A Story of Stock, Security and Simplicity Sacrificed Under French Law

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Introduction

In matters of security over personal property, France for a long time had a complex system of general and particular regimes. It had been hoped that legislative reform in this area, brought about by a 2006 law, and subsequent laws, would offer relative simplicity and security for financing parties. In particular, the new laws enshrined a general common law non-possessory pledge (gage sans dépossession), described at art. 2333 et seq. of the Civil Code. This common law pledge was designed to be user-friendly and requires relatively little formality. However, a recent decision of the commercial chamber of the French Cassation Court, handed down 19 February 2013, has raised questions over the efficacy of such pledges where stock is concerned, and raises other potential issues in this important area of commercial law.

Cassation Court decision

An English bank had been granted a common law non-possessory pledge over the stock of its French debtor company. The terms of the pledge included a resolutive clause (pacte commissoire) providing for the bank to become owner of the stock in the event of non-payment. Just prior to the debtor filing for administration because of insolvency, the bank invoked the clause. It thereby became owner of the stock just prior to the commencement of insolvency proceedings. The bank then claimed the stock in the insolvency proceedings. However, the liquidator defended the bank's claim, arguing that the resolutive clause was null and void. The liquidator pointed to the special security regime applicable to stock, contained in the Commercial Code, and in particular art. L527-2, which provides that "any clause providing that the creditor becomes the owner of the stocks in the event of non-payment of the debt owed by the debtor shall be deemed null and void."

The question for the court was thus whether the parties were bound to the regime regulated by the Commercial Code (art. L. 527-1 et seq.), or could they freely opt for the more flexible common law non-possessory pledge described in the Civil Code (art. 2333 et seq.)? If the Commercial Code regime applied to the exclusion of the Civil Code regime, the bank's claim was bound to fail.

At first instance and on appeal, the bank won the argument. The courts took the view that the parties were free to elect for the common law regime contained in the Civil Code. However, on further appeal to the Cassation Court, the lower court decisions were overturned. The Cassation Court seems to have taken the view that while the language of the relevant provisions was less than clear, the purpose of the special security regime for stock was to protect the debtor and should not be circumscribed through use of the more flexible common law pledge. The maxim specialia generalibus derogant, not expressed as such by the Cassation Court, appears to have been applied.

Comment

This decision has come as a surprise to many observers and commentators. For some, it marks a regression from the attempts to liberalise the law in this area, and to allow for choice. The first instance courts had taken a practical view of the matter. However, unless and until there is either a reversal by the Cassation Court or intervention of the legislator, credit establishments are now clearly on notice of the supreme court's position.

The first and most immediate consequence to be drawn from the decision is the immediate need for credit establishments that rely on security over debtor's stock to check and review their current arrangements. If their current arrangements rely on a common law non-possessory pledge, this may need to be remedied.

More broadly, the Cassation Court's decision begs the question as to whether a common law security regime must inevitably bow to a specialised regime. Given the Cassation Court's decision, it would be advisable to ask this question, in any given scenario, given the multiplicity of specialised regimes that exist under French law.