All of French Company Law: ordinary law of companies and specific regime for different types of companies

Company Law (en cours)

The most commonly used financing method by companies is borrowing from a bank or financial institution. In addition to traditional loans, banks can provide cash advances, which include overdraft facilities and bank overdrafts.
The overdraft facility constitutes a tacit and occasional authorization granted by the bank to the company, allowing it to display a temporary debit balance to address a cas …

Methods of appeal.

The most commonly used financing method by companies is borrowing from a bank or financial institution. In addition to traditional loans, banks can provide cash advances, which include overdraft facilities and bank overdrafts.

The overdraft facility constitutes a tacit and occasional authorization granted by the bank to the company, allowing it to display a temporary debit balance to address a cash flow gap . Rather than a true credit, the overdraft facility is considered a simple tolerance by the bank, discretionary and revocable at any time. Conversely, a bank overdraft generally arises from an agreement between the bank and the undertaking, which stipulates, over a given period, a maximum advance amount that the bank commits to granting, allowing it to display a debit account . Given the narrow distinction between the two concepts, case law specifies that an “overdraft facility” granted to a company without time limitation must be assimilated to a permanent overdraft authorization .

To improve their working capital needs, undertakings also resort to the mobilization of professional or commercial receivables. These short-term financing mechanisms involve the assignment, or even the pledging, by the undertaking, of certain receivables to obtain cash advances before the assigned receivable becomes due. The terms of the assignment or pledging of professional receivables are provided for by Articles L. 313-23 et seq. of the Monetary and Financial Code. When these terms are respected , the operation is enforceable against third parties as well as the assigned debtor under the conditions provided by these legal provisions, to which no other condition can be added in the contract generating the receivable . The most frequently used receivable mobilization techniques are factoring, Dailly assignment, and bank discounting. Factoring does not involve banking institutions but rather their specialized subsidiaries, known as “factors,” to whom the company assigns its receivables through the legal mechanism of conventional subrogation. In return, the factor pays the company the full amounts from the receivables and is responsible for collecting them from the debtors. The Dailly assignment follows the same principles, except that the assignment of receivables is made to a banking institution, which, moreover, does not handle the collection of the receivables. It is up to the company to obtain payment, and it must repay the amounts advanced by the bank even if it is not reimbursed by its debtors. Finally, bank discounting involves the company assigning its various payment instruments, such as promissory notes or bills of exchange, to the bank, which, after examining the company's overall financial situation, pays them, less interest and other bank charges. A bank can always refuse to discount commercial paper it deems risky, without incurring liability .

Leasing (crédit-bail), governed by Article L. 313-7 of the Monetary and Financial Code, is a specific financing technique that enables a company to acquire movable or immovable property, or even to finance investment operations, without needing to have the necessary funds at the time of acquisition. In such a case, the lessor acts as the financier for the company.  It acquires ownership of the property, which it makes available to the undertaking through a lease agreement, with the option for the company to acquire it definitively at the end of the term under predefined conditions. Case law clearly illustrates the purpose of the mechanism by emphasizing, with regard to real estate leasing, that it is not a real estate lease contract, but a complex financing operation whose essential purpose is to provide an industrialist or a merchant with the necessary funds to acquire the building corresponding to their needs, while essentially aiming at acquiring ownership of the premises . Consequently, the unilateral promise to transfer a real estate leasing contract is not subject to the formality of registration as long as it concerns a contract providing for a set of reciprocal contractual obligations, of which the purchase option is only one component, to constitute a financing operation for the acquisition of real estate .

