Insolvency 2019 Second Edition

Last Updated November 20, 2019

France

Law and Practice

Authors



Goodwin is a leading Global 30 law firm, with 1200+ lawyers in 13 offices across the USA, in Asia and in Europe. The Restructuring team in Paris is comprised of four lawyers (including one partner). The team's lawyers are experienced both in amicable proceedings and insolvency proceedings. Through these various procedural tools used in order to effectively address the difficulties of a company, Goodwin can represent debtors, financial and non-financial creditors, shareholders facing crisis situations, as well as investors interested in the takeover of distressed companies. Whether choosing appropriate proceedings, negotiating with creditors, drafting safeguard and reorganisation plans, or leading a transfer of business activities, the team’s strong experience in finance law, corporate law and litigation allows clients to benefit from its expertise, which covers all the aspects of restructuring-related issues. Goodwin's cross-border experience allows it to expertly assist clients in their international restructuring, in the framework of multi-jurisdictional proceedings.

The number of insolvency proceedings has continued to decrease in 2018 and during the first half of 2019 despite the consequences of the yellow vests movement (mouvement des gilets jaunes) on the retail industry. This favourable trend could be explained by a relatively positive macroeconomic environment (the French economy being more resistant to the consequences of the trade war between the USA and China) and the dynamic funding market (influx of liquidity, low interest rates, fierce competition between banks and alternative capital providers, cov-lite documentation).

Nevertheless, the number of insolvencies of companies with more than 100 employees has recently significantly increased (+62.5% in the second quarter of 2019). The third quarter of 2019 was also marked by the liquidation of two airline companies in a few weeks without any solution. In either case, the companies filed for insolvency quite late, in cash burn, limiting the ability of the court and the insolvency practitioners to find a solution.

Since the latest financial crisis and the regulation on non-performing loans, the French market has progressively faced an increase of the sale of their debts by the banks to hedge funds or alternative capital providers on the secondary market.

These players being less reluctant to act as shareholders of distressed companies, their increasing presence at the negotiating table within the context of amicable proceedings has given rise to lender-led transactions since 2013. Their ability to provide new money to distressed companies enables them to play a significant role in major restructuring matters.

The repeated reforms of these previous years have greatly modernised French insolvency law, improving creditors’ rights and the flexibility of amicable and insolvency proceedings in France. Nevertheless, the recent reforms have granted the creditors with substantial new rights. Creditors, and especially alternative capital providers, are able to play a greater role in French insolvency proceedings and, more generally, in French restructurings.

The future reform of the French insolvency law to transpose the European directive will increase the influence of Chapter 11 rules on the French insolvency rules: classes of creditors in homogeneous situations, cross-class cram-down, etc.

French insolvency law substantially changed in 2005 with law No 2005-845, dated 26 July 2005, and decree No 2005-1677, dated 28 December 2005. This law – usually named the “Safeguard Law” – introduced a diversified set of proceedings which includes out-of-court proceedings (mandat ad hoc and conciliation) and insolvency proceedings (safeguard, reorganisation, liquidation), offering a large choice to distressed debtors even before being insolvent.

This law has been amended several times since then, approximately every two years, in order to better address the distressed situations:

  • order No 2008-1345, dated 18 December 2008, and decree No 2009-160, dated 12 February 2009, have amended the criteria to be part of the different creditors’ committees in order to include financial debt held by debt funds or hedge funds, based on Eurotunnel’s experience;
  • law No 2010-1249, dated 22 October 2010, introduced accelerated financial safeguard proceedings (AFS), which is the combination of a negotiation phase in conciliation proceedings (which are confidential) and the cram-down of dissenting minority creditors through the vote of the plan by the creditors’ committees and the general assembly of bondholders in safeguard proceedings;
  • order No 2014-326, dated 12 March 2014, and order No 2014-1088, dated 26 September 2014, introduced accelerated safeguard proceedings (AS), which is based on the same combination as the AFS but which includes, in addition, the suppliers’ creditors’ committees (see 6.3 Roles of Creditors) and the prepack sale;
  • law No 2015-990, dated 6 August 2015, among others, created specialised commercial courts having exclusive jurisdiction regarding insolvency proceedings for large companies;
  • law No 2019-486, dated 22 May 2019, introduced additional amendments and empowered the government to amend substantially the French insolvency law in order to transpose the European Directive No 2019/1023, dated 20 June 2019, which aimed to harmonise European legislation regarding preventive restructuring proceedings and debtor's recovery.

French insolvency law provides for two types of proceedings, as detailed below.

Amicable Proceedings or Out-of-court Proceedings (Mandat ad hoc and Conciliation Proceedings)

Their purpose is to facilitate the negotiation of an agreement between the debtor and its creditors which usually consists in basic measures such as rescheduling or reducing the debtor’s indebtedness but may also implement sophisticated schemes such as debt-for-equity swap.

Negotiations are undertaken by a court-appointed mediator usually proposed by the debtor within the list of judicial administrators.

Amicable proceedings’ attractiveness relies on:

  • discretion, since stakeholders are bound by a duty of confidentiality (even though the statutory auditor has to be notified of the commencement order of conciliation proceedings);
  • consensus, as creditors cannot be coerced to accept any proposal and those not willing to take part cannot be bound by the agreement;
  • voluntariness, insofar as only the debtor can request the appointment of a mediator who will not be able to interfere with its management.

Insolvency Proceedings or Court-Assisted Proceedings (Safeguard, Accelerated Safeguard, Accelerated Financial Safeguard, Reorganisation and Liquidation Proceedings)

French insolvency law offers a range of court-controlled proceedings, each of them being designed to handle a specific degree or nature of difficulty. The emergence of prepack proceedings strengthens the whole legal arsenal creating a bridge between court-assisted and court-controlled proceedings (see 3.1 Restructuring Market Participants).

They are not confidential since the judgment opening the proceedings is published in the BODACC (a legal gazette).

