The beneficiary of a security interest for a third party escapes from the bankrupcy proceeding of the settlor … For now


High Court, commercial chamber, 25 November 2020, n°19-11.525, FS-P; Cass. com. 17 June 2020, n°19-13.153, FS-P+B+R

  • Security interest for others in common law

Since a decision of the Mixed Chamber of December 2, 2005, the High Court has held that a security interest for a third party does not imply any personal commitment by the settlor to satisfy the obligation of a third party (High Court. 2 December 2005, no. 03-18.210).

By security interest for a third party is meant, for example, the creation of a mortgage to secure the debt of a third party.

In other words, the call on the guarantee may only consist in the sale of the property given as security and not in an order for the settlor to pay the sum guaranteed, in the absence of a personal commitment.

  • Security interest in bankruptcy proceedings: the amendment of the solution reached in 1998

The High Court deduced from this in a judgment ruling of June 17, 2020 that the beneficiary of a security interest for a third party, in the absence of a personal commitment from the settlor, is not the creditor of the settlor and is therefore not required to declare his claim as a liability in the settlor’s bankruptcy proceedings (High Court, commercial chamber, June 17, 2020, no. 19-13.153, FS-P+B+R; High Court, commercial chamber, November 25, 2020, no. 18-26.272, not published).

By this decision, the High Court thus returns to the position it adopted on October 27, 1998 (High Court, commercial chamber, 27 October 1998, no. 96-14.037).

  • The clarification provided by the judgment of November 25, 2020

In its judgment of November 25, 2020, the French High Court drew the consequences of the judgment of June 17, 2020 by providing an additional clarification: the Court stated that the beneficiary of a security interest for a third party is not subject to the suspension of individual lawsuits’s rule resulting from the bankruptcy proceedings to which the settlor would be subject and that he “may pursue or initiate proceedings for seizure of real estate against the settlor, after having implicated the administrator and the creditors’ representative”.

  • In practice

The beneficiary of a security interest for a third party granted by a person subsequently placed in a bankruptcy proceedings is not required to declare his claim and may pursue the enforcement of his security interest after the commencement of the proceedings after the organs of the proceedings have been called into question.

It may nevertheless be observed that if the settlor does not owe a sum of money to the beneficiary, there is a debtor-creditor relationship between the settlor and the beneficiary.

On the other hand, if the beneficiary can enforce his security interest outside the rules governing the settlor’s bankruptcy proceedings, this means that he can apprehend the asset, which is the object of the security interest during the observation period or execution of the plan, and threaten the restructuring of the company in the bankruptcy proceedings.

On the other hand, the High Court does not specify the treatment of the product from the enforcement of the security interest. Will the beneficiary of the security be able to keep it or will it be distributed among the creditors of the bankruptcy proceedings ?

This question is certainly to be followed and the answer given by the High Court will depend on the attractiveness of the security interest for others.

By Thierry Montéran and Marine Simonnot.

Source : Légifrance