In order to avoid a significant increase in insolvency proceedings leading directly to liquidation proceedings and massive job losses during the COVID-19 pandemic, the French government decided to temporarily amend French distressed companies law with the objective of "making it more effective in dealing with distressed companies in light of the specific characteristics due to the exceptional nature of the health crisis."
These temporary amendments show a desire to, above all, preserve companies by:
These temporary measures implemented during the lockdown – coupled with massive support from the French State mainly through the freeze of tax and social charges, the partial unemployment measures and the granting of loans guaranteed by the French State up to 90% – temporarily mitigated the negative consequences of the COVID-19 crisis on the financial health of companies.
Therefore, the number of insolvency proceedings decreased during the second quarter of 2020 (-53.3% compared to the second half of 2019), with 10,000 entities having thus escaped insolvency. However, the number of insolvency proceedings opened toward companies with more than 100 employees only decreased by 33% compared to last year.
Some sectors, such as retail or oil and gas, which were already suffering, have been severely impacted.
French insolvency law substantially changed in 2005 with the implementation of 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 that includes out-of-court proceedings (mandat ad hoc and conciliation) and insolvency proceedings (safeguard, reorganisation, and liquidation proceedings), offering a large choice to distressed debtors even before becoming insolvent.
This law has been amended several times since 2005, approximately every two years, in order to better address distressed situations:
French insolvency law provides for two types of proceedings, as detailed below.
Amicable Proceedings or Out-of-Court Proceedings
The purpose of amicable proceedings is to facilitate the negotiation of an agreement between the debtor and its main 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 swaps.
Negotiations are undertaken by a court-appointed mediator (mandataire ad hoc or conciliateur), who is usually proposed by the debtor from the list of judicial administrators (administrateur judiciaire).
The appeal of amicable proceedings relies on the following:
Insolvency Proceedings or Court-assisted Proceedings
French insolvency law offers a range of insolvency proceedings, each of which is designed to handle a specific degree or nature of difficulty. The emergence of pre-pack proceedings strengthens the whole legal arsenal, creating a bridge between court-assisted and court-controlled proceedings (see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).
Insolvency proceedings are not confidential since the judgment opening the proceedings is published in the Bulletin officiel des annonces civiles et commerciales (BODACC – a legal French gazette).
Insolvency proceedings 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 2.4 Commencing Involuntary Proceedings), which occurs quite rarely.
In the context of safeguard and reorganisation proceedings, the opening judgment commences a six-month observation period (which is renewable for up to 18 months) during which the debtor continues to run the business (even though a judicial administrator can be appointed to either supervise (superviser) or assist (assister) the management), while preparing a safeguard/reorganisation plan to be negotiated with its creditors.
In the context of liquidation proceedings, the debtor can continue its operations temporarily in order to organise an auction of its business either as a whole or piecemeal.
The distressed debtor has to file for reorganisation or liquidation proceedings within 45 days of its insolvency (see 2.5 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 (faute de gestion) and involve the liability of the management/directors in the case of subsequent liquidation proceedings (see 10 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).
The public prosecutor and the creditors, regardless of the nature of their claim, can request the relevant 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 debts as they fall due (passif exigible) with immediately available assets (actif disponible) (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 insurance or banking, 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 they 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
Distressed insurance companies are subject to preventative measures, through the ACPR’s control, which may appoint a temporary manager. If these measures fail and the financial difficulties become critical and threaten the interests of the insured persons, specific liquidation proceedings may be opened, at the request of the ACPR or the public prosecutor or on the court’s own initiative, and a liquidator may be appointed to verify the claims, assets and liabilities.
Order No 2015-378 dated 2 April 2015 and decree No 2015-513 dated 7 May 2015 implemented European Directive No 2009/138 dated 25 November 2009 and introduced new prudential requirements for insurance companies in terms of governance, due diligence and reporting.
In France, mandat ad hoc and conciliation proceedings have proven their effectiveness, and all stakeholders recognise that they are an important first step before insolvency proceedings to preserve the business of the company as much as possible.
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 plays a role in the success of these informal proceedings. Banks are reluctant to accelerate if there is no payment default. Standstills upon the event of default are negotiated throughout the consensual proceedings to allow negotiations on the restructuring plan.
