Enhancement of secured creditors rights in France after cornerstone reform of security and insolvency law of September 2021 

March, 2022 - Jean-Francois Adelle, Jeantet

Article published in the Butterworths International Banking and Financial Law Journal March 2022.

Ordinances n°2021-1192 and 2021-1193 of 15 September 2021 reform the security law and amend Book VI of the FrenchCommercial Code. The Ordinances implement three mandates of the PACTE Law of 22 May 2019 to modernise security law, improve the interaction of security law with collective proceedings law and transpose the (EU) Directive 2019/1023 of June 20, 2019, known as the “Restructuring and Insolvency Directive”. For technical reasons, the two mandates of the PACTE Law relating to insolvency and the EU Directive were united in the same ordinance.

The aim of the security law and interaction of the security law with collective proceedings was to simplify security law in order to modernise it and make it easier to understand, strengthen legal certainty and efficacy of the security law while preserving the balance between the interests involved, particularly in the context of collective proceedings, and thereby make French law more attractive.

The implementation of the Restructuring and Insolvency Directive introduces into French law the rules set out in the Directive and gives users the ability to choose from the various options offered by the Directive. The purpose of the Directive is to strengthen the efficiency of preventive and insolvency proceedings, facilitate use of preventive proceedings and improve the position of secured creditors, especially those holding security.

Thanks to the simultaneous agenda of these reforms, the PACTE Law has paved the way for consistency and efficiency in relation to the position of secured creditors in France. Its preparation was the result of extensive public consultations and the transposition of theRestructuring and Insolvency Directive was conducted under closeco-operation between France and Germany. The result is a cornerstone reform that materially recasts the position of secured creditors at all stages of the life of the secured interest.

The Ordinance 2021-1192 related to security laws came into force on 1 January 2022. Ordinance 2021-1193 modifying collective proceedings law entered into force on 1 October 2021. This transposition deadline was imposed by the Directive, except for certain provisions related to securities the effective date for which is postponed to align it with the schedule for the reform of security law. In both cases, the new provisions will not have retroactive effect.

This international briefing outlines the key changes in security law and in the treatment of secured creditors in restructuring and insolvency proceedings.


Simplified architecture of security interests

  • Removal of obsolete security interests on tangible movables: Obsolete non-possessory specific security interests on various types of movable assets, created before dispossession was permitted in the general civil law pledge, disappear. They include the pledge on tools and equipment, the commercial pledge, the lien on petroleum products, the pledge on inventory, the automobile pledge and the hotel lien. The general civil law regime which provides for a pledge on tangible movables suffices to replace them.
  • Enlarged scope of the civil law pledge on tangible movables: The pledge on tangible movables is the default regime for assets not covered by a specific security interest. It now also covers fixtures (meubles immobilisés par destination) such as equipment for wind farms, solar power plants and industrial or mining installations). These types of installations are now removed from the onerous regime of mortgages on property in project financing transactions. It is noted that the pledge on tangible movables applies to digital assets such as cryptocurrencies, that do not qualify as money.

Reduced number of legal privileges

The reform abolishes several general and speCial privileges on movables that had become obsolete, such as allowances due to workers and employees.

Simplified perfection and enforcement of security

  • Generalisation of electronic signature: All security agreements can now be executed by electronic signature. This had been reserved for security interests entered into for the needs of the debtor’s profession.
  • Pledge on business: The obligation to register the pledge agreement within one-month or face nullity is abolished. The pledge will only be unenforceable against third parties as long as it is not registered.
  • Fiducie by way of security: The formalities required to perfect a fiducie by way of security (fiducie-sûreté, ie collateral trust) are reduced. The need to evaluate the transferred property or right is no longer necessary to validate the fiducie agreement. Likewise, its enforcement is simplified. The trustee now has the option, if he is unable to find a buyer at the price determined by an expert, to sell the security asset at a lower price, under his own responsibility.
  • Assets traded on trading platforms: On the enforcement of a collateral fiducie, a pledge over tangible movables and a pledge over financial securities, an expert is required to evaluate the asset posted as security before its transfer to the secured creditor, except when the asset is traded on a regulated or organised market. The exception now refers to the larger notion of “trading platforms”. This includes multilateral trading facilities, organised trading facilities, and generally all types of platforms where assets are traded, such as crypto-currency trading platforms.
  • Wider out-of-court enforcement: The simplified method of realisation, formerly reserved for commercial pledges, is now extended to all types of pledges set up as security for professional debt. Realisation allows proceeding to the public sale of the secured asset after the expiration of an eight-day formal notice period during which there has been no response or any court decision, even when the creditor does not hold an enforcement order. When the secured creditor holds an enforcement order, it can seize the asset without court permission.

