Redemption of litigious rights (Art. 1699 French Civil Code): the hidden risk of buying discounted debt

A fund acquires a portfolio of non-performing bank receivables at a fraction of their face value, then starts recovery proceedings for the full amount. The debtor, once summoned, discovers the price actually paid and relies on Article 1699 of the French Civil Code: the debtor is released by reimbursing that price, and the expected capital gain disappears. The right of redemption of litigious rights (retrait litigieux) is neither a curiosity dating from 1804 nor a marginal defence; in certain configurations, it neutralises the entire investment thesis behind the purchase of discounted debt. This analysis covers the conditions under which the right of redemption arises, the point at which the risk can be enforced against the assignee in light of the law of assignment of receivables (cession de créance) rewritten in 2016 and again in 2021, and the clauses to negotiate in the assignment agreement to allocate that risk.

The mechanism of Article 1699: the price paid becomes the ceiling on recovery

Article 1699 of the French Civil Code, in its original wording, never amended since 1804, provides:

A person against whom a litigious right has been assigned may be released from it by the assignee, by reimbursing the actual price of the assignment together with the costs and proper expenses, and with interest from the day on which the assignee paid the price of the assignment made to him.

Three elements structure the economics of the provision. First, the debtor is released: the debtor does not buy the receivable but extinguishes the debt. The transaction does not transfer an asset to the debtor; it ends the dispute. Second, the consideration is not the face value of the receivable but the actual price of the assignment, that is, the sum actually paid by the assignee to the assignor. Finally, that actual price is increased by the costs and proper expenses (frais et loyaux coûts) and by interest.

The economic consequence is severe for the buyer of distressed debt: once the right of redemption has arisen and is exercised, the discount obtained on purchase ceases to be a recovery margin and becomes a mere ceiling on reimbursement. The assignee recovers its outlay, its costs and interest, nothing more. The difference between the acquisition price and the value recovered, which makes up the entire expected return, evaporates.

The starting point of interest deserves particular attention because it is frequently misstated. The provision runs interest neither from the assignment nor from the request for redemption, but from the day on which the assignee paid the price. Where the price is payable in instalments, or where there is a gap between the signing of the closing and actual settlement, that date must be documented precisely. Proof of payment and of its date determines the basis of the calculation.

The scope of the "costs and proper expenses" is not defined by Article 1699. Advisory fees, registration duties, structuring costs: the provision is silent, and the delimitation is a matter for the courts. A prudent buyer documents, contractually and in its accounts, all costs directly attributable to the acquisition, without presuming that they will be admitted.

The twofold condition of Article 1700: proceedings and a dispute on the substance of the right

The right of redemption does not arise as soon as a receivable is disputed or unpaid. Article 1700 sets out a strict definition:

A matter is deemed litigious as soon as there are proceedings and a dispute on the substance of the right.

The two conditions are cumulative, and the wording is demanding. There must be proceedings, that is, an action before a court, and a dispute on the substance of the right, that is, a discussion concerning the existence or extent of the assigned right itself.

This twofold requirement excludes a range of situations that buyers sometimes wrongly equate with a risk of redemption. A formal notice (mise en demeure) left unanswered is not enough. A recorded payment default, an acceleration of the debt, or a simple exchange of contradictory letters between counsel do not amount to proceedings within the meaning of the provision either. Conversely, and symmetrically, the existence of an action does not in itself suffice: the dispute must still concern the substance of the right and not matters unrelated to the existence of the receivable.

In practice, the boundary is less clear than it appears. A dispute concerning only the amount, a discussion limited to the allocation of payments, or a purely formal objection to an order for payment (injonction de payer) call for case-by-case analysis. Likewise, the characterisation as litigious in the presence of arbitration proceedings, of an action pending before a foreign court or of a dispute raised in summary proceedings (référé) is not resolved by Article 1700. These situations are a matter for the courts and, in due diligence, should be treated as areas of uncertainty and not as established exclusions.