They are all voluntary proceedings, as they can be requested by the debtor even if the opening of reorganisation and liquidation proceedings may be requested by the public prosecutor or the creditors (see 2.5 Commencing Voluntary Proceedings), which occurs quite rarely.

In safeguard and reorganisation proceedings, the opening judgment commences a six-month observation period (which is renewable up to 18 months) during which the debtor is still running the business (even though a judicial administrator can be appointed to either supervise or assist the management), while preparing a safeguard/reorganisation plan to be negotiated with its creditors.

In liquidation proceedings, the debtor can continue its operations temporarily in order to organise an auction on its business as a whole, or piecemeal.

The distressed debtor has to file for reorganisation or liquidation proceedings within 45 days from its insolvency (see 2.6 Requirement for Insolvency) unless conciliation proceedings are ongoing.

The debtor’s failure to file for insolvency proceedings in due time may be considered as mismanagement and involve the liability of the management/directors in case of subsequent liquidation proceedings (see Section 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).

Under French insolvency law, the debtor is obligated to commence proceedings when it is insolvent (see 2.6 Requirement for Insolvency).

If the company is insolvent for less than 45 days, the debtor may either request the opening of conciliation proceedings or file for reorganisation or liquidation proceedings.

If the recovery of the business is still possible (even through a sale of the business as a whole), the court may open reorganisation proceedings. On the contrary, the court directly opens liquidation proceedings.

If the company is insolvent for more than 45 days, the opening of conciliation proceedings is no longer possible.

If the company is not insolvent, it is eligible only to voluntary proceedings, either to out-of-court proceedings (mandat ad hoc, conciliation) or to safeguard proceedings.

The public prosecutor and the creditors, regardless of the nature of their claim, can request the court to open reorganisation or liquidation proceedings against the debtor, unless conciliation proceedings are ongoing.

French insolvency law provides for an insolvency test (cessation of payment), which is a cash test and is defined as the inability to pay its debts as they fall due with its immediately available assets (taking into account moratoria granted by creditors and including undrawn credit lines).

French insolvency law applies to all French legal entities.

However, some specific provisions apply to regulated sectors such as the insurance or the banking sector in order to ensure the protection of investors and insured persons.

Insolvency proceedings of credit institutions are governed by law No 1999-532, dated 25 June 1999, and decree No 2000-1307, dated 26 December 2000. The definition of "insolvency" is different for credit institutions as the later are insolvent when they are unable to ensure their payments immediately or in the foreseeable future.

The implementation of European Directive No 2014/59/EU, dated 15 May 2014, by order No 2015-1024, dated 20 August 2015, prioritised the restructuring of credit institutions facing difficulties and provided for crisis prevention and management measures through the early intervention of the French banking regulator, the Autorité de contrôle prudentiel et de résolution (ACPR).

Distressed insurance companies are subject to preventive measures, through the ACPR’s control, which may appoint a temporary manager. If these measures fail and the financial difficulties become critical and threatening the interests of the insured persons (i) specific liquidation proceedings may be opened, at the request of the ACPR or the public prosecutor or on the court’s own initiative, and (ii) a liquidator may be appointed to verify the claims, the assets and the liabilities.

Oder No 2015-378, dated 2 April 2015 and decree No 2015-513, dated 7 May 2015, implemented European Directive 2009/138, dated 25 November 2009, and introduced new prudential requirements for insurance companies in terms of governance, due diligence and reporting.

Restructuring market participants are favouring the use of consensual and out-of-court proceedings. They do not openly or directly refer to informal restructuring frameworks as the INSOL principles. However, some of them are directly included in the legislative texts governing out-of-court proceedings, such as for instance the obligation of confidentiality or the possibility to benefit from a privilege for the granting of new money.

These principles are also very well integrated into market practices. For instance, the debtor should provide and allow relevant creditors and/or their professional advisers reasonable and timely access to all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper assessment of the financial situation of the debtor.

In France, mandat ad hoc and conciliation proceedings have proven their effectiveness and all stakeholders recognise that they are an absolute first step before insolvency proceedings to preserve as much as possible the business of the company.

Banks, credit funds and other lenders generally support borrower companies in financial difficulties as long as the independent business review (IBR) demonstrates that the company is still able to recover from its difficulties. The assistance of experienced specialised practitioners also participates to the success of these informal proceedings. Banks are reluctant to accelerate if there is no payment default. Standstills on the event of defaults are negotiated throughout the consensual proceedings to allow negotiations on the restructuring plan.

In France, out-of-court proceedings, unlike formal proceedings, are not mandatory and can only be initiated at the debtors' sole initiative. Contractual provisions that would trigger detrimental consequences (such as acceleration clauses) for the debtor upon the sole opening of amicable proceedings are considered null and void.

The choice to use these proceedings is made on a case-by-case basis given their strengths (eg, confidentiality, early-stage proceedings, special privilege for new financings).

Some practitioners are inclined to say that French out-of-court proceedings are designed to tackle balance sheet difficulties (eg, level of indebtedness inconsistent with the company's situation) when insolvency proceedings are meant to address difficulties in the profit and loss statement (eg, costs higher than competition, expense levels too high given the activity).

In addition, conciliation proceedings is a mandatory step in the different prepack proceedings. Accelerated financial safeguard or accelerated safeguard are then used to cram-down dissenting minority creditors as long as the plan negotiated is supported by a significant majority of the creditors.

It is also possible to use conciliation proceedings to prepare a prepack sale of its business when the debtor’s indebtedness does not make a reorganisation plan possible. This specific type of prepack consists first in seeking potential purchasers under mandat ad hoc or conciliation proceedings, taking advantage of the confidentiality, and then, once (at the latest) a satisfying offer is made, in implementing the sale of the company’s business within a few weeks in subsequent reorganisation or judicial liquidation proceedings.

Most of the consensual restructuring in France start by the opening of mandat ad hoc proceedings as there is no time constraint as long as the debtor is solvent.

