France

James Leavy1

I.Introduction

French law on security over tangibles has recently undergone some important changes as part of an effort to modernize the Civil Code. Traditionally, security over tangibles required dispossession of the grantor and the security could only be enforced through a judicial sale of the pledged collateral. Over the years some specific exceptions to the general rule were created in order to permit security without dispossession of the grantor, most notably for automobiles, for machinery and equipment purchased with financing, for certain tangibles included in the pledgor's business as a going concern (“fonds de commerce”) and even for motion picture reels. However, the basic rules of the Civil Code concerning security over tangibles remained unchanged.

A committee of experts appointed by the government and chaired by Professor Michel Grimaldi recommended important changes to the provisions of the Civil Code concerning security interests but it decided against recommending the adoption of a unitary security interest over moveables such as exists in North America, including Quebec whose law is based on French law. The experts considered that such a unified security interest was incompatible with the underlying principles of French civil law and did not offer clear-cut solutions where conflict might exist between various secured creditors.

Only some of the committee’s recommendations were translated into law.2 In particular, the law concerning privilèges (liens created by operation of law) was left largely untouched and it remains largely impenetrable.3 However, the legislator added to the Commercial Code a special

1The author acknowledges the assistance of Arnaud Briand and Arnaud Rainfray,

stagiaires (trainees) in the Paris office of Weil, Gotshal & Manges in connection

with the preparation of this paper.

2Ordonnance No. 2006-346 of 23 March 2006, JO 24 March 2006.

3There are privileges which cover all moveable property (general privileges) and privileges covering only specific items of property (special privileges). Some privileges are created by the Civil Code; others are created in specific legislation. Some privileges must be published in order to be enforceable. Other privileges are not

security interest on inventories (stocks) which neither the Grimaldi Commission, nor apparently the banks (who are its exclusive beneficiaries), had requested.

French civil law now recognises pledges of tangible moveables with or without dispossession of the grantor. It now recognises the possibility of granting a pledge over future property and also the granting of a pledge over a group (“ensemble”) of property although there is still no recognition of the types of general security or charge which exists in US or English law. Pledges without dispossession of the grantor are opposable to third parties upon publication in a special register maintained at the commercial court registry.4

The recent changes to the Civil Code also broaden the scope of the methods of realisation available to the beneficiary of the security interest. In addition to the traditional methods of a judicially ordered sale and attribution of the pledged property to the beneficiary by order of the court, it is now possible for the parties to the pledge agreement to agree that the pledge can be realised by having the beneficiary directly assume ownership of the pledged property i.e, without having to obtain a judgment for such purpose. There is no requirement of any preor postrealisation notice being given. It remains to be seen whether this form of realisation will prove to be popular. The reform did not authorize the socalled “clause de voie parée”, which is the creditor’s right to sell the pledged collateral by private sale.

Three other aspects of the reform are worth noting in connection with security over moveables generally, and more particularly in respect of tangibles. Firstly, the Civil Code now formally recognizes title retention as a security device.

Secondly, the Civil Code now establishes general principles applicable to the right of retention – a right which is a powerful weapon in the hands of the creditor who is entitled to such right. A right of retention is recognized to a) the person who received possession of a thing until complete satisfaction of his claim, b) the person whose unpaid claim arises from the contract which obliges him to deliver the thing retained and c) the person whose unpaid claim arises by reason of his possession of the thing retained.

subject to any formalities. The recent changes to the Civil Code establish the principle that, as a general rule, the special privileges take precedence over the general privileges. The new legislation also sets out the priorities of the general privileges amongst themselves. However, there is no legislative text which sets out the order of priority amongst the various special Civil Code and non Civil Code privileges which may apply to the same specific property.

4Art. 2338 C. civ. as amended by Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

The practical consequences of these changes will be examined in the context of the Case Studies.

Thirdly, an important issue which is not addressed by the new legislation on security interests is whether a pledgee who can benefit from a specific type of pledge over a property (such as the special nonpossessory pledge over financed equipment or the new pledge over inventory) can opt instead for the new general non-possessory pledge under the Civil Code. The Civil Code simply states that the new provisions on pledges do not prevent the application of the specific rules in commercial matters or in favour of licensed credit institutions. While it could be argued that the pledgee should be able to choose between the types of security interest available to it unless it is specifically forbidden to do so, it might also be argued that the more detailed and specific requirements of the special pledges exist for reasons of public interest including protection of third party creditors or purchasers and should therefore be followed, where applicable, in preference to the more general rules of the Civil Code. This issue, which results from the decision not to create a unitary general security interest, will undoubtedly come before the courts.

Even more recently, and in a move which took many in both the financial and legal communities by surprise, the government gave its support to a modified version of a bill, sponsored by Senator Philippe Marini, to introduce a form of trust mechanism (“fiducie”) into French law. The legislation, adopted in February 2007,5 permits commercial entities (but not individuals) to transfer "property, rights and security interests" to a trustee (“fiduciaire”) which will hold them in a patrimony of appropriation (“patrimoine d'affectation”) which is separate from that of the trustee itself. Only banks, insurance companies and other recognized financial institutions can be trustees. The trustee can also be the beneficiary of the fiducie. Every fiducie must be registered with the tax authorities and there will also be a public register of fiducies. However, at the time of writing this report, the decree which will set out the rules governing the register has not yet been published.

The legislation sets out the legal framework for the fiducie but leaves a great deal of freedom to the parties concerning the way in which each specific fiducie will operate, in particular the powers to be given to the trustee in connection with administration of the trust property. One of the principal uses which is expected for the new fiducie is that of having the trust property transferred to the patrimony of appropriation as security for performance of an obligation, whether owed by the settlor or by

5Law No. 2007-211 of 19 February 2007, JO 21 February 2007, introducing the fiducie as Art. 2011-2031 C. civ.

another person, a device commonly referred to as fiducie-sûreté (the new legislation does not itself use this expression).