In France, unlike formal proceedings (ie, reorganisation and liquidation proceedings), out-of-court proceedings are not mandatory and can only be initiated at the debtor's 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, a level of indebtedness inconsistent with the company's situation), while 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 are a mandatory step in the different pre-pack proceedings. AFS or AS are then used to cram-down dissenting minority creditors, as long as the negotiated plan is supported by a significant majority of creditors.
It is also possible to use conciliation proceedings to prepare a pre-pack sale of the business when the debtor’s indebtedness does not make a reorganisation plan possible. This specific type of pre-pack entails first seeking potential purchasers under mandat ad hoc or conciliation proceedings, taking advantage of the confidentiality, and then implementing the sale of the company’s business, once (at the latest) a satisfying offer is made, within a few weeks in subsequent reorganisation or liquidation proceedings.
Most consensual restructurings in France start by the opening of mandat ad hoc proceedings as they are not subject to any 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 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 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 against the debtor or sends a formal notice to pay to the debtor.
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 number of stakeholders, the different types of creditors and the amounts at stake. In most 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 the contractual priority of the various debt instruments (organised or not through intercreditor agreements) and the securities in place into account, but the restructuring scheme will be deeply influenced by the new money providers.
New money providers generally lead 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 the 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 it 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. The court cannot impose any debt rescheduling on these new money providers in the context of subsequent insolvency proceedings.
The applicable laws do not strictly impose obligations on creditors, the company or third parties regarding strategies, conduct, 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 must 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 a cram-down.
Conciliation proceedings, however, can be a first step towards pre-pack proceedings where this cram-down process is available, as long as the negotiated restructuring plan is supported by a large majority of the relevant creditors (see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).
General Security/Floating Charge
The concept of a 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 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 a pledge over the securities account (nantissement de compte-titres) (in relation to sociétés par actions – SAS, SA or SCA) or a pledge of shares (in relation to sociétés civiles – non-trading companies; sociétés en nom collectif – partnerships; or SARL – limited liability companies).
Shares issued by sociétés par actions 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 upon receipt of the déclaration by the account holder.
In the case of SARLs, SNCs or sociétés civiles, perfection requirements depend on the 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 a bailiff is required.
Security on Movable Property
Regarding movable property, a creditor may benefit from a pledge; this will be called either gage if it is over tangible assets or nantissement if it is 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, patents or 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.
The French trust (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, except during 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 cases of payment default.
During formal insolvency proceedings, prior 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:
In the 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.
Only creditors who hold a published security interest or are 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 (mandataire judiciaire) that they have to file their claim.
The two-month period for filing their claim will only start to run for them from the date of receiving 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 affected. One of the reasons for 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, those trade creditors whose 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 (clause de réserve de propriété), 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 a cram-down mechanism, their consent will be necessary in order 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 the committees depending on their quality (see 6.3 Roles of Creditors).
A creditor holding an outstanding receivable for which payment is due can file a petition before the relevant 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 of the insolvency proceedings, it will automatically be suspended.
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.
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, particularly if an agreement is about to be reached.
Conciliation proceedings are opened by a debtor who is not insolvent for more than 45 days but faces foreseeable or proven legal, economic and financial difficulties. If the company is insolvent for more than 45 days, the opening of conciliation proceedings is no longer possible.
In addition, safeguard proceedings can lead to a restructuring plan, which is opened by the court only at the request of a debtor who is not insolvent but faces difficulties 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 unanimous consent from the creditors and require mutual concessions from the different stakeholders.
Pre-pack proceedings have been introduced to French insolvency law to enable the cram-down of dissenting minority creditors (see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).
Out-of-court proceedings do not trigger any automatic stay on claims nor any stay of legal actions. 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 the context of the COVID-19 crisis, order No. 2020-596 dated 20 May 2020 introduced a new provision in order to strengthen conciliation proceedings and suspend individual legal actions (applicable to ongoing proceedings until 31 December 2020 included): when a creditor called to participate in conciliation proceedings does not accept the request made by the conciliator to postpone the due date of payment of his claim for the duration of the conciliation proceedings within the time limit determined by the conciliator, the debtor can request the following from the President of the Court who opened the proceedings, with a view, in particular, to secure the cash position:
This new mechanism is applied without prejudice to the debtor's ability to obtain payment facilities (délais de grâce) of two years maximum (C. Civ. art. 1343-5), under some new favourable conditions: until 31 December 2020, the debtor can request the judge to apply Article 1343-5 of the French Civil Code prior to any formal notice being served or legal action being filed by a creditor who did not accept the request made by the conciliator to postpone the due date of payment of his claim (and without any contradictory debate (débat contradictoire)), within the time limit determined by the conciliator. The judge rules by taking the debtor’s situation and the creditor’s needs into account.
