State of the Restructuring and Insolvency Market
There were 27,359 insolvencies in France as of the end of September 2021, down 25.1% from the same period in 2020, and down 47.9% from September 2019. Such reduction is relatively stable across all sectors, including those most severely affected by the health-related restrictions, such as accommodation and food services (down 44.2% year-on-year) and trade (down 28.1% year on year).
The number of insolvencies has thus remained at a historically low level. The various support measures implemented by the French government in response to the COVID-19 pandemic have helped companies through the health crisis.
Statistics from the Banque de France show that the decline in September was slightly less than at the end of August (-26.2%). This does not reflect a recovery in the number of insolvencies, but rather a "base effect". At the end of September 2021, the base for calculating variations (October 2019 – September 2020) included September 2020, which was the seventh month of the COVID-19 crisis (the containment period).
Despite leading to a collapse in GDP and global trade in 2020, the COVID-19 outbreak does not seem to have led to a wave of insolvencies (yet). However, there is new concern regarding the soaring price of raw materials. These increases, which cannot be reflected easily in sales prices, may put pressure on cash flow, requiring companies to fully draw down their credit lines, or even to use supplier credit and extend payment terms. If high prices were to persist significantly beyond the end of the year, these increases would weigh on margins and could seriously hinder financial recovery or even compromise the survival of certain companies.
Changes to the Restructuring and Insolvency Market
Even though the support from the French government mitigated the effects of the COVID-19 outbreak, certain sectors (notably consumer products and retail, automotive and transportation, media and tourism) have been hit especially hard by specific restrictions (eg, travel bans, the avoidance of public gatherings or the closure of countries’ borders), ending up with shrinking revenues.
However, the current economic cycle is quite unusual. Some companies are over-leveraged while the financial markets are in turmoil and more and more investors are attracted to the high-yield debt market. This trend offers new perspectives on both the debt and equity markets.
Restructuring practice is shifting from liquidity emergency treatment through consensual negotiations and covenant resets to a sector consolidation driven by M&A and complex lender-led transactions.
This pandemic is inevitably acting as a wake-up call for some sectors or industries that need to reset and reshape their value chain completely, providing an opportunity for them to reassess their partnership models and M&A growth.
The major laws applicable to French restructuring and insolvency that have been passed in the last ten years are as follows.
Under French law, there are two categories of proceedings:
The first category includes mandat ad hoc and conciliation proceedings. The second category includes safeguard, accelerated safeguard, and judicial reorganisation and liquidation proceedings, although the debtor under safeguard proceedings is not cash-flow insolvent (état de cessation des paiements).
Note that accelerated financial safeguard proceedings no longer exist separately under French law as they have been merged into accelerated safeguard proceedings (whose scope may be limited to financial creditors) by the 2021 Ordinance, as of 1 October 2021.
The distressed debtor (through its legal representatives) is required to file a petition for judicial reorganisation or liquidation proceedings within 45 days of the date of insolvency, unless conciliation proceedings are ongoing. If the debtor fails to file for such proceedings within the timeframe, de jure managers (including directors) and, as the case may be, de facto managers are exposed to civil liability.
Unless conciliation proceedings are ongoing, the opening of judicial reorganisation or liquidation proceedings against the debtor can be initiated by the court at the request of either the public prosecutor upon petition or any creditor upon summons, regardless of the nature of the claim.
A state of insolvency is required to commence judicial reorganisation proceedings and liquidation proceedings. However, debtors wishing to initiate an ad hoc mandate or safeguard procedure must not be insolvent; in conciliation proceedings, the debtor must not be insolvent for more than 45 days.
The French insolvency test is a pure cash flow test, defined as the debtor’s inability to pay its debts as they fall due with its immediately available assets, taking into account available credit lines and moratoria.
The general insolvency regime applies to all French companies. However, some specific provisions apply to regulated sectors, such as banking and insurance activities, in order to ensure the protection of customers and to prevent systematic effects.
Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (the Banking Resolution Directive or BRRD) is designed to enable a wide range of actions to be taken by the competent authorities in relation to credit institutions whose failure is known or predictable. The stated objective of the BRRD is to provide the resolution authorities with harmonised and effective instruments and powers in order to prevent a banking crisis, preserve financial stability and reduce taxpayers' exposure to losses arising from the failure of a credit institution.
The BRRD was implemented in France by Ordinance No 2015-1024 of 20 August 2015, containing various provisions for adapting legislation in line with the European Union in financial matters. This ordinance has modified and supplemented the provisions of Law No 2013-672 of 26 July 2013 on the separation and regulation of banking activities, which grants various powers of resolution to the resolution panel of the Autorité de contrôle prudentiel et de résolution (ACPR). Accordingly, the ACPR is given a broad range of tools with respect to defaulting banks (eg, appointing a temporary administrator, dismissing executive officers, transferring all or part of the bank’s assets and activities, checking credit institutions' compliance with minimum capital requirements, including prudential ratios and compliance with banking laws and regulations in general, implementing a recovery plan, etc). The BRRD applies to credit institutions and investment firms that meet certain conditions (Articles L. 613 to 34 et seq of the Monetary and Financial Code). However, credit institutions that are classified as significant are under the direct supervision of the European Central Bank with regard to resolution, in accordance with the implementation of the European Single Supervisory Mechanism.
In addition, Decree No 2015-1160 of 17 September 2015 and three Ministerial Ordinances of 11 September 2015 transposing the provisions of the ordinance on the recovery plan, the resolution plan and the criterion to assess the solvency of an institution or a group were published on 20 September 2015, mainly to transpose the BRRD in France.
This framework was amended in 20 May 2019 by the adoption of Directive (EU) 2019/879 (BRRD II), which has been transposed by Ordinance No 2020-1636 of 21 December 2020 relating to the resolution regime in the banking sector. The amendments introduced requirements relating to total loss-absorbing and recapitalisation capacity, which are applicable to global systemically important banks. Specific resolution rules for co-operative banking groups have also been set up, by adding the central bodies of co-operative banks to the list of entities that can be subject to the measures for the prevention and management of banking crises, or clarifying that the assessment of the circumstances under which an institution shall be considered as failing or likely to fail shall be made in light of the central body and its affiliated entities.