Some commentators view the fiducie-sûreté as at least functionally equivalent to the transfer of ownership by way of security provided for in German law and believe it will be possible for a fiducie-sûreté to operate without dispossession of the settlor (who could use and manage the trust property on behalf of the trustee).6

The legislation on the fiducie states that the insolvency of the trustee does not affect the trust property (which is in the separate patrimoine d'affectation) but it does not say anything about the consequences of the insolvency of the settlor (other than that the creation of the fiducie at a time when the settlor is legally presumed to be insolvent – the so-called “suspect period” – can be challenged in court).7 Even at this early stage, the generally accepted view is that through the fiducie-sûreté the property of the settlor which is subject to the fiducie is put effectively beyond the scope of any insolvency proceedings involving the settlor.

The 2006 changes to the Civil Code and the introduction of the fi- ducie-sûreté do not affect the other specific pledges of tangibles provided by law. These include the pledge of machinery and equipment purchased with financing, the pledge of tangibles as part of the pledge of a going concern (“nantissement de fonds de commerce”), the new inventory pledge, pledges of equipment and material associated with motion pictures, etc. To these can be added retention of title, which the Civil Code now recognises as a security interest, and, by analogy, the financial lease (“crédit-bail”). Each of the security interests has its own set of rules concerning creation, publicity and enforcement. There are, therefore, many opportunities for conflict among creditors claiming security (either by contract or by operation of law) over the same pledged property.

6Cf. R. Dammann/G. Podeur, Fiducie, sûreté et droit des procédures collectives:

évolution ou révolution?, D. 2007, 1359.

7Art. 18 Law No. 2007-211 of 19 February 2007, JO 21 February 2007, which amends Art. L. 362-1 C. com. for such purpose. The "suspect period" begins on the date on which the court which opens the insolvency procedure declares that the debtor became unable to meet its payments as and when they became due (“cessation des paiements”). This date can be as much as 18 months prior to commencement of the insolvency proceedings.

II.Case studies

Preliminary Remarks to the Case Studies

In the following discussion, it makes no difference whether the debtor is a corporation, a partnership or a sole proprietorship, except in the case of the fiducie-sûreté, which cannot be created by an individual but only by a legal entity which is subject to corporation tax. With some very limited exceptions, only licensed credit institutions may provide financing to French entities,8 including by way of crédit-bail. However, if an unlicensed institution provides financing, the transaction itself is not automatically invalid (at least according to the most recent decision on the subject by the Cour de Cassation9). The new inventory pledge, discussed in Case 3, can be granted only to a licensed credit institution10 and only such institutions (as well as insurance companies) can be trustees (“fiduciaires”) in the context of a fiducie-sûreté.11

1.Non-possessory security right in specific existing items of equipment

a) Until the 2006 reform of the Civil Code described in the introduction, the only non-possessory pledge available for such machines was as part of a pledge of a going concern (“nantissement de fonds de commerce”).12 Such a pledge requires a deed, which can be made before a notary or as a private deed, payment of a nominal amount of stamp duty and registration at the commercial registry in every district in which the concern has a place of business. Such registration (which is effective for 10 years) must be carried out within 15 days of the date of the pledge agreement and failure to abide by the registration deadline results in the nullity of the pledge.13

8Art. L. 511-5 C. mon. fin. Licensed credit institutions are those which are created under French law and meet the requirements of the law in such matters as capitalisation in order to be authorised to carry out credit transactions. Entities which are similarly licensed in other EU countries can carry out credit transactions in France

through branches without having to be separately licensed in France.

9Cass. 4 March 2005 Van Haar Heijmeijer & Sté Lauga Limited c/Sté Axa Bank ANHYP, JCP G 2005, II 10062. The lender could be subject to the fine imposed by

the law for breach of the banking monopoly.

10Art. L. 527-1 C. com.

11Art. 2015 C. civ.

12Art. L. 142-1 C. com. to Art. L. 143-23 C. com.

13Art. L. 142-4 C. com.

With the 2006 reform, it is now possible to create a non-possessory pledge under the Civil Code over a class or group (“ensemble”) of moveables;14 this could cover the 200 machines. The pledge must be set out in a written contract, which is the only form requirement. The contract does not have to be made before a notary. In order to be opposable to third parties, the pledge must be registered at the Commercial Registry. There is no deadline for registration and registration is effective for 5 years.15

Many commentators believe that the new fiducie-sûreté can be structured in such away that while ownership of the property subject to the fiducie is transferred from the settlor (“constituent”) to the trust patrimony (“patrimoine d'affectation”) held by the trustee, effective possession and use of the property remains with the settlor. The trust arrangements must be set out in writing and the fiducie must be registered with the tax authorities, as well with a special register of fiducies (which does not yet exist).16

b)Both the register of nantissements de fonds de commerce and the new register of non-possessory pledges can be accessed electronically by any person on payment of a small fee. Any credit-bail affecting machinery must also be registered and that register too is accessible electronically.17 However, there is no register for title retention security. In addition, many of the privilèges (liens created by operation of law) do not require registration or publicity. This category includes the privilege of the unpaid seller of a moveable. While there is as yet no specific information on the register of fiducies, it is expected that that register too will be accessible electronically.

c)For the purposes of this Case 1, we will assume that the lender benefits from either a duly registered nantissement de fonds de commerce or a duly registered new Civil Code non-possessory pledge. In either case, the lender will benefit from a droit de suite, i.e., the purchaser will acquire the machines subject to the lender’s rights under the pledge.18 In the case of the nantissement de fonds de commerce, the relevant legislation states specifically that the lien (privilege) of the pledgee follows the fonds de commerce into whatever hands it passes. In the case of the new Civil Code pledge without dispossession, once the pledge has been registered no one can rely on the defense of good faith possession in order to op-

14Art. 2333 C. civ.

