Restructuring and insolvency in France: overview

A Q&A guide to restructuring and insolvency law in France.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and insolvency Country Q&A tool.

This Q&A is part of the global guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.

Contents

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. The most common types of security for immovable property are:

  • Mortgage (hypothèque). If the debtor defaults, a mortgage gives the creditor a right to:

    • require the sale of the property at a public auction and be repaid out of the proceeds;

    • obtain a court order transferring title to the secured property as payment of its claims; and

    • benefit from a priority right (droit de suite) if the secured property is sold to a third party without the creditor being notified. If the third party cannot settle the claim, it can be forced to surrender the property to the secured creditor.

    The mortgage agreement can also provide that the creditor, in case of default, will be automatically vested with title to property after an expert's appraisal (the expert is appointed by the parties or the court).

    A mortgage must be created by a deed, drafted, stamped and executed before a notary or under an agreement deposited with a notary. These formalities are required to ensure validity and perfection of the mortgage. As a debtor can grant more than one mortgage as well as privileges over the same immovable property, the deed must be registered with the Mortgage Registry (Conservations des Hypothèques) so that the rank of creditors can be established.

  • Seller's privilege (privilège de vendeur d'immeuble). A seller's privilege is created by operation of law. This privilege is granted for the seller's benefit to secure the portion of the price that cannot be paid in cash. This confers the same rights as a mortgage (see above). This is created by operation of law.

  • Lender's privilege (privilège de prêteur de deniers). A lender's privilege is created by deed for the benefit of a lender funding the purchase of an immovable property. This privilege confers the same rights as a mortgage (see above).

    This must be created by a deed, drafted, stamped and executed before a notary. A lender's privilege is usually documented in the same deed as the deed of sale of immovable property, which must be registered with the Mortgage Registry (see above, Mortgage). These formalities are required to ensure validity and perfection of the privilege, as well as enforceability against third parties.

  • Fiducie. The Law of 19 February 2007 introduced this concept (similar to a trust) to the French legal system. In a fiducie, one or several settlers transfer assets, rights or security interests to a trustee that manages those assets, according to the terms of the trust agreement, for the benefit of designated beneficiaries.

    The trust agreement must be registered with the French tax authorities within one month of signing. Compliance with this filing obligation is necessary to ensure validity and perfection of the security.

Effects of non-compliance. Overall, all types of security are void if the required formalities mentioned above are not complied with (in particular where the security must be created in writing, whether or not before a notary). Non-compliance with the registration requirement makes the security unenforceable against third parties.

Movable property

Common forms of security and formalities. The most common types of security for movable property are:

  • Pledge. This is a security interest over a tangible or intangible asset created by contract. It can be used to secure the payment of any type of debt. If the debtor defaults, the creditor can either:

    • apply for a court order transferring ownership of the pledged asset to it;

    • be paid in cash from the proceeds of auctioning the asset.

    Parties to a pledge agreement can provide, at the time the security interest is created or thereafter, that where the creditor wishes to enforce the pledge, it can choose an alternative out-of-court enforcement process (pacte commissoire), under which the secured creditor is automatically vested with title to property after an expert's appraisal (the expert is appointed by the parties or the court).

    Some pledges confer to the secured creditor a right of retention (droit de rétention) over the pledged asset. The pledged asset is transferred to and retained by the creditor until the debt has been paid in full. An increasingly common type of pledge with a retention right is one taken over the securities account opened with a bank to record the securities' book entry (nantissement de compte-titres). The creditor can retain the securities until it has been paid in full, even if the debtor becomes insolvent and if the court-appointed administrator tries to repossess the securities so that they can be included in a sale plan (plan de cession) (see Question 6, Rehabilitation proceedings (redressement judiciaire): Conclusion).

    Generally, there are no specific formalities to create a pledge. However, to ensure third parties cannot challenge its existence or date of creation, certain types of pledges must be registered with a specific public registry.

  • Dailly assignment of receivables (cession de bordereaux Dailly or cession de créances professionnelles à titre de garantie). A debtor can transfer present or future debts owed to it by third parties to the creditor together with all security interests attached to them (Article L313-23, French Monetary and Financial Code). A Dailly assignment of receivables can only be used if all the following apply:

    • the creditor is a credit/banking institution licensed to carry out banking activities in France;

    • the receivables are assigned to secure facilities granted in connection with business activities; and

    • the assigned receivables arose during business or professional activities.

    Claims must be assigned using a special transfer form (bordereau) signed by the assignor, describing the amount and type of receivables to be assigned. The assignment comes into effect from the date specified on the form. Failing any agreement to the contrary, the remittance of the transfer form results in the legal assignment to the assignee of the security interest attached to the assigned receivables. The Paris Commercial Court held, in a widely commented decision rendered in the Coeur Défense case (Commercial Court of Paris, 19 October 2009), that a Dailly assignment was enforceable despite the debtor's filing for insolvency. This decision was confirmed by the Court of Appeals of Versailles on 28 February 2013.

  • Assignment of claims against third parties (délégation). A debtor transfers claims against its own debtor to the creditor under an agreement between the three parties. This type of assignment is used when the conditions for the more simple Dailly assignment of receivables (see above) are not met. Such an assignment can either be:

    • parfaite, where the transferred debtor is no longer bound to pay its initial creditor;

    • imparfaite, where the transferred debtor continues to be bound to pay its initial creditor and/or the creditor benefiting from the assignment.

  • Cash collateral charge (gage-espèces). Title to cash collateral is transferred to the creditor. If the debtor defaults, the creditor can set-off all sums owed by the debtor against the creditor's obligation to return the charged cash to the debtor.

  • Fiducie. See above, Immovable property: Common forms of security and formalities.

Effects of non-compliance. See above, Immovable property: Effects of non-compliance.

 

Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency?

Where creditors rank on insolvency is complex, and any attempt to provide a simple list can be misleading. However, the following basic principles apply:

  • On insolvency, there is a stay of proceedings. As a result, creditors cannot enforce their rights relating to debts that arose before insolvency proceedings. There are some exceptions, such as claims secured by an assignment of receivables by way of Dailly assignment (see Question 1, Movable property) or claims secured by a retention of title clause (see Question 3, Retention of title clause (clause de réserve de propriété)).

