Securing debt with a pledge of shares

Verified 22 March 2024 - Directorate for Legal and Administrative Information (Prime Minister)

The pledge of shares is a mechanism that allows to guarantee a debt. For example, a partner may pledge his or her shares as security for a loan. It is very efficient and its constitution is simple and inexpensive. Depending on how the collateral has been set up, it can be conventional (from a contract) or judicial (ordered by the judge at the request of a creditor).

Conventional pledge of shares

Who can be pledged?

The pledge of shares is a guarantee which can be used by a business or head of company to guarantee a occupational debt. In general, the creditor go ask the debtor to provide a guarantee for to ensure payment of the debt.

For example, a business (debtor) takes a loan (debt) from a bank (creditor). In order to offer a guarantee to the bank, the director will offer to pledge the shares he holds in the business.

The person who owns the shares and who owns the wealth is called the constituent. It can be the debtor itself, in other words the debtor can guarantee the payment of its own debt. For example, a business takes out a loan from a bank. As security for payment, it pledges shares which it holds as a legal partner in another business. Thus, the business is both the debtor and the grantor.

It is also possible that the grantor is not the debtor. For example, a partner may pledge its shares in business A to secure the debt of business B.

The grantor who is proprietor share capital keep possession of it. Even if the shares are pledged, the grantor retains his role as a partner. For example, they can still participate in general meetings, use their voting rights or receive dividends.

FYI  

The pledge may relate to a future debt. For example, a bank may ask a business to provide a guarantee to ensure that its bank account remains positive. As soon as the balance turns negative, the debt grows. On the other hand, the convention must specify the information which will enable clearly identify the debt.

What shares can be pledged?

In principle, it is possible to pledge shares in commercial businesses such as the SARL: titleContent, the SCS: titleContent and the CNS: titleContent. The shares in civil businesses may also be pledged.

Shares which correspond to contributions in cash or in nature may be well off. On the other hand, the shares corresponding to industrial inputs cannot be well off.

Warning  

One natural person may not pledge shares held jointly with his spouse without his consent.

Can shares be pledged multiple times?

Shares may be pledged several times for different creditors.

In this case, it is the order in which the pledges are recorded that will determine the order in which the claims are paid (from the oldest to the most recent).

What happens if the shares change value?

Over the life of a business, the value of the shares may decrease or increase. Where shares are pledged, the creditor takes the risk that they will lose value. Indeed, there is social hazard. For the sake of the business, shareholders may have to make decisions that reduce the value of the shares.

Where, on the other hand, the value of the shares decreases because of the shares of the member who owns them and who has secured them, the creditor may request the lapse of term. In other words, if they feel that the grantor has taken action to reduce the value of the shares, then the creditor can request that the debt be paid back immediately. If the debtor cannot repay the debt, then the pledge can be activated. In other words, the creditor will claim the shares as payment.

The creditor shall have the possibility to appoint a watcher in order to ascertain the changes in the situation of the company in which shares have been pledged. On the other hand, it cannot interfere in the life and management of the company.

FYI  

The shares of civil businesses of liberal practice (SEL) may not be pledged.

The rules are different depending on whether it is a pledge of shares in a commercial business (SARL, SCS, SNC) or a civil business.

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commercial business

The pledge of shares must be authorized by partners.

The pledge must be given to them notified by extrajudicial act or by registered letter with notice of receipt.

The manager has 8 days, from the notification, to convene the shareholders in a general meeting to discuss the draft pledge. If the statutes of the business may do so, it is possible to deliberate by written consultation.

Authorization must be given to the majority of partners representative at least half of the shares (unless the statutes provide for a larger majority).

If the partner who wishes to pledge his shares does not have an answer within 3 months which follow the notification, the collateral shall be considered to be authorized.

civil business

The pledge of shares must be authorized by partners.

The pledge project must be notified to the business and to each of the partners by extrajudicial act or by registered letter with notice of receipt. The statutes may provide that notification to the business is sufficient.

Authorization must be given to the majority of partners determined in the statutes. The articles of association may also provide that authorization is given by the manager. The partner who wishes to pledge his shares may participate in the vote.

FYI  

Even if the pledge has not been authorized (no request for authorization or refusal), it remains valid. On the other hand, if the creditor becomes the owner of the pledged shares, the members will have to approve it.