15Art. 7 Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

16Art. 2020 C. civ.

17Art. L. 313-10 C. mon. fin.

18Art. L. 143-12 C. com.; Art. 2337 C. civ.

pose the pledgee’s rights19 (this aspect is further discussed in the answer to Case 5 below). In the case of a fiducie-sûreté, the effect of publication in the (yet to be created) register of fiducies will be to serve notice on third parties that the property subject to the fiducie is not part of the settlor's patrimony.

d)In the case of a nantissement de fonds de commerce it is usually stipulated that the pledge will cover any replacements for the machinery and equipment initially pledged. However, even without such stipulation the pledge will cover such replacement equipment, provided that the nantissement de fonds de commerce has been registered and such registration remains effective at the time the replacement is made. The new Civil Code pledge can also be drafted so as to cover replacement equipment and machinery, since the pledge can cover both a group (“ensemble”) of property and future property. It is possible to include future property in a fiducie-sûreté, as well as an ensemble of both present and "future property rights and security interests", provided they are identifiable.20

e)In the case of a nantissement de fonds de commerce, the lender can enforce the pledge on default of the debtor if, after giving notice to pay to the debtor and the grantor of the pledge, the default is not cured within 8 days. Enforcement is by judicial sale, it requires a court order and the court will set the delay within which the sale would take place. At least 15 days before the sale, any other creditors whose claims have been registered must be given notice of the sale. There are also specific publicity and notice requirements to be observed at least 10 days prior to the sale. The lender cannot enforce by applying to the court to have the ownership of the fonds de commerce attributed to the lender,21 nor does the lender have the right to foreclose on the property pledged.

If the pledge is granted under the new provisions of the Civil Code, enforcement can be either by a judicial sale (carried out in accordance with rules of the Code of Civil Procedure) or by applying to the court for ownership of the pledged property to be attributed to the lender or, if the grantor and the beneficiary of the pledge have so agreed, by having the beneficiary directly assume ownership of the pledged property. In this latter case, the property must be evaluated as of the date of transfer of ownership by an independent expert chosen either by agreement among the parties or by the Court, unless the property is traded publicly on a regulated market. If the value of the collateral is greater than the amount

19Art. 2337 C. civ.

20Art. 2295 C. civ.

21Art. L. 142-1 C. com.

of the debt, the surplus is paid to the debtor (or is consigned if there are other secured creditors over such property).22

Enforcement of a fiducie-sûreté is essentially a matter for the contract which creates the specific fiducie. The law creating the fiducie does not give any guidelines as to what happens if the value of the property transferred to the patrimoine d'affectation substantially exceeds the amount of the unfulfilled obligation guaranteed by the fiducie-sûreté. It could be expected that the court would apply the general principle that the creditor of a security interest should not, upon realization, retain property or proceeds whose value exceeds that of the obligation secured.23

f) Whether the Lender has taken security under a nantissement de fonds de commerce or under a Civil Code pledge, his position would be the same in the case of insolvency proceedings against the manufacturer. The lender could not enforce his security while the manufacturer is under the protection of the court, either as part of the new procédure de sauvegarde (similar in some respects to US Chapter 11) or judicially-supervised reorganization (“redressement judiciaire”).24 The lender would have to register his claim with the Court in order to preserve his rights in the context of the insolvency proceeding. Property subject to security interests can be disposed of as part of a court-approved reorganisation but the proceeds of such disposition are deposited with the Caisse des Dépôts et Consignations for distribution to secured creditors, to the extent of their respective entitlement. In the case of the new procédure de sauvegarde, the court can order provisional payment of all or a portion of secured creditors’ claims but, in such case, the secured creditor will usually have to provide a bank guarantee which could be called if it were decided at a later stage in the procedure that such provisional payments had to be recalled.25

If Manufacturer goes into liquidation, secured creditors are entitled to enforce their security,26 but in such case, they will find that certain types

22Art. 2348 C. civ.

23The Grimaldi Commission had proposed to insert this principle as an article of the Civil Code. This suggestion was not acted on although it is reflected in the code provisions dealing with the pacte commissoire (Art. 2348 C. civ.) and title retention as security (Art. 2371 C. civ.).

24Art. L. 622-8 C. com. (“procédure de sauvegarde”).

25The procédure de sauvegarde can be instituted even while the debtor is still solvent and will usually result in the debtor retaining possession and control of its business. Redressement judiciaire is court-imposed protection of a debtor which is already insolvent (“en cessation des paiements”) and usually results in the appointment of an administrator (“mandataire judiciaire”) over the debtor’s assets and activity.

26Art. L. 643-2 C. com.

of privileged claims (particularly those of unpaid employees, the social security administration and providers of new money while the insolvent debtor was under court protection) will rank ahead of them.

In addition, if in the context of the insolvency procedure, the court were to determine that the lender had benefited from excessive security from Manufacturer and such security had been prejudicial to Manufacturer, the entire security would be invalid.27 This provision, which was introduced only in 2005, has not yet been the subject of a court decision concerning the criteria for determining what would constitute excessive security.

As already noted, the beneficiary of a fiducie-sûreté is, in principle, fully insulated, in respect of the trust property, from the effects of insolvency of the settlor (“constituent”). The property transferred to the patrimoine d'affectation is no longer a part of the settlor's patrimony and, under the general principles of civil law, is not subject to any action by or on behalf of settlors creditors. If the property transferred by the settlor to the patrimoine d'affectation is itself subject to a security interest at the time of such transfer, the security interest continues in force and will have the same effect in the context of the settlor's insolvency as if the fiducie had not been created.

The fiducie-sûreté should be subject to the rule against excessive security already mentioned. In addition, the creation of a fiducie by a settlor who is legally presumed to be insolvent (i.e., during the so-called "suspect period") can be challenged in court. Other security interests can be so challenged only where they have been created during the suspect period to guarantee pre-existing debts of the insolvent debtor.

g) At the moment, security granted over motor vehicles, other than in the context of financing granted for the purchase of the vehicle, is governed by the general rules discussed above. There is a special register for security granted to a lender who has financed the purchase of a motor vehicle.