At some point, conciliation proceedings become necessary, either because the debtor is insolvent or in order to request for either the acknowledgement (constat) by the president of the court or the approval by the court (homologation) of the conciliation agreement entered into between the debtor and its creditors.

Conciliation proceedings can last for a maximum period of five months.

The use of consensual “standstills” and credit agreement default waivers as part of an initial informal and consensual process is standard practice.

There is no specific legal duty for a debtor company in the context of an informal and consensual workout/restructuring process. Nevertheless, the negotiations are based on a high level of transparency with the different stakeholders.

The mandataire ad hoc and the conciliateur cannot coerce the creditors to negotiate. However, in conciliation proceedings, the court may grant the debtor a grace period (délais de grâce) for a maximum period of 24 months if a dissenting creditor takes legal action or sends a formal notice to pay.

There is no regulated mechanism to govern out of-court proceedings. The consensual process takes place on a case-by-case basis depending on the numbers of stakeholders, the different types of creditors and the amounts at stake. In most of the matters, the discussions are organised through plenary meetings under the aegis of the mandataire ad hoc or conciliateur following three steps: the explanations of the difficulties and their origin, the independent business review including the financial forecasts and the negotiations of a restructuring scheme. In the largest matters, ad hoc committees of lenders are generally organised.

Consensual restructuring in France generally takes into account the contractual priority of the various debt instruments (organised or not through intercreditor agreements) and the securities in place, but the restructuring scheme will be deeply influenced by the new money providers.

New money providers are generally leading the negotiations in the context of consensual restructurings, through the securities package requested to guarantee the new money and/or the request to have access to the governance in case of new difficulties (through golden share for instance).

In order to facilitate new money financings, a super-senior status, named new money privilege (privilège de conciliation) has been introduced by the Safeguard Law in conciliation proceedings only and has been strengthened in the subsequent reforms.

It only applies to providers of new money, goods or services during the conciliation proceedings to ensure the continuation of the business and aims to secure the payment of this new debt in the event of subsequent insolvency proceedings. This new debt will be reimbursed before pre-filing claims but only after certain employee-related liabilities and post-filing procedural fees (see 5.8 Statutory Waterfall of Claims). The court cannot impose any debt rescheduling to these new money providers in the context of subsequent insolvency proceedings.

Applicable laws do not strictly impose obligations on creditors, the company or third parties regarding strategies, conducts, negotiations, transactions and permissible restructuring outcomes.

However, stakeholders must ensure that they act in good faith and do not commit fraud.

In addition, in order to be approved by a court, the conciliation agreement must ensure the continuity of the company's activity and not harm the interests of non-signatory creditors (see 6.12 Restructuring or Reorganisation Agreement).

Out-of-court proceedings are widely used despite the fact that it is not possible to perform cram-down.

Conciliation proceedings can, however, be a first step towards prepack proceedings where this cram-down process is available as long as the restructuring plan negotiated is supported by a large majority of the relevant creditors (see 3.1. Restructuring Market Participants).

General Security/Floating Charge

The concept of floating charge covering most types of property of the debtor does not exist under French law.

French law provides for a general pledge over the ongoing business (“nantissement de fonds de commerce”) which does not offer a strong protection to the benefiting creditors.

Such pledge covers trade names, commercial leases, goodwill and, if mentioned in the agreement and the statement for registration of the pledge, some fixed assets such as equipment, tools and intellectual property rights.

Security on Real Estate Property

It is possible for a creditor to benefit from two types of security interests over real estate property: a mortgage and a lender's lien. In both cases, it is necessary to involve a notary.

These securities are enforced by means of a court-supervised public auction or by allocation of the asset to the secured creditor by court order.

When the value of the assessed property exceeds the secured amount, the creditor must pay the difference (soulte) to the debtor.

Security on Equity Shares

Security over shares is granted by way of pledge over the securities account (nantissement de compte-titres) (in relation to sociétés par actions – SAS, SA or SCA) or pledge of shares (in relation to sociétés civiles – non-trading companies), sociétés en nom collectif (partnerships) or SARL (limited liability companies)).

In case of sociétés par actions, shares issued by these companies are represented by book entries in a special account opened in the name of the owner of such securities and held either by the issuer or by an authorised financial intermediary. The pledge instrument is a déclaration de nantissement de compte de titres financiers dated and signed by the holder of the securities and notified to the account holder. The pledge is effective on receipt of the déclaration by the account holder.

In case of SARLs, SNCs or sociétés civiles, perfection requirements depend on nature of the relevant company. It is usually necessary to obtain the consent of the shareholders to the pledge and to register the pledge with the clerk’s office (greffe) of the relevant commercial court. In addition, with respect to sociétés civiles, a notarised or private pledge agreement registered with the French tax authorities and a formal notification of such pledge to the company by bailiff is required.

Security on Movable Property

Regarding movable property, a creditor may benefit of a pledge; this will be either called “gage” if over tangible assets or “nantissement” over intangible assets.

As such, pledgors will fictitiously retain the shares/financial securities until they are fully paid up by the debtor.

Security on Intellectual Property

In relation to intellectual property rights, a pledge over software exploitation, over patents and over trade marks requires registration in the national register held at the Institut National de la Propriété Intellectuelle.

Future intellectual property rights are not covered by the pledge, but the pledge can contain an undertaking to update the security to cover any future intellectual property rights.

Security over Inventory

A pledge over inventory may be perfected either with or without dispossession.

French Trust

The French trust, called “fiducie” has experienced growing interest, particularly given its strong resistance in the event of insolvency proceedings of the settlor.

This collateral is therefore preferred to other securities on French collaterals in the context of distressed companies.

Under out-of-court proceedings, secured creditors are free to enforce their rights apart from the grace period limitation (see 3.2 Consensual Restructuring and Workout Processes). Nevertheless, French lenders are reluctant to accelerate their debt and enforce their rights apart from in case of payment default.