Insurance and reinsurance companies are subject to the ACPR’s control, which focuses on safeguarding the interests of policyholders, insureds and beneficiaries. The ACPR may take all appropriate measures to safeguard an insurance company by appointing a temporary manager or requiring an increase in the solvency margin. If the entity’s financial difficulties become critical and jeopardise the insureds’ interests, the ACPR may fully withdraw the insurance company’s licence (agrément), thereby triggering liquidation proceedings. The ACPR will then appoint a liquidator, whose duty is to verify the insurer’s receivables and the company’s statement of assets and liabilities. In addition, Ordinance No 2015 378 dated 2 April 2015, completed by Decree No 2015 513 and dated 7 May 2015, has implemented European Directive 2009/138/CE dated 25 November 2009 (Solvency II Directive) by introducing new prudential requirements for insurance companies, mutual funds and provident institutions in terms of governance, due diligence and reporting.
French legislation tends to create bridges between out-of-court amicable proceedings and insolvency proceedings, with the idea that restructuring solutions could be negotiated during the amicable phase and implemented in the context of subsequent insolvency proceedings. These evolutions concern both the implementation of traditional restructuring plans and the sale of business.
While out-of-court proceedings have the advantage of confidentiality, their positive outcome requires that debtor’s creditors called up to participate in the negotiations agree to make the efforts that are necessary to ensure the continuation of business. Neither the court-appointed conciliator nor the debtor have the power to impose those efforts on dissenting creditors in the context of consensual proceedings. To overcome the opposition of dissenting creditors preventing the adoption of a restructuring agreement negotiated during the amicable proceedings, the practitioners were using accelerated safeguard proceedings to benefit from the cram-down system and force the adoption of the safeguard plan (ie, pre-pack plan). The conciliation may also be opened to organise the partial or total sale of the business (pre-pack sale plan), which could be implemented, where appropriate, in the context of a subsequent safeguard (for partial sale only), judicial reorganisation or liquidation proceedings. The main interests in using the pre-pack sale framework lie in – as in the pre-packaged safeguard plan – the confidentiality attached to the court-assisted amicable proceedings during the preparation phase and the reduction of the duration of the subsequent court-administered proceedings.
With a view to reaching a consensual restructuring, two proceedings are available:
In both cases, these procedures do not trigger an automatic stay of payment and enforcement actions. Creditors are therefore not barred from taking legal action against the debtor to recover their claims, but those that have agreed to take part in such proceedings usually also agree to abstain from such action while they are ongoing.
In any event, the debtor retains the right to petition the relevant judge for a grace period under Article 1343-5 of the French Civil Code. More particularly and pursuant to Article L. 611-7 of the French Commercial Code, the debtor retains this right to petition the judge if a creditor has formally put the debtor on notice to pay, is suing for payment, or does not accept a request to stay payment of its claim by the deadline set by the conciliator. In the latter case, the judge may order the postponement or the rescheduling of the creditor’s claims that have not yet fallen due, for the duration of the conciliation proceedings.
Ad hoc creditor groups or steering committees may be formed during out-of-court proceedings but there are no mandatory rules or obligations related to creditor steering committees. The agent for lenders under a secured credit facility may form a steering committee of lenders to help organise the lenders. Noteholders may organise ad hoc groups to represent them during restructuring negotiations. Sometimes, a single creditor purchases a large portion of outstanding debt and then negotiates directly with the company or plays an outsized role in an ad hoc group or steering committee.
Prior to or during restructuring negotiations, competing creditor groups may negotiate and reach intercreditor agreements, or other closely related subordination agreements, between two or more of a company’s creditors and may arrange their competing rights to receive payments of cash or other property from a company, as well as determine timelines and details with respect to such creditor groups’ respective abilities to exercise remedies. Such agreements will have particular importance in the opening of subsequent court-administered proceedings that require classes of creditors, with intercreditor agreements being taken into consideration by the judicial administrator in the class composition under certain conditions.
“New money” privilege (privilege de conciliation) granted to investors injecting new cash into a business exists under a conciliation agreement that has been approved (homologué) by the court. It only applies to new investors that have provided new money, goods or services during 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.
A debt claim benefiting from a new money privilege may be given a different treatment from old money in any subsequent court-administered proceedings. The new investors will enjoy a priority of payment over all pre-commencement and post-commencement claims (subject to certain exceptions, including with respect to certain post-commencement employment claims and procedural costs) in the event of subsequent court-administered proceedings. Such claims benefiting from this new money privilege may also not be rescheduled or written off by a safeguard or a reorganisation plan, without their holders’ consent, not even through a cram-down or a cross-class cram-down (in the event that classes of affected parties are formed). See 6.10 Priority New Money regarding the new money privilege under safeguard and judicial reorganisation proceedings.
There is no special principle in French insolvency law that imposes special duties on creditors, the distressed debtor or third parties, but only general principles. Insolvency judges must, however, ensure that the equality principle between creditors sharing common interests and the test of best interest of creditors with respect to dissenting creditors are properly met in the adoption of the plan. Another general principle prevents a creditor, the distressed debtor or any third party from acting through fraud – for example, in the case of a creditor that attempted to be reimbursed individually by the debtor through fraudulent means. Furthermore, the general principle of good faith applies between all stakeholders in insolvency proceedings.
Out-of-court proceedings do not provide for a cram-down system. However, conciliation proceedings can be a preliminary step to prepare a pre-pack plan that will be implemented in subsequent accelerated safeguard proceedings where the cram-down mechanism is available, provided that such restructuring plan is supported by a large majority of the relevant affected parties (see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).
Security on Real Estate Property
The two most common types of security over real estate property are the mortgage (hypothèque) and the lender’s lien (privilège du prêteur de deniers). Both require a notarial deed, which entails the payment of fees to the notaries involved (which is proportional to the principal amount secured, but negotiable above a certain level) and must be registered in order to take rank. Both a mortgage and a lender’s lien give the secured party the same rights over the property, but a mortgage only takes rank upon the date of its registration, while a lender’s lien takes rank from the date of the acquisition, provided that it is registered within two months (if not, it takes rank upon registration, like a mortgage). However, this difference will cease to exist on 1 January 2022 in respect of liens granted after that date, as such liens will be regarded as statutory mortgages (hypothèque légale).