Under new provisions of the Civil Code, which have not yet come into force (but must do so no later than 1 January 2008),28 in principle, any pledge over a motor vehicle will be effective against third parties only when a declaration (the form of which has yet to be determined) is filed

27Art. L. 650-1 C. com. This provision, which was included as part of the 2005 revisions to the insolvency legislation, may have been adopted as a sort of counterweight to the many provisions of the 2005 revisions to the insolvency legislation which are favourable to banks (such as their role on creditors' committees and the favourable treatment given to "new money" loaned by banks to a debtor operating under the new procédure de sauvegarde).

28Art. 2351 C. civ.

with the (as yet unnamed) "administrative authority". However, the same article of the Code states that upon filing, the pledgee will be deemed to have retained possession of the pledged vehicle, which seems to indicate that this section is principally designed to apply to purchase money financing.

2.Non-possesory security right in present and after-acquired equipment (floating security right)

As already indicated in Case 1, it is possible, in the context of a nantissement de fonds de commerce, or the new Civil Code pledge, or the new fiducie-sûreté, to include future equipment. In all three instances, the future property must be sufficiently identified. In the case of the nantissement de fonds de commerce, such identification is done by reference to the description of the business concern itself;29 in the case of the Civil Code pledge, it is done by reference to the nature, colour, quantity or place and, as the case may be, make and serial number of the property).30 The criteria for identificability of property subject to a fiducie-sûreté have not yet been published but they should be similar to those already adopted for pledges over moveables.

If these criteria are fulfilled, then the answers in Case 1 would, in principle, apply here.

Beyond these rules, French law does not, in principle, recognise a purely floating security over property generally or even over categories of property. Since the Civil Code rules on pledges of future property and groups (“ensembles”) of property are so new, it has yet to be seen how they will be interpreted by the courts.

3.Non-possessory security right in present and after-acquired inventory (floating security right)

Until the recent reform of the law governing security interests, it was considered very difficult, if not impossible, to take non-possessory security over revolving inventory. Now the law offers two, and possibly three, methods of taking such security:

a)under the general pledge rules of the Civil Code, which permit security to be taken over groups (“ensembles”) of property and over future property (and, in the case of fungible property, specifically per-

29Art. 24 Law of 17 May 1909.

30Art. 2, 4° Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

mit the pledged property to be disposed of and replaced with property of the same kind);31 or

b)under the specific pledge over inventory which has been added to the Commercial Code.32 The rules governing the pledge over inventory under the Commercial Code are much more specific than those of the Civil Code and there is some uncertainty as to whether a commercial entity can grant a pledge over its inventory other than by the new (and unwanted) specific pledge over inventory under the Commercial Code; or

c)possibly, through the fiducie-sûreté mechanism.

The pledge of inventory under the Commercial Code can only be granted in favour of a licensed credit institution. It requires the signature of a deed entitled acte de gage de stocks setting out the details of the secured obligation, a description which permits identification of present and future property pledged (nature, quality, quantity, value, location) and the term of the pledge. Inventory subject to title retention cannot be included in the pledge but, with this exception, the pledge can cover raw materials and other inputs, intermediate products and finished products.

The pledge must, as a condition of validity, be registered at the Commercial Court registry at the place of domicile of the pledgor within 15 days of signature of the deed of pledge. Where several credit institutions have registered pledges of inventory, priority is determined by the respective dates of registration. The pledge extends automatically to new inventory. The pledgor must make available to the pledgee a detailed list of the inventory and the pledgee can inspect such inventory at any time.

If the pledged inventory loses at least 20% of its value when compared to that declared at the time the deed of pledge is signed, the pledgee can put the pledgor on notice either to restore the value of the inventory or to reimburse the corresponding portion of the credit. Further, the parties can also agree that the amount of inventory pledged will be reduced as and when the credit facility is repaid.

One important difference from the Civil Code pledge is that the parties cannot agree in advance that, on default of the pledgor, the pledgee will automatically become the owner of the pledged inventory. The pledgee must either have the pledged inventory sold by judicial sale or apply to the court to have the pledged property attributed to it.

A Civil Code pledge can be given to cover a future obligation but the decree concerning registration of non-possessory pledges requires that the amount of the guaranteed obligation be stated or, in the case of future obligations, that elements of information which will enable them to

31Art. 2342 C. civ.

32Art. L. 527-1 C. com. to Art. L. 527-11 C. com.

be identified be stated.33 Likewise, in the case of the new pledge over inventory, the amount of the secured obligation must be set out in the deed as registered or, if the pledge over inventory secures future obligations, details of such obligations sufficient to enable them to be identified must be given.34

Could the fiducie-sûreté be used for the purpose of taking security over inventory? The legislation on the fiducie seems flexible enough to permit the settlor to transfer title over its inventory to the patrimoine d'affectation and then deal with the inventory on behalf of the trustee. However, the settlor would not be able to deal with the inventory as its own property but as that of the patrimoine d'affectation.

4.Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender

All three options mentioned are available.

Title-retention is now officially recognized in the Civil Code as a security interest.35 It must be agreed in writing but there is no requirement of registration or notification in order to perfect the title retaining seller’s rights. A financial lease (“credit-bail”) can be granted only by a licensed credit institution. It must be set out in writing and, in order to be opposable to third parties, must be registered with the commercial registry. Registration protects the rights of the lessor for 5 years from the date of registration (this period can be extended through successive renewals of registration).

In the case of a third-party secured lender, there is a specific pledge available (“gage de l’outillage et du matériel d’équipement”)36 as well as, possibly, the new Civil Code non-possessory pledge.