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 any act outside of its day-to-day business should be authorised by the supervisory judge (see 9.2 Statutory Roles, Rights and Responsibilities of Officers).
There are no creditors’ committees in out-of-court proceedings, but 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 whose accounts are certified by an auditor or an accountant, and for companies that have more than 150 employees or an annual turnover exceeding EUR20 million.
Two creditors’ committees are constituted:
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 plan proposed 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 of the decision notice (including the debtor, the judicial administrator, the creditors’ representative, the work council, the public prosecutor and the creditors who filed for a claim related to the creditors’ committees’ rules).
If 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 cram-down mechanism: 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 contains no provision regarding the expenses of creditors’ committees. Each committee bears its own expenses, such as for experts or counsels. Nevertheless, in the largest matters, the payment by the debtor of the fees incurred 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 (a French legal gazette).
In addition, the creditors’ representative ensures the provision of some special procedural information (see 4.3 Special Procedural Protections and Rights).
Creditors could also request from the supervisory judge their appointment among five controllers (créanciers contrôleurs) who assist the creditors’ representative and the supervisory judge. As they are bound by confidentiality, they can examine documents sent to the officers and benefit from privileged information.
No cram-down is provided for in conciliation proceedings: creditors’ rights cannot be modified without their consent. Pre-pack proceedings such as AFS and AS have been introduced to cram-down dissenting minority creditors.
In safeguard proceedings, a cram-down on dissenting creditors is possible inside each creditors’ committee as long as the plan is approved by 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 a repayment of debts over a maximum period of ten years on all non-consenting creditors who are not part of creditors’ committees.
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 reorganisation at a group level.
Having opened insolvency proceedings for a company of a group, the court 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 a common judicial administrator and creditors’ representative to all ongoing proceedings.
In conciliation proceedings, the debtor can freely sell 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 a 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 Consensual and Other Out-of-Court Workouts and Restructurings).
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 presents 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 under conciliation proceedings, see 3.3 New Money.
Regarding the new money privilege under safeguard and reorganisation proceedings, see 2.1 Overview of Laws and Statutory Regimes.
In conciliation proceedings, the debtor and the conciliateur can value the debtor’s liabilities and select the creditors who 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 of the publication of the judgment opening the proceedings in the BODACC (a French legal gazette) in order to take part in the subsequent distribution.
All claims arising prior to the opening judgment must be filed, even contingent claims.
The creditors’ representative controls the claims with the debtor (except for claims held by employees) and challenges them before the supervisory judge, who decides to admit or reject them. If the contestation is too substantial, the dispute is judged by the relevant 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 who did not take part in 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 result 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 arising prior to the opening judgment, set-off is mandatory 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, from the same contract or from different agreements that 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 a list of the assets to be transferred, the ongoing contracts essential for the continuation of the business, and a 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. In this situation, the insolvency proceedings are opened once at least one offer has been made and can be approved by the court within two to three weeks.
The same open bid process can be organised in liquidation proceedings.
The rules of safeguard proceedings apply to reorganisation proceedings (see 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group).
Under European Regulation No. 2015/848 dated 20 May 2015, French courts have jurisdiction to open insolvency proceedings when the centre of the debtor's main interests (COMI) is located in France.
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 these proceedings 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.
European Regulation No 2015/848 dated 20 May 2015 has introduced some provisions to facilitate the co-ordination of insolvency proceedings opened against companies that are part of the same group. It relates to the co-ordination of the courts in charge of the proceedings and the co-ordination of the insolvency practitioners.
Under European Regulation No 2015/848 dated 20 May 2015, 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 the following specific provisions:
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 company continues to operate, 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 that 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 to receive and verify all the proofs of claims from creditors.
The liquidator is mandatorily appointed to carry out 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 the insolvency proceedings.
In safeguard proceedings, the debtor can suggest the 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.
Directors are expected to manage the company with care and diligence but have no specific duty of care 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 other stakeholders, where there is a probability of insolvency.