Articles 1699 to 1701 likewise do not specify at what date the litigious nature is to be assessed, or up to what procedural stage the right of redemption may be exercised. These two questions, which are decisive in measuring how long the assignee remains exposed, are matters of case law and call for a file-by-file check rather than a general rule.

What the absence of proceedings does not guarantee

A buyer who takes over a receivable that has not yet been brought before a court is not durably protected. The provision concerns the litigious nature of the assigned right, and the debtor's litigation strategy may change. Whether a dispute arising after the assignment gives rise to the right of redemption is not settled by the texts. The analysis must therefore look not only at the state of the litigation on the day of signing, but also at the likelihood that a dispute on the substance of the right will be raised, and at the nature of the arguments available to the debtor.

The three exclusions in Article 1701, and only those

Article 1701 lists the cases in which the right of redemption is excluded:

The provision of Article 1699 ceases to apply: 1° Where the assignment was made to a co-heir or co-owner of the assigned right; 2° Where it was made to a creditor in payment of what is owed to that creditor; 3° Where it was made to the possessor of the property subject to the litigious right.

This list calls for a literal reading. It mentions neither global assignments of portfolios, nor block assignments, nor mergers or contributions in kind, nor transfers made under a plan. Presenting these arrangements as statutory exceptions to the right of redemption would extend the provision beyond what it says.

The second case, assignment to a creditor in payment of what is owed to that creditor, is the one most likely to be invoked in financial matters: the transfer of a litigious receivable in lieu of payment (dation en paiement) to a creditor of the assignor escapes the right of redemption. The transaction must still genuinely correspond to a payment and not to a disguised acquisition for consideration. A purely cosmetic structuring, intended to take a speculative acquisition outside the scope of Article 1699, exposes the parties to requalification.

Assignments by Dailly schedule (bordereau Dailly), acquisitions by a financing vehicle (organisme de financement) and transfers made within insolvency proceedings (procédure collective) do not appear in the list either. No text reviewed expressly excludes the right of redemption in these cases. It would be imprudent to build an acquisition thesis on the contrary assertion.

The prohibition in Article 1597 for legal professionals

Article 1597 prohibits judges, their deputies, members of the public prosecution service, court clerks, bailiffs (huissiers), avocats, défenseurs officieux and notaries from becoming assignees of litigious suits, rights and claims falling within the jurisdiction of the court in whose territorial area they perform their functions. The sanction is nullity, together with costs and damages.

The provision covers an exhaustive list of professions and a precise geographical perimeter, that of the area in which they practise. It is not intended to extend to other persons. Its practical interest, in a distressed transaction, lies in checking the ultimate identity of the investors and of the acquisition structures where professionals covered by the provision take part in them directly.

The enforceability timeline: what has changed since the 2016 ordinance

The right of redemption of litigious rights has not changed since 1804, but the general law of assignment of receivables was entirely rewritten by Ordinance No. 2016-131 of 10 February 2016, then amended by Ordinance No. 2021-1192 of 15 September 2021. Reasoning on the former Article 1690 and service by a bailiff is now a methodological error.

Transfer between the parties and enforceability against third parties

Article 1323, in the wording in force since 1 January 2022, provides that, between the parties, the transfer of the receivable, whether present or future, takes place on the date of the instrument, and that it is enforceable against third parties from that moment. The former rule under which the transfer of a future receivable took place only on the day it came into existence has been removed. The provision adds that, in the event of a dispute, the burden of proving the date of the assignment lies with the assignee, who may do so by any means.

This burden of proof is an operational point. In the assignment of a discounted receivable, the date of the instrument determines priority in a conflict between successive assignees, Article 1325 resolving the competing claims in favour of the earliest in date, who has a remedy against the person to whom the debtor has paid. The dating of the instrument must therefore be beyond challenge.

Enforceability against the assigned debtor

Article 1324 provides that the assignment is enforceable against the debtor, if the debtor has not already consented to it, only if it has been notified to the debtor or if the debtor has acknowledged it. The debtor's consent is not required for the validity of the assignment, except for a receivable stipulated as non-assignable, Article 1321 being explicit on this point.