  • A portion of employees' pre-petition claims benefit from a preferential status (superprivilège des salaires). This essentially protects the last 60 days' wages in arrears before the judgment opening insolvency proceedings. If the bankruptcy estate cannot pay these claims from its available cash, they are paid as advances by a national wage insurance body (Association pour la Gestion du régime de garantie des créances de Salariés), which then replaces the employees' ranking as a creditor.

  • Lenders that extended credit to a company as part of a workout agreement during conciliation proceedings (see Question 6, Conciliation proceedings (conciliation): Conclusion) rank ahead of all pre-petition and post-petition claims, if this does not prevent insolvency at a later stage. This does not apply to arrears of wages and post-filing court costs (essentially the administrator's or liquidator's fees), which always rank ahead.

  • In safeguard and rehabilitation proceedings (see Question 6, Safeguard proceedings (procédure de sauvegarde) and Rehabilitation proceedings (redressement judiciaire)), post-petition claims benefit from a statutory privilege provided that they either:

    • arise for the purpose of funding the observation period;

    • represent consideration due to a lender, or to a provider of goods or services, in a business transaction directly connected to the company's activities continued during the observation period.

  • Post-petition claims must be paid when they fall due. If not, they rank ahead of both secured and unsecured pre-petition claims. Post-petition claims, however, rank after arrears of wages, post-filing court costs and new money facilities extended in a court-approved conciliation workout agreement.

  • In liquidation proceedings (see Question 7, Liquidation proceedings (liquidation judiciaire)), the creditors' ranking is the same as in safeguard or rehabilitation proceedings, except that the pre-petition mortgage claims rank ahead of post-petition claims.

  • Shareholders do not receive any repayment of their capital investment, unless a surplus remains after all the creditors have been paid in full (which is extremely rare).

 

Unpaid debts and recovery

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

Retention of title clause (clause de réserve de propriété)

This is a guarantee that a buyer grants to a seller when buying a movable asset on a deferred payment basis. The seller benefiting from this guarantee retains legal title to the asset until the purchase price has been paid in full. If the buyer defaults, the seller can repossess the asset.

There are no specific formalities in relation to a retention of title clause, but it must be:

  • In writing.

  • Clear.

  • Visible on invoices before delivery.

Seizure of the debtor's property

A creditor can seize any asset belonging to the defaulting debtor, provided the creditor has an immediately enforceable debt instrument (titre exécutoire) (that is, an instrument created by a deed executed before a notary or a court decision).

If the debtor persists in not paying, the creditor can auction the asset and be paid out of the proceeds.

The main types of seizure are:

  • Seizure of tangible property (saisie-vente). This applies to all of the debtor's tangible assets.

  • Seizure of intangible property (saisie-attribution). The creditor seizes a sum of money belonging to the debtor and held by a third party (usually a bank). There is an accelerated procedure lasting eight days, which allows a creditor to seize listed securities that have been deposited in a securities account.

  • Seizure of immovable property (saisie-immobilière). Mortgaged property is transferred to the creditor or a third party bidder through the civil court.

Protective measures

If a creditor does not have an enforceable debt instrument, protective measures over the debtor's assets (mesures conservatoires) can still be granted by court order provided there is both a:

  • True basis for the creditor's claim.

  • Risk that the creditor will not recover the claim.

Once a court order granting protective measures is obtained, the creditor must begin an action on the merits within one month, otherwise the order becomes invalid.

Protective measures can be granted as either:

  • Attachments (saisies conservatoires). These allow a creditor to freeze any asset (tangible or intangible) belonging to the debtor. The asset then cannot be transferred until the creditor obtains an enforceable debt instrument. Specific rules apply to certain types of attachments (such as attachments of wages).

  • Orders authorising the taking of security (sûretés judiciaires). These authorise a creditor to take security over the debtor's:

    • immovable property (hypothèque judiciaire provisoire);

    • goodwill (nantissement judiciaire provisoire de fonds de commerce); or

    • shares or securities (nantissement judiciaire provisoire d'actions, de parts sociales ou de valeurs mobilières).

 
4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

Creditors can obtain an emergency order granting a provisional payment (provision) provided there are no clear grounds for challenging the basis of their claims. An application must be made to the president of the court and is usually dealt within eight days (or 24 hours if a real emergency can be shown). While the order only lasts until a final decision is made on the merits of the case, it is immediately enforceable. Creditors must begin a full action against the debtor to recover the balance of their claims.

To secure their claims, creditors can also ask the court to grant protective measures over the debtor's assets until a final decision is made (see Question 3, Protective measures).

Once a petition for safeguard, rehabilitation or liquidation proceedings has been filed and accepted by the court, the debtor is prohibited from paying pre-petition claims. Any violation of the prohibition is criminally sanctioned. However, set-off between pre- and post-petition claims that are deemed "connected" is allowed (provided the creditor filed, in due course, proof of claim for those pre-petition claims).

The French Supreme Court held that obligations are connected when either:

  • They result from a single contract or they are carried out under a contract setting out the business relationship between the parties.

  • The obligations are carried out under separate contracts, which constitute a single global contractual arrangement.

 

State support

5. Is state support for distressed businesses available?

The following state support is available for distressed businesses:

  • Pre-2008 crisis support policies. Pre-crisis governmental assistance programmes were developed at European and domestic levels. In 2005, a specific French public entity (Oséo) controlled by the Ministry of Finance was set up to provide assistance and financial support to small and medium-sized companies. Oséo's main aims were to:

    • support innovation. Oséo used to grant 0% interest rate loans. It also provided quasi-equity (prêts participatifs) to help fund companies developing innovative techniques;

    • provide financings and co-financings alongside commercial banks;

    • provide guarantees to secure a portion (up to 70%) of the risks assumed by banks or venture capital providers.

