Bankruptcy Law

The assets included in the sale plan may be subject to security interests. Article L. 642-12 of the  Commercial Code, which deals with this situation, distinguishes between two hypotheses, depending on whether or not the security secures the repayment of a loan, leading to a more or less pronounced sacrifice of the rights of creditors holding such security.

In the case of an assignment involving assets encumbered by a special lien, pledge, hypothec or mortgage which do not guarantee financing granted to the debtor, the court must allocate to each of these assets, for the purposes of price distribution and the exercise of the preferential right, the share of the price, determined in the light of the inventory and the appraisal of the assets and corresponding to the ratio between the value of this asset and the total value of the assets assigned. The deposit of funds by the transferee with the Deposit and Consignment Office (Caisse des Dépôts et Consignations), which is equivalent to a deposit with a view to the distribution of the price and the exercise of the preferential right, exempts creditors, from that date, from renewing mortgage registrations on the assets concerned . However, their rights are considerably reduced, since the price agreed in the transfer plans is often symbolic or, at best, considerably reduced in relation to the actual value of the assets transferred, and their pledge is only exercised over a proportion of this price. Moreover, the court may adopt the allocation of the shares of the price between the mortgaged assets proposed by the purchasers, if this seems appropriate in the light of the general scheme of the plan submitted to him . In addition, until full payment of the price, which entails the purging of registrations, creditors with a right of pursuit may only exercise it in the event of disposal of the asset sold by the transferee . Article R. 642-20 of the Commercial Code stipulates that the assignee must inform the insolvency authorities in advance of any planned disposal of an assigned asset. He is also required to inform the court if the disposal was not envisaged when his offer was filed . The bankruptcy judge and creditors with a right of pursuit, if any, are also notified without delay. Lastly, payment of the sale price precludes the assignee from exercising the rights of creditors registered on the assets .

Where, on the other hand, special security interests guarantee repayment of a loan granted to the company to enable it to finance an asset, Article L. 642-12(4) stipulates that the burden of these security interests is transferred to the transferee ipso jure. Consequently, the court is not even required to rule on this point , as long as this does not result in the assignee incurring commitments greater than those it had entered into , and the creditor is not obliged to carry out an amending registration . In reality, rather than transferring security interests, the text transfers to the assignee the burden of repayment of loan instalments subsequent to the transfer, and correlatively releases the debtor. The judgment adopting the sale plan may only transfer security interests validly registered and admitted to the insolvency procedure, and not those taken as security for claims only admitted on an unsecured basis . Securities transferred to the assignee include those guaranteeing loans to finance the acquisition of the debtor's business, as well as loans required to improve the business by carrying out work . On the other hand, the charge on a loan pledge is not transferred to the transferee of the business when the purpose of the loan is too imprecise to allow it to be linked to any asset .

The assignee to whom the security is transferred is bound to pay the creditor, who has duly declared his claim within the time-limits stipulated in Article L. 622-24, the instalments agreed with him and which remain due from the date of transfer of ownership or, in the case of a management lease, enjoyment of the asset to which the security relates . The assignee of the debtor's plant and equipment, financed by a loan secured by a pledge, is only required to pay the creditor bank the amount of instalments not yet due on the date of transfer of ownership . If the transferee defaults on payments due after the transfer of ownership, the creditor bank may exercise its right of pursuit by seizing the mortgaged property transferred under the sale plan .

The provisions of Article L. 642-12(4) may be waived by agreement between the transferee and the secured creditors . According to the Court of Cassation, an agreement between a creditor and the assignee of the debtor company concerning the amount owed by the latter in respect of future instalments on a loan secured by a pledge of a business is not one of those which prevent the transfer of the security interest .

Lastly, the provisions of Article L. 642-12 do not affect the right of retention acquired by a creditor on assets included in the assignment . Thus, a court adopting a plan for the sale of a debtor who has constituted a pledge with delivery on movable property may not, unless the holder of the pledge abuses it, demand its restitution until the debt for which the pledge was given has been paid in full, in principal, interest and costs .

When the court is called upon to record the transfer of a special lien, pledge, collateral security or mortgage, the other contracting party or parties or the holder or holders of the security are summoned to the hearing, at least fifteen days before the date of the hearing, by registered letter with acknowledgement of receipt, by the court registrar, on the instructions of the receiver, where one has been appointed, or the liquidator . The court verifies that the requisite conditions have been met, and notes in the judgment approving the plan the securities to be transferred .

Cass. com., 1 February 2000, LawLex202100003079JBJ (RJ).

Cass. com., 14 January 1997, LawLex202300002564JBJ (RJ).

Cass. com., 23 November 2004, LawLex202300002724JBJ (RJ).

Cass. com., 29 November 2016, LawLex202100001168JBJ (LJ).

Cass. com., 20 March 2019, LawLex202100001169JBJ (LJ).

Cass. com., 19 October 2010, LawLex202100003094JBJ (RJ).

C. com., art. L. 642-12, al. 5. See for an application, Cass. com., 20 May 1997, LawLex202300002567JBJ (RJ).

Cass. com., 3 May 2011, LawLex202300004445JBJ (RJ).

Cass. com., 4 October 2005, LawLex202100003093JBJ (RJ).

Cass. com., 30 October 2012, LawLex202100003095JBJ (RJ).

Cass. com., 7 July 2009, LawLex202100003080JBJ (RJ) ; 29 September 2015, LawLex202100001172JBJ(RJ).

Cass. com., 7 November 2018, LawLex202300004450JBJ (RJ).

Cass. com., 17 May 2011, LawLex202100003092JBJ (RJ).

886. Transfer of a security interest