To be valid, the collateral must be established in writing or a authentic instrument (if written by a notary) which must contain next items :

  • Designation of secured debt
  • Type or nature of share capital (e.g. share capital of SARL)
  • Number of pledged shares

FYI  

To find out if a business' shares have been pledged, you can use the on-line service made available by the National Council of Registrars of Commercial Courts (CNGTC).

So that the pledge can be enforceable, it is necessary to publish in the securities registry and other related transactions held by the Registry of the Commercial Court.

Registration of pledge

The entry of the pledge must in principle be made by the creditor.

If the pledge agreement was drafted by a notary, it is up to him to take the steps to publish the pledge. On the other hand, the grantor who pledged his shares and the creditor may decide that the procedure need not be carried out by the notary.

The creditor or notary must send the original or a copy of the pledge to the commercial court registry of the place of registered office of the business whose shares are pledged. If the document in question is an authentic instrument, he will have to send a dispatch of the act. He must also attach the entry form for the pledge (in 2 copies if the request is made by mail):

Registration form for a pledge of shares

Who shall I contact

Pledge renewal

Registration is valid for one 5-year term. At the end of this period, the creditor must submit a request for renewal. If he does not do so, the pledge will be removed from the security rights register by the commercial court registry.

The application for renewal must be made to the Registry which entered the pledge using the following form:

Notice of renewal of a pledge of shares

Who shall I contact

Amendment of pledge

In the event of a change in the pledge, the creditor must make a change publication at the Registry of the Commercial Court.

The creditor must send the original or a copy of the pledge to the commercial court registry of the place of registered office of the business whose shares are pledged. If the act in question is a authentic instrument, he will have to send a shipment of the deed. He must also attach to this document the change of security note (in 2 copies if the request is made by mail):

Amending registration form for a non-possessory pledge or pledge

Where the debtor does not pay the secured debt, the creditor may pledge the shares in one of the following ways:

  • He can to become owner of the shares : where the pledge agreement contains a commission pact, the creditor may decide to activate it.
  • He can apply to the courtthan the share capital be awarded to him as payment. He thus becomes a partner of the business whose shares have been pledged. Where the value of the shares awarded in payment exceeds the value of the secured claim, the creditor shall pay the difference to the grantor.
  • He may apply to the court for an order of forced sale of shares well-off. The creditor must notify the debtor and the third party settlor (if the settlor is not the debtor) of the forced sale and wait 8 days before it can proceed to a public auction. The latter must be carried out by a judicial auctioneer, a commissioner of justice or a sworn goods broker.

FYI  

The value of the pledged shares shall be determined by an expert who shall be appointed by mutual agreement or by legal process at the time of their transfer.

Once the secured debt has been fully paid by the debtor (principal debt, interest, etc.), the collateral must be written off the personal security registry and other related transactions.

The creditor must send the debit slip to the commercial court registry who posted the pledge. It must also indicate the date of entry of the pledge and its serial number:

Write-off slip for the pledge of shares

Who shall I contact

Any other person (e.g. the grantor) may also request the cancelation of the pledge by attaching to the cancelation slip one of the following:

  • Proof that the parties agree that the pledge should be written off
  • Court decision requesting the cancelation of the pledge
  • Document recording the sale of the shares pledged with the receipt recording payment of the price and a copy of the extract from the entries in the register

The cost of radiation varies with the type of radiation. It can be total or partial.

Judicial pledge of shares

The pledge of shares is a guarantee which can be used by a business or head of company to guarantee a occupational debt. The judicial pledge allows the creditor to apply to the judge to secure his claim.

He must ask the judge for authorization to pledge the shares. In order for the pledge to exist, the judge must order its inclusion in a decision. Before making his decision, the judge will check the Next 2 points :

  • The validity of the claim (its conformity with the rules of law)
  • A threat to the recovery of the debt. In other words, the risk that the debtor will not be able to pay the debt

The decision may be rendered by the enforcement judge or the president of the commercial court.

Theproprietor share capital keep possession of it. Even if the shares are pledged, he retains his role as a partner. For example, they can still participate in meetings, use their voting rights or receive dividends.

What shares can be pledged?

In principle, it is possible to pledge shares in commercial businesses such as the SARL: titleContent, the SCS: titleContent and the CNS: titleContent. The shares in civil businesses may also be pledged.