    Oséo was very active before the 2008 crisis (providing EUR365 million in grants, EUR2.8 billion of guarantees and EUR6.9 billion of financings and co-financings in 2007). It was then the cornerstone of the special assistance programme to small and medium-sized companies launched in October 2008 (see below).

  • New policies or schemes devised as a response to the 2008 crisis. A package of public expenditures, tax exemptions or reliefs, loans and guarantees was set up after the 2008 crisis with two objectives:

    • accelerating the speed of economic recovery;

    • targeting industries likely to foster economic growth.

    The total cost of the stimulus package for 2009 and 2010 ranged between EUR40 billion to EUR47 billion. Special assistance programmes were implemented for small and medium-sized companies, the automotive sector and banks.

  • Creation of a strategic investment fund (Fonds Stratégique d'Investissement) (FSI). The FSI was set up on 19 December 2008 and was part of the 2008/2009 economic stimulus package.

    The FSI was a commercial company controlled by the state and by the Caisse des Dépôts et des Consignations (a public group serving the public interest and promoting economic development). Its aims were to:

    • invest in strategic companies driving the growth of the French economy and in up-and-coming groundbreaking small and medium-sized companies; and

    • encourage co-financing.

    In 2011, the FSI was endowed with an overall EUR20 billion budget contributed at par by the Caisse des Dépôts et des Consignations and the French State. Between 2009 and 2011, EUR7.1 billion was invested by the FSI in more than 1,800 companies.

  • Creation of the national investment bank (Banque Publique d'Investissement) (BPI). The BPI is a state-backed investment bank the purpose of which is to encourage economic growth and innovation by lending to small and medium-sized enterprises (SMES), that are active in the following sectors (among others):

    • business innovation;

    • export;

    • ecological transition;

    • social and solidarity economy.

Set up in January 2013, its promoters intend to make the BPI a major key player in European private equity.

The BPI aggregates the former strategic investment fund (FSI), Oséo and CDC Enterprises (one of the subsidiary of Caisse des Dépôts et Consignations). The BPI has a financial capacity of EUR42 billion to take minority equity stakes in SMEs, provide fiinancing (in the form or short-, medium- and long-term loans and lease operations). It also issues guarantees for which the risks are backed by guarantee funds that are included in its balance sheet, and that are supplied by public authorities.

The BPI is prohibited from contributing equity to real estate, banking, infrastructure and press enterprises.

 

Rescue and insolvency procedures

6. What are the main rescue/reorganisation procedures in your jurisdiction?

The French bankruptcy law was extensively reformed in 2005. One of the main objectives of the 2005 reform was to promote reorganisation at a preventive stage and prompt creditors to take a more active role in pre-insolvency and insolvency proceedings, essentially through creating a safer environment for them to extend new credit facilities during both pre-insolvency and insolvency phases.

The major innovation was the creation of safeguard proceedings (procédure de sauvegarde), which is intended to enable debtors that are in financial distress, but not yet insolvent, to reorganise and restructure under the court's protection (essentially with a stay of enforcement actions subject to very few exceptions) and negotiate a consensual restructuring plan with creditors (see below, Safeguard proceedings (procédure de sauvegarde))

An ordinance dated 12 March 2014 (2014 Ordinance) recently reformed the French bankruptcy law, with a view to:

  • Favouring preventative measures.

  • Strengthening the efficiency of pre-insolvency proceedings.

  • Increasing the rights of creditors in insolvency proceedings.

In addition to the 2014 Ordinance, a bill dated 6 August 2015 (2015 Bill) partially amended the French bankruptcy framework, and in particular introduced the possibility to squeeze-out the shareholders of a bankrupt company in rehabilitation proceedings.

The main provisions of the 2014 Ordinance (as detailed below) together with the implementing decree dated 30 June 2014, entered into force in July 2014. The 2015 Bill entered into force on 7 August 2015, subject to few provisions applicable as from March 2016.

The main rescue/reorganisation proceedings are set out below.

Ad hoc proceedings (mandat ad hoc)

Objective. These are flexible and confidential proceedings in which the president of the court appoints an agent to carry out appropriate tasks. In practice, the proceedings are used to organise an informal negotiation between a company and its major creditors.

Initiation. These proceedings apply to all private (in contrast to government) legal entities. Only the company's legal representative can file a petition to the president of the court provided that the company is solvent (see below). The board of directors does not need to approve the petition unless the company's articles of association (articles) state otherwise. The company's statutory auditors must be informed of the appointment of the court agent.

Substantive tests. The company must be solvent under a pure cashflow insolvency test (in contrast to a balance sheet test). A company is deemed insolvent (en état de cessation des paiements) when it is unable to meet its current debts out of its current assets (those in the form of cash or those that can be quickly turned into cash), taking into account undrawn committed facilities and other credit reserves and moratoriums/standstills accepted by creditors.

Consents and approvals. The management must co-operate with the court-appointed agent and the major creditors to negotiate a solution to the company's difficulties. Major creditors are invited to consider debt rescheduling and/or cancellation and/or new money injection. In addition, the main shareholders can be invited to negotiate and potentially re-capitalise the company. A debt restructuring agreement accepted by some creditors cannot be imposed on other dissenting creditors, as the process is consensual and no cram-downs can be imposed. In practice, majority rules provided for in the existing credit documentation (loan, bond) apply.

Supervision and control. The court agent does not have any management responsibilities. There are no restrictions on business activities.

Protection from creditors. The opening of ad hoc proceedings does not trigger any automatic stay. However, the management can apply for a moratorium (two years maximum) if creditors attempt to enforce their rights while ad hoc proceedings are pending. Under the 2014 Ordinance, ipso facto provisions are now deemed null and void in ad hoc proceedings. Creditors are therefore prohibited from accelerating a loan, or terminating an ongoing contract, by the sole reason of the opening of ad hoc proceedings (or of any filing for that purpose). More generally, any contractual provision increasing the debtor's obligations (or reducing its rights) by that sole same reason is also null and void.

Length of procedure. It usually takes a few days to obtain a court order appointing an agent, who will be in charge of organising and supervising discussions between the debtor and its major creditors. There is no statutory time limit within which the agent must complete his tasks, but the process usually lasts from one month to a year.