During formal insolvency proceedings, secured creditors and unsecured creditors are both affected by the prohibition of payments of prior debts and the automatic stay on proceedings.

However, some securities remain particularly effective, as detailed below.

If the encumbered assets were, prior to the opening of insolvency proceedings, transferred as guarantee outside of the debtor’s estate. These assets are therefore outside the scope of insolvency proceedings allowing the creditor to freely enforce its security. This is the case of fiducie, Dailly assignment of receivables and leasing.

If during safeguard and reorganisation proceedings the encumbered assets appear necessary for the purpose of the efficient conduct of the proceedings or the pursuit of the debtor’s business activity, the supervising judge may therefore authorise the payment of debts incurred prior to the proceedings to obtain the return of such assets. This is the case of fiducie, retention right and leasing.

In case of sale of the business as a whole in reorganisation or liquidation proceedings, liability for special securities over immovable and movable assets guaranteeing the repayment of a loan granted to the business for the financing of the encumbered asset shall be conveyed to the new purchaser of the business.

In most cases, the creditors benefiting from a security interest will not be able to enforce their rights during the entire observation period, which can last up to 18 months (see 2.1 Overview of Laws and Statutory Regimes).

Thus, a pledge on assets will often be interesting at the time of liquidation proceedings. Creditors secured by pledges may then escape from the ranking of creditors by requesting the court the assignment of the encumbered asset (“attribution judiciaire”) prior to the authorisation to sell this asset granted by the supervising judge.

French insolvency law does not grant to foreign secured creditor any additional specific right, except the additional delay of two months to file their claims (see 5.7 Foreign Creditors).

However, in accordance with EU Insolvency Regulation No 2015/848, the opening of insolvency proceedings in France will not affect the rights in rem of creditors or third parties in respect of tangible or intangible, movable or immovable assets, both specific assets and collections of indefinite assets as a whole which change from time to time, belonging to the debtor which are situated within the territory of another member state at the time of the opening of proceedings.

Only creditors holding a published security interest or bound to the debtor by a published contract will be notified personally or, where applicable, at their elected domicile, by registered letter with acknowledgement of receipt by the creditors’ representative that they have to file their claim.

The two-month period for filing their claim will thus only start to run for them from the date of this notice.

In the course of insolvency proceedings, all unsecured creditors are subject to the same rules (prohibition of payments, stay on legal actions, etc).

In out-of-court proceedings, trade creditors are not commonly impacted. One of the reasons of the success of out-of-court proceedings is their confidentiality which preserves the business of the debtor and intends to protect the trade creditors.

In the course of insolvency proceedings, the trade creditors which claim represents more than 3% of the total amount of the trade claims are gathered in the suppliers’ creditors’ committee (see 6.3 Roles of Creditors).

Suppliers of goods generally benefit from a retention title enabling them to recover at least a significant part of their goods or the claims.

In out-of-court proceedings, unsecured creditors may be included in the discussions if they are affected by the restructuring plan at stake. Given the absence of cram-down mechanism, their consent will be necessary to reach an agreement.

In insolvency proceedings, unsecured creditors are requested to vote on the plan, on a bilateral basis if the thresholds to vote the plan through creditors’ committees are not reached, or through one of committees depending on their quality (see 6.3Roles of Creditors).

A creditor holding an outstanding receivable for which payment is due, can file a petition before the competent court to obtain an enforceable order giving the debtor an injunction to pay.

In the event of non-payment despite this order, the creditor can initiate an asset seizure. If this seizure is ongoing at the opening judgment date, it will be automatically suspended.

There is no automatic stay in out-of-court proceedings. The enforcement of an unsecured claim follows the rules of commercial law (formal notice and summons to appear before the competent court).

In insolvency proceedings, French law provides for the automatic stay of any claim incurred prior to the opening judgment.

Hence, as from this judgment, unsecured as secured creditors cannot enforce their claim. They are required to file their claim to the creditors’ representative.

The unsecured claims are then paid in accordance with the terms of the safeguard/reorganisation plan. Unless the restructuring plan is properly executed, there is little chance that unsecured creditors will successfully recover their full claim amount considering the priority order (see 5.8 Statutory Waterfall of Claims).

Landlords do not have bespoke rights except if they have taken security over immovable property.

In insolvency proceedings, the landlord has a lien:

  • on the rents due over the two years prior the judgment opening the proceedings, and
  • on the rents for the current year in the event the lease is terminated during the proceedings.

This lien should be mentioned in the proof of claim filed to the creditors’ representative.

The debtor is protected during a period of three months from the opening judgment of the proceedings against any termination of the lease agreement even in case of breach.

French insolvency law does not grant to foreign unsecured creditors any additional specific right, except an additional delay of two months to file their claims (four months compared to two months for French creditors) from the date of publication in the BODACC (a French legal gazette) of the opening judgment (see 6.11 Determining the Value of Claims and Creditors).

The statutory waterfall of claims in safeguard and reorganisation proceedings is the following:

  • highly preferred social debts and salaries;
  • legal costs arising regularly after the opening judgment for the purposes of the proceedings;
  • new money secured by the new money privilege granted in the context of a conciliation proceedings (see 3.3 New Money);
  • claims which arose after the opening judgment in a regular basis for the purposes of the proceedings or the observation period, or as compensation for a service provided to the debtor during that period and which have not been paid on due date;
  • preferred social debts and salaries;
  • loans granted during the observation period and receivables that have been subject to a deferred payment period within the observation period, and that have been authorised by the supervisory judge;
  • all other claims.

In the context of a liquidation proceedings, the statutory waterfall is the following:

  • highly preferred social debts and salaries;
  • legal costs arising regularly after the opening judgment for the purposes of the proceedings;
  • new money secured by the new money privilege granted in the context of a conciliation proceedings;
  • claims secured by a mortgage;
  • claims which arose after the opening judgment in a regular basis for the purposes of the proceedings or the observation period, or as compensation for a service provided to the debtor during that period and which have not been paid on due date;
  • preferred social debts and salaries;
  • loans during the observation period and receivables that have been subject to a deferred payment period within the observation period, and that have been authorised by the supervisory judge;
  • outstanding social receivables;
  • all other claims.

