A practical guide to security interests for businesses: understanding the essentials

In an unstable economic environment, securing receivables is an absolute priority. An unpaid invoice, a customer in financial difficulty, a defaulting partner - these are all situations that directly threaten your company's cash flow. In such cases, security is your legal shield. These mechanisms protect your rights and maximise your chances of recovery.

French law offers a comprehensive arsenal of tools adapted to each situation. But their diversity sometimes makes it difficult to select the most appropriate mechanism. This article provides an overview of the securities available to you, their characteristics, advantages and limitations.

What is a security deposit and what is it used for?

A surety is a legal mechanism that strengthens your position as a creditor. It gives you a privileged position compared with ordinary creditors, known in legal jargon as "unsecured" creditors.

Without security, you remain subject to the principle of equality between creditors set out in article 2285 of the Civil Code: "The debtor's assets are the common pledge of his creditors; and the price is distributed among them by contribution". In short, you share the same fate as all other creditors.

Safety allows you to escape this rule by granting you either:

• Preferential rights: you are paid before other creditors
• An exclusive right: you have a specific asset to guarantee your claim

The security landscape has been profoundly transformed by two major reforms:

• The Order of 23 March 2006 modernising security interests
• The Order of 15 September 2021, which overhauled the law on surety bonds

These reforms have simplified and clarified the legal regime governing sureties, but they have not reduced their diversity. French law distinguishes between two main categories of security:

1. Personal sureties: someone undertakes to pay on your behalf if your debtor defaults.
2. Collateral: one or more assets are assigned to the priority payment of your claim

Personal sureties: when someone guarantees your debt

Personal sureties are based on the commitment of a third party who agrees to guarantee your debtor's debt. There are three main mechanisms:

Guarantees: the classic surety

Surety bonds are still the most common form of personal security. Article 2288 of the French Civil Code defines it as "the contract by which a guarantor undertakes to pay the debtor's debt to the creditor in the event of the debtor's default".

A fundamental feature of this security is its ancillary nature. The guarantor may raise against the creditor all the defences that the principal debtor could raise himself. For example, if the principal contract is null and void, so is the guarantee.

The 2021 reform reinforced this ancillary nature by abolishing the distinction between defences purely personal to the debtor and defences inherent in the debt.

Individual guarantors benefit from enhanced protection, particularly in the event of collective proceedings against the principal debtor.

The autonomous guarantee: greater efficiency

The autonomous guarantee, defined in article 2321 of the Civil Code, is an undertaking by which the guarantor undertakes to pay a sum either on first demand or in accordance with agreed terms.

The major advantage of this security lies in its independence from the main contract. The guarantor cannot raise objections against the creditor arising from the basic contract. This independence makes it a particularly effective tool.

The guarantor must pay as soon as you request it, without being able to invoke a dispute between you and the principal debtor. Only in cases of obvious fraud or abuse can the guarantor refuse payment.

The letter of intent: flexibility

Article 2322 of the French Civil Code defines a letter of intent as "an undertaking to do or not to do, the purpose of which is to support a debtor in the performance of his obligation to his creditor".

Its scope varies considerably depending on how it is drafted:

• Mere moral commitment with no binding legal force
• A genuine guarantee creating an obligation of result
• Intermediate solution creating an obligation of means

Its main advantage is its flexibility, but this can also be its weakness if the wording is ambiguous.

Comparative table of personal sureties

Criteria	Bond	Stand-alone warranty	Letter of intent
Link with the main contract	Accessory	Independent	Variable
Enforceable exceptions	All	Fraud/abuse only	According to the editor
Efficiency in the event of litigation	Limited	High	Variable
Protection of the guarantor	Strong	Limited	Variable
Set-up costs	Moderate	High	Low

Collateral: when an asset guarantees your debt

Unlike personal sureties, real sureties assign a specific asset to the payment of your debt. Article 2323 of the Civil Code defines them as "the allocation of one or more assets, present or future, to the preferential or exclusive payment of the creditor".