Removal of legal uncertainties

Second ranking pledge: While second ranking pledges are possible for registered security, this was unclear for receivables and cash and securities accounts, due to the arguably indivisible nature of the right of retention. The reform expressly states that successive pledges over cash and financial securities accounts are valid.

Exclusive right of creditor over pledged receivables: It is clarified that, as soon as the pledge is notified to the debtor, the pledgee holds an exclusive right to the payment (principal and interest) of the receivable (based on a right of retention). The exclusive right, recognised by the latest case law, ensures full protection against competing creditors, for instance, an assignee by way of security. However, in the case of a pledged bank account, the secured creditor may not block the sums in the pledged account solely on the grounds of the opening of collective proceedings, as the receivable will secure pre-petition debt.

Real estate privileges: The nine special real estate privileges become special legal mortgages, with the consequence that priority is given from the date of registration and no longer retroactively from the date on which the secured debt arose. This ensures foreseeability of rights of competing creditors who have registered a security interest on the same property.

Assignment of sums of money by way of security: Cash collateral, a security interest so far unregulated by statute, is now introduced into the Civil Code by way of an assignment of a sum of money by way of security. This removes the legal uncertainties relating to cash collateral known as gage-espèces, which concerned its characterisation either as a pledge over a fungible thing or over property . The new security interest is aligned with the civil law regime relating to assignments of receivables. The assignment operates to definitively transfer ownership of the receivable and is enforceable against third parties upon funds remittance without the need for publication.

Retention of title: Conflicts between the seller with retentionof title (retained until it receives payment) and third parties holding competing rights on the asset from the purchaser are now resolved by statute in two cases. The first conflict, arising between the seller and the pledgee who has been granted a pledge over the asset subject to retention of title is arbitrated in favour of the pledgee in good faith, ie the pledgee is unaware that the asset did not belong to the grantor; the pledgee alone can have the pledge cancelled. Therefore, he can assert the pledge against the seller with retention of title. The second conflict is between the seller and the sub-purchaser over the proceeds of resale of the good payable by the sub-purchaser. In the event of resale of the asset before payment, the seller’s retention of title right is carried over to the sub-purchaser’s receivable. The sub-purchaser can oppose the seller’s retention of title where:

there are exceptions inherent to the debt; and

where exceptions apply arising from the sub-purchaser’s relations with the reseller-debtor before the sub-purchaser became aware of the carry-over of the retention of title right to the purchaser-debtor.

Extended recognition of contractual arrangements

  • Cash and proceeds relating to pledged financial securities: The law on the pledge over cash and financial securities accounts seemed to require the opening of a proceeds account with a credit institution at the same time as the creation of a pledged financial securities account to receive cash payments related to the pledged financial instruments. The reform expressly sets out the option to exclude dividends and repayment in cash of financial securities from the scope of the pledge over financial securities accounts. Furthermore, in order to reduce the difficulties and delays that may arise in the opening of such accounts, in particular when the pledgor has its registered office outside France, the cash account may be opened at any time from the signing of the declaration of the pledge until the date on which the security interest can be realised. If this account is opened, the pledge will be retroactive on the date of the declaration of the pledge and, if it is not, the dividends and repayment in cash will be excluded from the scope of the pledge.
  • Mortgage of future property: The principle of prohibiting mortgages over future property is abolished. This principle had contrasted with the regime for all other real securities.

Larger scope of security over property

Security over property enjoys bankruptcy remote treatment under French law and outperforms other types of security. The reform creates a new property security over receivables, that adds to the existing property securities (Dailly, fiducie and the newly codified cash collateral). This new assignment of civil receivable by way of security is designed to overcome the limitations of the Dailly assignment of receivables.

The Dailly assignment of receivables is only available to credit institutions in the European Economic Area and to certain designated lenders and can only be used to secure a loan granted to the assignor, but not as security for surety obligations (under a guarantee) or where the loan is provided by unregulated lenders. Since 2007 case law, the Dailly assignment of receivables could no longer be used as security.

The new assignment of receivables by way of security follows the general regime of assignment of receivables (requirement of writing, notification to the debtor or tripartite agreement). The transfer of ownership of the receivable is temporary. This implies that if the secured claim is paid in full by the debtor before the assigned claim (to the assignee) is paid, the assignee will automatically recover ownership of the assigned claim. If the creditor receives sums under the assigned receivable before the secured receivable maturity, these sums must be charged against the receivable when it is payable.

