Pledge of Public Procurement Contract: Creditor May Collect Despite Debtor's Liquidation

Imagine: you are a bank in Beausoleil, and you have lent a substantial sum to a public works company, taking as security a contract it has secured with the municipality of Monaco. Suddenly, the company is placed into judicial liquidation. You ask yourself: will I lose my money? Can I directly collect payment of the contract without going through the liquidator? This crucial question for any secured creditor was decided by the Court of Cassation in a judgment of 23 May 1978.

In short, the Court said: yes, the creditor benefiting from a pledge over a public procurement contract may collect the sums due, even after the opening of collective proceedings (judicial settlement or liquidation of assets) against the debtor, and without the intervention of the liquidator. But beware, this rule has a limit: if the liquidator has objected before collection to assert certain privileges, the creditor may lose its right.

This decision, nearly 50 years old, remains a reference for all those who finance public procurement contracts: landlord owners, developers, banks, subcontractors. It offers valuable legal certainty, but one must know its subtleties. How to react if you are in this situation? What pitfalls to avoid? I explain everything in plain language, without unnecessary jargon.

The facts: a story that happens every day

Mr Hamamouche, an entrepreneur in Beausoleil, secures a public procurement contract for the construction of a building in Monaco. To finance the works, he obtains a loan from the Caisse nationale des marchés de l'État (CNME), which takes a pledge over the contract: in case of default, the CNME can pay itself directly from the sums due by the municipality. But in 1972, Mr Hamamouche is placed into judicial settlement (the predecessor of safeguard proceedings) and then into liquidation of assets. A liquidator (equivalent of the judicial representative) is appointed to manage his affairs.

The CNME, which had already collected sums before the judgment, continues to collect the sums due under the contract, including for works executed after the pronouncement of the judicial settlement. The liquidator challenges this: according to him, the CNME should not have collected without his agreement, because since the opening of the collective proceedings, the debtor is divested of his assets. The CNME, on the other hand, argues that its pledge gives it a direct right over the contract, independently of the collective proceedings.

The case goes up to the Court of Cassation. The liquidator appeals, but the Court rejects his arguments. It rules in favour of the CNME, but sets precise conditions. The twist? The Court distinguishes depending on whether the sums were collected before or after the liquidator's objection, and whether the works were executed before or after the opening judgment.

The reasoning of the court — dissected

The Court of Cassation bases its decision on Article 190 of the Code of Public Procurement Contracts (now repealed, but its spirit persists in the Code of Public Procurement). This Article allows the secured creditor to collect the sums due under the contract, notwithstanding the opening of collective proceedings. In short, the pledge over a public procurement contract is a robust guarantee that withstands the debtor's bankruptcy.

But the Court adds a crucial nuance: collection constitutes realisation of the pledge (the creditor exercises its right to pay itself from the thing given as security). If the liquidator has objected before collection, asserting one of the privileges referred to in Article 193 of the same code (privileges of employees, the Treasury, etc.), the creditor may lose its right definitively. In other words, the liquidator must act quickly, before the creditor has collected the funds.

This reasoning confirms earlier case law, but clarifies a frequently disputed point: the moment when the creditor acquires a definitive right. The Court affirms that this right is acquired upon collection, unless the liquidator has previously objected. This is security for creditors, but also a call for vigilance for liquidators: if they want to recover the sums for the body of creditors, they must act without delay.

The judges also distinguished according to the date of execution of the works: for works executed after the opening judgment, the situation is different, because the debtor is in principle divested. But here, the CNME had collected sums corresponding to works after the judgment, and the Court held that this did not affect its right, provided the liquidator had not objected in due time.

What few people know is that this decision was rendered under the old Code of Public Procurement Contracts, but the principles have been taken up in current law. undefined, I have come across cases where banks in Nice or Monaco were able to recover debts thanks to this case law, provided they could prove that their pledge was valid and that no objection had been made before collection.