Movable sureties: for movable property

Movable securities relate to movable assets, whether tangible (equipment, goods) or intangible (receivables, intellectual property rights).

Pledges are the benchmark security instrument for tangible assets. It has been possible to create a pledge since 2006:

• With dispossession: the asset is handed over to the creditor
• Without dispossession: the debtor retains the use of the property

This second option has a major advantage for the debtor, who can continue to use his property. For the creditor, publication in the pledge register makes the security enforceable against third parties.

For intangible assets, pledging is the appropriate form of security. It may relate to receivables, goodwill, intellectual property rights or other intangible rights.

Security ownership, in particular retention of title, offers maximum protection. The seller retains ownership of the property until full payment has been made. In the event of non-payment, the seller recovers the property without the intervention of other creditors.

Property security: for immovable property

Mortgages remain the property security par excellence. Without dispossessing the owner, it confers on the creditor:

• A right of resale: possibility of seizing the property even if it has been sold
• Preferential right: priority over the sale price of the property

A pledge of immovable property (formerly antichresis) implies dispossession of the property. The creditor takes possession of the property and receives the income it generates.

The right of retention: an effective weapon

The right of retention allows a creditor in possession of an asset to keep it until full payment has been made. Its strength lies in the fact that it is enforceable against everyone, even preferential creditors.

This right is attached to certain securities such as pledges with delivery. It remains effective even in the event of insolvency proceedings, making it one of the most robust forms of protection.

Trusts: the most comprehensive mechanism

The security trust, established in 2007, is a particularly protective arrangement. The debtor transfers ownership of an asset to a trustee, who holds it until it is repaid in full.

In the event of default, the creditor becomes the definitive owner of the asset or has it sold without legal proceedings. This security is remarkably resistant to insolvency proceedings.

How do you choose the right security for your situation?

There are a number of decisive criteria when it comes to choosing a security system:

The type of claim to be guaranteed

The nature and amount of your debt will naturally influence your choice:

• For large receivables: opt for collateral security or autonomous guarantees
• For current trade receivables: opt for retention of title or surety bonds
• For international contracts: opt for stand-alone guarantees

The duration of the commitment is also a determining factor. A security agreement that is too restrictive may dissuade your partner from making short-term commitments.

Anticipating the debtor's difficulties

Your debtor's financial health should influence your strategy. If there are risks, give preference:

• Exclusive security interests (ownership-security, trust)
• Security interests with right of retention
• Stand-alone guarantees

These mechanisms are more resistant to insolvency proceedings, which drastically limit the rights of ordinary creditors.

The cost/protection balance

Each security incident generates variable costs:

• Incorporation costs (notarial deeds, registration)
• Advertising costs
• Production costs

These costs must remain proportionate to the debt secured. A mortgage for a small claim is often excessive.

Pitfalls to avoid

A number of errors frequently compromise the effectiveness of security interests:

1. Imprecise terms of contract. Rough drafting of a letter of intent or a surety bond can render them ineffective.
2. No formalities. Each guarantee is subject to strict formal rules. A surety bond must contain a specific handwritten note. A mortgage requires a notarial deed.
3. Failure to advertise. Non-possessory security interests must be disclosed to third parties. This formality is often neglected, but is essential.
4. The choice of an unsuitable safety system. Bonding a company in financial difficulty offers illusory protection. Trust or retention of title are preferable.

For optimum protection, it is often appropriate to combine several complementary securities. A surety bond can reinforce a real guarantee.

Prior legal advice enables us to assess your needs accurately and devise a coherent strategy. The complexity of security law justifies this preventive approach.

Our team of lawyers will be happy to provide you with a personalised analysis of your security needs and help you put in place the guarantees best suited to your situation.

Sources

• Civil Code, articles 2284 to 2488
• Order no. 2021-1192 of 15 September 2021