The gage d’outillage, which was created in 1951, is specifically designed to facilitate financing of the purchase of new equipment. It can be granted either to the seller (if it has not retained title) or to the lender, whichever financed the purchase. It must be created by a written instrument. It must be granted at the latest within two months of the date on which the equipment was delivered to the place in which it is to be used

33Art. 2, 3° Decree 2006-1804 of 23 December 2006, JO 31 December 2006.

34Art. 2, 3° Decree 2006-1803 of 23 December 2006, JO 31 December 2006.

35Art. 2367-2372 C. civ.

36Art. L. 525-1 C. com. to Art. L. 525-20 C. com. (this device was called a nantissement: under the new nomenclature introduced in 2006 to distinguish the pledge of intangibles (“nantissement”) from that of tangibles (“gage”), it is now called a “gage”.

and it must be registered in the registry of the Commercial Court within 15 days of the date on which the pledge is created. Failure to meet both of these requirements will result in the invalidity of the pledge.37

The title-retaining seller is in a very strong position in the case of default by its buyer, provided that at the time of default the property sold has not been or incorporated into something else from which it cannot be separated without causing damage,38 and provided further that the property has not been sold to a third party acting in good faith and without notice of the title retention. In those circumstances the title-retaining seller can take proceedings to reclaim possession of the property. On the basis of the general rule that a pledge granted on the property of another is void,39 the title-retaining seller’s rights should take precedence over competing liens and security interests. However, since title retention is not published, a third party might be able to rely on Art. 2279 C. civ. (the article of the Civil Code which protects good faith purchasers without notice). There are no court decisions which have determined priority as between the title retaining seller and the beneficiary of a gage d’outillage (probably because a lender will have made sure, before lending (even though there is no register which it can consult for the purpose), that the goods to be financed are not subject to title retention).

All three asset-acquisition financiers (title-retaining seller, financial lessor and a lender benefiting from a gage d’outillage) are in a relatively favourable position in terms of priority when compared to the pledgee of a Civil Code non-possessory pledge or the pledgee of a fonds de commerce, and the purchase-money lender which benefits from a gage d’outillage will take precedence over the lien of the unpaid seller (cf. question 8 below).

The title-retaining seller may revindicate (reclaim) the property provided it is still in the possession of the buyer and provided it has not been incorporated into another property such that it cannot be separated from it without causing damage.40 The financial lessor in his capacity as owner of the leased property will be entitled, both under law and, generally, also under the specific terms of the lease, to claim restoration of the property if the lessee is in default. The purchase-money lender which benefits from a gage d’outillage can, upon giving 8 days notice to the defaulting debtor, move to have the collateral sold at public auction.41

If Manufacturer seeks court protection from its creditors, the titleretaining seller can claim the property provided it is still in Manufac-

37Art. L. 525-3 C. com.

38Art. 2370 C. civ.

39Art. 2335 C. civ.

40Art. 2370 C. civ.

41Art. L. 525-14 C. com. and Art. L. 521-3 C. com.

turer’s possession and has not been altered (or if it has been incorporated into something else, it can be separated without causing damage).42 If the insolvency administrator does not agree to the claim, the matter will be decided by the court.43 In any case, the property cannot be revindicated by the title-retaining seller if more than three months have passed since Manufacturer was placed under court protection.44

The financial lessor’s position will depend on whether Manufacturer has continued to pay the rentals and, if not, when it stopped paying. The fact of Manufacturer being placed under court protection does not in itself entitle the lessor to terminate the lease and reclaim the property. It is at the discretion of the judicially appointed administrator of the insolvent manufacturer to continue or not with the lease. The administrator has a delay of 30 days in which to decide on continuation of the contract after having been put on notice by the other party to the contract. If it does not continue, then the financial lessor can recover the property on essentially the same conditions as the title retaining seller. If the administrator decides to continue the lease and then defaults, the lessor can recover the property even without the administrator’s consent (the three months delay runs from default).45

The lender which benefits from a gage d’outillage is in the same position as any other secured lender. It cannot enforce its security while Manufacturer is under court protection. If the property subject to the security interest is sold in the context of a reorganization of the debtor, the proceeds of such sale are set aside with the Caisse des Dépôts et Consignations and when they are distributed, the lender will be entitled to assert its priority.

It is possible to imagine purchase money financing being provided on the basis of a fiducie-sûreté arrangement under which title to the relevant equipment would, simultaneously with the sale, be transferred from the buyer to the lender, acting as trustee and beneficiary of the fiducie-sûreté to guarantee repayment of the purchase-money financing. In such case, the lender could effectively insulate the financed equipment from the effects of the buyer's insolvency. However, if the buyer has the use of the equipment during the period of the fiducie-sûreté under an arrangement with the trustee, such arrangement might be characterized as an executory contract, similar to a financial lease arrangement, in which case the position of the lender, as trustee and beneficiary of the fiducie-sûreté, might be essentially similar to that of the financial lessor, as discussed above, in the case of the buyer's insolvency.

42Art. L. 624-9 C. com. to Art. L. 624-18 C. com.

43Art. L. 624-17 C. com.

44Art. L. 624-9 C. com.

45Art. L. 622-13 C. com.

5.Bona fide acquisition

For the purposes of this Case Study (and bearing in mind that French law does not provide for a general floating charge), it will be assumed that in the case of machinery there is either a pledge as part of the pledge of a fonds de commerce or a pledge in accordance with the new rules of the Civil Code. In the case of inventory, it will be assumed that there is a pledge granted under the new rules applicable to pledges of inventory.

By way of background, the right of the third party bona fide purchaser, or beneficiary of a security interest granted by such purchaser, to oppose the rights of the original owner (or those of a secured creditor of the original owner) are based on Art. 2279 C. civ. which provides that in the case of moveables possession is equivalent to ownership. Cases had held that at least in respect of some forms of security interest requiring publicity for opposability to third parties, the fact that such publicity was carried out did not prevent the third party purchaser from asserting bona fide ignorance of the rights of the genuine owner or its secured creditor.