What this means for you — in concrete terms

Landlord owner or property developer: If you have pledged a public procurement contract (for example, a construction contract with a local authority), this decision protects you in case of your contractor's default. You can collect the sums due directly, without waiting for the end of the collective proceedings. Concrete example: a developer in Beausoleil pledged a renovation contract for the municipality of Monaco. The contractor goes bankrupt. Thanks to this judgment, the developer recovers €150,000 directly, while the liquidator wanted to block the funds.

Bank or financial institution: You are the secured creditor. You must be reactive: as soon as you learn of the collective proceedings, collect the sums due without delay. If the liquidator has not objected before your collection, you are safe. On the other hand, if the liquidator notifies you of an objection, you must check whether it invokes one of the privileges of Article 193. If so, you risk having to return the funds.

Liquidator or judicial representative: Your role is to protect the interests of all creditors. This decision imposes heightened vigilance on you: as soon as proceedings are opened, identify the pledged contracts and file a written objection before the creditor has collected. Do not delay, as the creditor can act very quickly.

Tenant or co-owner: Indirectly, this decision may affect you if your landlord or co-ownership association is involved in a pledged public procurement contract. For example, if the association goes bankrupt, the secured creditor may recover the funds intended for works, which may delay their execution. But in practice, this remains rare.

Four tips to avoid this type of dispute

• Constitute a valid pledge upon signing the contract: To be enforceable against third parties, the pledge must be notified to the debtor (the local authority) and registered. Without these formalities, you cannot invoke Article 190. Have a lawyer assist you to verify the validity of the guarantee.
• Monitor the financial health of your contractor: If you are a secured creditor, follow the legal publications (BODACC, gazettes) to detect any collective proceedings. As soon as you become aware of them, collect the sums quickly, before the liquidator reacts.
• If you are a liquidator, act without delay: Upon your appointment, ask the debtor for the list of all pending public procurement contracts. If a contract is pledged, file an objection by registered letter with acknowledgement of receipt to the creditor and the local authority, stating the privileges you intend to assert.
• Document your collections: Keep proof of the date of collection (bank statements, receipts). In case of a dispute, you will need to demonstrate that the collection took place before any objection by the liquidator.

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Further reading: related case law and developments

The Court of Cassation confirmed this solution in a judgment of 14 November 1979 (Bull. civ. IV, No. 291), specifying that the pledge confers a right of preference over the contract price, even in the event of collective proceedings. More recently, the Commercial Chamber recalled (Civ. 3e, 12 May 2010, No. 09-66.365) that the secured creditor is not required to declare its claim in the schedule of liabilities if it has already collected the funds before the opening judgment.

The trend of the courts is therefore favourable to secured creditors, but with a requirement of speed. Liquidators, for their part, have learned to react more quickly. Since the reform of security law in 2021, the pledge of public procurement contracts is now governed by Articles 2355 et seq. of the Civil Code, but the principles established by the 1978 judgment remain relevant.

For the future, one can expect that the courts will continue to protect creditors who have taken security, while ensuring fairness among creditors. If you are involved in such a situation, do not hesitate to consult a lawyer lawyer for the latest developments.

In practice: what to do

FAQ:

1. Can I collect a pledged public procurement contract after my debtor's liquidation?
Yes, provided the liquidator has not objected before your collection. If there is an objection, you must check whether it is based on a legal privilege. If in doubt, consult a lawyer.

2. What should I do if I am a liquidator and discover a pledge?
File a written objection immediately, citing the privileges you intend to defend (wages, Treasury, etc.). Send this objection to the creditor and the debtor local authority. Keep proof of receipt.

3. What deadlines to act?
There is no precise legal deadline, but urgency is key. As soon as you become aware of the collective proceedings, act within days. A delay of a few weeks can be fatal.

4. What are the risks if I collect without verifying the absence of an objection?
If the liquidator proves that he had objected before your collection, you could be ordered to return the sums, with interest and damages. Better to check.

5. Does this decision apply to private contracts?
No, it only concerns public procurement contracts (State, local authorities, public establishments). For private contracts, the pledge is subject to the general law of security, with different rules.

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