De jure or de facto directors may be held liable for assets’ shortfall (responsabilité pour insuffisance d’actif) in the case of liquidation proceedings and may be subject 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 with personal insolvency (faillite personnelle) or a prohibition on managing, administering and controlling (directly or indirectly) a company for a maximum period of 15 years (interdiction de gérer). Only facts arising prior to the opening of insolvency proceedings can justify these sanctions, such as use of legal entity assets as their own or for personal purposes, wrongfully continuing a loss-making activity in a personal interest, 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, if the liquidator fails to fulfil its duties, the majority of the creditors may have recourse to request the court to do so instead.
In the context of reorganisation or liquidation proceedings, the court must declare the following transactions that have been entered into by the debtor during the claw-back period (période suspecte) as being automatically null and void:
In addition, at its own discretion the court can optionally declare the following transactions null and void when they are entered into by the debtor during the claw-back period and if the contracting party knew that the debtor was insolvent:
When transactions are cancelled, the amounts recovered are used to continue the business or to pay creditors.
The claw-back period (période suspecte) 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 up to 18 months before the judgment opening the proceedings.
However, if a conciliation agreement has been reached between parties and approved (homologué) 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 transactions null and void 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.
How Restructuring Due to the COVID-19 Pandemic is Likely to Reshape France’s Economic Landscape
The second wave of COVID-19 in France and the new lockdown confirm the unprecedented scale of the crisis that is impacting the country and the world in general. As of today, one certainty is that a return to a normal situation will take time and will depend largely on how quickly consumers recover from the overall impact of the pandemic outbreak, as counterbalanced by the measures implemented by the European governments to fight its effects. The only thing that can be predicted is that this “U shape” crisis is resulting in a large wave of large defaults and restructurings.
In this unprecedented era, dealing and managing uncertainty will be paramount for recovery.
As a result, restructuring practice is shifting from liquidity emergency treatment through amicable negotiations and covenant resets to a sector consolidation driven by M&A and complex lender-led transactions.
A liquidity toolbox for meeting urgent cash flow needs resulting from the COVID-19 lockdown(s)
In response to the health crisis, the French government very quickly introduced various tools intended to shield companies’ cash situations. Bespoke regulations were implemented, as follows:
Most practitioners, however, believe that these governmental aid measures have artificially assisted suffering businesses. The very low number of requests for filing out-of-court amicable arrangements (mandat ad hoc or conciliation proceedings) or judicial proceedings (safeguard, reorganisation or liquidation proceedings) is leading practitioners to assume that many companies are "under financial artificial infusion”.
Ultimately, while these measures were clearly necessary and successful as a short-term approach, they did not – and could not – address economic difficulties resulting directly from a dramatic plunge in revenues.
Vulnerability of certain industry sectors or a source of strategic opportunities for growth?
Even though the support from the French government mitigated the effects of the health crisis, certain sectors (notably consumer products & retail, automotive & transportation, media and tourism) have been hit especially hard due to specific restrictions imposed on their sector (eg, travel bans, the avoidance of public gatherings or the closure of countries' borders), ending up with shrinking revenues.
For some such undertakings, the conditions of a PGE were not met (for instance, if they qualified as “undertakings in difficulty” under European Regulation No 651/2014) or their PGE application was refused by commercial banks – mainly as a result of the unpredictable outlook for the business, an insufficient cash forecast or a failure to build a robust and deliverable business plan.
In this volatile environment, there are high expectations on sponsors and shareholders, as they are the actual owners of businesses and should play a key role by curing technical or payment defaults through equity, by financing investments where RCF (revolving credit facility) lines have been totally drawn, by providing support for consolidation or M&A projects towards growth-generating businesses, etc.
However, and different to the liquidity crunch of 2008, significant amounts of financing and dry powder liquidity are available today.
This factor has fundamentally changed the restructuring paradigm and dynamics, especially where existing shareholders are not agile enough or supportive of a quick and in-depth turnaround.
That situation is clearly a new source of opportunity, both for liquidity providers (eg, hedge/investment funds specialising in distressed situations) eager to secure a return for their own investors, and also for the distressed company and its management, who must always consider the interest of the business as a going concern first, rather than the sole interest of a defaulting shareholder.
“Loan-to-own” is no longer a bad word – especially where French banks are reluctant to provide funding (due to their own balance sheet constraints and concerns) – the aim being to de-leverage the company so as to restore a clean balance sheet while injecting new money to help the company achieve turnaround, resizing and sustainable growth.