In the case of the pledge of a fonds de commerce, the position of a third party purchaser is different. We have already seen that registration of the pledge of a fonds de commerce within 15 days of the grant of the pledge is a requirement for validity (and not merely for opposability) of the pledge. If the pledge is not so registered, the pledgee has no rights under the pledge which it could assert against third party purchasers. Conversely, if the pledge is registered, the Commercial Code provides that the rights of the pledgee follow the goods pledged. There are also specific provisions in the Commercial Code (which will however be abrogated in the near future) requiring the purchaser at a judicial sale of a pledged fonds de commerce to give notice to creditors of the vendor and "purge" security interests on the fonds de commerce. A third party purchaser would therefore appear to have no possibility (or at least only a very limited possibility) of relying on the protection of Art. 2279 C. civ. – although there do not appear to be any decided cases on this issue.

If the pledge is granted under the new rules of the Civil Code concerning non-possessory pledge, and if the pledge has been registered, the Civil Code itself provides that no one may rely on Art. 2279 C. civ. to assert rights against the pledgee. This, in effect, places an obligation on a subsequent buyer to check whether there is a pledge registered against the seller in respect of the good sold.46 It also means that if the pledge has not been registered, the subsequent buyer should be able to rely on

46He will be able to check the existence of a pledge by reference not only to the pledgor but also by reference to the type of property which may have been pledged (Art. 11 Decree 2006-1804 of 23 December 2006, JO 31 December 2006) in accordance with a nomenclature set out in an Order (“arrêté”) of 1 February 2007.

Art. 2279 C. civ.. What is not clear is whether a buyer from a person that had acquired the asset from a prior seller takes subject to a pledge granted by and registered against the prior seller. Since the register of non-possessory pledges is organised primarily by reference to the pledgors, it seems difficult to deny the benefit of Art. 2279 C. civ. to the good faith buyer whose seller was not the party against which the pledge had been registered.

Note that if the machinery sold is subject to a gage d’outillage, the buyer from the pledgor can rely on Art. 2279 C. civ. even if the pledge is registered, unless the pledgee had also affixed to the equipment a plaque attesting that the equipment is pledged. The Commercial Code permits (but does not require) such plaque to be affixed.47

In the case of inventory pledged under the new specific pledge of inventory, the pledgor is entitled to deal with specific items of the pledged inventory: his obligation is to ensure that at all times the value of the inventory subject to pledge is sufficient. Although there is no specific reference in the new rules to the position of third parties, they should be able to rely either on the general principles underlying the new pledge of inventory, or more specifically on Art. 2279 C. civ., to protect their position against the pledgee, even where the pledge is registered. If the pledge of inventory is not registered within 15 days of creation it becomes ineffective for all purposes.

If the inventory is subject to a fiducie-sûreté which is published (assuming that the use of the fiducie-sûreté for such purpose will be permitted as an alternative to the special pledge of inventory), the rights of a bona-fide subsequent buyer are uncertain. There is no equivalent in the portion of the Civil Code dealing with fiducie to the rule against relying on Art. 2279 C. civ. that is expressly stated in the case of a registered pledge without dispossession.

Therefore, as a rule, the general principles of civil law should apply and these would tend to favour the position of the bona fide buyer, even where there is a registered fiducie-sûreté in respect of the inventory, i.e., there would not be any obligation on a bona fide buyer to verify if a fiducie-sûreté is registered in respect of the property it acquires. However, the courts might be tempted to apply, by analogy, the rules on nonpossessory pledges and in such case, publication of the fiducie-sûreté will serve to prevent any third-party acquiror from being able to rely on Art. 2279 C. civ. to defeat the rights of the trustee.

47 Art. L. 525-4 C. com.

6.Possessory pledge – constructive or fictive possession

In the case of tangibles, French law has not traditionally recognized any concept of constructive or fictive possession. The only exception to this rule concerns automobiles whose purchase is financed by a recognized credit institution. In such case, if the financed vehicle is pledged to the lender, the lender is deemed by law to have retained possession of the vehicle.48 As already mentioned in the introduction, the Civil Code has recently been amended in order to clarify the circumstances in which a right of retention will be recognised and enforced. The significance of this fictitious possession, however, is not in its serving to perfect a possessory pledge (which, for example, in an insolvency would rank behind substantial privileges), but in its supporting a right of retention that effectively makes that subordinate ranking irrelevant.

7.Over-security

In France, there is no general doctrine of over-security. However, where creditors take excessive (disproportionate) security and such act is prejudicial to the debtor, such creditors could be held liable for the debtor’s debts in the context of the debtor’s insolvency. If such liability is held to exist, the security interests will be considered to be void. There has not yet been any court interpretation of the provisions of the Commercial Code adopted in 2005 which introduce this concept of excessive security.49

8.Legal (non-consensual) rights of unpaid seller

The unpaid seller of a tangible to which it has not retained title has a lien (“privilège”) over the tangible so long as it is in the possession of the purchaser.50 If the goods have not been purchased on the basis of delayed payment (e.g. on credit), the unpaid seller may revindicate them within 8 days of their delivery to the purchaser provided they are still in the possession of the purchaser and have not been altered from their condition at the time of sale. If the goods have been sold on the basis of delayed payment, the seller’s privileged right is that of being preferred on the proceeds of the sale of the property (this is also the case, even where the

48Art. 2352 C. civ. (this provision will only enter into force during 2007. However the legislation it will replace, which dates from 1953, contains a similar provision).

49Art. L. 650-1 C. com., cf. footnote 31 supra.

50Art. 2332 C. civ.

goods have been sold on the basis of immediate payment, if the delay for revindication has expired). The unpaid seller’s lien ranks after the rights of the lender which has a gage d’outillage, the lien of the state for tax debts, the lien of the landlord for unpaid rentals (if the landlord does not have notice of the seller’s rights) and the lien of employees for unpaid salaries. It should rank ahead of the ordinary Civil Code pledge but the courts have not yet had the chance to rule on this issue.