Conclusion. If an agreement is reached between a company and its creditors, the agent's duties end. If there is no solution to the company's financial difficulties and it later becomes insolvent, the only option is to initiate insolvency proceedings.

Conciliation proceedings (conciliation)

Objective. These are flexible, voluntary and, to some extent, confidential proceedings aimed at facilitating negotiations and reaching a workout agreement (protocole de conciliation) between a company and its creditors under the supervision of a court-appointed agent (conciliateur).

A workout agreement sets out any loans extended by creditors or shareholders, and any consents by creditors to grant waivers, rescheduling and/or cancellation of existing debts.

The main difference between ad hoc proceedings and conciliation is that creditors in conciliation benefit from certain protection against the risk of future clawback and that new money injected in the framework of a court-approved workout agreement benefits from a statutory super-senior status should the debtor subsequently file for insolvency. The 2014 Ordinance strengthened the super-senior status of new money and the law now provides that:

  • Privilege is extended to new money facilities made available during the negotiation phase: lenders can extend credit while discussions are pending and the privilege will vest if and when the agreement is ultimately approved by the court

  • If the debtor relapses and must file for bankruptcy, the new money providers do not have to suffer any rescheduling in a term-out scenario (see below, Safeguard and Rehabilitation).

Initiation. The proceedings apply to all private (in contrast to government) entities and to all individuals acting as merchants, craftsmen or independent professionals (professions libérales), such as lawyers. The company's legal representative (or the individual concerned) files a petition for conciliation proceedings with the president of the court. Unless otherwise specified in the company's articles, no specific consent or approval is required to petition for conciliation.

Substantive tests. The company must face legal or financial difficulties (whether actual or foreseeable). Conciliation is available to insolvent companies provided that they have been insolvent for less than 45 days before the petition is filed.

Consents and approvals. The management must co-operate with the court-appointed agent and the major creditors to negotiate a solution to the company's difficulties. Trade creditors and major shareholders can also be invited to take part in the negotiations. The social and tax authorities can be asked to consent to a debt-rescheduling plan or a cancellation of debts. As in ad hoc proceedings, a restructuring plan accepted by some creditors cannot be imposed on other dissenting creditors, unless accelerated financial safeguard or accelerated safeguard proceedings are opened (see below, Expedited financial safeguard proceedings (sauvegarde financière accélérée)). Majority rules provided for in the existing loan/bond documentation shall apply.

Supervision and control. The court agent does not have any management responsibilities. There are no restrictions on business activities. The 2014 Ordinance further provides that the court-appointed agent can, at the debtor's request and after consultation of the various creditors invited to participate to the negotiation, be entrusted with the task of selling the business (in whole or in part). Depending on the circumstances, such a sale would subsequently be implemented in formal reorganisation proceedings (safeguard, rehabilitation or liquidation proceedings).

Protection from creditors. The opening of conciliation does not trigger any automatic stay.

However, at the request of the debtor, the court can force one or several dissenting creditors that attempt to enforce their rights while conciliation is pending, to accept a moratorium for up to two years. This can be requested during both:

  • The conciliation negotiation phase.

  • The implementation phase (that is, after the workout agreement has been approved by the court).

Ipso facto provisions are deemed null and void in conciliation, as well as any clause increasing the obligations, or reducing the rights, of the debtor by the sole reason of the opening of conciliation (or of a filing for that purpose) (see above, Ad hoc proceedings: protection from creditors).

Length of procedure. It takes a few days to obtain an order appointing an agent. The court appoints the agent for a maximum of four months, but this period can be extended by up to a month at the agent's request.

Conclusion. If a consensus is reached, the company has two options:

  • It can request formal court approval of the workout agreement. This is to encourage creditors to extend credit to the company. New money facilities granted in the framework of a court-approved workout benefit from a statutory priority of payment should the company subsequently file for insolvency (see Question 2). Except where fraud has taken place, a court-approved workout agreement is protected from the risk of being voided in the future. However, this approval must be recorded in a full judgment accessible to the public and is therefore subject to challenge by a third party (tierce opposition) or appeal. Employees' representatives must be informed by the debtor of the terms and conditions of the restructuring agreement and be invited to attend the court hearing ruling on such agreement.

  • It can obtain the president of the court's approval. This option does not involve publicity, but implies that the creditors having granted new money facilities in the framework of such conciliation proceedings waive their right to priority of payment and to protection against the risk of the workout agreement being voided in the future.

As long as the conciliation agreement is in effect, interest on claims that have been restructured as part of the agreement cannot bear interest. If the workout agreement is successful, the court agent's duties end. However, the agent can be reappointed if a party to the workout agreement fails to comply with its obligations.

Safeguard proceedings (procédure de sauvegarde)

Objective. Safeguard proceedings allow companies that, though still solvent, face difficulties that they cannot overcome, to be restructured at a preventive stage under the court's supervision.

The safeguard plan can involve:

  • Debt restructuring.

  • Re-capitalisation of the company.

  • Debt-for-equity swap.

  • Sale of assets.

  • Partial sale of the business.

However, it cannot include a proposal to sell the business as a whole.

Initiation. Only the company can file a petition for safeguard. Companies that can use safeguard proceedings are the same as those that can use conciliation proceedings (see above, Conciliation proceedings (conciliation): Initiation).

Unless otherwise specified in the company's articles, no specific consent or approval is required to file a petition for safeguard proceedings. Before filing a petition, the management must inform and consult with the employees' representatives. However, these representatives do not need to approve the filing.

Substantive tests. The company must be solvent, but facing difficulties that cannot be overcome. If the company is insolvent or becomes insolvent after the opening of safeguard proceedings (that is, the company is unable to pay its due and payable liabilities arising post-filing), the court orders the proceedings to be replaced by rehabilitation or liquidation proceedings (see below, Rehabilitation proceedings (redressement judiciaire) and Question 7, Liquidation proceedings (liquidation judiciaire)).