In either case, enforcement may be effected by means of a court-supervised public auction or a court-ordered attribution of the property to the secured creditor(s) (subject to the creditor(s) paying the amount, if any, by which the value of the property as appraised independently exceeds the secured amount). In the case of a contractual mortgage only, enforcement may also – if agreed in the mortgage deed (or at the time of enforcement) – result from the direct appropriation of the secured property by the secured creditor (subject to the payment of any excess, as in the case of court-ordered attribution). Direct appropriation is seldom agreed by borrowers in normal financing circumstances, but may more likely be imposed in a restructuring context.
A French security trust arrangement (fiducie) may also be used for security purposes in relation to real estate (but costs may be higher than a mortgage, as the notarial fees and the registration fee and duty are based on the value of the property rather than the amount secured).
Security over Equity
The most usual types of security are the pledge over shares (nantissement de parts) or the pledge over a company’s securities accounts (nantissement de comptes titres), depending on the corporate form of the company. As such, pledgors will fictitiously retain the shares/financial securities until they are fully paid up by the debtor. In addition, a French security trust arrangement may be used (see above).
Security on Movable Property
One of the main types of security over movable property is the pledge (known as gage in respect of tangible assets and nantissement in respect of intangible assets). Failing performance of the secured obligation, the pledged assets may be sold and the price paid to the secured creditor who has a priority right on that price (although not a first -rank priority right). Contractual appropriation is also possible if it is provided for in the security documents. The existence of a pledge is subject to a written instrument (which may be in electronic format) and its efficiency against third parties is subject either to a recording in a special register or to the transfer of possession of the movable into the hands of the creditor. The secured creditor can invoke its priority right in insolvency proceedings.
In respect of receivables, an assignment by way of security (transferring title in the collateral) may be used. When the secured assets are professional receivables and certain other conditions are met, parties can use the special regime (known as Dailly security assignments) provided for by the Monetary Financial Code. As of 1 January 2022, it will also be possible to use the general assignment regime provided for by the Civil Code, which will enable the transfer by way of security of all types of receivables, between all types of parties.
Security on Intellectual Property
In relation to intellectual property rights, a pledge over trade marks, patents or software requires registration in the national register held at the Institut National de la Propriété Intellectuelle.
Under a cash collateral, title to cash collateral is transferred to the creditor. If the debtor defaults, the creditor should be able to set off all sums owed by the debtor against the creditor’s obligation to return the charged cash to the debtor, even under safeguard or insolvency proceedings.
In out-of-court proceedings, an agreement (if any) will be reached by secured and unsecured creditors alike. Since there is no automatic stay on claims or proceedings, secured creditors may keep pursuing the debtor to recover their secured claims through security enforcement.
In court-administered proceedings, the automatic stay on claims prevents creditors from enforcing security (except for security interests relying on title transfer, such as a security trust or a Dailly security assignment). However, secured creditors would benefit from privileged rights due to their security interests. In particular, certain security interests may confer upon their beneficiaries a retention right, which is generally effective (but not enforceable) despite the occurrence of court-administered proceedings. For example:
Please note that, since the 2021 Ordinance, any increase in the scope of a contractual security interest or a contractual retention right, regardless of the method used (ie, by addition, complement or transfer of assets or rights – eg, dividends under pledged securities), would be prohibited starting from the opening of court-administered proceedings. The exact extent of this principle remains uncertain, and certain exceptions to this principle are provided, particularly with respect to Dailly security assignments.
Effects of Contractual Intercreditor Covenants
The creditors’ right in respect of the ranking (in terms of priority of payment and application of proceeds) and enforcement of security interests (with potentially a second or lower ranking pledges), among others, can be organised under an intercreditor agreement (known as a subordination agreement).
Although these agreements may influence the negotiating power of certain creditors during out-of-court proceedings (notably, the priority creditors, in particular according to their ranking and their voting rights in relation to the majorities required to implement the security package), they are not binding vis-à-vis the bodies of such proceedings (eg, the conciliator, the court, etc).
This differs in court-administered proceedings since the 2021 Ordinance. Pursuant to the new provisions of the French Commercial Code (Articles L. 626-30 and L. 682-7), the class composition determined by the judicial administrator shall comply with the provisions of subordination agreements between creditors entered into prior to the opening of court-administered proceedings (if classes are set up), provided that such subordination agreements have been brought to the administrator's attention within the required deadline. As a consequence, contractual intercreditor covenants are likely to have a substantial impact in the context of court-administered proceedings with regard to the new class composition system.
With respect to special procedural protections, any secured creditor that has a published security interest or that is bound to the debtor by a published contract benefits from specific proof of claim proceedings. These creditors shall 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 from the date of receiving this notice.
With respect to special rights, secured creditors are likely to have a stronger position in out-of-court proceedings to negotiate a workout agreement considering their rights under their security interests.
In court-administered proceedings, secured creditors shall benefit from a better priority of payments in a judicial liquidation and from preferential or exclusivity rights, depending on the nature of the related security interest. Additionally, in court-administered proceedings where classes of affected parties are formed, these secured creditors shall be grouped into one class of secured affected parties (or several according to a sufficient commonality of economic interest) that could potentially cram-down dissenting (non-secured) affected parties, subject to specific conditions being met.
In the course of court-administered proceedings, creditors (regardless of whether they are secured or unsecured) will be subject to the same rules, particularly the prohibition of payments and the stay on proceedings and petition of claims in relation to pre-insolvency claims.
However, where the constitution of classes would be required in the context of court-administered proceedings, the allocation of affected parties into classes shall be carried out according to a sufficient commonality of economic interest (communauté d’intérêt économique suffisante) on the basis of objective verifiable criteria. There shall be at least a distinction between creditors whose claims are secured by security interests in rem (sûretés réelles), in respect of their claim so secured, and other creditors.
As a result, secured and unsecured creditors shall belong to different classes. Secured creditors shall therefore be treated differently from unsecured creditors, reflecting their respective economic rights. The secured creditors’ rights will also enjoy a priority of payment over all unsecured creditors in the event of subsequent court-administered proceedings.
Unsecured pre-petition trade claims are generally entitled to no higher priority or better treatment than other general unsecured claims. However, most restructuring processes tend to protect trade creditors and focus on financial creditors and/or shareholders in order to avoid affecting the operation of the business itself.
Note, however, that suppliers of goods also typically include retention of title of clauses to enable goods to be recovered as a matter of contract if payment is not made by a specified date. If the contract has been published, the supplier will have to request the restitution of the goods (action en restitution). Otherwise, the supplier will have to file a French action en revendication within three months of the publication of the judgment opening the proceedings.
