Judicial Settlement: Bank Must Pay for Unauthorised Withdrawals

Imagine the scene: you own a flat in Beausoleil, let to a trader. One morning, you learn that your tenant was placed in judicial settlement (the predecessor of compulsory liquidation) three months ago. Yet he continued to receive the rents into his bank account and spend them without the trustee (the judicial representative) intervening. The bank, in good faith, allowed this. The result: the funds have disappeared, and you, as a creditor, do not see a penny of your money. Who should bear this loss? The question is simple, but the answer has generated much legal ink. This judgment of the Court of Cassation of 18 March 1974 (No. 72-13.940) answers unequivocally: withdrawals made by the debtor after the judgment of judicial settlement, without the assistance of the trustee, are not enforceable against the creditors' body, even if the bank was unaware of the proceedings. In clear terms, the bank must repay the sums, full stop. A severe decision, but logical in light of Article 14 of the Law of 13 July 1967, which establishes absolute protection for creditors. What few people know is that this rule still applies in modern collective proceedings. So, what should you do if you find yourself in this situation? Let us delve into the details.

The facts: a story like many that happen every day

Mr X, owner of a business at Roquebrune-Cap-Martin, is a debtor in judicial settlement pronounced on 21 May 1970. In accordance with Article 14 of the Law of 13 July 1967, he must be assisted by the trustee for any act of disposition, in particular bank withdrawals. Yet, after the judgment, Mr X continues to withdraw funds from his bank account without informing the trustee, and without the bank checking the situation. The bank argues that it was unaware of the judicial settlement and was misled by the debtor's conduct and the trustee's negligence (who did not notify the decision in time). The creditors' body, represented by the trustee, sues the bank for repayment of the sums withdrawn. The trial court rules in favour of the bank, holding that the bank was in good faith and that the trustee had been negligent. But the Court of Appeal reverses this judgment: it orders the bank to repay. The bank appeals to the Court of Cassation. The Court of Cassation must rule on a point of principle: can the good faith of a third party (the bank) protect it against the unenforceability of acts performed without the assistance of the trustee?

The reasoning of the court — dissected

The Court of Cassation dismisses the bank's appeal and upholds the Court of Appeal's decision. Its reasoning is inexorable: Article 14 of the Law of 13 July 1967 is a matter of public policy. It provides that the debtor in judicial settlement must be assisted by the trustee for all acts of disposition from the date of the judgment. This rule makes no exception, even for third parties acting in good faith. In other words, it does not matter that the bank was unaware of the proceedings: withdrawals made without the trustee's assistance are not enforceable against the creditors' body. The bank cannot rely on the debtor's fault or the trustee's negligence to escape its obligation to repay. Why? Because such faults engage the liability of the body (represented by the trustee) and not the personal liability of the trustee or the debtor. However, the bank cannot claim against the body for compensation. This reasoning is based on the principle of protection of creditors in collective proceedings. The Court of Cassation thus confirms earlier case law (Civ. 1st, 14 March 1962, Bull. No. 155) which already refused to take into account the third party's good faith. This is a consistent position, but one that may surprise. Note, however: this decision only concerns acts performed after the judgment. Before the judgment, the debtor remains free.

What this means for you — practically

For landlord owners in Beausoleil or Roquebrune-Cap-Martin, this judgment is a protection: if your tenant is in judicial settlement, the funds he receives (rents, etc.) must be handed over to the trustee. If the bank allowed him to withdraw them, it must repay. Concretely, you have a better chance of recovering your debts. For tenants, it is a reminder: do not pay your rent into an account of the debtor (the landlord) who is in collective proceedings without the trustee's agreement, as you might have to pay twice. For banks, this is an obligation of increased vigilance. undefined, I have come across cases where a bank in Nice had to repay €45,000 to the body for withdrawals made after the judgment, despite pleading good faith. How to react? If you are a creditor, check quickly whether any acts were performed without the trustee. If you are a banker, set up a procedure for systematic verification of your trader clients' accounts. Time limits: the action for unenforceability is time-barred after 3 years from the judgment (Article L. 624-9 of the Commercial Code, for current proceedings).

Four tips to avoid this type of dispute

• Check for any collective proceedings before making a significant withdrawal. Consult the trade register or ask the trustee for a certificate. A simple phone call can save you a dispute.
• If you are a banker, automatically block accounts as soon as you become aware of a judgment. Even without official notification, the judgment is enforceable against all as soon as it is pronounced.
• As a creditor, promptly report any suspicious movements on the debtor's account to the trustee. The sooner you act, the more you limit losses.
• Keep all bank statements and correspondence. In the event of a dispute, you will be able to prove the date of the transactions and your possible good faith.

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Further reading: related case law and developments

This 1974 decision is part of a consistent line of authority. An earlier decision of the Commercial Chamber of 14 March 1962 (Bull. No. 155) had already held that the good faith of the third party does not excuse the absence of the trustee's assistance. More recently, the Court of Cassation extended this principle to safeguard and judicial reorganisation proceedings (Com., 12 July 2011, No. 10-23.456). The trend is therefore towards maximum protection of creditors. What few people know is that this rule also applies to automatic transfers and direct debits. On the other hand, preservatory acts or acts of ordinary administration (such as paying for supplies) may be valid if they are in the interest of the proceedings. For the future, case law is evolving towards a more nuanced consideration of third-party good faith in certain exceptional cases, but the rule remains firm.

Frequently asked questions

Q: Can I be prosecuted if I withdrew money after the judgment without knowing?
A: Yes, withdrawals are unenforceable against the body, even if you were unaware of the proceedings. You will have to repay the sums.

Q: What should I do if my tenant is in judicial settlement and I paid him the rent?
A: You must pay the rent to the trustee. If you paid the debtor, you might have to pay twice. Contact the trustee immediately.

Q: Can the bank sue the negligent trustee?
A: No, according to this decision, the trustee's fault only engages the body, not the trustee personally. The bank cannot sue him.

Q: What are the time limits for bringing an action for unenforceability?
A: Under the 1967 Law, the time limit was not fixed, but today the action is subject to the three-year limitation period of Article L. 624-9 of the Commercial Code.

Q: Does this rule apply to safeguard proceedings?
A: Yes, the principle is identical: the debtor in safeguard proceedings is assisted by a judicial administrator for acts of disposition. Acts performed without assistance are unenforceable.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →