The pledge of a securities account is a powerful guarantee, but its true effectiveness is measured at the time it is realised. When the debtor fails to honour his commitments, the creditor must be able to transform this security into cash to recover his debt. This phase, far from being a mere formality, is a legal process governed by strict rules designed to balance the rights of the creditor and the protection of the debtor. A mistake can wipe out the benefits of the guarantee. For a complete overview of the mechanism, our guide to securities account pledging details the steps involved in setting up a security system. This article focuses on the procedures for implementing this security, i.e. how it can be enforced in practice.
Conditions precedent to the realisation of the pledge
Before even considering the sale or appropriation of the securities, the creditor must ensure that a number of imperative conditions are met. Realisation is neither automatic nor discretionary; it follows a precise sequence, failure to comply with which may render the entire transaction null and void.
Debt that is certain, liquid and payable
Pledging is an "accessory" form of security: it exists only to guarantee a principal debt. Consequently, to be able to activate it, the claim must have three cumulative qualities. It must be certain, i.e. its existence or principle must not be disputed. It must also be liquid, which means that the amount is known or can be determined by a simple calculation. Finally, it must be due and payable, i.e. the payment term must have expired. If one of these conditions is not met, the creditor cannot legally initiate the enforcement procedure.
Formal notice: a must
The formal notice is the act by which the creditor formally notifies the debtor of his intention to realise the pledge in the absence of payment. It is not a simple reminder letter. Article D. 211-11 of the French Monetary and Financial Code imposes precise formalities. The formal notice must be sent to the debtor, but also to the account holder if it is another person (the grantor). It must state, on pain of nullity, that if payment is not made within a given period, the pledge will be realised. It must also inform the pledgor of his right to indicate the order in which he wishes the assets to be sold or allocated.
The omission of this stage or a drafting that does not comply with it is not a simple irregularity. Case law considers that its absence vitiates the entire realisation procedure. A creditor who proceeds with the sale of the securities without prior formal notice is liable to be required to return the full value of the assets, and not simply to compensate the debtor for any loss of opportunity. It should be noted that this system may be affected by the opening of insolvency proceedings, which are subject to their own rules governing the due date of claims and the realisation of securities. To find out more, see our analysis of the impact of insolvency proceedings on securities account pledges.
Compliance with legal or contractual time limits
Once formal notice has been received, a period of time must elapse before the creditor can take action. The law sets this period at eight days. However, the parties are free to adjust this period in the initial pledge agreement. They may provide for a longer or shorter period, depending on the nature of the assets or the relationship of trust. This period has a dual function: it gives the debtor a last chance to pay off his debt and gives him time to inform the account holder of his preferences regarding the order in which the assets should be realised.
Terms and conditions for realising pledged assets
Once the preconditions have been fulfilled and the deadline has passed, the creditor can proceed with enforcement. The method of realisation depends directly on the nature of the assets in the account. The composition of the account at the time of enforcement is decisive. The assets available depend on the management and development of the pledged portfolio throughout the life of the contract.
Principle of realisation up to the amount of the secured claim
A fundamental principle governs the entire procedure: proportionality. The creditor may only realise the assets to the extent necessary to cover the amount of his claim, plus the costs of realisation. If the value of the pledged account is greater than the debt, he cannot appropriate the surplus. As mentioned, the pledgor may indicate to the account keeper the order in which he wishes his securities or cash to be used. If he fails to do so within the stipulated period, the creditor has complete freedom to choose which assets he will realise first, which is a significant strategic advantage.
Realization of sums of money
This is the simplest and most straightforward situation. If the pledged account contains liquid assets (for example, dividends or proceeds from previous sales), the creditor has the right to appropriate them directly. In practice, this means instructing the account holder to transfer the necessary sums to his or her own account. Ownership is then transferred immediately, and partial or full recovery is effected without further formality.
Realisation of securities admitted to trading on a platform
For securities listed (shares, bonds) on what the law calls a "trading platform" (which includes regulated markets such as Euronext Paris but also multilateral systems such as Euronext Growth), the creditor has a choice of three options. They can :
- Sell the titles on the platform and appropriate the proceeds.
- Organise a sale to a restricted circle of qualified investors.
- Allocate them directly to themselves in full ownership, up to the amount of their claim, on the basis of the last known closing price.
This last option is particularly effective. It allows the creditor to avoid the risks and delays of a sale on the market by becoming the direct owner of the securities.
Sales of units or shares in undertakings for collective investment (UCIs)
The mechanism is similar for units in SICAVs and FCPs. The creditor may opt either to present the units to the management company for redemption, or to allocate them directly as property. In the latter case, the value used is the last known net asset value, ensuring an objective valuation.
Realisation of unlisted securities
The situation becomes more complex for shares in unlisted companies (SAS, SARL, etc.). In the absence of a market providing an objective price, the default realisation options are more cumbersome: public sale (at auction) or judicial allocation, which requires the matter to be referred to a judge. These procedures are long and costly. This is where contractual anticipation, via the commissory agreement, comes into its own.
The commissory agreement: a strategic clause
For unlisted securities, the best protection for a creditor is often to contractually provide for an effective exit solution. The commissory agreement is such a tool.
Principle and legality of the commissary agreement
The commissory agreement is a clause inserted into the pledge agreement, authorising the creditor to appropriate the pledged assets in the event of the debtor's default. Long viewed with suspicion by French law, it is now perfectly lawful in security matters, as set out in article 2348 of the Civil Code. It makes it possible to bypass public sale or judicial allocation for unlisted securities, offering a private, rapid and efficient means of realisation.
Specific features of the valuation of unlisted securities
Ownership is not acquired at any price. To protect the debtor against abusive valuation, the law imposes an essential condition when the commissory agreement relates to unlisted securities: the value of the securities must be determined by an expert on the day of transfer of ownership. This expert may be appointed in advance in the agreement or, failing that, by the court. This expert's report ensures that the creditor takes ownership of the securities at their fair value, and that he must pay the debtor the difference if this value exceeds the amount of his claim.
The role of the account keeper or DEEP manager
The financial intermediary who holds the securities account (or who manages the shared electronic recording device for dematerialised securities on blockchain) plays a pivotal role. It is the execution arm.
Obligations of the account holder
The account holder is not an arbitrator in the dispute between the creditor and the debtor. His role is to carry out the realisation instructions sent to him by the creditor, provided that they appear to comply with legal and contractual requirements. When he receives a sale or allocation instruction, he is required to carry it out without being able to oppose it, unless he incurs his own liability if he carries out an instruction that is manifestly irregular. He must act with diligence to ensure that the transaction is completed.
Allocation of development costs
Any realisation procedure incurs costs: brokerage fees for a stock market sale, expert fees for a valuation, etc. These costs are borne by the debtor. These costs are borne by the debtor. They are deducted from the proceeds of the realisation before they are used to repay the principal debt. The creditor is therefore entitled to priority reimbursement of these expenses.
The effectiveness of a guarantee depends on its proper execution. Pledging a securities account is a technical process in which every step counts. To secure the recovery of your debt and benefit from a legal support for your guarantees and securitiescontact our office.
Sources
- Monetary and Financial Code (in particular article L. 211-20 and articles D. 211-10 et seq.)
- Civil Code (in particular articles 2347 and 2348 on commissory agreements)
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities
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