In out-of-court proceedings, unsecured creditors may be involved in the discussions if they are affected by the restructuring plan. Without a cram-down mechanism, their consent will be necessary to reach a consensual agreement. Furthermore, these unsecured creditors have the right to petition the Commercial Court to file a petition commencing a judicial reorganisation proceeding or a liquidation proceeding case against a debtor if they can prove that the debtor is insolvent.
In court-administered proceedings, if they are affected parties unsecured creditors shall basically be grouped into a class that is entitled to vote on the restructuring plan. However, such a class of unsecured creditors is likely to be crammed down by a higher ranking affected party, with the class generally being qualified as “out of the money”.
Prior to the start of court-administered proceedings, an unsecured creditor may try to obtain an attachment order and to seize one or more of the debtor’s assets, provided that the debt is overdue. Unless the seizure is completed prior to the opening judgment, such seizure is stayed during the court-administered proceedings. An attachment order can be obtained on an expedited basis.
Employment claims, procedural costs and new money claims (including conciliation and safeguard/reorganisation privilege) have a very favourable ranking in the legal waterfall of liquidation proceedings under French insolvency law. The priority of payment among these creditors is as follows:
Note that this order of priority is not relevant to all creditors – for example, creditors benefiting from a retention right over assets with respect to their claim related to such asset will be treated separately.
In certain conditions, a French debtor facing difficulties may request the opening of out-of-court proceedings (mandat ad hoc or conciliation), the aim of which is to reach a consensual agreement on a confidential basis with the debtor’s main creditors and stakeholders.
Mandat ad hoc proceedings can only be initiated by the debtor itself, at its sole discretion. In practice, mandat ad hoc proceedings are used by debtors that are facing any type of difficulties but are not insolvent. A mandataire ad hoc shall be appointed, whose name may be suggested by the debtor itself, and his/her missions shall be laid down by the President of the Commercial Court. The proceedings are not limited in time.
Conciliation proceedings can only be initiated by the debtor itself if it faces actual or foreseeable difficulties of a legal, economic or financial nature and is not insolvent or has not been insolvent for more than 45 calendar days. A conciliator (conciliateur) shall be appointed, whose name may be suggested by the debtor itself, and his/her missions shall be laid down by the President of the Commercial Court. The proceedings may last up to five months (after an initial period of a maximum of four months, upon request of the conciliator, the court may extend the conciliation up to a maximum of five months).
As these proceedings are consensual and optional by nature, no cram-down has been provided for by French law. A conciliation proceeding requires the unanimous agreement of the creditors involved. As the interests of the parties involved in the conciliation proceeding are not aligned, the preparation of the agreement will require mutual concessions. However, the plan prepared in conciliation proceedings with the support of a majority of creditors could be forced upon the dissenting creditors by the opening of accelerated safeguard proceedings where a cross-class cram-down is available through a class-based consultation (see 3.1 Consensual and Other Out-of-Court Workouts and Restructurings).
To be eligible to access accelerated safeguard proceedings (court-administered proceedings), the debtor shall meet the following conditions:
If the debtor does not meet the conditions that require creditors’ classes to be formed, the court must order such constitution in the decision opening the proceedings. The regime applicable to standard safeguard proceedings is broadly applicable to accelerated safeguard proceedings (see 6.3 Roles of Creditors regarding the class-based consultation rules).
Out-of-court proceedings do not trigger any automatic moratorium nor any stay of enforcement actions. However, financial institutions, social security organisations or institutions managing the unemployment scheme may grant a stay on claims to the debtor on a voluntary basis. In any event, the debtor retains the right to petition the relevant judge for a grace period under Article 1343-5 of the French Civil Code (see 3.2 Consensual Restructuring and Workout Processes). If an agreement has already been reached, however, the creditors of this agreement will only be bound by the contractual terms and will have no obligation to provide for additional moratoria or stays on claims.
See 9.2 Statutory Roles, Rights and Responsibilities of Officers regarding business and management operations.
See 3.3 New Money and 6.10 Priority New Money regarding new money during the process.
There are no creditors’ committees nor classes of affected parties in out-of-court proceedings, but creditors are not prevented from organising themselves through ad hoc committees to facilitate negotiations (see 3.2 Consensual Restructuring and Workout Processes).
In court-administered proceedings, and notably in safeguard or accelerated safeguard proceedings, creditors (and, if applicable, equity holders) must be consulted on the manner in which the debtor’s liabilities will be settled under the safeguard plan (debt write-offs, payment terms or debt-for-equity-swaps) prior to the plan being approved by the court. The rules governing consultation will vary depending on the size of the business.
If a class-based consultation is mandatory in accelerated safeguard proceedings, the creation of such classes will only be compulsory if the debtor is above certain thresholds in safeguard or judicial reorganisation proceedings (as described below).
This applies to companies that, on the date of the petition for the commencement of proceedings, meet or exceed either of the following thresholds:
Classes can also be created upon the debtor’s request and with the authorisation of the supervisory judge if the company concerned does not meet such thresholds. If the debtor in accelerated proceedings does not meet the thresholds that require creditors’ classes to be formed (as mandatory), the court must order such formation in the decision opening the proceedings.
The judicial administrator is responsible for drawing up the classes and informing each affected party that it is a member of a class. On the basis of objective verifiable criteria, they must also allocate the affected parties in classes representing a sufficient commonality of economic interest (communauté d’intérêt économique suffisante) in compliance with the following conditions:
The judicial administrator shall notify each affected party of the criteria for class formation and the determination of the voting rights corresponding to the affected claims or rights allowing them to cast a vote.
The consultation involves the submission of a draft plan prepared by the debtor with the assistance of the judicial administrator for consideration by the affected parties (except in judicial reorganisation proceedings, where any affected party may submit an alternative plan to the vote of the class(es)).
The decision shall be taken by each class by a two-thirds majority of the votes held by the members casting a vote.
Creditors’ Representation and Expenses
The creditors are informed of the opening of insolvency proceedings through the publication of the opening judgment in the BODACC (a French legal gazette). Upon the publication of the opening judgment, the creditors’ representative must ensure special procedural information to the benefit of creditors to enable them to file their proof of claims (see 4.3 Special Procedural Protections and Rights).