Shares which correspond to contributions in cash or in nature may be well off. On the other hand, the shares which correspond to industrial inputs may not be pledged.

Warning  

One natural person may not pledge shares held jointly with his spouse without his consent.

Can shares be pledged multiple times?

Shares may be pledged several times for different creditors.

In this case, it is the order in which the pledges are recorded that will determine the order of payment (from the oldest to the most recent).

What happens if the shares change value?

Over the life of a business, the value of the shares may decrease or increase. Where shares are pledged, the creditor takes the risk that they will lose value. Indeed, there is social hazard. For the sake of the business, shareholders may have to make decisions that reduce the value of the shares.

Where, on the other hand, the value of the shares decreases because of the shares of the member who owns them and who has secured them, the creditor may request the lapse of term. In other words, if they feel that the grantor has taken action to reduce the value of the shares, then the creditor can request that the debt be paid back immediately. If the debtor cannot repay the debt, then the pledge can be activated. In other words, the creditor will claim the shares as payment.

The creditor shall have the possibility to appoint a watcher in order to ascertain the changes in the situation of the company in which shares have been pledged. On the other hand, it cannot interfere in the life and management of the company.

FYI  

The shares of civil businesses of liberal practice (SEL) may not be pledged.

The rules differ according to whether the share capital belongs to a civil business or to a commercial business.

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Pledge of shares in a commercial business

The creditor may find himself in any of the following :

  • Either he has a enforceable title, a non-enforceable court decision or evidence of non-payment of a bill of exchange accepted, of a promissory note, check or rent (with lease). In this case, he does not need the authorization of the judge to request the registration of the pledge.
  • Either he does not have one of the documents cited above. In that case, he has to make a application for judicial authorization. It may be issued by one of the following authorities:
    • Enforcement Judge of the court of the debtor's place of residence.
    • President of the Commercial Court only if the claim is commercial and no proceedings have been instituted in respect of the claim.

In order for the judicial pledge to have legal value, it must be notified to the business whose shares are pledged by a act of commissioner of justice. It's called significance.

The creditor must send a notification that contains the following:

  • Designation of creditor and debtor
  • Authorization by the court or the enforceable title under which the pledge is required by law
  • Indication of the principal amount of the claim and its ancillary items (e.g. interest)

The creditor then 8 days from service (from the court pledge to the business) to inform the debtor by act of commissioner of justice.

This act shall contain the following elements:

  • A copy of the order of the judge or the enforceable title under which the security was taken. If it is a notarized obligation or a claim on the part of the State, regional or local authorities or their public establishments, the security is not necessary. However, the date, nature and amount of the debt must be indicated.
  • Indication that the debtor may request the release of the pledge (i.e. the cancelation of the pledge). It must be in very visible characters.
  • Reproduction of certain articles of the Code of Civil Enforcement Procedures

FYI  

In the absence of any of these elements, this act may be canceled (declared void). If the 8-day period is not respected, the pledge can be canceled.

The debtor then has a period of 1 month to contest the pledge.

Pledge of shares in a civil business

The creditor may find himself in any of the following :

  • Either he has a enforceable title, a non-enforceable court decision or evidence of non-payment of a bill of exchange accepted, of a promissory note, check or rent (with lease). In this case, he does not need the authorization of the judge to request the registration of the pledge.
  • Either he does not have one of the documents cited above. In that case, he has to make a application for judicial authorization. It may be issued by one of the following authorities:
    • Enforcement Judge of the court of the debtor's place of residence.
    • President of the Commercial Court only if the claim is commercial and no proceedings have been instituted in respect of the claim.

In order for the judicial pledge to have legal value, it must be notified to the business whose shares are pledged by a act of commissioner of justice. It's called significance.

The creditor must send a notification that contains the following:

  • Designation of creditor and debtor
  • Authorization by the court or the enforceable title under which the pledge is required by law
  • Indication of the principal amount of the claim and its ancillary items (e.g. interest)

The pledge shall be provisionally entered in the registers of security interests and other related transactions and annexed to the Commercial and business Register (SCR).

The creditor must then proceed with a provisional entry. He has to table 2 copies of the notice of pledge at the registry of the commercial court of the place of registration of the business whose shares are pledged.

