An SCI is a non-trading company whose purpose is the ownership and administration of one or more properties. Its object is exclusively civil, and the liability of the partners is indefinite and not joint and several.
When it is registered, an SCI acquires a legal personality distinct from that of the partners; it therefore has its own assets and liabilities.
Under French law, since assets are one of the attributes of legal personality, the creation of an SCI gives rise to new assets. The corporate assets are therefore attached to the legal personality of the company; they are autonomous and different from the assets of the partners who make up the SCI.
The creation of a new asset will make it possible to isolate the property used privately by the company director and protect it from professional creditors.
The autonomous legal personality of the SCI as protection for the company director's property assets
The aim is to make the SCI the owner of the property or properties for private use that the company director wishes to protect. The business owner will only own the shares in the company. The first step is to find a partner, because a company needs at least two people. This partner could be a close relative, spouse or partner.
In the event of difficulties, the business owner's professional creditors will only be able to seize the company shares and not the property (unless security is taken directly over the property). They will only be able to sell the shares, not the property, at auction. Unlike in the case of joint ownership, they may not cause the property to be divided.
However, the seizure will result in theunavailability of the seized debtor'specuniary rights. They will no longer be entitled to dividends. If the shares are sold, these dividends will be added to the sale price and distributed among the creditors. However, until the shares are sold, the debtor will continue to exercise the non-pecuniary rights attached to his shares: the right to attend meetings and vote, the right to receive reports and other corporate documents intended for shareholders, etc.
In practice, this situation is very favourable for the business owner in difficulty, as putting the shares up for auction will be much more delicate and uncertain than putting the property up for sale directly, due in particular to the intuitu personae that dominates SCIs. The company director will only own a proportion of the shares. Even if the majority of the shares are seized, finding a buyer for the creditor will be particularly difficult, as the potential buyer will not have direct control over the property, but will be subject to the rules of the company's articles of association and will have to share control of the company with the business owner's partner. This is not very attractive. What's more, the transfer of shares, even if forced, requires the approval of the other partners.
This is why you need to draw up tailor-made Articles of Association for a very closed company, in which many decisions will have to be taken unanimously, which will put off potential buyers.
Furthermore, incorporation is all the more disadvantageous for creditors because, in general, the value of the company shares is 10 to 20% lower than the corresponding share of the company property. Again, this is because these companies are very closed and the purchaser of the shares cannot freely dispose of the property. The real value of such shares rarely corresponds to their mathematical value. What's more, as an autonomous legal entity, the SCI may have various liabilities of its own, which may further reduce the value of the shares.
Similarly, creditors risk losing track of their debtor's assets for good. Indeed, even if the formation of a civil partnership entails the completion of certain publicity formalities, it will be more difficult for creditors to ascertain the extent of their debtor's assets once the debtor has formed a company. In practice, when a creditor wants to know the property assets of his debtor in a given geographical area, he asks the relevant mortgage office for a file in the debtor's name, which reveals all the transactions carried out by that person. If the debtor has set up a non-trading property company (SCI) to purchase the property, the file will be blank.
These disadvantages for creditors are just as many advantages for the debtor, who benefits from effective protection, especially as he retains control of the company during the seizure of his shares (only his pecuniary rights are unavailable).
So, in the event of insolvency proceedings, the property is effectively out of the reach of creditors. The company director will still be able to benefit from it, as he retains the non-pecuniary rights to his shares. However, if the property in question is used for rental investment, any dividends accruing to the company director will be used to pay off the creditors.
However, in order to make an informed choice about whether or not to set up an SCI to protect their private property assets, business owners need to be aware of some of the disadvantages and dangers of holding property through a non-trading company.
First of all, the separation of assets resulting from the creation of an SCI screen has its limits. Setting up a non-trading property company to protect your private assets before you get into debt is perfectly laudable. Doing so in an attempt to avoid creditors who are already present is much less so. But how do you determine when setting up an SCI is still commendable and when it is no longer?
If the company property has never formed part of the debtor's assets, setting up an SCI should pose no problem, as the creditors' pledge will not be reduced, at least if the financing is provided through the intervention of a bank.
If the property belonged to the debtor, a distinction must be made as to when the property was transferred to the SCI. If the transfer took place before the claims arose, the debtor should not be concerned, but if it did not, the creditors may try to challenge the contribution in several ways:
* The fictitious company: creditors may try to demonstrate to the courts that the characteristic elements of a company have not been met and that, as a result, the SCI is merely a fictitious arrangement. Cancellation of the SCI will then enable them to regain their direct claim on their debtor's property. Care must be taken to ensure that the non-trading property company continues to operate normally throughout its life, since the absence of any legal life is one of the key indicators that the company is a sham. It should be recognised, however, that a declaration that a company is fictitious is exceptional.
* Action paulienne: When a person contributes his or her property to a company for the sole purpose of shielding it from creditors, the creditors may attack the contribution by means of an action paulienne, in order to have it declared unenforceable against them. The creditors may then either seize the contributed asset directly from the company or obtain compensation for the loss that the contribution may have caused them. On a reading of the case law, it would appear that the contribution of a property to an SCI when the contributors already have debts does not make it possible to effect a separation of assets and liabilities with complete peace of mind. It is this action that will be the greatest threat to the SCI, so it is on this point that the company director should be cautious.
The paulian action is time-barred after 5 years from the date on which the creditor knew or should have known of the fraudulent act, i.e. the contribution.
* In the event of insolvency proceedings being brought against the company director in connection with his professional activity, the contribution may be cancelled if it was made during the suspect period, on the basis of articles L.632-1 and L.632-2 of the Commercial Code.
In addition, the court may, on the basis of article L.632-2 of the Commercial Code, extend the proceedings to the SCI on the grounds of confusion of assets and liabilities. This is a classic example of the combination of SCI and operating company, which we will examine in more detail in the second part.
In view of these disadvantages, should we conclude that setting up a non-trading company is pointless, or even a handicap? None of the reasons given in this study would justify not setting up a civil partnership and doing without the undeniable advantages it can bring. However, these disadvantages should be taken into account as part of the advice provided and should be raised with the client to ensure that his or her needs are met as effectively as possible.
The protection afforded by the SCI is not perfect, but it does make it possible to isolate certain real estate assets from the business owner's assets and make it more difficult for creditors to sell them.