In the Coeur Défense case, the Supreme Court held that no restriction should apply to the concept of "difficulty" justifying the opening of a safeguard. In particular, to be granted the benefit of safeguard court protection, the debtor cannot be requested to characterise such difficulty as affecting its business activities. In that particular case, the court ruled that the necessity for the debtor to renegotiate, in the case of an event of default, the terms and conditions of a loan may constitute a difficulty allowing such debtor to petition for safeguard proceedings.

Consents and approvals. For companies of a certain size (that is, companies with more than 150 employees or with an annual turnover of more than EUR20 million), three classes of creditors (two comités and one bondholder group) must be arranged into separate classes, comprising:

  • Financial institutions.

  • Major trade creditors (that is, trade creditors with more than 3% of the total trade claims).

  • Bondholders (gathered into one single class, regardless of the currency or applicable law of the various bond indentures).

Creditors with claims that were initially held by a credit institution or by a major trade creditor are invited to participate and vote within the class of financial institutions.

However, creditors benefiting from a fiducie agreement (see Question 1) do not vote, notwithstanding their identity/statute, within the classes of creditors. There have been cases where a shareholder that granted shareholder loan(s) was invited to vote in the class of financial institutions.

Subject to court approval, classes of creditors can also be organised for small companies.

The classes of creditors are invited to vote on the draft safeguard plan at a two-thirds majority in value for each class.

The court-appointed administrator must be informed by each member of the creditor classes of the existence of any:

  • Subordination agreement.

  • Agreement restricting or conditioning its vote.

  • Agreement allowing for third party payment of the debt.

The administrator must then submit to the relevant class member a proposal for the computation of its voting rights. If there is disagreement, the concerned class member can petition to the president of the court through motion proceedings.

To reinforce the creditors' role (so far reduced to making mere suggestions to the administrator) the 2014 Ordinance provides that any member of the comités (that is, financial institutions or major trade creditors, but not bondholders) can submit an alternative safeguard plan competing with the plan prepared by the debtor.

The plan is deemed approved by the classes if the required percentage in each class votes in favour of the plan. If the plan provides for a debt-equity-swap (or any other operation requiring shareholder approval), shareholders must also be consulted and vote in favour of the plan at a two-thirds majority (no craw-down of shareholders is possible in safeguard). However, the 2014 Ordinance provides that the majority applicable to shareholder meetings convened on first notice can be reduced by court order to a simple majority of the shareholders present or represented provided they represent at least 50% of the voting shares.

In practice, the bondholder class must be consulted after the class of financial institutions and the class of trade creditors have approved the plan.

Social and tax authorities are not members of the classes; they are invited to negotiate and can grant a debt rescheduling or cancellation. If the classes of creditors are not set up, or if one of the classes has rejected the draft plan, the plan must be negotiated on a one-to-one basis with each creditor.

If the creditors consulted individually refuse to approve the draft plan prepared by the company, the court can impose a ten-year maximum term-out to dissenting creditors.

However, this ten-year maximum term-out is without prejudice to any longer maturity date agreed in the loan agreement. Consenting creditors benefit from the shorter maturity date (if any) that they would have negotiated. The court cannot impose any debt-to-equity swap or debt write-off of principal or interest claims in a term-out scenario.

The 2014 Ordinance provides that the Court cannot impose a term-out plan to new money providers benefiting from the super-senior status attached to conciliation proceedings under the safeguard plan, unless they agree otherwise.

The yearly instalments under the term-out plan must not, after year three following court approval of the plan, be less than 5% of the total admitted pre-filing liabilities except if either:

  • The classes of creditors voluntarily accept a yearly repayment of less than 5%.

  • The contract initially provides for a longer maturity date.

Supervision and control. The judgment opening safeguard proceedings appoints:

  • An insolvency judge (juge commissaire) who oversees the whole procedure.

  • An administrator (administrateur) who supervises or assists the management to prepare a safeguard plan (plan de sauvegarde).

  • A creditors' representative (mandataire judiciaire) who represents the creditors' interests and assesses proofs of claim. This creditors' representative can be assisted by supervising creditors (créanciers contrôleurs)) appointed by the court.

The 2015 Bill now provides that at least two administrators and creditors' representatives must be appointed by the court, if the net revenues of the debtor or of one of the companies mentioned below reach at least a threshold of EUR20 million and the debtor either:

  • Owns at least three secondary establishments located in the jurisdiction of another Commercial Court than the one the debtor is registered in.

  • Owns or controls at least two companies against which safeguard, rehabilitation or liquidation proceedings have commenced.

  • Is owned or controlled by a company against which safeguard, rehabilitation or liquidation proceedings have commenced and that owns or controls another company against which safeguard, rehabilitation or liquidation proceedings have commenced.

All management decisions that go beyond ordinary actions must be approved by the insolvency judge beforehand.

Protection from creditors. Once a safeguard has been ordered by the court, there is an automatic stay of all actions against the company and individuals acting as guarantors and joint debtors. The following exceptions to the automatic stay are provided:

  • Claims secured by a security interest conferring a retention right. During the observation period, at the request of the administrator, the insolvency judge may, in exceptional circumstances, authorise the payment of a pre-filing creditor to obtain from that secured creditor the surrender of the retained pledged asset to the estate. The pledged asset must be necessary to the debtor's pursuit of its business activity.

  • Claims assigned by way of Dailly assignment of receivables. The creditor to which the debtor's receivables have been assigned by way of Dailly assignment, can directly seek payment of those assigned receivables despite any filing (for safeguard or rehabilitation proceedings) (see Question 1, Movable property). This was held by the Paris Commercial Court in the Coeur Défense matter, and confirmed by the Versailles Appeal Court on 28 February 2013.

  • Claims secured by a fiducie agreement. The creditor can enforce its rights over the assets transferred to the trust, except where the creditor initially agreed, at the time the fiducie agreement was executed, that those assets would remain in the debtor's possession (convention de mise à disposition).

  • Set-off and close-out netting of financial obligations. These are provided for by the French Monetary and Financial Code.

