Academic journal article Nottingham Law Journal

Pledges over Inventory in France

Academic journal article Nottingham Law Journal

Pledges over Inventory in France

Article excerpt

Cour de Cassation Assemblee pleniere Arret No. 627 du 7 Decembre 2015

ECLI:FR:CC ASS: 2015:AP00627

(President: M. Louvel; Avocat General: M. Le Mesle)

In December 2015, the French Cour de Cassation (the 'Supreme Court') in plenary session handed down the final judgment in a case that had spent over four and a half years in the French judicial system. Of great importance to banks, it considered whether the preferred method of taking security over the stock of their customers was, in fact, permitted at law. To the dismay of the banking community, the Supreme Court held that the preferred method (which involved enforcement outside judicial proceedings) was not, in fact, available to financial institutions, despite having been widely used by them for several years. Whilst the effects of the judgment going forward have been rapidly rebuffed by legislative action, the case is a useful reminder to English lawyers of the complexities of taking security in non-common law jurisdictions. In particular, self-help remedies are viewed with suspicion by many foreign courts.


The facts of the case need to be understood against the backdrop of security law reform that had taken place in France in 2006.

Ordonnance No.2006-346 of 23 March 2006 (the "Ordonnance") was passed with the aim of updating and clarifying French law security interests, including the pledge. French law, like most Civil law jurisdictions, has traditionally relied on the pledge for taking security over tangible assets. To this effect, the Ordonnance added to the French Civil Code provisions to permit the creation of a pledge over any kind of tangible movable property (1) (the "Civil Law Pledge"), being a general pledge, wide enough to include a pledge over inventory. The Ordonnance also amended the French Commercial Code, to create a more specific pledge over inventory (2) (the "Commercial Code Pledge"). The Commercial Code Pledge contained two limitations, however, which in practice limited its attractiveness to lenders. These were first, that it could only be used by credit institutions (something which would not pose a problem for French-based lenders used to French banking monopoly rules, but which would be a constraint to some non- traditional lenders); and second, that it could only be enforced by court procedures. The Civil Law Pledge, by contrast, was available to all creditors, but more importantly also introduced a new method of non-j udicial enforcement known as the pacte commissoire. This new remedy allowed direct transfer of the pledged assets to the pledgee, so long as the debtor had consented to this process in advance (which of course meant such consent became a standard term of any such pledge agreement). This non-j udicial enforcement was a considerable step forward from the point of view of French creditors.

Ever since the 2006 Ordonnance, there had been a certain amount of discussion in French legal circles about whether the Commercial Code Pledge offered the only procedure for banks wanting to take a pledge over inventory, or whether banks could use the wider Civil Law Pledge if they wished. (3) The Ordonnance was quiet on this point (possibly because the Commercial Code Pledge was introduced at a very late stage in the drafting), but the prevailing view in French jurisprudence was that there was nothing to support a restrictive interpretation, and accordingly the banks could take which ever pledge they preferred. (4) Part of the rationale behind the Ordonnance had, after all, been to make French security law more efficient and competitive for lenders. (5) Accordingly, the practice grew of banks using the Civil Law Pledge in preference to the Commercial Code Pledge in their secured lending transactions. Although the legal opinions banks received generally contained a qualification indicating that the right to use the Civil Law Pledge in this way was unclear, in practice the banks themselves considered this little more than a minor health warning. …

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