Part of the social debts and salaries, legal costs related to the proceedings and new money claims are paid before any other creditor, including secured ones (see 5.8 Statutory Waterfall of Claims).

A restructuring agreement can be negotiated through mandat ad hoc or conciliation proceedings. Mandat ad hoc proceedings are less formal than conciliation proceedings and may be converted into conciliation proceedings at the request of the debtor, in particular if an agreement is about to be reached.

Conciliation proceedings are opened by the debtor who is not insolvent for more than 45 days but faces legal, economic and financial difficulties.

In addition, safeguard proceedings can lead to a restructuring plan. They are opened by the court at the request of the debtor only, who is not insolvent but faces difficulties which it is not able to resolve on its own.

Agreements negotiated in the course of mandat ad hoc or conciliation proceedings should be consensual. The requested majority provided for in the contractual documentation or the by-laws for the shareholders should be reached. By consequence, most of the restructuring agreements request a unanimous consent of the creditors and require mutual concessions of the different stakeholders.

Prepack proceedings have been introduced in French insolvency law to enable the cram-down of dissenting minority creditors (see 3.1 Restructuring Market Participants).

Out-of-court proceedings do not trigger any automatic stay on claims or stay of legal actions (see 5.5 Timeline for Enforcing an Unsecured Claim). However, the different creditors can grant them on a voluntary basis through standstills renegotiated at each step of the proceedings.

In this context, the debtor is free to operate its business and manage the company during the negotiations.

In safeguard proceedings, the distressed company benefits from a stay on claim and legal actions during the observation period (see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership), if the legal actions and the claims arose before the opening judgment.

Even if the debtor remains in possession, it is supervised or assisted by the judicial administrator and should be authorised by the supervisory judge for any act outside of its day-to-day business (see 9.2 Statutory Roles, Rights and Responsibilities of Officers).

There are no classes of creditors in out-of-court proceedings. Nevertheless, creditors are not prevented from organising themselves through ad hoc committees to facilitate the negotiations.

In safeguard proceedings, the judicial administrator is required to organise the vote on the plan through creditors’ committees for companies (i) which accounts are certified by an auditor or an accountant, (ii) having more than 150 employees or an annual turnover exceeding EUR20 million.

Two creditors’ committees are constituted:

  • credit institutions (banks, any entity which carries out a credit transaction and any holder of a claim acquired from a credit institution); and
  • major trade creditors (ie, trade creditors holding more than 3% of the total of trade creditors’ claims).

Bondholders are not members of the committees but they are gathered in a unique bondholders’ meeting including all bondholders, irrespective of each bond issuance contract.

The safeguard plan must take into account subordination agreements entered into prior to the opening of the proceedings. It may include the cancellation or rescheduling of debt and/or debt for equity swaps.

Each committee has 20 to 30 days to vote upon the proposal made by the debtor, with the assistance of the judicial administrator. Unaffected creditors do not vote on the proposed safeguard plan. Any member of the committees (as defined above, excluding the bondholders) can present their own alternative plan.

Once a two-third majority of the claims held by the members having voted is obtained in each committee, the court can approve the safeguard plan. In this case, the safeguard plan is binding on all creditors’ committees’ members (including creditors who did not vote or voted against the plan).

The parties may appeal against the court decision approving or rejecting the safeguard plan within ten days from the decision notice (including the debtor, the judicial administrator, the creditors’ representative, the work council, the public prosecutor and the creditors which filed for a claim related to the creditors’ committees’ rules).

When one of the creditors’ committees or the bondholders’ meeting does not approve the plan within the first observation period, the creditors are consulted on the safeguard plan on an individual basis by the judicial administrator. There is no longer cram-down, the court is only entitled to impose on dissenting creditors a rescheduling of their debt over a maximum period of ten years.

French insolvency law does not provide for any provision regarding the expenses of creditors’ committee. Each committee bears its own expenses, such as experts or counsels. Nevertheless, in the largest matters, the payment by the debtor of the fees occurred by the creditors is generally negotiated.

The creditors are informed of the opening of insolvency proceedings through the publication of the opening judgment in the BODACC.

In addition, the creditors’ representative ensures some special procedural information (see 4.5 Special Procedural Protections and Rights).

Creditors could also request from the supervisory judge their appointment among five controllers which assist the creditors’ representative and the supervisory judge. As they are bound by confidentiality, they can examine documents sent to the officers and they benefit from privileged information.

No cram-down is provided for in conciliation proceedings: creditors’ rights cannot be modified without their consent. Prepack proceedings such as accelerated financial safeguard and accelerated safeguard have been introduced to cram-down dissenting minority creditors.

In safeguard proceedings, cram-down on dissenting creditors is possible inside each creditors’ committee as long as the plan is approved by all the creditors’ committee, the bondholders unique assembly and the general assembly of shareholders if relevant (especially for debt for equity swap).

The creditors that are not part of the creditors’ committees are consulted on an individual basis by the judicial administrator. The court may impose on all non-consenting creditors which are not part of creditors’ committees a repayment of their debts over a maximum period of ten years.

French insolvency law does not prevent a creditor from assigning its claims to a third party after the judgment opening safeguard proceedings, under the conditions of the French Civil Code.

The judicial administrator must be informed of the assignment to ensure that the assignee is invited to participate in the proceedings.

Few measures have been put in place in order to facilitate the reorganisation at the group level.

The court having opened insolvency proceedings for a company of a group remains competent to open other insolvency proceedings regarding the other companies of the corporate group (that are controlled by this company or that control it).

This court can appoint common judicial administrator and creditors’ representative to all ongoing proceedings.