As a general rule, creditors (except employees) must file proof of their claim within two months of when the opening judgment was published in the legal gazette (Bulletin Officiel des Annonces Civiles et Commerciales). The period is four months for creditors located outside of France.

The 2014 Ordinance provides that where the debtor provided the creditors' representative with sufficient information on the existence of a claim and no proof of claim has been filed yet, the proof of claim is deemed filed with the creditors' representative.

Creditors are allowed to confirm or amend a proof of claim filed on their behalf by the debtor, or file their own proof of claim, which then prevails.

In relation to trading contracts/licences with the debtor, the court-appointed administrator can require the debtor's contracting party to perform ongoing contracts in exchange for the performance of the debtor's post-petition obligations. However, all contracts can be terminated at the option of the administrator.

The contracting party can require the administrator to express his position on the assumption of an ongoing contract, which will be automatically terminated once a formal notice is sent to the administrator and has remained unanswered within a month (renewable at the administrator's request).

The debtor's contracting party must perform its obligations despite non-performance by the debtor of its own pre-petition obligations. The non-performance of these pre-petition obligations will only allow the contracting party the right to file proof of claim.

Interest for loans with a duration of one year or more, or for contracts having a deferred payment of one year or more, will continue to accrue but cannot bear interest.

Length of procedure. Safeguard proceedings begin with an observation period of up to six months to assess the company's financial position. This period can be extended once for six months, and in exceptional circumstances, can be extended further at the Public Prosecutor's request for an additional six months.

Conclusion. Once approved by the court, the safeguard plan is enforceable against all members of the three creditors' classes (financial institutions, trade creditors and bondholders), including the dissenting minority. If the classes of creditors or creditors consulted on an individual basis (after a failure of the voting process within the classes or because the creation of the classes was not mandatory) refuse to approve the draft plan circulated by the company, the court can impose a ten-year maximum term-out on dissenting creditors. The court cannot impose any debt write-off.

Once the court approves a safeguard plan, it appoints an agent to supervise its implementation (commissaire à l' exécution du plan). If the company fails to meet its obligations under the plan and becomes insolvent, the court must order the plan to be cancelled and initiate rehabilitation proceedings (see below, Rehabilitation proceedings (redressement judiciaire)) or, if the rescue of the company appears as obviously impossible, liquidation proceedings (see Question 7, Liquidation proceedings (liquidation judiciaire)).

Expedited financial safeguard proceedings (sauvegarde financière accélérée)

Objective. The law of 22 October 2010 on banking and financial regulations, effective as of 1 March 2011, and its implementing decree of 3 March 2011, created a type of accelerated safeguard inspired by the US Chapter 11 pre-pack. The purpose of this expedited financial safeguard process (sauvegarde financière accélérée) is to restructure financial debt in a very short time frame, assuming the consent of at least two-thirds of financial creditors and, as the case may be, of bondholders is obtained.

The Thomson/Technicolor case (Commercial Court of Nanterre, 17 February 2010) is generally viewed as the first implementation of a quick pre-pack process before the law creating the expedited financial safeguard was enacted: a conciliation procedure was opened on 23 July 2009 and negotiations were conducted with creditors under the supervision of the conciliateur. However, it turned out, during the conciliation phase, that the contractual majority could not be reached, and so the company decided to file for safeguard so that the plan agreed with a two-thirds majority of banks and bondholders during conciliation could be imposed on the one-third dissenting minority through the safeguard voting process. It then took only 12 weeks to have a safeguard plan approved by each of the creditors' class and the court.

Initiation. Expedited financial safeguard is opened, at the debtor's request, provided that a conciliation procedure is pending (any direct access to the expedited financial safeguard is strictly prohibited) (see above, Conciliation proceedings (conciliation)) in which at least a two-thirds majority in value of financial creditors and, as the case may be, bondholders are likely to approve the restructuring proposals prepared by the company and the conciliateur. The opening of the expedited financial safeguard only has effects in relation to financial creditors and, as the case may be, bondholders (excluding therefore trade creditors from the process).

Substantive tests. Following the 2014 Ordinance, expedited financial safeguard applies to companies that are either solvent or that were insolvent for less than 45 days at the time the petition for conciliation was filed (see above, Safeguard proceedings (procédure de sauvegarde): Initiation and Substantive tests) provided they compile consolidated financial statements or their financial statements have been audited or established by a certified accountant and they reach at least one of the following thresholds:

  • 20 employees minimum.

  • Minimum annual turnover of EUR3 million (without value added tax).

  • Minimum total balance sheet of EUR1.5 million.

Consents and approvals. This is the same as for safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde): Consents and approvals) except that only the class of financial institutions (and as the case may be, the class of bondholders) are invited to vote on the plan proposed by the company at a 2/3 majority in value (of those assisting or represented at the meeting) in each class. Trade creditors are not affected by the proceeding.

Supervision and control. This is the same as for safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde): Consents and approvals).

Protection from creditors. This is the same as for safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde): Consents and approvals).

Length of procedure. The expedited financial safeguard process must be completed within one month, renewable once for one month maximum.

Conclusion. The opening of an expedited financial safeguard triggers most of the effects triggered by the opening of a safeguard (automatic stay, appointment of court agents, and so on) (see above, Safeguard proceedings (procédure de sauvegarde): Conclusion). The company must prepare a draft plan likely to receive sufficient support from its creditors, which would lead to its adoption. The plan must be submitted for approval to financial creditors and to bondholders (two-thirds majority in value). The mechanism applicable to the voting process for the adoption of the restructuring plan is the same as in safeguard, except that trade creditors are not invited to participate. Once approved by financial creditors (and as the case may be, the bondholders), the plan is submitted to the court for review and approval.

If any of the classes refuse to approve the plan, the court will close the proceeding. If, as a result of such closure, the company becomes insolvent, it will have no other choice than to file for rehabilitation or liquidation.

Expedited safeguard proceedings (sauvegarde accélérée)

Objective. The 2014 Ordinance has introduced in the French system an expedited safeguard (in addition to the expedited financial safeguard that is limited solely to financial creditors (see above, Expedited financial safeguard proceedings (sauvegarde financière accélérée)). This pre-pack process enables debtors, for which conciliation proved unsuccessful to reach creditors' consent, to be restructured in a very short timeframe with the consent of a two-third majority within creditor classes, including trade creditors.

