Since the reform of the law of security interests of 15 September 2021, secured creditors have enjoyed a considerably strengthened arsenal: the pledgee’s exclusive right to payment, the generalisation of forfeiture clauses (pactes commissoires), simplified judicial transfer of ownership, etc. In the hands of a prudent creditor, these instruments allow for rapid and effective recovery. But in the hands of a reckless, malicious or simply impatient creditor, they can lead to catastrophic situations for a business, thereby extending Professor Jacques Mestre’s reflections on the abuse of the right to recover a debt (J. Mestre, “Réflexions sur l’abus du droit de recouvrer sa créance, in Mélanges Raynaud, 1985, Dalloz, p.439 et seq.).
For while every creditor is, in principle, free to choose how to recover its debt, that freedom is not unlimited. Case law has consistently reiterated this since the early twentieth century: all rights are capable of abuse. The theory of abuse of rights thus runs through the whole of private law: it first appeared in property law, before extending to company law and then to contract law. In the law of security interests, the logic of liability is gradually gaining ground in the field of personal guarantees, with the rise of proportionality requirements and the duty to warn. By contrast, the theory of abuse of rights as applied to security in rem remains little explored: legal scholars pay it scant attention, case law is scattered and practitioners make only timid use of it.
Yet the creditor’s traditional and new weapons reveal an increased risk of abuse, which can have formidable consequences. Where fault is established, the first victim is the debtor itself, particularly where it is a legal entity. A company whose essential assets have been realised hastily is thus deprived of any chance of recovery and faces judicial liquidation (liquidation judiciaire). In its wake come third parties who may also suffer loss as a result of the abuse: personal guarantors, shareholders, investors, contracting parties, etc. The issue of abuse of rights in relation to security in rem therefore has its own specific features. We will first characterise the fault (I) before examining the conditions for compensation (II).
I. Characterising the abuse
Since the famous Clément-Bayard judgment, it has been settled that every subjective right is capable of abuse. This theory applies without restriction to a creditor holding security.
In matters of security, the creditor is in principle free to choose which security it decides to enforce. It may thus pursue a personal guarantor before enforcing its security in rem. In all cases, however, its choice and the manner in which it exercises it are not absolute.
Abuse of rights in the law of security interests manifests itself first through the criterion of disproportion. This principle now runs through the entire law of security interests. Articles 2299 and 2300 of the French Civil Code, introduced by the 2021 reform, impose a duty to warn on professional creditors and reduce a manifestly disproportionate guarantee to the amount up to which the guarantor was able to commit. Article L. 111-7 of the French Code of Civil Enforcement Procedures provides that the enforcement of recovery measures “may not exceed what proves necessary to obtain payment of the obligation”; and Article L. 121-2 of the same Code empowers the enforcement judge to order the creditor to pay damages in the event of “abusive attachment”. Finally, in insolvency proceedings (procédures collectives), Article L. 650-1 of the French Commercial Code renders the creditor liable where the security taken is disproportionate to the credit granted, an exception to the principle of non-liability that creditors cannot afford to overlook.
Abuse also manifests itself, independently of any disproportion, in the choice of the timing or the methods of enforcement. This is illustrated by the case in which a pledgee had enforced its pledge even though its debt had been paid (Aix-en-Provence, 5 Nov. 1987, Gaz. Pal. 1988. 2. 709, note E. Putman), or the case in which a bank had carried out a garnishment even though it already held an exclusive right, prior to any attachment, over the insurance indemnity owed to its debtor (Civ. 2ᵉ, 27 Apr. 1983, no. 82-10.250). What these decisions have in common is that the creditor had a less harmful means of obtaining payment and deliberately chose not to use it. Another example, in the case of a pledge over a business, is the refusal to grant a partial release where the debtor company (whose forecasts show a credible recovery trajectory) absolutely needs the proceeds from the sale of its business to finance its restructuring. A bank that seized a substantial part of the price of an asset sold by a company, when its claim was otherwise covered by several other cumulative securities, would necessarily be committing an abuse of rights. The creditor thus obtains more than it needed, to the detriment of its debtor’s survival. Abuse in relation to security in rem can therefore lead directly to judicial liquidation and cause serious harm to various persons.
II. Compensation for the loss
Where an abuse of rights in debt recovery is established, the debtor, whether a natural or legal person, is the first victim of the abusive enforcement. Its action is then based on Article 1240 of the French Civil Code, since the fault is non-contractual: it lies not in the failure to perform the contract but in the abusive exercise of a right.
The loss will typically take the form of a loss of the chance of recovery: the victim then need only establish the actual and certain disappearance of a favourable prospect.
In practice, particularly where the company has been placed in judicial liquidation, proof requires a retrospective analysis of the objective evidence predating the enforcement of the security: forecasts prepared by an accounting professional, turnover in line with forecasts, prospects for savings, no defaults on loan instalments, etc. Once the likelihood of recovery has been established, the loss is calculated by multiplying the value of the lost chance by the probability rate. On the basis of the theory of adequate causation, the causal link is then easy to prove: without the abusive recovery, it is clear that the company would have prospered.
In the wake of the liquidation thus provoked, third parties who had placed their assets at the company’s service suffer personal losses distinct from that of the legal entity. Their non-contractual action against the creditor rests on a basis now firmly established by the judgment of the Full Court (Assemblée plénière) of 6 October 2006: “a third party to a contract may invoke, on the basis of tortious liability, a contractual breach where that breach has caused it harm” (AP, 6 October 2006, no.05-13.255). Their loss is the calling of their guarantee, a personal loss distinct from the company’s loss, which the lower courts have confirmed to be compensable: where a bank’s wrongful conduct has led to the liquidation of a company, the guarantors are entitled to compensation for the loss arising from the calling of their guarantee as well as for their non-pecuniary loss (Paris Court of Appeal, division 5, chamber 5, 31 May 2018, no. 16/17448).
Finally, shareholders whose securities have lost all value may bring an action only if they allege a loss that is personal and distinct from that of the company, a condition that the French Supreme Court (Cour de cassation) scrutinises closely (Com., 9 March 2010, no.08-21.547). Such loss exists where they can demonstrate the loss of a chance of receiving future dividends or of being repaid the shareholder current account advances made during a period of difficulty. Where objective evidence shows a favourable economic trajectory abruptly interrupted by the creditor’s fault, the disappearance of those prospects constitutes a separate loss for which compensation may be claimed.
Where the victim is a third party, the causal link is of course more tenuous. Their loss is not the direct and immediate consequence of the creditor’s abuse but the result of a causal chain into which the company’s judicial liquidation and, where applicable, the calling of the guarantee are interposed. The analysis is then governed by the theory of equivalence of conditions, which will require careful preparation before being submitted to the sovereign assessment of the trial judges.