Far beyond the traditional restructuring and insolvency paradigms (that now belong to the past), this crisis highlights the need for multidisciplinary, urgent and efficient actions resulting in an increasing proportion of high-end/complex M&A transactions with a deep reshuffling of the corporate and debt structure.
The prospect of acquiring targets with an already strong underlying business model for the symbolic, de minimis, price of EUR1 is an attractive tool for some investors, such as private equity funds, hedge funds and special situation funds that have the skills, expertise and resources required to successfully turn a company around.
Whilst other company-led recovery strategies are possible for financially vulnerable targets (for example, share capital increases or bond issuances), depressed market valuations and lower levels of competition allow investors to create synergies, acquire a new product line or establish themselves in novel geographical areas.
Nevertheless, taking over a company short of liquidity has its own special issues, as evidenced by the constraints inherent in such operations and the quality of the investment expected by the target companies. In particular, financial investors may also use more specific tools if these transactions involve mechanisms such as the sale of securities or assets, as often contemplated when the target is financially viable.
The conversion of debt into equity is an effective way to successfully complete a distressed M&A transaction, as it strengthens the target company’s balance sheet by carrying out a share capital increase, while also reducing its debt. Financial investors who have acquired high-yield or bank debt on the secondary market, often at a price below the nominal value, can thus skilfully convert their debt into capital at a lower price and with a guaranteed rate of return. The benefits of adopting a loan-to-own approach are especially striking when the target’s securities are admitted to trading on a regulated market, since creditors will ultimately be able to benefit from the liquidity of their securities.
More “hostile” approaches exist: the exercise by a creditor of an efficient (ie, French law insolvency remote) security package based on a double-luxco or trust (fiducie) over the target securities or assets may also result in a change of control at the expense of the existing shareholder.
Although financial investors are the key players during the implementation of these distressed turnarounds, addressing and minimising the target’s failures (and future challenges) requires the intervention and support of other players. In addition to the usual negotiations between the new equity investors and the target’s shareholders, it is equally essential to co-ordinate with the lenders, security holders, management, lessors, suppliers, customers and employees of the target in order to ensure that the business, once acquired, remains viable. This is especially critical when a “traditional” mutual agreement procedure is initiated to address difficulties, such as ad hoc mandate or conciliation proceedings that have their own rules and timetables.
Against this background, the real source of the company’s difficulties must be identified and understood (including any unaddressed financing needs), so that investors can provide the necessary funds to ensure the recovery of the target. However, such an operation often retains the usual features of all M&A transactions along with an inflexible timetable: financial, legal and tax due diligence is inevitably reduced, but should not be neglected. The provision of mandatory information, the consultation process of the work council and the stricter operation timetable should also be taken into account, in addition to any regulatory authorisations and clearances (for example, in the case of a sensitive sector or merger control) that must be obtained and requested at the appropriate time in order to avoid blocking positions or delays. It should be noted that an exemption from the suspensive effect of the merger control process may be granted (with certain conditions) in order to carry out a distressed transaction without prior clearance from the competition authority.
Furthermore, technical sale plans overseen by commercial courts, under reorganisation or liquidation proceedings, are also rapidly growing in popularity, to the extent that the government has loosened the regulations governing the potential takeover by a former management team. Although the purpose is to save as many employees as possible, this measure must remain strictly controlled and, in particular, must not be used as a pressure tool during insolvency proceedings to purely and simply write off the debt. Any alternative plan, whether from creditors or from a third party, must be discussed and negotiated to prevent abuse by managers who are likely to repeat the same mistakes.
Outlook: massive waves of consolidation, M&A distressed activity and equity restructuring
This crisis will inevitably act as a real wake-up call for some sectors or industries that need to reset and reshape their value chain completely, and will provide an opportunity to reassess their partnership models and M&A growth. The themes of discounting, cost rationalisation, digital acceleration, industry consolidation, and corporate innovation should be the highest priorities.
Business transfers and external growth create opportunities, so are traditional tools used to increase value. In the present context, they will be an effective means of reversing and protecting France’s economic and industrial network.
To mitigate the overall damage during this period, there will be important and vital choices on who is the most well-equipped (existing or new) partner-investor and what strategy, models and organisational changes should be pursued, as well as what should not be pursued.