The capitalisation of interest, more technically known as anatocism, is a mechanism that can have significant financial consequences on the cost of a debt in the event of late payment. While the term may seem technical, it is worth understanding how it works and its implications, particularly in relation to mortgages. While this article focuses on anatocism in the context of debt, it is worth noting that this same compound interest mechanism is the driving force behind the performance of many savings products, such as life insurance or home savings plans. This article explains what the anatocism clause is, how it applies and its limits, particularly in the protective context of consumer law. For a personalised analysis of your situation or to defend your rights, please contact our lawyers specialising in banking and mortgage law.
What is anatocism? Definition and general rules of the Civil Code
Anatocism, governed by thearticle 1343-2 of the Civil Code (which replacesold article 1154 of the Code), is the mechanism by which interest due on an initial capital, when not paid, is added to the capital and in turn produces new interest. This is also known ascompound interest. This process can cause debt to grow exponentially, which is why it is strictly regulated by law.
For this capitalisation to take place, the Civil Code lays down two fundamental conditions. Firstly, the interest must be due for at least one full year. On the other hand, capitalisation must be based on one of these two sources:
- A agreement An anatocism clause must be expressly provided for in the initial agreement (loan contract, IOU, etc.).
- A court decision In the absence of a clause, a creditor may ask the court to order the capitalisation of interest.
The distinction between the origin (provided for by an agreement or decided by the judge) is essential, as it determines the conditions of implementation and the possible remedies for the debtor and the creditor.
Anatocism in consumer law: a strictly regulated principle
Consumer law aims to protect individuals, who are considered to be the most vulnerable party in their relationship with a professional. This principle has direct implications for the validity of anatocism clauses in credit agreements.
Prohibition on capitalisation of contractual interest
In the case of both consumer credit and home loans granted to private individuals, the capitalisation of interest at the rate stipulated in the contract is the norm. prohibited. The articles of the French Consumer Code, in particular article L. 313-52 for home loans, list exhaustively the amounts that the lender may claim from the borrower in the event of default. Capitalisation of this interest is not included.
The case law of the Cour de cassation is constant and firm on this point. An anatocism clause relating to interest at the contract rate is deemed unwritten (Cass. 1re civ., 20 Apr. 2022, no. 20-23.617). This means that it is deemed never to have existed. The judge is obliged to raise this irregularity ex officio, even if the borrower does not invoke it, because it is a measure of public policy protection. This protection is essential, given the potentially heavy financial impact of anatocism. For a better understanding mortgage reform and your rightsIt is crucial to be aware of these limits.
Possible capitalisation of interest on arrears at the legal rate
An important distinction needs to be made. If the capitalisation of contractual interest is prohibited in consumer law, what happens to interest moratoria ? This is the interest due for late payment, calculated at the legal rate, often after a court order or a court order forfeiting the right to interest. This interest on arrears corresponds to the legal rate, which may sometimes be increased in the event of persistent late payment following a court ruling.
The Court of Cassation has accepted that the Consumer Code does not preclude the capitalisation of interest at the legal rate. However, such capitalisation remains subject to the strict conditions of article 1343-2 of the Civil Code: it must be requested in court and the interest must be due for at least one full year in order to be capitalised.
Notable exceptions to the ordinary law of anatocism
The general regime set out in article 1343-2 of the Civil Code is subject to a number of important exceptions, stemming from commercial practice or specific legal regimes. These derogations demonstrate the complexity of the subject and are crucial for professionals and businesses.
The special case of current accounts: capitalisation by use
The best-known exception concerns current accounts, particularly those opened by professionals. A banking practice, enshrined in case law, authorises the quarterly capitalisation of debit interest, without any contractual clause or court ruling. This practice is therefore in direct contravention of the two conditions of civil law (annuality and contractual/judicial source).
It works as follows: each time the account is periodically closed (generally every three months), the debit interest is calculated and added to the account balance. In this way, the interest is converted into capital and becomes interest-bearing for the following period. This practice, justified by the very nature of the current account as an instrument for the permanent settlement of reciprocal debts, is a fundamental exception to the principle of prohibiting intra-annual anatocism.
The impact of insolvency proceedings on the capitalisation of interest
When a company encounters economic difficulties and collective proceedings (safeguard, receivership or compulsory liquidation) are initiated, the system of interests is radically altered. The decision to open insolvency proceedings leads tointerest rate stop for most receivables not secured by real estate.
This provision, set out in article L. 622-28 of the French Commercial Code, has a direct consequence: it effectively paralyses any capitalisation of interest for unsecured (non-preferential) creditors for the duration of the proceedings. The aim is to freeze the company's liabilities in order to facilitate its recovery via a continuation plan or to organise an equitable liquidation. This exception illustrates how a special regime can take precedence over the ordinary law of obligations. For more complex situations involving companies, understand more the impact of insolvency proceedings on debt collection.
Compensatory allowance in family matters
Another area where the question arises is that of family law, particularly for the compensatory allowance. When a compensatory allowance is fixed in the form of capital but with a credit payment, non-payment of the instalments generates interest at the legal rate. The Court of Cassation has recognised that this interest may be capitalised in accordance with article 1343-2 of the French Civil Code. This possibility has significant financial implications for the part debtor and is the subject of numerous decisions in call. Le amount of the compensatory allowance can rise significantly.
