There is no general concept of a floating charge under French law, and no concept of a debenture or blanket security agreement covering all or most of the assets of a company. As a consequence, separate pledges are generally required to be taken over all the assets of a company, and each type of asset is subject to a different set of statutory provisions governing the creation and perfection of security over that asset. In addition, while the Civil Code recognises the possibility of creating security over future assets, provided that they can be sufficiently identified and determined, creating security over potential future assets is not allowed. This means that for the security interest to be valid there must be a high level of certainty that the pledged asset will come into existence or be acquired by the pledgor and that the parties must be able to properly identify the asset in the relevant security document.
The French law security interests that are closest in form to a floating charge are the pledge over the ongoing business described below, which is both limited in scope and cumbersome to enforce, and the pledge over inventory.
There follows a non-exhaustive list of the most common types of security interests that may be granted over assets located in France.
Securities account pledge
This type of security interest is available only with respect to securities issued by a joint-stock company, which, in France, are in dematerialised form and take the form of entries into paper accounts (opened with the issuing company) or electronic accounts (opened with a bank or other entity licensed to operate securities accounts). The pledge is created through the execution and delivery by the pledgor of a statement of pledge, which must follow a prescribed format. However, legal practitioners generally also require that the pledge be recorded in the register of securities transfers and the register of individual securities account of the issuing company. There are no particular perfection requirements. The pledge agreement may provide that other securities held by the pledgor from time to time shall be credited to the pledged securities account, whereupon they shall be deemed to have been included in the original pledge with effect from the date of the original statement of pledge without any further formalities.
Shares in SARLs and certain other companies are not classified as financial securities and security is taken through a pledge over the shares themselves. New pledges must be entered into to cover any new shares transferred to or subscribed by the pledgor. With regard to perfection requirements, registration of the pledge with the relevant public registry is necessary to make the pledge enforceable against third parties.
Pledge over receivables
Security may be granted over any receivable through execution of a pledge agreement in writing between the pledgor and the secured creditor, indicating the secured obligations and properly identifying the relevant receivable and corresponding third-party debtor. While the pledge is valid and enforceable against third parties generally from the date of the pledge agreement, it is not enforceable against the third-party debtor unless and until it receives notice of the pledge, and the third-party debtor may continue to discharge payment obligations under the pledged receivable to the pledgor. Once the third-party debtor has received notice of the pledge, it must discharge any payment obligations under the pledged receivable to the secured creditor, regardless of whether acceleration of the secured debt has occurred.
Bank account pledge
This security interest is simply an unusual variant of a pledge over a receivable, and execution requirements are the same. The pledge is not enforceable against the third-party debtor (ie, the bank with whom the pledged account is open) unless and until it receives notice of the pledge. However, the pledge will only cover monies standing to the credit of the pledged bank account as at the date of enforcement of the pledge, and subject to completion of the current transactions affecting the pledged account.
Cash collateral arrangement
Security can be obtained over cash through payment of the relevant monies into an account opened in the name of the beneficiary (which, where the beneficiary is a bank, can be an internal account within that bank), and not in the name of the pledgor. The taking of cash collateral is subject to the general regime of pledge over tangible assets. However, given the fungible nature of cash, a cash collateral arrangement has the effect of transferring title to such cash to the beneficiary, subject to an obligation of the latter to repay an equivalent amount of money on expiry or discharge of the secured debt.
Pledge over ongoing business
This security interest covers:
- leasehold rights with respect to the premises at which the business is being operated;
- some fixed assets (such as machinery, equipment and tools, subject to these not being pledged under a pledge over plant and equipment);
- trade name and goodwill; and
- future assets of the nature of those mentioned above, either not yet in existence or not yet the property of the pledgor at the time the pledge is granted.
Its scope may be extended to include intellectual property rights (which can alternatively be pledged per se as described below). Such a pledge must be registered with the tax authorities within 10 days, and with the clerk of the commercial courts having jurisdiction over the principal place of business and every branch included in the scope of the pledge within 15 days of execution of the pledge agreement. If intellectual property rights are included in the scope of the pledge, specific registration requirements with the Trademark and Patent Office (INPI) also apply.
Pledge over intellectual property rights
Intellectual property rights can also be pledged independently from a pledge over ongoing business. Specific registration requirements with INPI apply.
The mortgage deed must be signed before a notary public. Mortgages are rather expensive due to the costs of registration with the French tax authority and the land registry and are, therefore, rarely seen in acquisition financings.
Civil law pledge over inventory
French law provides for two methods of creating a pledge over inventory. The first one, known as the civil pledge, requires that the secured creditor be effectively transferred possession and control of the items constituting the pledged inventory. This is generally achieved by the parties designating a third-party service provider who will segregate the pledged items, control in- and outflows and maintain a register accordingly. While difficult to implement and costly to administer, a civil pledge over inventory is a very efficient security interest, as possession by the secured creditor allows it to outrank even those creditors that would otherwise be legally privileged over enforcement proceeds.
Commercial law pledge over inventory
A second method of creating a pledge over inventory was introduced in the French legal system a few years ago. Pursuant to this simplified commercial pledge, the security interest is created by the parties executing a pledge agreement that identifies the pledged items and must be registered with the clerk of the commercial court having jurisdiction over the place where the inventory is located within 15 days of execution of the pledge agreement. The pledgor may sell items comprised in the pledged inventory without the beneficiary’s approval and without any particular release formalities having to be carried out, and the pledge will, within the limit of the initial description of the pledged items, extend automatically to new similar items making up the inventory. Such a pledge does not, however, outrank legally privileged creditors and is not as efficient as a civil pledge. In addition, there are certain statutory limitations to using such a pledge as it may only be granted by the borrower itself (and not by a guarantor), solely in favour of licensed credit institutions and only as security for its indebtedness under the loans (and not bonds or derivative instruments) made available by the relevant beneficiaries.
Assignment by way of security of business receivables
This is another quite efficient security interest, whereby a company can assign outright (and thereby transfer full title to) its present (provided they are sufficiently identified) and future (provided they arise out of the performance of sufficiently identified agreements) receivables arising out of the implementation of its business. Assignment is made effective by delivery by the assignor of a delivery form in a prescribed format and which lists the relevant receivables. Delivery of the list of receivables in electronic form is also permitted. It is market practice to have a master agreement that provides the general terms and conditions that govern the initial assignment, as well as any future assignments. Notice to the debtor is not required to perfect the assignment, but if payments are to be made directly to the secured creditor, notice must be given, otherwise payments will be made to the pledgor. Cash paid directly to the pledgor does not form part of the security and may be recovered by every other creditor of the pledgor, unless particular mechanisms (such as a pledge of the account to which payments are directed) are implemented. Similar statutory limitations as the ones described under ‘commercial law pledge over inventory’ apply to assignment by way of security of business receivables.
Pledge over plant and equipment
A number of strict and rather onerous requirements apply in order to create this type of security. In particular, it too may only be granted by the borrower, in favour of licensed credit institutions only, and as security for its payment obligations under loans made available to it for the purpose of acquiring (and not refinancing) identified plant or equipment and must be granted directly in the relevant loan facility agreement. The pledge must be registered with the clerk of the commercial court having jurisdiction over the place where the inventory is located within 15 days of execution of the loan agreement.
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