The result is a two-stage chronology that buyers must take into account. The assignment takes effect between the parties and as against third parties from the date of the instrument, but the debtor is bound to pay the assignee only from notification or acknowledgement. That is generally the moment at which the debtor learns of the assignment, and it is from then on that the debtor may consider asserting the right of redemption.

The defences that the debtor retains

Article 1324 distinguishes two categories of defences. The debtor may raise against the assignee the defences inherent in the debt, such as nullity, the defence of non-performance, termination or set-off of connected debts. These remain available without any condition as to date. The debtor may also raise the defences arising from the debtor's relations with the assignor before the assignment became enforceable against the debtor, such as the grant of a time limit, release from the debt or set-off of unconnected debts.

The dividing line is temporal for the second category only. A buyer who delays notifying the assignment lengthens the period during which the debtor can build up, in dealings with the assignor, defences that can later be raised against the buyer. In distressed situations, where the assignor often keeps operational management of the file between signing and the effective transfer of management, this gap is a source of erosion of the value acquired, in addition to the risk of redemption.

The last paragraph of Article 1324 deserves mention for its practical scope: the assignor and the assignee are jointly and severally liable for all additional costs caused by the assignment, which the debtor is not required to advance, and, unless otherwise agreed, those costs are borne by the assignee. This default allocation is open to negotiation.

Buying non-performing bank receivables: the framework of the 2023 ordinance

Acquisitions of bank portfolios are now subject to a specific regulatory framework, arising from Ordinance No. 2023-1139 of 6 December 2023, which entered into force on 30 December 2023 and was codified in Chapter XI of Book V of the French Monetary and Financial Code.

Article L. 54-11-1 defines a non-performing credit agreement as a credit agreement which, on the date of its transfer to a credit purchaser, is classified as a non-performing exposure within the meaning of Article 47 bis of Regulation (EU) No. 575/2013 of 26 June 2013. It defines the credit purchaser as any person, other than a credit institution, that purchases the rights held by a creditor under such an agreement, or the agreement itself, in the course of its commercial or professional activities.

Article L. 54-11-27 requires a credit purchaser whose registered office is in France to appoint a credit institution or a credit servicer to carry out the servicing activities relating to those agreements. Article L. 54-11-30 requires a purchaser not domiciled in the Union to appoint in writing, when the transfer is concluded, a representative domiciled in the Union, the Autorité de contrôle prudentiel et de résolution addressing itself to that representative, who is fully responsible for compliance with the obligations of the chapter.

This framework organises the servicing and supervision of acquisitions of non-performing debt. It contains no provision excluding Articles 1699 to 1701. A credit purchaser complying with Chapter XI remains, on the same terms as any assignee, exposed to the right of redemption of litigious rights.

The same finding holds for securitisation. Article L. 214-169 V of the French Monetary and Financial Code provides that the acquisition or assignment of receivables by a financing vehicle is effected by the mere delivery of a schedule, that it takes effect between the parties and becomes enforceable against third parties on the date affixed to the schedule on delivery, without any other formality, and that this delivery automatically entails the transfer of security, guarantees and accessories. This special regime radically simplifies the mechanics of transfer, but no provision reviewed attaches to it an exclusion of the right of redemption of litigious rights.

Allocating the risk in the assignment agreement

Exposure to the right of redemption is addressed when the agreement is negotiated, not at the litigation stage. Several levers coexist.

The written instrument and the allocation of the price

Article 1322 requires that the assignment of a receivable be recorded in writing, on pain of nullity. That document is also the basis for proving the actual price, the payment schedule and the risk allocation clauses.

In a portfolio acquisition at a lump-sum price, determining the actual price attributable to an individual receivable becomes a central issue if a debtor exercises the right of redemption. The texts do not regulate the method of allocation. The question is a matter of case law. Two contractual strategies compete: allocating the price precisely line by line, which secures the analysis but provides the debtor with an easily quantified basis for redemption; or maintaining a global price, which complicates the debtor's demonstration but exposes the buyer to a judicial allocation that it does not control. The choice depends on the share of the portfolio that is actually litigious within the meaning of Article 1700.

