When faced with business creditors, how can a sole trader protect his house or flat, which is his main residence, or more generally his property that is not used for his business?
Articles 2284 and 2285 of the French Civil Code state that "anyone who is personally obliged is obliged to fulfil his commitment on all his movable and immovable property, present and future" and that "the debtor's property is the common pledge of his creditors".
A shopkeeper or craftsman acting as a sole trader will commit all of his assets in the course of his business activity, unlike a person operating under the cover of a limited liability company.
It should be noted that setting up this type of company limits liability, especially in theory, because creditors, particularly banks, will often ask the director to act as a guarantor. What's more, in the event of poorly kept accounts, judges may rule that assets are commingled, thereby committing the executive's personal assets.
Several provisions have been introduced to protect sole traders.
The law of 11 February 1994, known as the Madelin law, gives entrepreneurs a right of discussion over their business assets. This means that business creditors must be paid first against the entrepreneur's business assets (assets needed for the business) before they can assert their rights against the rest of his assets.
But it is above all the law of 1 August 2003 that provides the most effective protection (for want of other procedures) for the sole trader by offering him the possibility of declaring his principal residence unseizable, as well as all his property assets not used for business purposes (law of 4 August 2008). In the short term, this declaration will be replaced by the status oflimited liability sole trader(EIRL).
The declaration of unseizability prompts us to address the following points:- Beneficiaries of the declaration of unseizability
- Beneficiaries of the declaration of unseizability
- Assets that may be declared exempt from seizure
- Effects of the declaration of unseizability
- How to declare an asset exempt from seizure
- Possible adjustments by the declarant
- Sole trader with limited liability (EIRL)
Beneficiaries of the declaration of unseizability
Article L. 526-1 of the French Commercial Code states that a declaration of unseizability may be made by a natural person registered in a legal professional register or carrying on an agricultural or self-employed professional activity.
If a shopkeeper, farmer, craftsman or self-employed professional can declare their home or any non-business property to be exempt from seizure, what about a self-employed entrepreneur?
Although they are not required to register with the Registre du Commerce et des Sociétés, self-employed entrepreneurs are likely to be able to declare their property exempt from seizure in the same way as the other professionals mentioned above.
Assets that may be declared exempt from seizure
Initially, the law of 1 August 2003 allowed sole traders to declare their main residence exempt from seizure. This option has now been extended to all property not used for business purposes.
When the declaration of unseizability is made, the real estate assets that are the subject of the declaration will be designated individually. In the event of a subsequent acquisition of another property, the entrepreneur will have to make a new declaration of non-distrainability (if he also wishes to isolate this property), unless this purchase is made by means of a re-investment, in which case the non-distrainability will automatically be transferred to the new property.
Although the law uses the concept of "rights in the property", the declaration of unseizability does not apply to property belonging to a non-trading property company in which the sole trader is a partner.
Where not all of the property is used for business purposes, the part that is not used for business purposes may only be declared exempt from seizure if it is designated in a descriptive statement of division. However, the fact that the declarant is domiciled in his residential premises pursuant to article L.123-10 of the French Commercial Code does not prevent the premises from being the subject of the declaration, without the need for a descriptive statement of division.
Effects of the declaration of unseizability
As its name suggests, this declaration renders the real estate designated in the deed exempt from seizure. The entrepreneur's professional creditors will not be able to exercise any rights over the principal residence or other property declared unseizable.
However, the declaration will only have effect in respect of creditors whose rights arise after publication of the declaration of unseizability.
In addition, the declaration only concerns claims arising from the declarant's professional activity.
Finally, it should be remembered that the entrepreneur's spouse should be wary of acting as guarantor if the property declared exempt from seizure is a joint asset. Creditors guaranteed by the spouse's surety would then have an easy way of evading unseizability.
The sole trader retains free disposal of the property declared exempt from seizure.
How to declare a property unseizable
The declaration of unseizability must be made before a notary. The notary will then register the deed with the relevant mortgage office. Lastly, the declaration of unseizability must be recorded in a legal publicity register in which the sole trader is registered (if the sole trader is not registered in such a register, the declaration must be announced in a local legal gazette).
Possible adjustments by the declarant
Sole traders may amend their declaration to adapt it to any changes in their situation. While the declarant may waive the unseizability of his real estate assets at any time, he may also waive it only for certain assets or certain creditors.
This greater freedom leads to the creation of a hierarchy of professional creditors, which runs counter to the primary aim of protecting entrepreneurs. For example, a creditor could ask the sole trader (with varying degrees of insistence) to declare his immovable property exempt from seizure, except in his case. In this way, the creditor in question will take precedence over other creditors against whom the unseizability will be enforceable.
Sole trader with limited liability (EIRL)
In the short term, it will be possible to opt for the new EIRL (Entrepreneur Individuel à Responsabilité Limitée) scheme. This new system, which creates a special-purpose estate, will enable entrepreneurs to declare their assets for professional use, which are the only assets that can be seized by their professional creditors. It should be noted that it will still be possible to use the declaration of unseizability, but the creation of the EIRL regime should rapidly render the declaration of unseizability obsolete.