When acquiring a business with debt, it is quite common for the lender to ask for a pledge on the business that is the subject of the acquisition.

The pledge of a business: Definition

The pledge of a business is a real security (sûreté réelle) which gives its holder (the lender) a guarantee on its debts. 

This security entitles the lender to:

• a preferential right: the lender can be paid in priority on the sale price of the business prior to common creditors (i.e., simple creditors without any security); and
• a resale right (droit de suite): the lender may obtain the sale of the business before courts. 

The creditor’s consent is necessary for any modification of the structure or sale of the business. As a consequence, it is necessary to obtain the release (mainlevée) of any pledge before any transfer of the business.

NB: The lender cannot have the business assigned by the court to him as a payment. 

A decrease in the value of the business, mainly in the event of financial difficulties, will reduce the effectiveness of the security. The pledge of a business is thus generally used as a complementary security.

The creditors can also request in court a pledge of business in case of emergency and if the recovery of the debt seems complicated. 

What is covered?

Only the following may be included in the pledge:

• the sign and the trade name,
• the leasehold rights,
• the goodwill (clientèle),
• commercial furniture, equipment or tools used for the operation of the business,
• patents, licenses, trademarks, industrial designs and models, and generally the intellectual property rights attached to it.

This list is restrictive and excludes, for example, merchandise, or even certain receivables.

In the absence of an express designation in the deed of pledge, the pledge includes the sign, the trade name, the leasehold rights and the goodwill only.

Formalities

The deed of pledge (authentic or private deed) must be drawn up in writing and shall contain the information required by article R. 143-8 of the French commercial code.

The deed of pledge must be registered with the competent tax department, this obligation being no longer necessary as of January 1, 2023. 

The duly registered deed must be filed with the clerk’s office of the competent court, together with two copies of the registration form, within 30 days of the signature of the constitutive deed.

If the pledge also covers industrial property rights or software, an additional registration must be made at the INPI (national propriety rights organization).

The registration (inscription) of the pledge of a business is valid for 10 years, renewable. 

As for the cancellation of the registration (radiation), the initiative to cancel the registration belongs to both the creditor and the debtor upon proof of the agreement between the two parties or by a release act. 

The Arborescence network and its lawyers can assist you in the transfer of a business and the establishment of a pledge.