Who shall I contact

The creditor then 8 days from service (from the court pledge to the business) to inform the debtor by act of commissioner of justice.

This act shall contain the following elements:

  • A copy of the order of the judge or the enforceable title under which the security was taken. If it is a notarized obligation or a claim on the part of the State, regional or local authorities or their public establishments, the security is not necessary. However, the date, nature and amount of the debt must be indicated.
  • Indication that the debtor may request the release of the pledge (i.e. the cancelation of the pledge). It must be in very visible characters.
  • Reproduction of certain articles of the Code of Civil Enforcement Procedures

FYI  

In the absence of any of these elements, this act may be canceled (declared void). If the 8-day period is not respected, the pledge can be canceled.

The debtor then has a period of 1 month to contest the pledge.

During this period, the creditor cannot request the final registration of the pledge. After provisional registration, he must make a final registration.

The rules for the final recording of the pledge differ depending on whether the provisional recording was carried out with or without enforceable title.

Provisional Registration with Enforcement Order

The creditor has Maximum 3 months from the service of the pledge to the debtor to make his request for final disclosure. However, he will not be able to apply during the firster months to allow time for the debtor to challenge the collateral.

The creditor must send to the registry of the commercial court 2 certified true copies of the pledge served on the business whose shares are pledged

Example :

The creditor notifies its debtor on January 10, 2024 that an interim registration of pledge of shares has been made. The debtor has 1 month to contest this registration. The creditor must wait until February 10, 2024 to request the final registration of the claim. It has until April 10 to do so.

Provisional registration without enforcement order

The creditor must obtain a enforceable title. Once obtained, it has a period of Maximum 2 months to apply for final registration. However, he will not be able to apply during the firster the month following service on the debtor to give him time to challenge the pledge.

The creditor must send to the registry of the commercial court 2 certified true copies of the pledge served on the business whose shares are pledged

It must also attach the enforceable title with a certificate of non-opposition or non-appeal.

Example :

On January 10, 2024, the creditor notifies its debtor that an interim share pledge registration has been made. The debtor has one month to challenge the registration, until February 10, 2024.

On January 22, 2024, the creditor obtains an enforceable title.

It must therefore wait until the time limit for challenging the debtor has elapsed (on 10 February 2024) in order to request the definitive registration of the claim. It has one month from the enforceable title to do so, that is, until March 22.

FYI  

The date of pledge is the date of final entry.

The partners do not need to give their consent for the shares to be legally pledged. However, once the formalities for entering the pledge have been completed, the members must give their approval. It allows the creditor to become a partner if he becomes the owner of the pledged shares.

It must be collected at the general meeting. Associates have 3 months to answer (6 months for civil real estate businesses). In the absence of a written reply within that period, approval shall be granted.

Where the debtor does not pay the secured debt, the creditor may pledge the shares in one of the following ways:

  • He can to become owner of the shares : where the pledge agreement contains a commission pact, the creditor may decide to activate it.
  • He can apply to the courtthan the share capital be awarded to him as payment. He thus becomes a partner of the business whose shares have been pledged. Where the value of the shares awarded in payment exceeds the value of the secured claim, the creditor shall pay the difference to the grantor.
  • He may apply to the court for an order of forced sale of shares well-off. The creditor must notify the debtor and the third party settlor (if the settlor is not the debtor) of the forced sale and wait 8 days before it can proceed to a public auction. The latter must be carried out by a judicial auctioneer, a commissioner of justice or a sworn goods broker.

FYI  

The value of the pledged shares shall be determined by an expert who shall be appointed by mutual agreement or by legal process at the time of their transfer.

Once the secured debt has been fully paid by the debtor (principal debt, interest, etc.), the collateral must be written offthe personal security registry and other related transactions.

The creditor must send the debit slip to the commercial court registry who posted the pledge. It must also indicate the date of entry of the pledge and its serial number:

Write-off slip for the pledge of shares

Who shall I contact

Any other person (e.g. the grantor) may also request the cancelation of the pledge by attaching to the cancelation slip one of the following:

  • Proof that the parties agree that the pledge should be written off
  • Court decision requesting the cancelation of the pledge
  • Document recording the sale of the shares pledged with the receipt recording payment of the price and a copy of the extract from the entries in the register

The cost of radiation varies with the type of radiation. It can be total or partial.

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