company. To freeze these funds, the creditor will have to resort to another procedure: precautionary attachment of receivables.
Provisional advertising
The protective pledge procedure begins with a public notice informing the issuing company or financial intermediary of the existence of the security. This step is essential, as it marks the starting point of the unavailability of the securities and determines the creditor's ranking.
Service of the deed on the company or authorised intermediary
Publicity is effected by the service of a document by a bailiff (now a court commissioner). The purpose of this document depends on the nature of the securities. In the case of company shares (SARL, société civile), the document is served directly on the company that issued them, in the person of its legal representative. In the case of securities admitted to trading by a central depository (as in the case of listed companies) or registered in an account with an authorised intermediary (a bank, for example), the document must be served on this intermediary. It is this service that makes the measure enforceable against third parties, first and foremost the company or the intermediary.
Contents of the deed and compulsory information
In order to be valid, the pledge deed must contain certain mandatory information, failing which it will be null and void. In accordance with the provisions of the French Code of Civil Enforcement Procedures, in particular articles R. 523-1 et seq:
- The name and address of the debtor, or its name and registered office.
- The name and address of the distraining creditor.
- The judge's authorisation or the title under which the measure is taken.
- A breakdown of the sums for which the security is taken, including principal, costs and interest.
- Precise identification of the pledged membership rights (number of shares, issuing company).
- Indication that the measure renders the pecuniary rights unavailable.
The omission of any of these details may render the deed null and void and therefore render the guarantee ineffective.
Information obligations of the garnishee
The legal entity or intermediary that receives service of the document (the "garnishee") has an obligation to cooperate. Under article L. 211-5 of the Code of Civil Enforcement Procedures, they are required to provide the court commissioner with all relevant information concerning the debtor's rights. In particular, he must declare the extent of the shareholder's rights, the number of shares held, and the existence of any pledges or prior seizures already encumbering these shares. This declaration is fundamental for the creditor, as it enables him to know the real value of his guarantee and the exact legal situation of the assets.
Effects of provisional publication of the protective pledge
Service of the deed of pledge has immediate and powerful effects. The main effect is to render the shares unavailable, but this unavailability is qualified and does not paralyse all the rights of the debtor partner.
The unavailability of pecuniary rights and the preservation of political rights
The main effect of a protective pledge is to render the pecuniary rights attached to the shares unavailable. In practical terms, the debtor can no longer sell, pledge or transfer the shares. Any transfer in breach of this unavailability would be unenforceable against the distraining creditor. The fruits and proceeds of the securities, such as dividends, are also frozen. The company or intermediary can no longer pay them to the debtor; they must be consigned.
However, a protective pledge does not deprive the debtor of his political rights. Unless otherwise stipulated, the debtor partner retains the right to vote at general meetings. They continue to participate in the life of the company. This distinction is logical: the purpose of the measure is to secure a claim, not to exclude the shareholder from the company.
Contesting seizures and depositing sums of money
Several creditors frequently seek to secure the same securities. Where there is more than one pledge, or where the pledge is in conjunction with a seizure, the rule applicable is that of antecedence. The first creditor to have served his deed will be the first to be paid from the proceeds of the sale of the securities. This is why speed of action is often a key factor in success.
Amounts that become payable during the period of unavailability, such as dividends, cannot be paid to the debtor or to creditors. The garnishee must deposit them with the Caisse des Dépôts et Consignations. These funds will be distributed among the creditors at a later date, once their respective rank has been definitively established.
Release by provision of a guarantee
The debtor is not totally powerless. If they wish to regain free disposal of their shares, for example in order to sell them as part of a strategic operation, they can request that the pledge be released. To do so, they must offer an equivalent guarantee to the creditor, as provided for in article L. 512-1 of the Code of Civil Enforcement Procedures. This guarantee often takes the form of a bank guarantee or a deposit of a sum of money sufficient to cover the principal, interest and costs of the claim. If the creditor accepts it or if the judge orders it, the initial guarantee is released and the pledge is lifted.
The debtor's rights: challenge, release and substitution
The debtor has a number of remedies available to contest the measure or limit its effects. These remedies are subject to strict time limits and must be brought before the enforcement judge (JEX). It is important to note that the opening of insolvency proceedings can have a major impact on these rights, a subject we cover in our article on precautionary measures in insolvency proceedings.
Conditions and deadlines for requesting release
The debtor may contest the pledge within one month of service of the deed. The challenge is brought before the enforcement judge in the debtor's place of residence. The grounds for challenge may be varied:
- The non-existence or lack of substance of the claim.
- Irregularity in the pledge procedure (formal defect in the deed).
- Whether the measure is disproportionate to the amount of the claim.
If the court upholds the challenge, it may order the release of all or part of the pledge.
Possibility of guarantee substitution
As mentioned above, the debtor may at any time request that the pledge on his shares be replaced by another guarantee. This substitution option is a valuable tool for partners who need to regain control of their assets. The substitute security must be of sufficient value to pay off the creditor. If the creditor refuses the substitution, it will be up to the judge to decide whether the new security proposed is as effective as the initial pledge.
Definitive publication of the protective pledge
The conservatory phase is temporary in nature. For the guarantee to become permanent and enable the creditor to be paid, it must be converted into a definitive pledge. This conversion, or "definitive publicity", is only possible when the creditor obtains a writ of execution recording his claim (a judgement of condemnation, for example).
Registration formalities and approval rules
Once the writ of execution has been obtained, the creditor must carry out further publicity formalities. These consist of registering the final pledge. In the case of company shares, this registration is made in a special register held at the registry of the commercial court where the company is registered.
A particular difficulty arises with company shares because of the approval clauses. If the company's articles of association stipulate that any transfer of shares is subject to the approval of the other shareholders, this clause also applies in the event of a compulsory sale. The creditor must therefore notify the shareholders of his proposed sale, who may either approve the proposed buyer or buy the shares themselves. This mechanism protects the closed nature of the company but may make it more difficult to realise the security. Although this is a powerful form of security, it needs to be analysed on a case-by-case basis, as we explain in our general article on pledging.
Effects of final publication: consolidation of ranking
Final publication consolidates the effects of the pledge. The creditor's rank, i.e. its order of priority in relation to other creditors, is definitively fixed on the date of provisional publication. This retroactive effect is the key to the effectiveness of protective measures.
Above all, definitive publication gives the creditor the right to proceed with the compulsory sale of the pledged securities, in accordance with the procedures laid down by law. In this way, the creditor will be able to obtain payment from the sale price, while respecting the order of liens and other security interests, if any.
The procedure for conservatory pledging of shares and securities is a technical legal instrument, but one that is highly effective for creditors. Its success depends on rigorous execution of the various stages, from provisional publicity to final conversion. If you are faced with such a situation, whether you are a creditor or a debtor, do not hesitate to contact our firm for a detailed analysis and tailored support.
Sources
- Code of civil enforcement procedures (in particular articles L. 511-1 et seq., L. 521-1, R. 523-1 et seq.)
- Commercial Code (provisions relating to shares and securities)
- Civil Code (provisions on pledges and securities)
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