учебный год 2023 / Chalhoub, Study of The French Law of Security Interest on Movables

The fungibles provided for in Article 2342 C. civ. (those that the creditor can freely

dispose of when the agreement allows him to do so, on condition that he replace them by the

same quantity of equivalent goods) are not subject to this modification procedure.68 The question

arises what type of procedure should be followed in cases where the substituted goods have

different identification elements. Or if the value, the color, or quality of such goods is different.

Mrs. Bouteiller suggests the following solution:

A stock of bottles of wine, vintage 2000, can, if sold, be substituted by other bottles of the same vineyard of another vintage. But to obtain the equivalent in terms of value, the number of bottles is not the same, in this case, we should modify the registration. The same applies if in terms of value the bottles are equivalent but the wine is different.69

d. Order of priorities

The immediate result of the registration of the non-possessory pledge is the opposability

against third parties.70 The creditors are ranked according to their date of registration. In cases

where the dates are identical, the priority is determined according to the order of registration

established by the number given by the clerk at the time of registration.71 Things become more

complicated where there are I two pledges coexisted on two or more different registries. If this

situation arises, the creditors will have to consult at least two registries in order to be able to

68Patrice Bouteiller, La publicité des gages sans dépossession (gage de roitd commun et gage des stocks)

[The Publicity of Non-Possessory Pledges (Pledge of Civil Law and Pledge of Stocks)], La Semaine Juridique Entreprise et Affaires n° 4, 25 Janvier 2 007, 1112.

69Id.

70Art. 2337 C.civ.

71Bouteiller, supra note 68.

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determine the priority.72 To avoid this complexity, the best solution would be to unify the registries. Unfortunately, it seems that the French legislature is taking the opposite direction.

In case of conflict of priorities between possessory and non-possessory creditors of the same pledged good, by applying the first-in-time first-in-right rule, the latter has priority as long as his pledge was duly registered before the possessory creditor took possession of the

good.73 This can create some difficulties with respect to proof of the time of acquisition of possession, and one can easily envision pawn shop owners getting backdated receipts. A reasonable solution would be to require the registration of most of the possessory pledges.

Even though, in this case, the non-possessory pledgee is given the priority over the possessory one, some French scholars predicted that the possessory pledge would be still be

preferred by lenders because it grants them the right of retention.74 Since the non-possessory

pledge did not offer a right of retention, it did not meet the high expectations.75 Subsequently, in 2008, the French legislature included Article 79 in the “Law of Modernization of the Economy” to add a new paragraph to Article 2286 C.c iv. allowing the right of retention for -

possessory pledge.76 As a result, senior security interests will normally have priority over junior interests.

72Legeais supra note 63 at 91.

73Art. 2340 C. civ.

74Legeais supra note 63 at 82.

75Dominique Legeais, Droit de rétention du créancier gagiste[Right of Retention of the Creditor Pledgee], Revue de Droit bancaire et financier n° 5, Septembr e 2008, comm. 139 .

76Law n° 2008-776, August 4, 2008 Modernization of the Economy, art. 79: Art. 2286 C. civ. states: Can prevail of a right of retention on the thing:

1° The one to whom the thing was given until the p ayment of its debt;

2° The one whose unpaid debt results from the cont ract which requires him to deliver it; 3° The one whose unpaid debt was born during the d etention of the thing;

4° The one whom benefits of a pledge without dispo ssession.

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The possible conflict over a junior possessory creditor benefiting from a clause of retention of title was not a real issue as it was legally prohibited. With the new paragraph in

Article 2286 C. civ.77 more difficulties will arise. Mr. Simler and Delebecque satirized: “In the case of non-possessory pledge, the right of retention can be only explainable through magic of the law.” They added that “this fiction is hardly j oyful, because it turns upside down the natural order of the real réelmovable security interests. The creditor pledgee becomes super-privileged and will be entitled not only to be paid by preference to other creditors, but also to oppose any

seizure.” 78

e. Deletion of the registration

The pledge is conserved for five years after registration. At the expiration date, if not

renewed, the registration is not opposable against third parties.79

At the request of the creditor or by the pledgor, the registration of the gage can also be

canceled by a judicial decision upon justification of the extinction of the secured debt.80 This is

The right of retention is lost by the voluntary relinquishment.