If the buyer becomes subject to court protection by reason of insolvency, the unpaid seller’s right of revindication, if it still exists, can be exercised only in respect of shipped merchandise which is in transit and has not yet been placed in the possession of the buyer or its agent51 (the unpaid seller can retain merchandise which has not been shipped).52 The unpaid seller can also revindicate if the sale was cancelled either by court decision or by the operation of a resolutory condition prior to the court decision opening insolvency proceedings.53

9.Special property registries

There are special registries for security interests on:

a)ships (there is a special register at the customs house at the port of registry of the ship),54

b)boats (there is a register at the commercial court),55

c)airplanes (a single special national register is kept by the Civil Aviation Authority),56

d)motor vehicles (the current register is maintained at each prefecture: by 1 July 2008 a new system will be established, as a consequence of the pledge on motor vehicles being integrated into the Civil Code),57

e)all tangible and intangible property rights connected with the production and distribution of motion pictures (at a special register maintained by the National Centre of Cinematography),58 and

51Art. L. 624-13 C. com. Note however that revindication is no longer possible if prior to their arrival at the debtor’s premises, they have been resold "without fraud", based on invoices or transport documents in proper form.

52Art. L. 624-14 C. com.

53Art. L. 624-12 C. com.

54Sec. 43, 48 Law of 3 January 1967.

55Law of 5 July 1917.

56Art. 121-2 C. aviat. and Art. 122-7 C. aviat.

57Decree No. 53-968 of 30 September 1953 (existing law): Art. 2351-2353 C. civ. (new law, to be in force prior to 1 July 2008, cf. Art. 58 Ordonnance No. 2006-346 of 23 March 2006, JO 24 March 2006).

58Art. 33 C. ind. cin.

f)patents, trademarks and rights in computer software (the register is kept by the French Patent and Trademark Office – INPI).59

10.Non-possessory security rights in raw materials – effect of processing

The title-retaining seller can still claim sold goods even if they are commingled or processed, provided that the property sold can be separated from that with which it is co-mingled or incorporated, without causing damage to the property.60 Under the new rules contained in the Civil Code, where the raw material is fungible, the title-retention security will attach to property of the same nature if the debtor has such property.61 The title-retaining seller would not have any real rights in respect of the final product in to which the raw material is inseparably incorporated.

It would be somewhat unusual for a financial lessor to lease raw materials and financial leases generally prohibit the lessee from dealing in any way with the equipment or material leased in a manner which would prevent the lessor from recovering possession of it if the lessee is in default (or chooses not to exercise the option to become the owner of the leased property at the end of the lease).

Raw materials would not be the subject of the special pledge on machinery and equipment (“gage d’outillage”) referred to in the answer to question 4. Instead, under the 2006 changes to the law on security interests, they could form the subject-matter of the new pledge of inventory included in the Commercial Code and could, perhaps, also be the subjectmatter of a pledge without dispossession under the Civil Code. In neither case does the law set out any rules concerning the consequences of commingling or processing of the pledged property. In the case of the special pledge of inventory, the intent of the legislation would not appear to favour the idea that the pledgee would have security over processed goods or finished product. The new rules expressly state that the pledge automatically ceases to cover inventory disposed of and automatically attaches to substituted inventory.62 In addition, any significant depletion of inventory (more than 20%) would have to be rectified at the pledgee’s request and failure by the pledgor to do so would entitle the pledgee to require immediate repayment of the loan.63

59Art. 613-8 C. propr. intel. (patents), Art. L. 714-7 C. propr. intel. (trademarks), Art. L. 132 para. 34 C. propr. intel. (software).

60Art. 2370 C. civ.

61Art. 2369 C. civ.

62Art. L. 527-5 C. com.

63Art. L. 527-7 C. com.

In the case of the new general Civil Code pledge (assuming it is available for financing inventory), it would not appear to be the case that the non-possessory pledge would survive co-mingling or processing or that it would extend to finished product. Instead, if the raw materials are considered to be fungible (which would usually be the case) the pledge could cover new raw materials replacing those initially pledged.64 In addition, the pledgor may be subject to an obligation to conserve the pledged property. Processing or attachment might constitute a violation of such obligation. In such case, the new Civil Code rules permit the creditor to accelerate payment of the obligation guaranteed by the pledge or to require that additional property be pledged.65

A fiducie-sûreté over inventory (on the assumption that a fiduciesûreté for such purpose is possible, as an alternative to the new Commercial Code pledge over inventory) would, in order to be workable, probably require that the settlor retain possession of the inventory, under an arrangement with the trustee, in order to be able to sell the inventory or use it in its activity. Alternatively a third party warehouser could be entrusted with such task. In either case, there are no specific rules covering the consequences of commingling or processing of the raw material subject to a fiducie-sûreté. These subjects could be covered in the trust agreement and the settlor might be required to replace commingled or processed inventory. In the absence of any such provisions in the trust agreement, the courts might consider the trustee as being in a position analogous to the title-retaining seller, since the title to the inventory is held by the trustee in the patrimoine d'affectation, or they might seek to apply the general rules of the Civil Code pledge, on the basis that the fiducie-sûreté should, in the absence of special provisions to the contrary, be treated as a pledge.

11. Cross-border issues

This subject is somewhat difficult because, although the general principles of French private international law applicable to recognition of foreign security interests have been established for some time, there are not many cases dealing with the issues presented in this Case Study and many of the practical consequences of such general principles are still matters of speculation.

As a general rule, France applies the principle of lex rei sitae to determine what security interests can be created over a moveable. Whether such security interests will be recognized and enforced in France depends

64Art. 2342 C. civ.