In conciliation proceedings, the debtor can freely sale its isolated assets without any conditions, except contractual consents.

In safeguard proceedings, the debtor is allowed to carry out only day-to-day management transactions during the observation period. Therefore, the sale of isolated assets requires the authorisation of the supervisory judge (see 9.1 Types of Statutory Officers).

In out-of-court proceedings, the sale of business or the sale of an autonomous branch is carried out by the legal representatives of the company. The mandataire ad hoc or the conciliateur can be in charge of supervising an auction process on all or part of the business of the company, before the implementation of the sale in the context of insolvency proceedings (see 3.1 Restructuring Market Participants).

In safeguard proceedings, the sale of the business as a whole is not possible. However, the court can authorise the debtor to sell autonomous branches or certain assets on a piecemeal basis, provided that the company is still able to continue its operations and present a safeguard plan. The sale of certain assets can also be part of the whole restructuring plan. The supervising judge will control the sale price of the assets compared to their fair value.

In conciliation proceedings, securities over the company’s assets may be released only as part of commitments included in the conciliation agreement.

In safeguard proceedings, securities over the company’s assets or claims may be released during the observation period subject to the authorisation of the supervising judge (see 9.2 Statutory Roles, Rights and Responsibilities of Officers).

Regarding the new money privilege, see 3.3 New Money.

In conciliation proceedings, the debtor and the conciliateur can value the debtor’s liabilities and select the creditors which have an economic interest in the company in order to negotiate the restructuring agreement.

In safeguard proceedings, the debtor provides the judicial administrator and the creditors’ representative with a list of its creditors and the amount of its debts. In parallel, prior creditors must file a proof of claim within two months from the publication of the judgment opening the proceedings in the BODACC in order to take part to the subsequent distribution.

All the claims arisen prior to the opening judgment must be filed, even contingent claims.

The creditors’ representative controls the claims with the debtor (except claims hold by employees) and challenges them before the supervisory judge who decides to admit or to reject them. In the event the contestation is too substantial, the dispute is judged by the competent court.

There are several fairness tests implemented by the court.

Before approving a conciliation agreement, the court controls that the agreement does not affect the interests of creditors that did not take part to the agreement.

In safeguard and reorganisation proceedings, the court controls that the interests of creditors are sufficiently protected by the safeguard plan voted by the creditors’ committees.

In safeguard or reorganisation proceedings, non-debtor parties must fulfil their duties after the opening of the proceedings, despite the debtor’s failure to respect its contractual commitments prior to this opening.

The mere opening of safeguard or reorganisation proceedings cannot automatically results in the termination of ongoing contracts entered into by the debtor. However, at the request of the judicial administrator, the supervisory judge can pronounce the termination of ongoing contracts if it is necessary to the safeguard proceedings and if the termination does not excessively affect the interests of the contracting party.

At the opening of insolvency proceedings and during the observation period, claims arising prior to the opening judgment are frozen and the debtor is prohibited from paying them.

The creditor can set-off its reciprocal debts on the debtor in limited circumstances. For reciprocal debts arisen prior to the opening judgement, set-off is mandatorily if the reciprocal debts were certain, due, and payable (certaines, liquides, exigibles) before the opening judgment.

The right to set-off can also be exercised after the opening judgment if the reciprocal claims are connected (connexes) – ie, when they arise from the same account, the same contract or different agreements which all belong to a global contractual framework.

If the debtor failed to observe the terms of a conciliation agreement, the court or the president of the court can pronounce the termination of the agreement at the request of one of the parties to the conciliation agreement.

If the debtor is no longer able to meet its obligations provided for in the safeguard plan, it may introduce before the court a request to amend the safeguard plan. The creditors will then be consulted on the proposed amendment.

If the debtor fails to observe the terms of the safeguard plan, the insolvency practitioner in charge of supervising the execution of the plan (commissaire à l’exécution du plan) or the public prosecutor can request from the court the termination of the safeguard plan and the opening of reorganisation or liquidation proceedings.

Any restructuring agreement, safeguard or restructuring plan that includes a debt for equity swap, or any change in the capital structure or the by-laws, shall be approved by the shareholders.

Reorganisation proceedings are commenced upon the request of an insolvent debtor, a creditor or the public prosecutor.

The debtor generally stays in possession while preparing a reorganisation plan with its creditors. The regime governing reorganisation proceedings is the same as in safeguard proceedings, with limited exceptions.

If it appears that a reorganisation plan is not possible, the court may decide to have the debtor’s business sold through an open bid process organised by the judicial administrator.

Judicial liquidation proceedings apply to a debtor that is insolvent and whose restructuring is obviously impossible.

The debtor is no longer in possession and the liquidator is therefore charged to sell the assets as a whole or piecemeal.

In the context of reorganisation proceedings, the sale of the business can be one of the outcomes of the proceedings if it appears that a reorganisation plan is not possible. The judicial administrator organises an auction process; only third parties can bid.

The offers should contain the list of the assets to be transferred, the ongoing contracts essential for the continuation of the business, the list of the employment contracts to be transferred. The purchaser acquires assets free and clear of claims, subject to some exceptions.

The court selects the most serious offer with regard to the sustainability of the offer, the number of employees transferred and the proceeds of the sale.

There are no stalking horse bids under French insolvency law. In addition, there is no credit bid since a creditor seeking to purchase assets from the debtor cannot pay the purchase price by reducing the amount of its claim against the debtor.

The open bid process can be prepared in the course of conciliation proceedings in order to preserve the business.

The same open bid process can be organised in liquidation proceedings.

If the debtor fails to observe the terms of the reorganisation plan, the insolvency practitioner in charge of supervising the execution of the plan (commissaire à l’exécution du plan) or the public prosecutor can request from the court the termination of the plan and the opening of liquidation proceedings.

The rules of safeguard proceedings apply; see 6.10 Priority New Money.

