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Bank account pledges should be used with caution

Introduction

Bank account pledges are often part of the security package in secured lending. Under Article 2360 of the Civil Code, a bank account pledge comprises a pledge to the pledgee (eg, the lender) of the balance standing to the credit of the pledgor’s bank account at the time of enforcement. This means that the security amount is effectively unknown until the pledge is enforced.

To avoid the risk of the account being emptied prior to enforcement, practitioners have developed a blocking notice that may be delivered to the account holder where a default occurs. This aims to prevent the debtor from sweeping the account ahead of enforcement actions. However, following two recent court decisions, bank account pledges may not be as bulletproof as previously thought.

Recent cases

In the first case,(1) the Court of Cassation denied the pledgee the benefit of the blocking provision and held that the clause could not prevent the debtor from sweeping the account. However, the court admitted that the amount secured by the pledge – the amount standing to the credit of the account on the date of the blocking notice – was also the amount securing the pledgee’s claim in the pledgor’s insolvency proceedings.

In the second case,(2) which was rendered a few weeks ago and in which the pledgor was not involved in any insolvency proceedings, the court held that the bank account pledge did not prevent the account holder’s third-party creditors from seizing the account before the pledgee enforced the pledge. The court argued that the pledge was attached not to the bank account, but to the pledgee’s rights in the credit of the account on enforcement.

Comment

These two cases do not represent the end of the use of bank account pledges in France. However, lenders should be cautious when discussing security packages with borrowers at term-sheet stage. If a borrower’s account is to be pledged to a lender (or security agent), the account should be segregated from the borrower’s other accounts (ie, it should not be an operating account) and the account should be blocked from the outset pursuant to the account holder’s instructions to the bank either on or prior to the drawdown of the loan.

Despite these two court rulings, there is hope ahead. Parliament is set to discuss various changes to the law which governs security and guarantees.(3) This will include:
– the recognition of cash collaterals (known as ‘gage-espèces‘); and
– the subsequent confirmation of their validity by their consecration in the Civil Code.

Where parties previously used bank account pledges as a security over cash (rather than as a security over an account), cash collaterals will offer a solid security, independent of bankruptcy, to lenders and other finance providers.

(1) Court of Cassation, Commercial Chamber, 22 January 2020 (18-21647).
(2) Versailles Court of Appeal, 16th Chamber, 14 January 2021 (19-08059).
(3) The ordinance to reform the law which governs securities and guarantees must be presented to Parliament
before the end of May 2021.

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