The collective proceedings have long caused problems for security interests. Ordinance 2021-1193 of 15 September 2021 attempts to resolve this conflict. It strikes a balance between safeguarding businesses and protecting creditors. This balance meets the expectations of practitioners faced with contradictory rules.
A rethink of the relationship between two branches of law
Security law aims to ensure the effectiveness of guarantees. Collective proceedings law aims to safeguard businesses. These objectives often conflict.
The PACTE Act of 22 May 2019 gave the government the task of "simplifying, clarifying and modernising the rules on security interests and creditors holding security interests in Book VI of the French Commercial Code".
Ordinance 2021-1193 maintains these rules in the French Commercial Code. However, it adds bridges with the law on securities. Several articles of the Civil Code now refer to specific solutions for insolvency proceedings.
The new system standardises terminology. It uses the phrase "persons who are co-obligated or who have granted a personal guarantee or who have assigned or transferred property as security" to refer to all guarantors.
The fate of guarantors in insolvency proceedings
The reform strengthens the protection of guarantors. It extends measures favourable to guarantors to include co-obligors and third-party security providers.
Article L. 622-26 of the French Commercial Code, as amended by the Ordinance, specifies that claims that have not been duly declared cannot be enforced against natural person guarantors during and after the implementation of the plan.
Article L. 622-28 allows natural person guarantors to take advantage of the suspension of interest and legal proceedings.
The major innovation is the alignment of receivership with safeguard. The ordinance deletes the final paragraph of article L. 631-14, which excluded the application of these protective measures to guarantors in receivership.
The new article L. 622-34 allows guarantors, "even before payment", to "declare their claim in order to safeguard their personal recourse". This provision replaces the former pre-payment recourse under the Civil Code.
The reform also clarifies the effect of an irregular declaration. The amended Article L. 622-26 specifies that claims "not duly declared within these time limits, in particular where the claim declaration is deemed inadmissible" are simply unenforceable and not null and void.
The new classification of creditors
The major innovation is the creation of a general ranking of claims. Article L. 643-8 sets out fifteen priority rankings.
This classification is "without prejudice to the right of ownership or retention enforceable against the insolvency proceedings". This formula confirms the strength of exclusive rights. It is crucial to note how these rules interact with the cessation of the accrual of interest and the prohibition of new registrations of security interestswhich directly affect the validity and ranking of your cover.
Claims secured by real estate collateral are ranked sixth, "among themselves in the order provided for in the Civil Code". Ordinary pledges are only ranked thirteenth.
The building lessor's lien is limited to six months' rent. It is relegated to thirteenth place, along with pledges.
The reform creates a "new money privilege" for creditors contributing funds during the proceedings (article L. 622-17, III, 2°). These claims rank ninth, after the safeguard privilege.
The Ordinance also introduces the concept of "classes of affected parties". This concept, which stems from EU Directive 2019/1023, replaces creditors' committees. These classes are formed on the basis of objective criteria allowing for differentiated treatment of creditors.
The nullities of the suspect period rethought
Article L. 632-1 of the French Commercial Code penalises certain acts performed during the "suspect period. The ordinance substantially modifies its content.
6° now refers to "any contractual security interest or contractual right of retention" created for previous debts. This broader wording replaces the previous list, which was limited to mortgages and pledges.
An important exception has been added: nullity does not apply if the security "replaces an earlier security of at least an equivalent nature and basis". This tolerance codifies long-standing case law.
The ordinance adds a 7th point, which renders null and void "any legal mortgage attached to sentencing judgments" registered for prior debts.
Another major addition is the prohibition on "any increase in the basis of a contractual security interest in the debtor's assets for debts previously contracted".
Article L. 622-21, as amended, prohibits "any increase in the basis of a contractual security interest or a contractual right of retention, by any means whatsoever, by adding or supplementing assets or rights".
Termination of security interests in insolvency proceedings
Some securities resist insolvency proceedings better than others. Security ownership (trust, retention of title) and the right of retention offer maximum protection.
Article L. 624-9 of the French Commercial Code enshrines the owner's right of revendication. It concerns both retention of title and security trusts.
The right of retention confers a formidable blocking power. Article L. 642-20-1 states that the juge-commissaire may authorise the sale of the asset retained by the creditor, but the right of retention applies to the price.
In the event of a sale plan, the amended article L. 642-12 releases the debtor from the repayment of the loan assigned to the buyer. This release also benefits the guarantor, unlike the third party granting a security interest.
For creditors, the lesson is clear: give preference to securities based on ownership or right of retention. Traditional securities (mortgages, pledges) offer less protection.
Our firm can help you secure your receivables against the risk of insolvency. The right strategy can limit your exposure. Contact us for an analysis of your guarantees and find out how our expertise in the field of judicial safeguard can help you.
Sources
- Order no. 2021-1193 of 15 September 2021
- Commercial Code, Book VI (articles L. 610-1 to L. 680-7)
- EU Directive 2019/1023 of the European Parliament (Restructuring and Insolvency Directive)
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