The rules of safeguard proceedings apply; see 6.3 Roles of Creditors.

The rules of safeguard proceedings apply to reorganisation proceedings; see 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group.

The rules of safeguard proceedings apply to reorganisation proceedings; see 6.7 Restrictions on a Company’s Use of or Sale of its Assets.

In liquidation proceedings, the debtor’s isolated assets can be sold on a piecemeal basis.

The supervisory judge authorises the liquidator to sale them and controls the conditions of the sale.

The assets are sold through a public auction or by mutual agreement.

The proceeds of the sale are distributed among creditors pursuant to the distribution order; see 5.8 Statutory Waterfall of Claims.

Under the European Regulation 2015/848, dated 20 May 2015, when the centre of the debtor's main interests (COMI) is located in France, French courts have jurisdiction to open insolvency proceedings.

The COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. It is presumed to be the place of the registered office if it has not been moved within three months prior to the request for the opening of insolvency proceedings.

The opening judgment of the insolvency proceedings and all the decisions related to are recognised in any other European member state (except Denmark), with no further formalities.

However, insolvency proceedings opened outside the European Union may be recognised in France after an exequatur request.

The European Regulation 2015/848 has introduced some provisions to facilitate the co-ordination of insolvency proceedings opened against companies which are part of a same group. It relates to the co-ordination of the courts in charge of the proceedings and in the co-ordination of the insolvency practitioners.

Under the European Regulation 2015/848, the law of the member state opening the insolvency proceedings is applicable to all the proceedings and their effects, with some limited exceptions.

Foreign creditors benefit from specific provisions; see 5.7 Foreign Creditors and 4.4 Foreign Secured Creditors.

In out-of-court proceedings, the president of the court appoints a mandataire ad hoc or a conciliateur whose mission is defined in the order.

In safeguard and reorganisation proceedings, the court appoints a judicial administrator and a creditors’ representative.

In liquidation proceedings, the court appoints a liquidator and a judicial administrator if the operation of the company continues in order to organise the sale of the business as a whole through an open bid process.

Under safeguard proceedings, the judicial administrator generally supervises the debtor who stays in possession and prepares the safeguard plan. The court may decide that the judicial administrator assists the debtor, which means that all the payments should be controlled by the judicial administrator.

Under reorganisation proceedings, the judicial administrator generally assists the debtor. The court may decide in extreme situations that the judicial administrator administers the company.

In any case, acts which are not considered to be within the ordinary course of business are subject to the prior authorisation of the supervisory judge.

In safeguard and reorganisation proceedings, the creditors’ representatives is mandatorily appointed to represent the creditors and protect their collective interest but also receive and verify all the proofs of claims from creditors.

The liquidator is mandatorily appointed to carry out the transactions regarding the disposal of the business of the debtor (as the management is usually divested of all its rights) and distribute the proceeds among the creditors.

The court appoints the officers and fixes their mission within the judgment opening insolvency proceedings.

In safeguard proceedings, the debtor can suggest a name of an insolvency practitioner to be appointed as judicial administrator. In reorganisation or liquidation proceedings, the public prosecutor can suggest the appointment of particular statutory officers. However, the court is not bound by these suggestions.

The court can replace the officers on its own initiative or at the request of the public prosecutor or the supervisory judge (at the request of the debtor or creditors). The officers can request their own replacement.

To be eligible, the officers must pass a national exam and be registered on a list.

Both in out-of-court and insolvency proceedings, several advisors may be employed: lawyers specialised in restructuring, financial advisors, accountants and statutory auditors, investment bankers, and management consultants.

The advisors are employed by the debtor, the creditors or investors interested in the takeover of the distressed company.

In out-of-court proceedings, it is very common for the debtor to pay the compensation of creditors’ advisors in case of success of the negotiations and based on agreements negotiated at the beginning of the proceedings.

In insolvency proceedings, each party compensates its own advisors, except specific arrangements in the largest matters.

There is no legal requirement to engage advisors.

The parties can freely appoint their advisors without court decision or authorisation.

However, some experts may be appointed by the supervisory judge or the court in specific fields, if necessary (technicians, experts in business diagnostics, operational management experts).

Advisors have no specific duties or responsibilities in relation with insolvency proceedings.

Alternative dispute resolution mechanism are still rarely used in French restructurings.

See 11.1 Utilisation of Mediation/Arbitration.

The French Supreme Court has ruled that pre-insolvency agreements to arbitrate are enforceable in the context of liquidation proceedings when the liquidator has elected to continue the agreement containing the arbitration clause.

France is party to many international and European conventions aiming at simplifying the recognition and enforcement of foreign arbitral awards, and prohibits appeal against such awards. France has not adopted the UNCITRAL Model Law.

Contractual mediation is governed by an order, dated 16 November 2011, which implements the European Mediation Directive into French law (Directive 2008/52/EC of the European Parliament and of the Council of 21 May 2008 On Certain Aspects of Mediation in Civil and Commercial Matters). Judicial mediation is governed by Act No 95-125 of 8 February 1995 and by Decree No 96-652 of 22 July 1996 which are reflected in the code of civil procedure.

When mandatory arbitration is required by pre-petition contracts, the process for choosing and appointing the arbitrator usually is set out in, and governed by, the pre-petition contract.

Failing resolution by the parties, the courts will step in to appoint the arbitrators/mediators.

The criteria required to be appointed as arbitrators depend on the rules set by the relevant international arbitration institution.

Directors are expected to manage the company with care and diligence but no specific duty of care apply in relation to creditors, owners, shareholders or subsidiaries.

However,  European Directive No 2019/1023, dated 20 June 2019, provides for an obligation for the debtor to take into account the interests of the creditors, the shareholders and others stakeholders, where there is a probability of insolvency.

De jure or de facto directors may be held liable for assets’ shortfall in case of liquidation proceedings and sentenced to financial and personal sanctions.