At the creditor’s request, the supervisory judge (juge commissaire) can appoint creditors as controllers (contrôleurs), whose duties are to assist the creditors’ representative in the supervision of the company’s administration and to assist the creditors’ representative in his or her functions. The supervisory judge may appoint up to five controllers from among the voluntary creditors. At least one of them is selected from security interest holders and another is selected from unsecured creditors (créanciers chirographaires); in any event, the judge needs to make sure that controllers do not act in their own interest. A controller holds a right of information regarding the proceeding, and has the right to examine all documents sent to the judicial administrator and the creditors’ representative.
Each creditor bears its own expenses, such as for experts or counsels. Nevertheless, in the largest matters, the fees incurred by the creditors are generally borne by the debtor according to the provisions of the finance documentation and up to a generally pre-negotiated amount. Procedural costs (including the fees of the judicial administrator, etc) are covered by the debtor and benefit from a super-privileged payment priority.
Dissenting Class(es) of Creditors
No cram-down is provided for in conciliation proceedings: creditors’ rights cannot be modified without their consent. However, pre-pack proceedings may be used to implement the pre-pack plan prepared in conciliation through accelerated safeguard proceedings to cram-down dissenting minority creditors (also applicable in safeguard proceedings at the request of the debtor or the judicial administrator with the approval of the debtor).
This mechanism enables the court to adopt a plan notwithstanding the negative vote of one or several classes, subject to the following general conditions:
Dissenting Class(es) of Equity Holders
Where one or more classes of equity holders have been constituted and have not approved the plan, the plan can be imposed on such dissenting equity holders in the following circumstances:
Judicial reorganisation proceedings broadly take place in a manner that is similar to safeguard proceedings, subject to certain specificities. The main differences are as follows:
French insolvency law does not prevent a creditor from assigning its claims to a third party after the judgment opening safeguard proceedings.
The right of an affected party to vote in a class shall be considered an accessory to the claim arising prior to the judgment opening the proceedings and shall be transferred ipso jure to its successive holders, notwithstanding any provision to the contrary.
The holder of the assigned claim will only be informed of the debtor's proposals and be entitled to vote as from the time when the assignment is brought to the attention of the judicial administrator.
With respect to corporate groups, French law provides that court-administered proceedings of corporate groups can be opened by the court in the jurisdiction of the registered office of any company of the group, and this court will remain competent for the opening of all other insolvency proceedings of the group. In such cases, the court can appoint a judicial administrator and a creditors’ representative that is common to all the proceedings.
In out-of-court proceedings, the debtor can freely sell its isolated assets without any conditions, except contractual consents if required (notably under the existing finance documentation according to negative covenant).
During safeguard proceedings, however, the debtor is allowed to carry out day-to-day transactions, and any transaction that would entail the sale of an important asset of the business would be subject to the supervisory judge’s authorisation. The judge may indeed authorise the sale of certain assets on a piecemeal basis if the situation so requires.
In out-of-court proceedings, the sale of a business or an autonomous branch is carried out by the legal representatives of the debtor. The mandataire ad hoc or the conciliator can supervise a total or partial sale of the company’s assets, which would then be adopted under a court-administered proceeding after solicitation of the public prosecutor’s opinion. This proceeding offers the possibility of avoiding the compulsory public advertising for the submission of tenders. In subsequent insolvency proceedings, several pre-pack sales will be submitted to the judicial administrator or the liquidator, as the case may be (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 (in contrast to judicial reorganisation proceedings). However, the court may authorise the sale of certain assets, either on a piecemeal basis or as a going concern if such assets form an autonomous branch, provided that the debtor can continue to run its business as a going concern without affecting its ability to present a safeguard plan. It can also be a term of a restructuring plan that disposals are executed on a pre-agreed basis and that certain creditors voting on the plan can acquire those assets. The plan needs to be approved by the requisite majorities and the price needs to be legitimate and at a fair value to avoid claims of unfair prejudice and material irregularity.
In conciliation proceedings, securities over the company’s assets may be released only as part of the undertakings provided for 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 supervisory judge.
Regarding the new money privilege under conciliation proceedings, see 3.3 New Money.
The 2021 Ordinance has officially introduced a new safeguard/reorganisation new money privilege (inspired by US debtor-in-possession financing and resulting from the COVID-19 temporary measures) that is applicable to all new cash contributions (excluding contributions made prior to the opening of the relevant proceedings and contributions made by shareholders as part of a capital increase), by any person (including shareholders of the debtor), as follows:
Similar to the “new money” privilege in conciliation, claims benefiting from the safeguard/reorganisation privilege cannot be rescheduled or written-off without the consent of the relevant creditors, not even through a cram-down or a cross-class cram-down (in the event that classes of affected parties are formed), in the ongoing or subsequent court-administered proceedings. They will also enjoy a priority of payment in the context of a subsequent judicial liquidation (see 5.5 Priority Claims in Restructuring and Insolvency Proceedings).
An amicable proceeding enables the debtor and the court-appointed representative to value claims and select the main creditors that have an economic interest in the company.
Being more regulated, safeguard proceedings are supervised by the court. The debtor must give the judicial administrator a list of its creditors, the amount of debts and the main current contracts. A mandatory inventory is established by the judicial administrator.
When the conciliation agreement is formally approved (homologué) by the court, the judge assesses the fairness between the creditors involved in the agreement, and more particularly ensures that the agreement does not impair the rights of the non-signatory creditors.
In safeguard and judicial reorganisation proceedings, after the draft plan has been adopted by the class(es), the court must ensure that certain conditions are met, and notably that the interests of all parties affected are sufficiently protected (for further details, see 6.4 Claims of Dissenting Creditors). In any case, the court may refuse to adopt the plan if it does not provide a sufficient perspective to avoid the debtor's insolvency or to ensure the viability of the business.
The judgment adopting the plan makes its provisions enforceable against all parties.
In safeguard or judicial reorganisation proceedings, the non-debtor parties must fulfil their duties despite the debtor's failure to respect its commitments prior to the opening judgment.
Contractual provisions pursuant to which the commencement of the proceedings triggers the acceleration of the debt (except with respect to judicial liquidation proceedings in which the court does not order the continued operation of the business) or the termination or cancellation of an ongoing contract are not enforceable against the debtor. Any contractual provision that modifies the conditions for the continuation of an ongoing contract by reducing the debtor’s rights or increasing its obligations simply by reason of the designation solely upon the opening of judicial reorganisation proceedings is deemed null and void (in accordance with a decision of the French Supreme Court dated 14 January 2014, No 12-22.909, which case law is likely to be extended to safeguard or accelerated safeguard proceedings).