65Art. 2344 C. civ.

on several factors. The first is whether French law recognizes a security interest which is identical or essentially similar to the foreign security interest. French courts will not enforce against property located in France rights of a type which French law does not itself recognise. The question of whether any special publicity or other formality would be required in France for the validity or opposability of the French equivalent of such foreign security interest is also relevant. If French law would require that for purposes of opposability a formality be carried out at a place which, in the circumstances (e.g., the grantor of the security interest is a French entity), is in France, then failure to carry out such formality in France in respect of a foreign security interest would be fatal to its opposability in France. If French law requires that a formality be carried out at a place which, in the circumstances, is in another country, then, in principle, French law would accept such opposability if the requirements of such other country’s rules have been complied with. If French law does not require that any particular formality be carried out for the purposes of opposability, then (although the matter does not appear to have ever been considered by French courts) it appears that opposability would require compliance with the formalities required in the country of origin of the security interest.66

For the purpose of answering the questions raised by this Case Study, we will assume that the security interest created in State A is of a type which would be recognised and given effect by the courts in France if that security interest had been created in France.

Taking as a starting point that the security interest has not been perfected against third parties in the country of origin (State A), then, in any of the three circumstances mentioned in the question (title retention, financial lease, non-possessory security interest), French courts would not uphold the original security interest over a subsequent security interest duly created and perfected under French law, and this would be the case even if French law itself would not have required any particular formality for the purposes of perfection (for example, in the case of title retention). In such circumstances, security could be granted in France purely on the basis of French law and without reference to the law of State A.

If we now assume that at the time the property is moved from State A to France, it is subject to a security interest which has been perfected in accordance with the requirements of the law of State A, we would still need to know whether, under the law of France, perfection of the equivalent security interest involves a formality being carried out in France. In the present case, which concerns security granted exclusively over tangi-

66For a summary of French law concerning the conflicts of law aspects of security interests on moveables, cf. P. Mayer/V. Heuzé, Droit international privé (2004), p. 469-483.

bles, no formality would be required under French law for retention of title, a financial lease or a non-possessory pledge granted in respect of a moveable located outside France at the time of the grant, unless the grantor was a French entity, in which case French law would require that a financial lease or a non-possessory pledge be registered with the Commercial Court registry at the domicile of the grantor. Therefore, assuming that perfection had been carried out in State A in accordance with the law of State A before the property was moved to France (and that if necessary in the circumstances, any formalities required in France had also been carried out), such prior security interest should be opposable before French courts to a subsequent security interest created in France.

However, the French court might still have to determine if, in the circumstances, a party in France such as a seizing creditor in possession of the property pledged under the law of State A could nonetheless rely on Art. 2279 C. civ. and, in such context, the answers to question 5 above would be relevant. It will be recalled that registration of a nonpossessory Civil Code Pledge will deprive third parties of the right, pursuant to Art. 2279 C. civ., to rely on the possession of the person from whom they derive their rights in respect of the goods and to consider such possession as being equivalent to unrestricted ownership of such goods. However, in other cases such as a financial lease or a pledge of inventory or a pledge of machinery to secure purchase money financing, registration by itself may not be sufficient to defeat the rights of a person who is otherwise entitled to rely on Art. 2279 C. civ.. Since the position of the third party depends, in French law, on the type of security interest to which the relevant property is subject, the position of such third party, before French courts, in respect of a security interest validly created abroad and recognized by French law should depend on whether the court will consider the foreign security interest to be equivalent to a French security interest (Civil Code pledge, “nantissement de fonds de commerce”) to which Art. 2279 C. civ. does not (or might not) apply.

If the security interest is perfected in State A after the property is transferred to France but before a security interest is perfected in France, that security interest would in principle prevail over the subsequent security interest perfected in France. This answer assumes not only that French law will recognize by equivalence the security interest perfected under the law of State A but also that if the security interest is of a kind which requires registration in France if granted by a French entity (which would be the case for a financial lease and a non-possessory pledge), that such formality has been carried out in France prior to perfection of the second security interest granted in France, if the grantor is indeed a French entity. If either of these conditions is not met, the security interest perfected under the law of State A will still not be opposable to a subsequently perfected security interest created under the law of France.

The answer to this question has not considered what would be the position if the security interest granted in State A is equivalent to the fi- ducie-sûreté. France already gives limited recognition to foreign trusts but the sort of recognition required for the purposes of giving full effect in France to a foreign fiducie-sûreté may depend on France ratifying the Hague Convention of 1985 on the Law Applicable to Trusts and on their Recognition. France signed the Convention in 1991 but, in accordance with a declaration made at the time, it has not ratified it, pending creation in French law of a mechanism equivalent to the trust. There is now speculation that, as a consequence of the introduction of the fiducie, France will ratify the Hague Convention.

The following are some measures which could be adopted to reduce the risks related to validity of a security interest over a moveable resulting from transfer of the moveable to another jurisdiction.

a)create a security interest of a kind which is likely to be recognised in the other jurisdiction to which the moveable might be expected to be moved. Continental European countries have fairly similar types of security interests over moveables, but those similarities should not be exaggerated. An Art. 9 UCC security interest or an English law floating charge is unlikely to benefit from equivalence in France – although as a consequence of the changes to the rules concerning security interests over moveables, including the fiducie-sûreté, discussed in this paper, "anglo-saxon" security interests, as well as German style security interests involving transfer of ownership of collateral, may stand a better chance than in the past of benefiting from equivalence;

b)in the security document, condition the right to move the collateral on the prior consent of the secured party;

c)make sure that the security is perfected as soon as possible in the country of origin (i.e. the country where the moveable is located at the time the security interest is granted);

d)if the grantor of the security is “located” in a country other than the country in which the moveable is located at the time of the grant of security right, perfect (if possible) in the grantor’s country in accordance with the rules applicable to perfection in the grantor’s country, even if the moveable has not been moved to the grantor’s country.