The major drawback of resorting to borrowing lies in the guarantees that the lender requires in return from the subscribers, such as the letter of intent, pledge, or surety. Article 2322 of the Civil Code presents the letter of intent as “the commitment to do or not to do something aimed at supporting a debtor in fulfilling their obligation to their creditor.” Given the seriousness of such a commitment, which creates an obligation of result , case law specifies that the letter of intent issued to cover debts resulting from credit lines opened for the benefit of a company must be authorized by the board of directors of the company originating the commitment . The pledge, defined in Article 2333 of the Civil Code, refers to the agreement by which the pledgor grants a creditor the right to be paid in preference to other creditors from a movable asset or a set of tangible movable assets, present or future. To finance their activities, companies are often led to grant pledges on their stock. The regime of stock pledges has undergone many changes. Initially, case law considered that a pledge in favor of a bank on a company's stock of goods, agreed upon as part of a credit operation, was not subject to the ordinary law of pledges of movables without dispossession, so it could not request the return of the existing stock or its equivalent value in case of termination of the credit contract for non-payment of installments . A first reform  overturned this case law by allowing the stipulation of arbitration clauses in stock pledge agreements. More recently, the ordinance of 15 September 2021  abolished the special law of stock pledges, provided for in former Article L. 527-1 of the Commercial Code, effectively subjecting this type of pledge to the ordinary law of pledges, derived from the Civil Code. Finally, suretyship is the contract by which a guarantor commits to the creditor to pay the debtor's debt in case of the latter's default . According to Article 2292 of the Civil Code, it can guarantee one or more obligations, present or future, determined or determinable . Due to the binding nature of its commitment, the consent of the person acting as guarantor must be protected, and they must be warned of the risks involved. Regarding consent, Article 2297 of the Civil Code provides that the individual guarantor must personally state that they commit, as guarantor, to pay the creditor what the debtor owes in case of default. As for the warning, case law long recognized an increased duty of warning for the “uninformed” guarantor. It considered in this respect that the status of informed guarantor could not be inferred solely from the position of director of the principal debtor company . However, the director of the principal debtor company who had a professional background demonstrating that they had held responsible positions requiring technical and commercial skills, had received specific training in business takeovers, and had personally handled the preparation and monitoring of financing files for the complex takeover operation they organized, as well as the necessary negotiations to obtain them, was considered an informed guarantor . The distinction between informed and uninformed guarantors has now disappeared, and Article 2299 now states that the professional creditor is obliged to warn the individual guarantor when the principal debtor's commitment is unsuitable for the latter's financial capabilities.

The termination of the loan contract, regardless of its form, constitutes a final source of difficulties. The Court of Cassation specifies that Article L. 442-1, II of the Commercial Code relating to liability incurred for the abrupt termination of an established commercial relationship does not apply to the termination or non-renewal of credits granted by a credit institution to an undertaking, as these are exclusively governed by the provisions of the Monetary and Financial Code . To determine the liability incurred by the banker due to the termination of credit granted to an undertaking, it is necessary to distinguish whether the credit arises from a commitment by the bank or if it has granted facilities. Indeed, in the latter case, the bank is free to reverse its decision at any time . The tolerance of overdraft excesses during the operation of a company's account is also considered an occasional facility that can be terminated at any time . The bank's liability for abusive termination of credit is not established when the account agreement with its client is not accompanied by any express overdraft authorization and the tolerances granted, in the certainty of imminent fund inflows, could not have led the company to legitimately believe that it benefited from a tacit credit line . However, in the presence of an overdraft authorization, Article L. 313-2 of the Monetary and Financial Code requires the banker who intends to terminate a credit to observe a sixty-day notice period . Thus, the bank's liability cannot, in principle, be engaged when it has complied with the required notice period . The bank may, without having to justify itself, unilaterally terminate an open-ended account agreement in favor of a company, when its decision is accompanied by a 90-day notice period sufficient to allow its client to find a new banker and does not stem from an illegitimate motive or a desire to harm . By exception, the bank that terminates a banking facility without notice does not incur liability for abusive termination of credit when the credit beneficiary company has behaved faultily . Such is the case when the borrowing company, subject to a contractual obligation of sincerity and loyalty, is guilty of seriously reprehensible behavior by deliberately and repeatedly withholding alarming information about its situation . Similarly, a bank may terminate, even without notice, the credits granted to a company due to seriously reprehensible behavior  characterized by double mobilization of professional receivables  or the production by the company of insincere income statements to conceal its financial difficulties .

Cass. com., 22 May 2012, LawLex202300002069JBJ, emphasizing that the banker who makes transfers by debiting the account of their client, when there is no prior sufficient provision, grants them an overdraft facility to finance a cash flow gap, not requiring a prior express agreement.

Cass. com., 23 April 2013, LawLex202100005612JBJ, on the mandatory nature of respecting the maximum overdraft amount granted by the bank.

Cass. ass. plén., 7 December 2015, LawLex202300001860JBJ.

Ordinance No 2021-1192 of 15 September 2021 on the reform of security law.

See, for an application, Cass. com., 8 January 2008, LawLex202200010023JBJ, holding that neither the good faith that must govern the relations between the bank and the guarantor, nor the duty of information require the bank to warn the former manager of the granting of a new loan, as long as the guarantee he subscribed covers all debts, even future ones, of the company and only ceases if expressly revoked.