Otherwise, the assignee is free to dispose of the sums paid and, when the secured receivable is fully performed, has the obligation to return them to the grantor/assignor.

Protection of the grantor of a security interest against third parties

  • Grantor of a security interest securing a third party’s debt: Where the grantor of security interest secures a third-party’s debt, the grantor will enjoy some of the protections afforded to a personal guarantor; these include the creditor’s duty to warn of default, an information obligation and a right to require enforcement against the debtor first. Those are narrowly defined, and the nature of the security as a security interest rather than a personal guarantee is confirmed.
  • Third-party purchaser of mortgaged property: A third-party purchaser of mortgaged property is given the option to exclude the mortgagee from discussions. Case law denies the mortgagee access to discussion in certain cases. The third-party purchaser can, like the guarantor, prevent the mortgagee from benefitting from exceptions belonging to the main debtor.

Personal guarantee (cautionnement)

The changes simplify the formalities, codify the case law, and remove excessive sanctions in the event of breach of the formalities or breach of creditors’ duties. The absence of a handwritten signature is no longer a cause for nullity of the guarantee as long as the writing indicates with sufficient precision the nature and scope of the guarantor’s commitment.

The civil or commercial nature of the personal guarantee is now aligned with that of the guaranteed debt. This submits litigationrelating to the personal guarantee to the same jurisdiction as that relating to the underlying debt.

The changes confirm that a guarantee is accessory, ie a suretyship not a primary obligation. The guarantor is only required to pay where the debtor is in default. Other breaches do not trigger the guarantee.

Rules on perfection and enforcement have been materially strengthened. There is a requirement of proportionality between the guaranteed amount and revenues due to the guarantor. The failure of the creditor to warn the personal guarantor of the debtor’s default is no longer sanctioned by nullity of the guarantor’s obligation. Instead, the guarantee is limited to the effective damage suffered by the guarantor. The guarantor no longer has the option to sue the debtor to protect its subrogation right (once the debtor has paid the debt in full) until the guarantee is itself called. The guarantor may only ask for security in the event of an extension of the term of the secured debt. Lastly, contrary to recent case law, in case the caution’s legal person disappears by way of merger or absorption, all the guarantor’s obligations are mandatorily passed on to the new entity.


The reform strikes a new balance between secured creditors and debtors. On the one hand, it has strengthened the rights of creditors who benefit from security interests in insolvency proceedings, and on the other hand, it has created new protections for debtors and guarantors.

Strengthened rights of creditors benefiting from security interests

Effect of the new mechanism of creditors’ classes

The reform enshrines the removal of creditors’ committees imposed by the Restructuring and Insolvency Directive. The committees are replaced by classes of affected parties, called upon to vote on the plan. (The affected parties must meet the thresholds of having more than 250 employees and €20m in turnover or €40m in turnover on a consolidated basis). The vote to adopt the plan takes place by a two-thirds majority of votes cast in each class. A creditor is considered an affected party when its rights are directly affected by the draft plan. Classes are at least two in number, and sub-classes may be set up. The bondholders, most often unsecured, who formed a creditors’ committee, no longer constitute a class. They can no longer oppose the plan. Secured creditors benefit from several layers of protection:

Secured creditors form the highest ranking class of affected parties, protected by the absolute priority rule. Creditors holding security interests necessarily constitute a class. Unsecured creditors form one or more classes – and shareholders, if they are affected (eg conversion of debt into equity), are also grouped in a class. The new scheme elects the absolute priority rule. According to the rule the higher ranking class of affected parties must always be satisfied by the same or equivalent means ofpayment in order for a lower class to obtain payment. This rule ensures the predictability of the rights of secured creditors affected by the plan, since they must be paid in full in priority to any other creditor, unless the court grants an exception at the request of the debtor where it is necessary to achieve the objectives of the plan.

If one or several classes have voted against the plan, the court cannot impose a forced cross-class plan unless a majority of the classes, including the secured creditors class, have voted in favour of the plan, or the plan has been approved by at least one class of affected creditors in the money, other than a class of shareholders. With the combined effect of the absolute priority rule and the absolute security rule and this condition to cross cram, the secured creditors class is unlikely to have a plan imposed on it where secured creditors are repaid first.