Role and powers of the judge: from application to decision
Where anatocism is not provided for in a clause, it can only result from an judicial decision. The judge plays a central role, but his powers are governed by precise procedural rules designed to guarantee the debtor's rights.
The need for a legal claim
One fundamental point must be emphasised: the judge can never order the capitalisation of interest on his own initiative (ex officio). Judicial anatocism is subject to an court application made by the creditor. This is an application of the operative principle that governs civil proceedings: the judge can only rule on what is asked of him.
Case law specifies that this request does not have to appear in the document initiating proceedings (the writ of summons). It may be presented for the first time during the course of the proceedings, for example by way of pleadings. The court will then check whether the conditions of article 1343-2 of the Civil Code have been met, i.e. that the interest is due and payable for at least one full year as at the date of the application, before granting or refusing capitalisation. This decision, once made, is subject to appeal.
Consequences and penalties: from forfeiture to prescription
The application, or attempted application, of the anatocism rules can have significant legal consequences, ranging from sanctioning the lender to modifying the limitation periods for the debt.
Forfeiture of the right to interest as a sanction
In credit law, the main sanction for an irregularity in the loan agreement (such as an incorrect APR, a non-conforming preliminary offer, or a breach of the obligation to provide information) is often the loss of entitlement to contractual interest. When this penalty is imposed by a judge, the lender loses the right to receive interest at the contractual rate.
However, the borrower still owes the principal and interest at the legal rate. It is on this new basis, that of legal interest, that the creditor will be able to make a request for judicial capitalisation, always respecting the conditions of article 1343-2 of the Civil Code. Forfeiture therefore transforms the nature of interest and conditions the regime for its possible capitalisation.
The impact of capitalisation on the debt prescription period
Anatocism also has an effect on prescription, a complex legal mechanism. In principle, interest on a debt is time-barred after five years, whereas the principal amount of the capital may be subject to different time limits. By transforming accrued interest into capital, capitalisation changes the legal nature of the sum owed.
As a result, the limitation period applicable to this capitalised interest is no longer that of the interest, but that of the capital. This mechanism can therefore have the effect of "saving" interest that would otherwise have been time-barred by incorporating it into capital, for which the limitation period has not yet expired. This is a technical point that requires careful analysis, as it can significantly alter the rights and obligations of the parties over time.
The anatocism clause in practice: what are the risks for the borrower?
In practice, it is not uncommon to find anatocism clauses in old mortgage contracts. However, their presence often has no direct consequences for the consumer borrower, for a number of reasons:
- Unlawfulness in consumer law As explained, if the clause relates to interest at the contract rate, it is deemed unwritten and the bank cannot rely on it.
- Strict conditions of application Even if capitalisation were theoretically possible (e.g. for statutory interest after legal proceedings), an amount of interest would have to be outstanding and due for at least one year.
- Banking practice Credit institutions are generally aware of these rules. Their systems for calculating the amount due in the event of default are often configured to comply with the legislation and not to apply unlawful capitalisation of conventional interest.
Nevertheless, vigilance is still required. An in-depth analysis of the contract may reveal other points of attention, which may affect the total to be paid, for example concerning APR calculation and verification. If you took out your loan several years ago, it may be useful to see our article on the legal regime for mortgages before the 2016 reform to understand the applicable context.
Legislative news: what recent changes have there been to the capitalisation of interest?
The legal framework of anatocism, although anchored in the Civil Code, is sensitive to legislative developments. The main recent change is the renumbering of article 1154 into article 1343-2 of the Civil Code by the ordinance of 10 February 2016 reforming the law of contracts, the general system and proof of obligations. While the substance of the law remains unchanged, this new numbering must be taken into account in all acts and procedures. It should be noted that the legal interest rate itself is updated every six months (a publication in January for the first six months, another in July for the second six months), which has a direct impact on the calculation of capitalisable default interest.
Furthermore, while private law is the main framework, we must not overlook administrative case law, which may provide specific rules for capitalising interest on debts relating to a public service or public contracts. The impact of the transposition of European directives should also be monitored. For example, Directive (EU) 2021/2167, transposed by Ordinance 2023-1139 and Decree 2023-1211, concerns credit buyers and managers. Although it does not directly modify anatocism, it strengthens the framework for debt recovery and the protection of borrowers, a context in which issues of capitalisation of interest are frequent. This active legal watch, coupled with in-depth research into the applicable texts, is essential to ensure that the law is applied correctly and up to date.
It is clear from the above that although the anatocism clause is a mechanism provided for in the Civil Code, its application is strictly regulated, or even prohibited, in the case of home loans granted to consumers for the interests of the contract. Given the complexity of these rules and the financial stakes involved, particular vigilance is required. If you have any difficulties or questions about your loan contract, contact our lawyers specialising in banking and mortgage law to analyse your situation and assert your rights.
Sources
- Civil Code: article 1343-2 (formerly article 1154)
- Consumer Code: article L. 313-52 (home loans)
- French Commercial Code: article L. 622-28 (collective proceedings)
- Court of Cassation, 1st Civil Division, 9 February 2012, no. 11-14.605
- Court of Cassation, 1st Civil Division, 20 April 2022, no. 20-23.617
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