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Variation

The fact that the security transfer took place many months after the credit was granted does not affect its validity. But if the transfer, which caused the insolvency of C, was made with an intention of prejudicing the other creditors of C, and this was known to A, then C’s creditors have the right to contest the alienation within the following five years (articles 939, 946 A.K.). In C’s insolvency the administrator may ipso iure revoke the subsequent security transfer. According to article 537 EmbN, the grant of a real security for a pre-existing debt during the suspect period, or ten days before it, is revocable, irrespective of the good or bad faith of the creditor. It has also been suggested34 that a security transfer of ownership which is granted to reinforce a previous claim, rather than a present or a future claim, is revocable, according to an expansive interpretation of the above rule.

It should also be mentioned that the above provision is not applicable if the real security is granted to secure the pre-existing claim of a bank (L.D. 4001/1959). If A is a bank, the insolvency administrator cannot revoke a security transfer of ownership, even if made many months after the loan was made. There is a contention, however, that such security ownership could be annulled by the court (article 538 EmbN).

f r a n c e

(a) French law does not provide for a security interest akin to the English f loating charge.35 The main problem about creating a security right over stock-in-trade stems from the invalidity under French law of security rights over future and/or non-individualised assets. Yet, due to the needs of commerce, French law has created specific instruments by which fungible or revolving assets may be charged. These instruments are based on the legal concept of the warrant.36 This is a form of security available to professionals, which takes the form of a promissory note handed to the creditor, as a guarantee for credit, that can subsequently be assigned. Publicity is arranged. The debtor must retain and look after the collateral or, where the assets are fungible, he must maintain the stock in

34N. Rokas, Stoicheia ptocheutikou dikaiou 41; see also K. Rokas, Ptocheutikon Dikaion 243 who suggests that article 537 EmbN is applicable also in the case of a security transfer of ownership over a ship.

35For general information on the f loating charge and French law, see Dahan, JDI 1996, 381.

36From the English term warranty. See Scholder, Rev jur com 1980, 121.

the same quantity or value. The nature of the assets concerned is such that the creditor has no right to trace into the hands of third parties, but the creditor is granted fictitious possession and a right of retention, which means that he has a right to the proceeds of a sale ordered by an insolvency administrator.37

The warrants available in respect of fungible assets are:

(1)the agricultural warrant over fungible assets;38

(2)the warrant over a stock of products derived from petrol;39

(3)the warrant over a stock of war material;40

(4)the warrant over industrial assets.41

In practice, only the first warrant is used. In the instant case, C cannot grant a security right by way of warrant over his revolving stock-in-trade, because there is no warrant applicable to motorcar accessories.

Of more relevance to the present case would be a security right over C’s trading activity. The Law of 17 March 1909 allows the charge of an undertaking’s fonds de commerce. Basically, a fonds de commerce is made up of the property of the business (equipment, rental agreement of the premises, patents and trademarks, etc.) and the attributes of the business (name, commercial appellation, clients, location of the business that contributes to commercial activities, etc.). In order for a valid charge to be constituted over the fonds de commerce, the business must possess a clientele and the said clientele must be included within it. The fonds de commerce represents wealth that can be traded: either sold or used as collateral for a security right.

(b) It is possible to create a security right over a fonds de commerce. The charge (nantissement) is equivalent to a pledge, although of course it does not require the surrender of possession, since the very value of the fonds de commerce depends on its continued exploitation as a going concern. The parties are free to specify what is included as collateral, but it should be noted that immovable assets (e.g., title to buildings and materials

37TGI Douai, 17 Sep. 1992, Rev proc coll 1993, 424, obs. Dureuil.

38Rural Code, articles L. 342.1 ff.; Wine Code. This warrant may be used only by farmers and producers, in order to charge crops, animals or farming equipment.

39Law of 21 Apr. 1932. The warrant is available only to oil companies.

40Decree-Law of 24 June 1939.

41Law of 12 Sep. 1940. This was created during wartime and required manufacturers to have been granted a letter of agreement which invited them to undertake the production of goods for the war effort.