However, the court-appointed administrator can unilaterally decide to terminate ongoing contracts (contrats en cours) if it believes the debtor will not be able to continue to perform such contracts.
From the date of the judgment opening court-administered proceedings, the debtor is prohibited from paying debts incurred prior to the opening of the proceedings, subject to specified exceptions, which essentially cover:
If the debtor or a creditor fails to perform the terms of the conciliation agreement, any related party may petition the President of the Commercial Court or another court (depending on whether the agreement was acknowledged or approved) for the termination of the agreement. However, termination will not extend to the provisions of the conciliation agreement addressing the consequences of such termination. New conciliation proceedings cannot be opened until three months have passed from the end of the previous ones.
If the debtor fails to observe the terms of the safeguard plan and becomes insolvent, a creditor, the judicial administrator in charge of supervising the implementation 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 judicial reorganisation proceedings or, if the rescue of the company appears obviously impossible, the opening of liquidation proceedings.
Existing equity owners may be entitled to receive dividends, but, because of their moral duty towards the company, they should not in principle accept them if such distribution would compromise the company's chances of recovery.
In safeguard or judicial reorganisation proceedings, equity owners will be regrouped into class(es) of equity holders if required under thresholds or if the thresholds requiring the constitution of classes of affected parties are met. In this case, they shall vote on the drafting plan under the rules governing votes at shareholders/equity holders’ general meetings, except the decision is taken at the same two-thirds majority. Similar to dissenting creditors, a plan may be imposed on equity holders if specific legal conditions are met (see 6.4 Claims of Dissenting Creditors regarding the cross-class cram-down applicable to dissenting equity holders).
Judicial Reorganisation Proceedings
When the debtor is insolvent (under the cash flow insolvency test – see 2.5 Requirement for Insolvency) and rescue does not appear to be impossible, the management of the distressed company must request the opening of judicial reorganisation proceedings no later than 45 days from the date on which it becomes insolvent (provided that conciliation proceedings are not pending).
Any unpaid creditor or the public prosecutor may request the court to open judicial reorganisation proceedings. The effects of an involuntary judicial reorganisation are similar to those of voluntary judicial reorganisation proceedings.
The purposes of judicial reorganisation proceedings are the sustainability of the business, the preservation of employment and the payment of creditors, in that order.
As it is a court-administered proceeding, the insolvency judge opens a six-month “observation period”, renewable for up to 18 months (against a maximum of 12 months under safeguard proceedings), during which the debtor will negotiate a waiver of debt or rescheduling with its creditors. Unlike out-of-court proceedings, a judicial reorganisation is public and pre-filing claims are automatically stayed against the company.
At the end of the observation period, the judge will make an order for:
Judicial liquidation proceedings apply to a debtor that is insolvent and whose recovery is manifestly unfeasible. The liquidation proceeding may be initiated by an insolvent debtor, a creditor or the public prosecutor.
The purpose of such a proceeding is to liquidate a company by selling it as a whole or by selling each branch of activities or asset one by one.
In order to request the court to open an immediate liquidation proceeding, the debtor must show evidence that its recovery is hopeless and obviously impossible. The court may order the immediate liquidation of the debtor’s assets and will appoint a liquidator to replace the debtor in its management and proceed with the sale of the assets (private sale or auction).
However, when it seems possible that all or part of the business has the chance to be sold to a third party, then the operation of the company will continue temporarily for up to six months.
The court will end the judicial liquidation proceedings when either of the following occurs:
Calculating a Creditor’s Claim
Creditors must file a petition for their claims within two months from the publication of the opening judgment in the BODACC (the Official Gazette for Civil and Commercial Announcements). Creditors residing outside of France can avail themselves of an extension period of up to four months for declaring their claims. Failure to file a claim within this time limit will render the creditors unable to take part in the subsequent distribution of funds as part of the plan. All claims are required to be declared, whether contingent or unquestionable.
The proceedings may be officially commenced from the judgment ruling the opening of the judicial reorganisation or liquidation proceedings.
The judgment ordering the commencement of judicial reorganisation proceedings opens an observation period that may last six months (or less) and up to 18 months as a maximum. At the end of the observation period, the court may decide to approve a continuation plan or a sale plan (as a subsidiary way only) that has been prepared during the observation period by the debtor, the judicial administrator or the liquidator.
As indicated above, the observation period of judicial reorganisation proceedings may last up to 18 months. The law does not provide any maximum duration for liquidation proceedings; in practice, the duration will depend on the ongoing litigation, the size of the company and the value of its assets. There is a simplified form of liquidation proceedings available for small businesses, which lasts for a maximum of one year.
During the observation period of a judicial reorganisation or during a liquidation proceeding (if applicable), all secured and unsecured creditors are subject to a stay on legal individual proceedings and enforcement actions against the company for proceedings or claims that arose before the opening judgment. However, in order to be stayed, legal proceedings or enforcement actions must be related to a default of cash payment. Otherwise, legal proceedings or enforcement actions related to a specific performance (execution forcée en nature), such as the release of a document, the termination of a contract or the reimbursement of defective hardware, are not subject to the stay on proceedings principle.
Management of the Company
During the observation period of judicial reorganisation proceedings, the court appoints a judicial administrator to be in charge of assisting the management of the debtor’s business. The management of the debtor will continue the daily management of the business while the judicial administrator supervises and sometimes authorises in advance any exceptional decisions to be taken about the debtor’s assets. During liquidation proceedings, however, a liquidator is appointed by the court, and the management of the debtor is usually (but not necessarily) divested of all rights pertaining to the business of the debtor and the disposal of assets. Given the severity of the financial difficulties encountered by the distressed debtor, the business of the company will usually be managed entirely by the liquidator.
Rejecting or Disclaiming Contracts
In judicial reorganisation proceedings, the judicial administrator has the exclusive power to continue or terminate the debtor’s contracts. The judicial administrator may request the termination of a contract that is deemed necessary to the safeguarding of the debtor and if the contract involved does not excessively prejudice the other party’s rights. If contracts are continued, the debtor and the creditor remain in the same situation as existed prior to the opening of the proceeding. The creditor shall continue to honour its commitments despite the default of payment by the debtor prior to the proceedings. If the contract is rejected, the effect may also be favourable to the debtor since the burden will be reduced. The creditor will have to file its claim resulting from the rejection of the contract. The same provisions apply in liquidation proceedings that open with an observation period.