77Philippe Simler & Philippe Delebecque, Droit des sûretés[Law of Security Interests], La Semaine Juridique Edition Générale n° 47, 19 Novembre 2008,I 211 at 22.

78Id.

79Art. 7 of the decree n° 2006-1804.

80Art. 8 of the decree n° 2006-1803: “The cancellat ion of the registration can be requested by the creditor or the pledgor by producing the agreement of the parties or by an act allowing the withdrawal of the registration. It can also be done by the execution of a final court decision...”

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due to the fact that the creditor or pledgoe cannot require the cancellation of the registration

unless and until full payment of the principal of the secured debt and its interests and costs.81

f.Rejection of the request of registration, modification or cancellation

The clerk has to reject the requests for registration, modification or cancellation in case of

their non compliance with the provisions of Article 282, 483 and 884 of the Decree. The applicant is notified of the reason for refusal, and the indication that she can have recourse against the decision of rejecting the application within fifteen days from the date of the notification. The applicant can bring her claim in front of the president of the court of the clerk’s office along with the necessary supporting documents. The decision of the president of the court or the delegated judge can be appealed within fifteen days following the notification of the decision by registered

letter with notice of receipt.85

B. The non-possessory pledge of stocks

The Order of 2006 added a new Chapter VII to Title II of Book V of the Commercial Code (art. L. 527-1 to L. 527-11) entitled pledge of stocks. Loyal to the French tradition, the authors of this reform attempted to define the subject matter and, unsurprisingly, the

81Art. 2339 C. civ.

82See supra note 55.

83See supra note 67.

84

See supra note 80.

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definition/scope of the pledge of stocks is very limited and confusing.86 Article L.527-3 C. com.

defines them as:

With the exception of the goods subject to a clause of reserve of property, the stocks of raw and supply material, intermediary products, residual and finished, as well as the goods belonging to the debtor and estimated in kind and in value at the date of the last inventory, can be pledged

The term “stocks” is actually used by the French le gislature to mean inventory. For an Anglo-

American reader, “stocks” usually refers to securit ies in the form of bonds and shares. In

addition to this lingual perplexity, the pledge of stocks was not acclaimed by the doctrine due to

the numerous restrictions it introduced. The difficulties, as well as creation and perfection of this

type of pledge, will be discussed in detail below.

a.Creation

II.The stock pledge can be created by legal entities and natural persons acting in the course of their professional business. The pledge must be in writing and registered in a special public registry. The same rules of execution of the general possessory pledge apply to the stock pledge.87 Surprisingly, however, Article L. 527-2 C. com. prohibits the pactum commissorium

that has already been allowed in the same reform for the similar general possessory pledge.88

The creation of this pledge requires a written statement which must include the following details, under penalty of nullity: (Article. L. 527-1 C. com.):

86Legeais, supra note 26 at 85.

87Art. L.527-1 C. com.

88Art. L. 527-2 C. com states that: “Is deemed not written every clause providing that the creditor becomes proprietor of the stocks in case of nonpayment of the due debt by the debtor.”

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1.The title "deed of pledge of stocks";

2.Designation of the parties ;

3.Provision that the deed is subject to the dispositions of Articles L. 527-1 to L. 527-11;

4.Name of the insurer guaranting against fire and damage;

5.° Designation of the secured debt;

6.A description allowing the identification of the concerned present or future property, in kind, quality, quantity and value, as well as the indication of the place of their conservation;

7.Duration of the pledge.

French courts are still to rule how failure to disclose the above required information will be remedied under the law.

a. Perfection

The pledge of stocks is opposable to third parties upon publicity.89 The beneficiaries are ranked according to their date of registration, and in cases where the dates are identical , then according to the order of registration established by the number given by the clerk at the time of

registration.90

i.Paper filing

The pledge of stocks produces effect only if registered in a public registry held at the clerk's office of the court having jurisdiction over the place where the debtor has his headquarters or residence. The registration must be done, under the sanction of nullity of the pledge, within

fifteen day as of the formation of the constituting deed.91

89Art. L.527-4 C. com.