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incorporated into immovable assets) cannot form part of a fonds de commerce. Moreover, the charge (as opposed to the sale) cannot include stock- in-trade (Law of 17 March 1909, article 9).42 Publicity is arranged in order to inform third parties. Registration on a special register is required within fifteen days following the execution of the charging agreement.43 The chargee does not have a direct interest in the particular assets, his interest lies in the undertaking as a whole. Thus, enforcement must be ordered by a court, which will arrange the sale of the undertaking by auction and pay the chargee out of the proceeds of sale.

An important drawback of the instrument is that the chargee does not enjoy a very high level of priority (all taxes are paid ahead of him). Also, the very value of the fonds de commerce depends upon the ability of the trader to manage it and to generate profits. Enforcement of the charge is likely to occur at a time when it has failed.

(c)The nantissement de fonds de commerce is well known to the retail sector and is very commonly used in practice, despite its limitations. So in the present case, A will certainly wish to take such a charge over C’s undertaking, as this will provide security over many elements of C’s business, but not the stock.

(d)No limitation is imposed on the value of the fonds de commerce that may be charged referable to the amount of the secured loan.

Variation

Pursuant to C. com, article L. 621-107, a number of transactions concluded by the debtor before the commencement of insolvency proceedings but after the date for the suspension of payments (as defined by C. com, article L. 621-1 and 621-7) are deemed to be void. This period is called the suspect period. Paragraph 6 refers to security rights (contractual, statutory or judicial) on immovable and movable property to secure pre-existing debts. There are exceptions to this rule, in particular when the new security interest was created only to replace another one already in existence.44 So if A was granted a charge over a fonds

42But materials could be included: Req, 21 June 1933, DH 1933, 426.

43As confirmed in Civ. (1), 18 Feb. 1997, JCP 1997, Som, 252, obs. Piedelièvre; D affaires 1997, 406.

44Com 20 January 1998, Bull civ IV, No 28; JCP 1998, I, 141, obs. Cabrillac; RTDC 1998, 707, obs. Bandrac/Crocq.

de commerce, or a warrant, and after that grant C went into financial difficulties, such a security right could be declared void by the court.

b e l g i u m

(a)Financial institutions will generally ask for a pand op de handelszaak/gage sur fonds de commerce. This is a form of enterprise charge and was created by the Act of 25 October 1919. It is only available to banks and financial institutions. Other creditors are not entitled to use this form of security. The introduction of this non-possessory security right explains why the business community did not forcefully lobby for the introduction of security transfer of ownership. The chargor remains in possession of the assets and is, as under an English f loating charge, entitled to dispose of them in the ordinary course of his business. The security right covers not only existing but also future assets. The security interest is perfected by registration of the charging agreement on a public register. The charge must include the essential classes of assets of the business (equipment, goodwill, trademarks). The parties may also include other classes of movable assets (e.g. claims against customers). So far as stock is concerned, article 2 restricts the security interest to 50 per cent of the value of the assets of the enterprise. The parties may not limit the collateral to a particular class of assets (e.g. only stock).

In other cases, the principle that the pledgee must take possession of the assets can be circumvented by the use of constructive possession on the part of a third party. Under the Warrant Act of 1862, stock may be stored in a warehouse, whereupon the warehouse-holder may then prepare a document which represents the goods, which will be a negotiable instrument. This instrument may be transferred to a creditor for security purposes. It is also possible for pledged goods to be stored on the premises of the pledgor, if certain conditions are met in order to prevent him from having free access to the stock. In either case, only the equivalent of an English-model fixed charge may be obtained.

(b)A financial institution with a charge of the pand op de handelszaak/gage sur fonds de commerce obtains the right to realise the whole of the assets and obtain preferential payment out of the proceeds. However, the security on stock is limited to 50 per cent of its value. In so far as the creditor’s claim exceeds an amount that equals 50 per cent of the value of the stock, the creditor will be unsecured. When the debtor is declared