Creditors’ Rights of Set-Off or Netting
Despite the principle of a stay on proceedings, creditors who are part of insolvency proceedings may be paid by set-off if they have reciprocal receivables against the debtor. If arising prior to the opening judgment, the set-off occurs by effect of law to the extent that receivables are due, liquid and payable. Otherwise, set-off can occur post-filing only if the two receivables are deemed connected (see above).
Information Available to Creditors
The creditors’ representative gives notice to the secured creditors by a registered security interest or by leasing agreements at the beginning of the insolvency proceedings. The other creditors (unsecured ones) will be aware of the start of the proceedings from the notice published in the official gazette (BODACC).
Insolvency proceedings are concluded with the distribution of the realised company value to the different claims holders in the selected assets of the debtor. The value distribution follows a predetermined rank order. Creditors’ claims are settled hierarchically with respect to asset collateralisation and rights of priority. Creditors’ ranking is, however, very complex to describe since it will depend on many factors. Hereinafter, the basic principles that normally apply to the ranking of creditors will be described (see 5.5 Priority Claims in Restructuring and Insolvency Proceedings).
In the context of judicial 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, in which 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 without liabilities (with exceptions) and a list of the employment contracts to be transferred. The price offered for the transferred assets (including real estate assets) is usually at a significant discount compared to their going-concern market value. 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. There is also 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 court-administered 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.
There are no committees under French law for new proceedings opened since 1 October 2021, but rather classes of creditors, which are grouped according to the nature of their claims and not depending on their quality.
The rules for safeguard proceedings apply regarding the creation of classes of affected parties and their powers and expenses (see6.3 Roles of Creditors).
The principal legislation that applies to cross-border restructuring and insolvency cases involving France and other EU member states is European Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), as amended, in particular by Regulation (EU) 2018/946 of the European Parliament and of the Council of 4 July 2018 (the EU Insolvency Regulation).
The EU Insolvency Regulation applies within the European Union (other than Denmark) to public insolvency proceedings as defined therein and listed in its Annex A (including safeguard, accelerated safeguard, judicial reorganisation and judicial liquidation proceedings). It provides that the courts of the member state in which a debtor’s “centre of main interests” (COMI) is situated have jurisdiction to commence the main insolvency proceedings relating to such debtor. The determination of a debtor's COMI is a question of fact on which the courts of the different member states may have differing and even conflicting views.
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. The presumption that the COMI is in the place of the registered office will not apply if the registered office has shifted in the preceding months.
When the other country is one of the member states of the European Union (excluding Denmark), the European texts applicable in this matter – particularly the European Regulation – are based on the principle of the immediate and automatic recognition of decisions relating to the opening, running and closing of the insolvency proceedings in all other EU member states without any special procedure or declaration of enforceability being required. There are few defences available that could prevent enforcement (eg, public policy incompatibility).
See 8.5 Recognition and Enforcement of Foreign Judgments for further details.
France has not adopted the UNCITRAL Model Law on Cross-Border Insolvency (1997) (Model Law) (in contrast to the UK). However, the EU Insolvency Regulation has introduced some provisions to facilitate the co-ordination of insolvency proceedings opened against companies that are part of the same group.
The main rules under French insolvency law determining which jurisdiction's decisions, rulings or laws are paramount are those provided by the EU Insolvency Regulation, with the main test being the COMI (see 8.1 Recognition or Relief in Connection with Overseas Proceedings).
Foreign creditors benefit from the following specific provisions:
In countries where the EU Insolvency Regulation does not apply and insolvency judgments are made in a jurisdiction that does not have a treaty with France, recognition will no longer be automatic but will be subject to a court declaration of enforceability (exequatur).
In out-of-court proceedings, the President of the court appoints a mandataire ad hoc or a conciliator, whose mission is laid down in the order.
In safeguard and judicial reorganisation proceedings, the court appoints a supervisory judge, 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.
In out-of-court proceedings, the mandataire ad hoc or conciliator do not have any management responsibilities; they will only assist the debtor in negotiating an agreement with all or part of its creditors and/or other stakeholders.
Under safeguard proceedings, the judicial administrator generally supervises the debtor, who stays in possession and prepares the safeguard plan (mission de surveillance). The court may decide that the judicial administrator assists the debtor, which means that all the payments should be controlled by the judicial administrator (mission d’assistance).
Under reorganisation proceedings, the judicial administrator generally assists the debtor (mission d’assistance). The court may decide in extreme situations that the judicial administrator should administer the company (mission de gestion).
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 judicial reorganisation proceedings, the creditors’ representative is mandatorily appointed to represent the creditors and protect their collective interest, and 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 to distribute the proceeds among the creditors.
Out-of-court proceedings are carried out by a mandataire ad hoc or conciliator, whose name may be suggested by the debtor itself, under the supervision of the President of the commercial court.
In court-administered proceedings, the court appoints the officers and fixes their mission within the judgment opening insolvency proceedings.
In safeguard and judicial reorganisation proceedings, the public prosecutor may submit to the court the name of a judicial administrator and the creditors' representatives to be appointed, upon which the court shall request the debtor's observations. The rejection of such proposals must be duly motivated. The debtor may also propose the name of a judicial administrator.
In liquidation proceedings, the public prosecutor can suggest the appointment of a particular liquidator.
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.
While managing the distressed business, directors need to act in the ordinary course of business. As a matter of corporate law, directors have fiduciary duties towards the company first and, as such, need to preserve it as a going concern and act in accordance with its corporate interest.
Within the scope of liquidation proceedings, directors may be personally liable for acts of mismanagement that would have contributed to an insufficiency of assets in accordance with Article L. 651-2 of the French Commercial Code. The liability of directors may be retained for having increased the financial difficulties of the company. Since the Sapin II Law No 2016-1691 dated 9 December 2016 entered into force on 11 December 2016, directors' liability would be excluded in the event of mere negligence in the management of the company.
Directors may also incur criminal liability for criminal bankruptcy (banqueroute), as set out in Articles L. 654-1 et seq of the French Commercial Code, or for other criminal offences, as set out in Articles L. 654-8 et seq of the French Commercial Code.