The assignor's warranty under Article 1326

Article 1326 is the basis for negotiating warranties. A person who assigns a receivable for consideration warrants the existence of the receivable and its accessories, unless the assignee acquired it at its own risk or knew that the receivable was uncertain. In distressed situations, the assignor will systematically include one of these two clauses. The buyer must appreciate that, by accepting an acquisition at its own risk, or by having its knowledge of the uncertain nature of the receivable raised against it, it loses the statutory warranty of existence.

The same article specifies that the assignor answers for the debtor's solvency only where the assignor has undertaken to do so, and up to the amount of the price obtained from the assignment. Where the assignor has warranted that solvency, the warranty covers only the current solvency; it may extend to solvency at maturity, but only on condition that the assignor has expressly specified it. To write that an assignor warrants payment as a matter of principle would be inaccurate. Any protection in this area is contractual, capped at the price and limited to the present unless an extension is stipulated.

Representations, indemnity and price adjustment

The risk of redemption is usefully addressed through a set of representations by the assignor on the state of pending proceedings on the day of the assignment, receivable by receivable: existence of an action, nature of the arguments raised, scope of the dispute. These representations serve as the basis for a specific indemnity clause in the event the right of redemption is exercised, separate from the warranty of existence under Article 1326. A price adjustment mechanism or a conditional deferred price may also help align interests where the litigious characterisation of part of the portfolio is uncertain at closing.

The validity of an advance waiver by the debtor of the right of redemption of litigious rights, like that of price confidentiality stipulations intended to neutralise Article 1699 in practice, finds no basis in the texts reviewed. These questions are a matter for case law and legal scholarship. Building protection on these clauses alone amounts to resting the investment thesis on an uncertainty.

Assignment of contract rather than assignment of receivable

Some structures favour the assignment of contract under Article 1216 over the assignment of receivable. The regime differs significantly: the assignment of contract requires the consent of the assigned party, which may be given in advance, in particular in the contract concluded between the future assignor and the assigned party, in which case the assignment takes effect as against the assigned party when the contract concluded between assignor and assignee is notified to it or when it acknowledges it. It must be recorded in writing, on pain of nullity.

The requirement of the assigned party's consent changes the dynamics of negotiation, since the debtor becomes a party to the transfer. However, none of the texts reviewed states that the assignment of contract escapes the right of redemption of litigious rights. Presenting this structure as an immunisation technique would be an assertion with no textual support.

Redemption from the debtor's side: a lever, not only a defence

For a manager or finance department facing recovery action by a fund, Article 1699 is a negotiating instrument before it is a defence in court. Its effectiveness requires three elements to be brought together: characterisation as litigious within the meaning of Article 1700, the absence of any of the three exclusions in Article 1701, and knowledge of the actual price of the assignment.

The first step, on receipt of the notification of assignment provided for in Article 1324, is to identify the assignee, the acquisition structure and the nature of the transaction. The second is to check that the dispute raised genuinely concerns the substance of the right and not peripheral matters. The third, the most delicate, concerns access to the price: the texts reviewed place no obligation on the assignee to disclose it spontaneously, and the procedural means of obtaining this information are not regulated by Articles 1699 to 1701.

The texts likewise do not specify the procedural vehicle for the right of redemption, or the time limit within which it must be exercised. These silences call for a prudent approach: treating the right of redemption as an option to be exercised early in the proceedings rather than as a card held back for the appeal.

Conclusion

The right of redemption of litigious rights is the least well provisioned risk in acquisitions of discounted receivables. It does not appear in covenants, is not found in coverage ratios and shows up in no rating, but it can bring the margin on a line of the portfolio down to zero. Its distinctive feature is that it resists the usual structuring techniques: the exclusions in Article 1701 are exhaustive, the regulatory framework for credit purchasers arising from the 2023 ordinance does not exclude it, the assignment regime by schedule applicable to securitisation does not exclude it either, and neutralisation clauses rest on uncertain foundations.