90Bouteiller, supra note 68.

91Art. L.527-4 C. com.

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Article 1 of Decree No. 2006-1803 provided for a special registry for the gage of stocks. However, this decree was later abrogated by Decree No. 2007-431 and replaced by Articles R. 527-1 to R.527-11 of the Commercial Code, which did not restate the letter of Artcile 1 above and remain silent as to whether it is a special registry. Logically, the registry of the nonpossessory pledges should be used, but based on all the confusion so far, one should not be surprised if it was not the same.

The law also dictates that the beneficiary provide the clerk’s office with the

following documents: 92

-an original of the private deed establishing the gage or a copy of the authentic form.

-as per article R.527-2 a schedule of initial registration in two specimens that include:

-the designation of the parties:

*for a natural person: the last name, first names, the date and place of birth, the residence, the completed unique identification number, and if that’s possible, by the mention RCS [Registry of Commerce and Companies Registre du Commerce et des Sociétés] followed by the name of the city where the registration at the clerk’s office has occurred.

*for a legal entities: indication of the form, name, address of head quarter, the unique identification number, completed if possible, by the mention RCS followed by the name of the city where the registration at the clerk’s office has occurred.

*for the creditor establishment of credit: indication of the form, name, address of head quarter, the unique identification number, completed by the mention RCS, and followed by the name of the city where the registration at the clerk’s office has occurred.

• - the date and nature (private or authentique) of the deed constituting the gage, and the indication that it relates to stocks,

• - the amount of the principal secured debt, its d ue date and the interest rate,

•- for the potential future debts, the elements al lowing their determination,

•- the description of the secured stocks, present or future, their nature, quality, quantity, value, and the mention that the portion of the secured stocks decreases in prorate of the disinterest of the creditor,

•- the place of conservation of the secured stocks and the designation of the guardian,

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• - the mention of registration of the pledge, that is, the date and number of registration and its number.

The clerk then proceeds to the registration on the public registry mentioned in Article L. 527-4 C. com., where he controls an alphabetical schedule organized by the name of the debtors,

and gives the request a registration number. This alphabetical schedule can be electronic.93 The clerk ultimately gives the filing beneficiary one of the above two schedules whereby he certifies

that the registration has been made.94

ii. Electronic filing

As per Article R.527-3 C. com., the registration of the pledge of stocks can be done in electronic form under the conditions of Article 1316-4 C. civ. and the Decree n° 2001-272 of March 30, 2001 (i.e.: provisions on electronic signature).

b. Modification of the registration

The debtor can, in the course of his business, sell the secured stocks provided that he reconstitutes them in a value equivalent to that of the initial stock. The creditor can also require

that the debtor reconstitutes them by goods of identical nature and quality.95 Only in the first case

a modification of the registration is required.96

93Art. R.527-5 C. com.

94Art. R.527-4 C. com.

95Id.

96Art. R.527-7C. com.

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Moreover, any modification affecting the information related to the pledgor, the creditor or the pledged good(s), is published in margin of the existing registration according to the same

procedure for the modification of the registration of the general non-possessory pledge.97

However, when the modification concerns the jurisdiction of a clerk’s office different than the one who initially registered the pledge, the pledgor should transfer the modified registration to

the registry of this new tribunal after informing the credit institution.98

c. Cancellation or deletion of the registration

This pledge is also conserved for five years after registration, and can be cancelled by the

same and for the same reasons as the general non-possessory pledge.99

d. Rejection of the request of registration, modification or cancellation

The same rules for rejection of the request of registration, modification or cancellation of the general non-possessory pledge apply to the pledge of stocks.

e. Reduction of the stocks’ value100

In the silence of the law and if for any reason whatsoever the value of the secured stock is decreased by 20% compared with its initial value, the creditor can put the pledgor on notice either to immediately restore its value or to reimburse the debt in proportion of the decrease. If

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the pledgor did not comply, the debt is deemed due, and the creditor can require full

reimbursement of the debt within 15 days.101

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