Initiation. Expedited safeguard is opened, at the debtor's request, provided that a conciliation procedure is pending (any direct access to the expedited safeguard is strictly prohibited) (see above, Conciliation proceedings (conciliation)) in which at least a two-thirds majority in value of financial creditors and trade creditors (and as the case may be, bondholders) are likely to approve the restructuring proposals prepared by the company and the conciliateur.

Substantive tests. This is the same as in expedited financial safeguard proceedings (see above, Expedited Financial Safeguard proceedings (sauvegarde financière accélérée)).

Consents and approvals. The class of financial institutions, the class of major trade creditors (and as the case may be, the class of bondholders) are invited to vote on the plan proposed by the company at a 2/3 majority in value (of those assisting or represented at the meeting) in each class.

Supervision and control. This is the same as for safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde): Supervision and control).

Protection from creditors. This is the same as for safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde): Protection from creditors).

Length of procedure. The expedited safeguard process must be completed within a maximum of three months from the date of the opening judgment.

Conclusion. This variant of the expedited financial safeguard proceedings is intended to facilitate the negotiation of pre-packaged plans with the ability to eventually cram-down dissenting minority creditors through the vote of creditor classes, including trade creditors.

Rehabilitation proceedings (redressement judiciaire)

Objective. The aims of rehabilitation proceedings are to (in order of priority):

  • Safeguard a company's activities and prospects of recovery.

  • Save jobs.

  • Pay creditors.

Initiation. The company must file for rehabilitation no later than 45 days from the date on which it becomes insolvent (provided conciliation proceedings are not pending).

Rehabilitation proceedings can also be initiated:

  • At the request of any creditor, whether secured or unsecured (regardless of the amount of its claims).

  • At the request of the Public Prosecutor.

The companies that can use rehabilitation proceedings are the same as those that can use conciliation proceedings (see above, Conciliation proceedings (conciliation): Initiation).

The board of directors does not need to approve a decision to file for rehabilitation proceedings, unless the company's articles state otherwise. However, the company's legal representatives usually seek the board's approval as a precautionary measure. Before filing a petition, management must inform and consult with the employees' representatives. However, these representatives do not need to approve the filing.

Substantive tests. Rehabilitation proceedings are appropriate if the company is insolvent, but has not ceased operating, and its rescue seems possible.

Consents and approvals. The same principles apply as in safeguard proceedings (see above, Safeguard proceedings (procédure de sauvegarde)).

Three classes of creditors are automatically set up for companies of a certain size and at the option of the debtor, subject to court approval, for small companies.

If the three classes of creditors are set up, the rehabilitation plan must be approved by the same percentages as for safeguard (see above, Safeguard proceedings (procédure de sauvegarde)). In the same way as safeguard plans, rehabilitation plans can, in a term-out scenario, postpone the date on which the claims of dissenting creditors (except conciliation super-senior financings) must be paid by up to ten years (unless the initial maturity date was already in excess of ten years). However, the court cannot impose any debt write-off to dissenting creditors. If the court considers that no restructuring plan is viable, it can approve a sale (of all or part of the business) and the creditors will be repaid with the available proceeds.

Following the 2014 Ordinance, any member of the class of financial institutions or of the class of major trade creditors can submit to the vote a competing alternative restructuring plan.

As in a safeguard, if shareholder approval is required, the court can reduce quorum and majority rules applicable on first notice. Moreover, the court-appointed administrator can vote the shares of dissenting shareholders (although only in a limited set of circumstances) to promote conversion of debt into equity. For this purpose, shareholders must have:

  • Refused to restore themselves the company's net equity.

  • Refused to vote a share capital increase to that effect.

The court-appointed administrator will only have the power to vote a re-capitalisation within the limit of what is the mandatory minimum under the French corporate law to restore the company's net equity (up to 50% of the company's pre-existing equity and no more).

The 2015 Bill further introduced the possibility to squeeze out shareholders of a company under rehabilitation proceedings if those shareholders are no longer able or willing to turn the company around and if the draft rehabilitation plan contemplates a change in the equity structure. Such a squeeze-out could take the form of:

  • A forced sale of all or part of the shares of the shareholders that have refused to implement the required change in the equity structure and that hold directly or indirectly a majority stake or a blocking minority stake in the capital of the company.

  • An imposed dilution of their equity stake.

However, the application of this squeeze-out is very limited as the court may only force a shareholder to sell its shares in a company or appoint an agent in charge of implementing a capital increase if all of the following apply:

  • The shareholders have refused to implement the change in the equity structure contemplated under the draft rehabilitation plan.

  • The distressed company employs (directly or indirectly) a minimum of 150 employees.

  • The disappearance of the company is likely to cause serious disturbance to the local economy and employment.

  • A share capital reorganisation is the only solution to allow business activities to continue (a partial or total sale of the company's assets must be contemplated before allowing such squeeze-out).

In case of capital increase in cash (that is, contrary to a debt-equity swap), the preference rights of the shareholders still apply.

In case of a court-ordered sale of shares, and if the parties do not agree on the value of these shares, an expert is appointed by a court order to determine the value. In addition, if only part of the shareholders have voted against the draft rehabilitation plan and had their shares tendered by the court, the remaining shareholders that have voted in favour of the rehabilitation plan can benefit from a tag-along right (that is, they can ask the court to order the sale of their shares as well).

If it becomes clear that rehabilitation will not succeed, the court can order the conversion of the procedure into liquidation (see Question 7, Liquidation proceedings (liquidation judiciaire)).

Supervision and control. The judgment opening rehabilitation appoints:

  • An insolvency judge to oversee proceedings.

  • An administrator in charge of assisting the management or taking control of the company's management.

  • A creditors' representative to represent the creditors' interests and assess proofs of claim. This creditors' representative can be assisted by supervising creditors (créanciers contrôleurs) appointed by the court.