Directors may be held personally liable for all or part of the assets’ shortfall – ie, the outstanding debt after offsetting all the proceeds from the disposal of assets and after having paid the creditors – if they are found guilty of mismanagement that led to the assets’ shortfall. Mismanagement can be a late filing for insolvency proceedings (see 2.3 Obligation to Commence Formal Insolvency Proceedings), accounting irregularities or an abusive continuation of the loss-making activity.

Directors may be sanctioned to the personal insolvency (faillite personnelle) or the prohibition to manage, administer and control (directly or indirectly) a company for a maximum time period of 15 years (interdiction de gérer). Only facts arisen prior to the opening of insolvency proceedings can justify these sanctions, such as: non-co-operation with insolvency practitioners; use of legal entity assets as its own or for personal purposes; wrongfully continuing a loss-making activity in a personal interest; failure to provide creditors’ representative with certified list of creditors; late filing for insolvency proceedings (see 2.3 Obligation to Commence Formal Insolvency Proceedings), etc.

Creditors do not hold any individual direct rights to sue a distressed debtor held liable.

The right to pursue is generally deferred to the liquidator or the public prosecutor.

However, should the liquidator fail to fulfil its duties, the majority of the creditors may have recourse to request the court to do so.

Chief restructuring officers (CROs) can be appointed by the company to support the CEO in the management and the operational turnaround of the debtor.

Under French law, de facto director who carries out management actions in an independent manner can be held liable for the assets shortfall only in liquidation proceedings (see 12.1 Duties of Directors).

In reorganisation and liquidation proceedings, de facto directors may be prohibited to manage, administer and control any company (see 12.1 Duties of Directors).

Due to their limited liability, the shareholders' liability in any case shall be limited to their contribution to the company.

Nevertheless, shareholders can be held liable to creditors when they acted as de facto directors (see 12.4 Shadow Directorship).

In the context of reorganisation or liquidation proceedings, the court must declare automatically null and void the following transactions that have been entered by the debtor during the claw-back period (période suspecte):

  • any deed entered into without consideration transferring title to movable or immovable property;
  • any bilateral contract in which the debtor’s obligations significantly exceed those of the other party;
  • any payment by whatever means, made for debts that were not fallen due on the date of the payment;
  • all payments for outstanding debts that are not made by cash settlement, wire transfers, remittance of negotiable instruments, or Dailly assignment of receivables;
  • any deposit or consignment of money made without final court decision;
  • any mortgage or pledge granted to secure a pre-existing debt;
  • any protective measure, unless the recordation or the registration of the measure was filed before the date of insolvency;
  • any granting exercise or reselling of stock options;
  • any transfers of movables or assignment of rights into a trust estate, unless this transfer or assignment occurred as a guarantee of a debt concurrently undertaken; and
  • any amendment to a trust agreement affecting the rights and movables already assigned or transferred to a trust estate as a guarantee of debts undertaken prior to such amendment.

In addition, the court can optionally declare null and void, at its own discretionary power, the following transactions when they have been entered by the debtor during the claw-back period and if the contracting party knew that the debtor was insolvent:

  • any payment for overdue debts;
  • any act with consideration.

When transactions are cancelled, the amounts recovered are used to continue the business or to pay creditors.

The claw-back period starts from the date of the debtor’s insolvency and ends on the day of the judgment opening reorganisation or liquidation proceedings.

The court can decide to backdate the insolvency date up to 18 months before the judgment opening the proceedings.

However, if a conciliation agreement has been reached between parties and approved by the court before the opening of the proceedings, the insolvency date cannot be fixed at a date prior to the court decision approving the conciliation agreement.

The request to declare null and void transactions can be filed by the judicial administrator, the creditors’ representative, the insolvency practitioner in charge of the implementation of the plan (commissaire à l’exécution du plan) or the public prosecutor.

The role of valuations in the French restructuring and insolvency market is still limited.

In the context of out-of-court proceedings, the central financial document is the independent business review which will provide an overview of the debtor’s businesses, the explanations of the reasons of the difficulties and its financial forecasts. It does not include per se a valuation of the company or the business. The shareholders on one side and creditors on the other side can decide to initiate a valuation process in order to support their restructuring proposal. At this stage, this is limited to large matters where creditors are ready to take the control of the company.

Valuation of certain assets may also be necessary to support the discussions on the restructuring plan or to make sure that the sale price is fair.

A valuation of the assets is conducted at the opening of insolvency proceedings by a certified auctioneer, essentially to make sure that the sale price of the assets or the business as a whole are not too far from the fair value. Nevertheless, the price paid by bidders in this context are generally quite low compared to the going concern value.

The role of valuations may dramatically change in out-of-court and insolvency proceedings, after the transposition of the European Directive No 2019/1023, dated 20 June 2019, which is substantially inspired by Chapter 11 rules.

There is no hard rule regarding who will initiate a valuation process in French insolvency proceedings. See 14.1 Role of Valuations.

See 14.1 Role of Valuations.

Goodwin

12 rue d’Astorg
75008 Paris
France

+ 33 (0)1 85 65 71 71

www.goodwinlaw.com
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Law and Practice

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Goodwin is a leading Global 30 law firm, with 1200+ lawyers in 13 offices across the USA, in Asia and in Europe. The Restructuring team in Paris is comprised of four lawyers (including one partner). The team's lawyers are experienced both in amicable proceedings and insolvency proceedings. Through these various procedural tools used in order to effectively address the difficulties of a company, Goodwin can represent debtors, financial and non-financial creditors, shareholders facing crisis situations, as well as investors interested in the takeover of distressed companies. Whether choosing appropriate proceedings, negotiating with creditors, drafting safeguard and reorganisation plans, or leading a transfer of business activities, the team’s strong experience in finance law, corporate law and litigation allows clients to benefit from its expertise, which covers all the aspects of restructuring-related issues. Goodwin's cross-border experience allows it to expertly assist clients in their international restructuring, in the framework of multi-jurisdictional proceedings.

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