As a fall-back protection, dissenting secured creditors subject to an approved plan despite their negative vote, can benefit from another safety net. In accordance with the best interest test, the court must verify that the secured creditors do not find themselves in a less favourable situation, as a result of the forced application of the plan than they would be in if the order of priority for the distribution of assets (in judicial liquidation) or the sale price of the business (in reorganisation proceedings) were applied, or a better alternative solution was validated (a continuation of activity scenario). The dissenting creditor with a security interest will therefore be protected at least to the extent of the value of its security, and the quality of its security interest.

Creditors benefiting from a fiducie by way of security are deemed to be an unaffected party. As a matter of principle, under the previous rule which has been maintained, creditors who benefit from a fiducie by way of security are deemed to be unaffected parties up to the secured portion of their security. They do not sit in the classes and as such cannot be subject to debt rescheduling or haircuts or forced inter-class enforcement of the plan. Although a symmetrical provision is not provided for other creditors benefiting from other forms of property security, it appears that the same rule would apply to them.

Shortening of the stay period of enforcement of securities

The accelerated safeguard proceeding is modified to become the reference restructuring proceeding implementing the Directive. It may only be opened after a conciliation. The maximum duration of the observation period and therefore a stay of enforcement of security during the accelerated safeguard phase must not exceed four months. The maximum duration of the observation period of the safeguard proceeding is reduced from 18 to 12 months.

Legal certainty of substitution of security interests performed during the suspect period

The Civil Code enshrines the case law of the Cour de cassation which authorises substitution of security interests during the suspectperiod, when new security replaces previous security of an equivalent nature and basis.

Respect of ranking of claims and subordination agreements enshrined

New rules for the classification of claims establish in detail the order of privileges and security interests in safeguard or reorganisation proceedings and in liquidation proceedings. Further, it is established as a principle that subordination agreements entered into before the opening of the proceedings must be taken into account. This was not systematic until now, as they could be set aside by the plan. Subordination agreements entered into before the opening of the proceedings must be declared at the time of the setting up of the classes, otherwise they will not be enforceable in the proceedings.

Post money privilege

The former new money privilege, reserved for providers of loans in conciliation proceedings, is extended to all forms of cash contributions (which covers all working capital financings) and to safeguard and reorganisation proceedings, with a view to encouraging the financing of the continual activity the company for the duration of the proceedings. Claims secured by the post money privilege cannot be subject to rescheduling or hair cut in possible subsequent collective proceedings without the creditor’s consent.


Possible stay of enforcement during conciliation proceedings: The president of the court who has opened conciliation proceedings may, at the request of the debtor, impose a grace period on a creditor who does not accept, within the deadline provided, the request made to it to suspend the payment of monies due to it for a period of two years.

Stay of legal actions for creditors, which are beneficiaries ofa security interest set up by the debtor to secure a third-party’s debt: The stay of payment and prohibition of enforcement proceedings is no longer limited to the debtor’s creditors and now applies to the beneficiary of a security interest granted by the debtor to secure a third-party’s debt.

Extension of unenforceability of undeclared claims: The reform extends the obligation to declare claims to security interests granted to creditors on the debtor’s assets as security for third party’ debt. In addition, undeclared claims become unenforceable against the debtor’s guarantors and against the debtor in reorganisation proceedings.

Prohibition to increase the basis of a security interest after the opening judgment: It is prohibited to increase the basis of a contractual security interest or a contractual right of retention after the publication of the opening judgment, because this deprives the debtor from cash flow and hinders the continuation of the business. Topping-up provisions, widely used in pledges over financial securities, requiring the increase of the security asset base in the event that the security has decreased in value, in the proportion of the decrease in value, can no longer be effective after the commencement of a proceeding.

Extension of voidness regime of security posted during the “suspect period” to all contractual security interests and to contractual rights of retention: The regime of void acts made during the suspect period is extended to all security interests and the contractual right of retention set up during the suspect period and is no longer limited to mortgages, pledges and privileges. However, the exemption in favour of the assignment of receivables taking place under a framework agreement concluded prior to the date of cessation of payments remains.

Rebound of honest entrepreneurs: The “rebound of honest entrepreneurs”, part of the Restructuring and Insolvency Directive aimed at allowing swift forgiveness of debt of individual debtors no later than three years after a previous proceeding, is implemented through the professional recovery proceeding and the simplified judicial liquidation procedure, now available for individuals without any threshold conditions, provided that the debtor’s assets do not include real estate.

In conclusion, the Ordinances implement significant changes to the position of creditors holding security in France, that will facilitate financings and refinancings and improve the legibility, foreseeability, legal certainty and efficiency of secured creditors’ rights in work-out scenarios. n



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