Cass. com., 28 February 2018, LawLex202200010021JBJ; 29 November 2017, LawLex202200010020JBJ.

Cass. com., 18 January 2017, LawLex202200010019JBJ.

Cass. com., 25 October 2017, LawLex201700001719JBJ.

CA Grenoble, 26 January 2023, LawLex202300002060JBJ, holding that the termination of an open-ended current account consequently results in the termination of the overdraft facility attached to it, which serves no other purpose than to allow the account to operate in a debit position.

Cass. com., 11 July 2006, LawLex200600001627JBJ.

Cass. com., 23 September 2014, LawLex202300002068JBJ.

Cass. com., 27 January 2015, LawLex202300002072JBJ; 9 January 1978, LawLex202300002063JBJ, considering that a bank does not commit any abuse by terminating overdraft facilities granted to a company whose account shows a deficit far exceeding the authorized amount and by refusing to honor its payments from a period significantly after the formal notice it sent to obtain the necessary funds.

Cass. com., 15 April 2008, LawLex202300002071JBJ, holding that a bank cannot be accused of abusively terminating an overdraft authorization whose existence is not demonstrated, since the law does not require it to observe a notice period for termination of occasional credit facilities.

Cass. com., 9 May 1990, LawLex202300001760JBJ, considering that the unilateral termination by a bank of an open-ended overdraft agreement granted to a company requires notice, in the absence of which its liability may be engaged, even if it is not demonstrated that it acted with the intent to harm its client.

Cass. com., 26 January 2010, LawLex202300001759JBJ; 9 March 1999, LawLex202300001763JBJ, emphasizing that the liability of a banking institution for the abrupt termination of credit granted to an SCI cannot be engaged if it has given a reasonable notice period, following negotiations that failed due to the manager's refusal of the bank's reasonable proposals for guarantees and the manager's substantially different counter-proposals, which were not accepted by the bank.

Cass. com., 30 November 2022, LawLex202300002066JBJ, considering that the seriously reprehensible behavior of a company that does not use the loans for the declared purposes justifies the bank's immediate revocation of the overdraft granted to it.

Cass. com., 28 June 2011, LawLex202100003136JBJ.

Cass. com., 14 February 2006, LawLex202300001764JBJ, considering that a bank does not abuse its right to terminate, even without notice, the indefinite-term account agreement binding it to a company when it has reasons to suspect a circuit of accommodation bills; 2 November 1994, LawLex202300001769JBJ, specifying that no fault can be attributed to a bank for not respecting sufficient notice before terminating the credit facilities granted to a company guilty of significant and repeated overdrafts of the granted cash authorizations, notwithstanding repeated reminders and warnings, and breaches of its duty to inform the banker, likely to significantly alter the trust relationship between the parties.

Cass. com., 8 March 2011, LawLex202300001768JBJ.

Cass. com., 20 June 2006, LawLex202300001770JBJ.

See a contrario, Cass. com., 25 February 2003, LawLex202300001852JBJ, holding that the bank assignee of a claim cannot demand payment from the assigned debtor when it does not produce the corresponding assignment of claims slips, bearing all the mentions required by Article L. 313-23 of the Monetary and Financial Code.

Cass. com., 11 October 2017, LawLex202300001851JBJ.

Cass. com., 21 February 2012, LawLex202300001841JBJ; 30 November 1999, LawLex202300001842JBJ, considering that a bank may refuse to discount bills drawn on a company, due to not having received the useful information it requested, without abuse, from the manager of the client company.

CA Versailles, 13 February 2014, LawLex202300001992JBJ.

CA Versailles, 28 January 2010, LawLex202300001993JBJ.

Cass. com., 26 February 2002, LawLex202200008503JBJ, considering that a letter of intent containing the firm commitment of the parent company to ensure that its subsidiary has sufficient cash flow to meet its obligations under cash credits and overdrafts to a creditor involves an obligation of result and not a best-efforts obligation.

Cass. com., 19 April 2005, LawLex202300001856JBJ.

Company Law (en cours)

55. Methods of appeal.

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Les décisions de justice citées dans ce paragraphe :

Les notions juridiques connexes

55. Methods of appeal.

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Les décisions de justice citées dans ce paragraphe :

Les notions juridiques connexes

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