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, or late filing for insolvency proceedings.
Under French law, the concept of a shadow directorship or de facto management (gestion de fait) targets any person who, directly or indirectly, interferes or has interfered with the management decisions of the company. Creditors can become shadow directors, as can shareholders or more generally anyone. A de facto manager has the same responsibilities as a de jure manager of the company.
Creditors do not hold any individual direct right to sue a distressed debtor held liable. The right to pursue is generally deferred to the liquidator (mandataire judiciaire) 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.
In judicial reorganisation or liquidation proceedings, when a debtor goes into insolvency, the insolvency court may declare void certain transactions that have been entered into during the hardening period (nullités de la période suspecte).
An exhaustive list of transactions that are set aside by the court when carried out during the hardening period is provided by the French Commercial Code, as follows:
In addition, any payment made or any transaction entered into during the hardening period is subject to optional voidance at the discretionary power of the insolvency court, subject to the fulfilment of two conditions:
The hardening period starts from the date that the debtor becomes insolvent and may be backdated by the insolvency court up to 18 months before the insolvency judgment. If a conciliation agreement has been reached and formally approved prior to the opening of the judicial reorganisation or liquidation proceeding, the insolvency date cannot be set at a date before the court order approving the conciliation agreement.
A petition to annul a voidable payment or a transaction may be brought by the judicial administrator/liquidator, the creditors’ representative, the commissaire à l’exécution du plan or the public prosecutor. Under French law, a petition relating to the hardening period may only be brought in an insolvency proceeding to the extent that the insolvency test is met.
Fewer Insolvencies for More Opportunities
At the end of 2021, corporate bankruptcies (for most company sizes and in most sectors) were at their lowest level compared to the pre-COVID-19 figures from 2019, with a 50% drop in insolvency proceedings and a 10% decrease in pre-insolvency situations. This was largely due to the temporary impact of government emergency measures and support, including:
However, the current economic cycle is quite unusual. Some companies are over-leveraged, while the financial markets are in turmoil and more and more investors are attracted to the high-yield debt market. This trend offers new perspectives on both the debt and equity markets. In fact, most of the major deals in the restructuring market have involved a reorganisation of both debt and equity.
These trends highlight that a restructuring process requires more than just dealing with debt; it now also requires a holistic and thorough restructuring of a company's balance sheet. In France, “loan-to-own”, “lender-led” or “debt-for-equity swaps” are no longer extraordinary practices but are increasingly being considered as the most efficient and effective way to deleverage a company's balance sheet while providing for new streamlined governance structure.
Far beyond the traditional restructuring and insolvency paradigms, this crisis has highlighted the need for multidisciplinary, timely and targeted action involving a deep reshuffling of the often complex equity and debt structure.
Accordingly, the restructuring practice is shifting from emergency liquidity treatment through consensual negotiations and covenant resets to sector consolidation driven by distressed M&A activity, complex lender-led transactions and increased shareholder activism.
Whilst other company-led recovery strategies are possible for financially vulnerable targets (eg, share capital increases or bond issuances), depressed market valuations and lower competition levels allow investors to create synergies, acquire a new product line or establish themselves in new geographical areas.
Finally, this pandemic has inevitably acted as a real wake-up call for some sectors and industries, which need to reset and completely reshape their supply chain. It has also provided an opportunity to reassess partnership models and the possibility of growth through M&A activity. The themes of discounting, green and environmentally sustainable strategies, cost rationalisation, digital acceleration, industry consolidation and corporate innovation should be afforded the highest priorities.
To mitigate the overall damage of this health crisis and ease company recovery, there will be important and vital choices to make: who is the better equipped – existing or new partner-investors? And what strategy, models and organisational changes should – or should not – be pursued?
Market Outlook and Expected Timeline
In the meantime, the pandemic brought forward an unprecedented economic downturn. A reduction in business activity left many European companies heavily indebted and suffering substantial reductions in profitability (primarily as a result of the significant market disruptions during the pandemic); some of those businesses are facing enduring or even permanent changes to their economic environment.
In addition, there are concerns regarding the soaring price of raw materials. These increases, which cannot always be absorbed by a corresponding increase in sales prices, may put pressure on companies’ cash flow, forcing them to fully draw down on their French State-backed loans (if available), or even to use supplier credit and/or extend payment terms. If high(er) prices persist beyond the end of the year and into 2022, it is likely that margins will be negatively impacted, hindering financial recovery and potentially even compromising the survival of certain companies.
As a result, many European companies are likely to be insolvent (or on the verge of insolvency) when the public support measures are withdrawn. A return to more normal levels of financial restructuring and insolvency activity is expected as these measures are scaled down, or even an acceleration of activity mid-2022. This is because substantial amounts of French State-backed loans will become repayable in March 2022; combined with the French Presidential election due to be held in May 2022, it is reasonable to anticipate an acceleration in restructuring activity starting in spring 2022, with a steady flow of restructuring transactions in the following 18-month period.
The recent reforms to the French restructuring legal framework (resulting from the implementation of EU Directive No 2019/1023 of 20 June 2019 on preventive restructuring frameworks), amongst other things, have rebalanced the rights between different creditor groups, and are expected to also help distressed or special situation investors to become more comfortable with the French legal framework and generate more activity (ie, the end of a shareholder-friendly legal framework, which discouraged some foreign investors).
Target Distressed Sectors
The busiest sectors for insolvencies recently recorded in France were retail (eg, Camaieu, Vivarte/La Halle, Celio), consumer products (eg, Office Depot, Groupe Ales, Agatha), media (eg, Ymagis, Technicolor, Solocal, Mars), transportation (eg, Europcar, Hertz, Corsair) and oil and gas (eg, Vallourec), whereas data for the rest of Europe shows that food and beverages was the busiest sector (alongside retail, consumer products and oil and gas).
Non-digitised retail and consumer product players and commercial real estate groups will continue to be heavily affected. Industrial sectors are also likely to be affected in the near future due to raw material shortages and higher energy costs, which will have a real impact on the market and its participants.
Growing inflation will also have an impact on certain sectors (eg, tech) and can hasten debt reschedulings and financial restructurings. Shareholder activism is also fast becoming an area of focus for stressed or underperforming listed companies, creating opportunities for both defensive and offensive strategies and tactics by distressed investors and hedge funds.