The operational consequence is as follows: the risk of redemption is addressed upstream, through characterisation and price, not downstream through litigation. Before any acquisition of distressed debt, have a map of the procedural status prepared, receivable by receivable, distinguishing the files where proceedings are pending with a dispute on the substance of the right, those where an action exists without a dispute of that kind, and those not yet before a court. Focus the negotiation on the assignor's representations about that procedural status, on a specific indemnity clause in the event the right of redemption is exercised, and on the choice between allocating the price and a lump-sum price. On the most exposed lines, the discount must factor in the probability of redemption, not ignore it.

Frequently asked questions

What is the right of redemption of litigious rights under Article 1699 of the French Civil Code? Article 1699 allows a person against whom a litigious right has been assigned to be released from it by the assignee, by reimbursing the actual price of the assignment together with the costs and proper expenses, and with interest from the day on which the assignee paid the price. The debtor does not acquire the receivable: the debtor extinguishes the debt. The economic effect is to cap the assignee's recovery at the price actually paid, increased by costs and interest, which cancels the capital gain expected from buying a discounted receivable.

What conditions must be met for a receivable to be characterised as litigious? Article 1700 of the French Civil Code states that a matter is deemed litigious as soon as there are proceedings and a dispute on the substance of the right. The two conditions are cumulative. A formal notice, an acceleration of the debt or a simple disagreement between counsel is not enough, for want of proceedings. Conversely, pending proceedings are not enough either if the dispute does not concern the existence or extent of the assigned right.

Does the purchase of a portfolio of bank receivables escape the right of redemption of litigious rights? No, no text provides for this. Article 1701 of the French Civil Code lists only three exclusions: assignment to a co-heir or co-owner of the assigned right, assignment to a creditor in payment of what is owed to that creditor, and assignment to the possessor of the property subject to the litigious right. Global assignments, block assignments, mergers and contributions in kind do not appear there. Chapter XI of Book V of the French Monetary and Financial Code, created by Ordinance No. 2023-1139 of 6 December 2023, sets out the obligations of credit purchasers without excluding Articles 1699 to 1701.

From when is the assignment of a receivable enforceable against the debtor? Since Ordinance No. 2016-131 of 10 February 2016, Article 1324 of the French Civil Code has provided that the assignment is enforceable against the debtor, if the debtor has not already consented to it, only if it has been notified to the debtor or if the debtor has acknowledged it. The former requirement of service by a bailiff under Article 1690 has disappeared. Between the parties and as against third parties, Article 1323, in the wording resulting from Ordinance No. 2021-1192 of 15 September 2021 applicable since 1 January 2022, gives effect to the transfer on the date of the instrument, the burden of proving that date lying with the assignee, who may do so by any means.

Does the assignor warrant payment of the assigned receivable? No, not as a matter of principle. Article 1326 of the French Civil Code distinguishes the warranty of existence of the receivable, owed by an assignor who assigns for consideration unless the assignee acquired it at its own risk or knew that the receivable was uncertain, and the warranty of solvency, which applies only if the assignor has undertaken it, up to the amount of the price obtained from the assignment. This warranty of solvency covers only current solvency, unless extended to solvency at maturity as expressly specified by the assignor.

Does interest payable on redemption run from the date of the assignment? No. Article 1699 runs interest from the day on which the assignee paid the price of the assignment, and not from the signing of the instrument or from the request for redemption. Where the price is paid in instalments or with a gap after signing, the date of the actual payments must be documented, since it determines the basis of the calculation.

Does structuring the transaction as an assignment of contract avoid the right of redemption? The texts do not say so. Article 1216 of the French Civil Code makes the assignment of contract subject to the consent of the assigned party, which may be given in advance, and to a written instrument required on pain of nullity. This regime changes the dynamics of the transaction since the debtor consents to it, but no provision reviewed states that this structure excludes Articles 1699 to 1701. Presenting it as an immunisation technique would be speculation.