The 2015 Bill now provides that at least two administrators and creditors' representatives must be appointed by the court, if the net revenues of the debtor or of one of the companies mentioned below reach at least a threshold of EUR20 million and the debtor either:

  • Owns at least three secondary establishments located in the jurisdiction of another Commercial Court than the one the debtor is registered in.

  • Owns or controls at least two companies against which safeguard, rehabilitation or liquidation proceedings have commenced.

  • Is owned or controlled by a company against which safeguard, rehabilitation or liquidation proceedings have commenced and that owns or controls another company against which safeguard, rehabilitation or liquidation proceedings have commenced.

All management decisions that go beyond ordinary actions must be approved by the insolvency judge beforehand.

Protection from creditors. Rehabilitation triggers an automatic stay of proceedings against the company. However, this does not usually extend to actions against individuals acting as guarantors. The exceptions in safeguard apply (see above, Safeguard proceedings (procédure de sauvegarde): Protection from creditors).

As a general rule, creditors other than employees must file a proof of their claim within two months of the judgment opening rehabilitation proceedings being published (or four months in the case of foreign creditors).

In relation to trading contracts/licences with the debtor, the court-appointed administrator can require the debtor's contracting party to perform ongoing contracts in exchange for the performance of the debtor's post-petition obligations. However, all contracts can be terminated at the option of the administrator.

The contracting party can require the administrator to express his position on the assumption of an ongoing contract, which will be automatically terminated once a formal notice is sent to the administrator and has remained unanswered within a month (renewable at the administrator's request).

The debtor's contracting party must perform its obligations despite non-performance by the debtor of its own pre-petition obligations. The non-performance of these pre-petition obligations will only allow the contracting party the right to file proof of claim.

When an ongoing contract is pursued, which involves the payment of a sum of money, the contracting party can require (in rehabilitation and liquidation proceedings only) that the payment is made cash on delivery.

Interest from loans with a duration of one year or more, or from contracts having a deferred payment of one year or more, will continue to accrue but cannot bear interest.

Length of procedure. The rules for safeguard proceedings apply (see above, Safeguard proceedings (procédure de sauvegarde): Length of procedure).

Conclusion. The rehabilitation plan can combine all of the following:

  • A debt restructuring.

  • A re-capitalisation of the company.

  • A debt-for-equity swap.

  • The sale of certain assets or of portions of the business.

The administrator can only make a proposal to auction the business as a whole or by portions if the court rules that the company cannot continue to operate. In these circumstances, the sale plan is implemented within the legal framework of the rehabilitation but following the rules applicable to liquidation proceedings (see below).

 
7. What are the main insolvency procedures in your jurisdiction?

Rehabilitation proceedings (redressement judiciaire)

See Question 6, Rehabilitation proceedings (redressement judiciaire).

Liquidation proceedings (liquidation judiciaire)

Objective. The aim is to liquidate a company by selling:

  • Its business, as a whole or per branch of activity.

  • Assets one by one.

Initiation. The situation for rehabilitation proceedings applies (see above, Rehabilitation proceedings (redressement judiciaire), Initiation). Liquidation is the appropriate remedy when the company is insolvent and its rehabilitation appears obviously impossible. The companies that can use liquidation proceedings are the same as those that can use conciliation proceedings (see above, Conciliation proceedings (conciliation): Initiation).

Substantive tests. The debtor must be insolvent and its rehabilitation must appear as obviously impossible.

Supervision and control. The judgment opening liquidation proceedings appoints:

  • An insolvency judge to oversee proceedings.

  • A liquidator, who is responsible for:

    • collecting in all of the company's assets and paying the creditors to the extent that funds are available;

    • assessing proofs of claim and representing the creditors' interests.

    The 2015 Bill now provides that at least two administrators and creditors' representatives must be appointed by the court, if the net revenues of the debtor or of one of the companies mentioned below reach at least a threshold of EUR20 million and the debtor either:

    • Owns at least three secondary establishments located in the jurisdiction of another Commercial Court than the one the debtor is registered in.

    • Owns or controls at least two companies against which safeguard, rehabilitation or liquidation proceedings have commenced.

    • Is owned or controlled by a company against which safeguard, rehabilitation or liquidation proceedings have commenced and that owns or controls another company against which safeguard, rehabilitation or liquidation proceedings have commenced.

Up to five supervising creditors can be appointed by the court from among the creditors to assist the liquidator.

Consents and approvals. Not applicable (in a liquidation, creditors are not invited to vote as no restructuring plan is prepared by the debtor). Creditors are repaid according to their rank and privilege out of the proceeds of the sale(s) of the company's business (as a whole or branch by branch) or assets carried out by the liquidator.

Protection from creditors. Liquidation proceedings trigger an automatic stay of proceedings against the company. All pre-filing creditors are barred from enforcing their rights to seek payment from the debtor subject to some exceptions (the same as those applicable in safeguard and in rehabilitation, see Question 6). In a liquidation (unlike a safeguard or in rehabilitation), secured creditors benefiting from a pledge can enforce their security interest through a court-monitored allocation process (attribution judiciaire), that is, request the court to be transferred ownership of the pledged asset(s).

If a sale plan on all or part of the business is contemplated, trading parties cannot terminate or rescind their contracts with the debtor (same as for safeguard and rehabilitation proceedings).

Length of procedure. Liquidation proceedings last until the liquidator finds that no more proceeds can be expected from the sale of the company's business or assets. After two years (calculated from the judgment ordering liquidation), any creditor can request the court to order the liquidator to close the liquidation. There is a simplified form of liquidation proceedings available for small businesses, which last for a maximum of one year.

Conclusion. Liquidation closes when the business (as a whole or branch by branch) and any residual assets have been sold and the proceeds distributed to the creditors by order of priority.

 

Stakeholders' roles

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?

Stakeholders

Restructuring plan in safeguard and rehabilitation proceedings. In a safeguard, the drafting of the restructuring plan is usually the responsibility of the company's management, monitored or assisted by the administrator. In a rehabilitation, the management can be either assisted or (in exceptional cases) totally replaced by the administrator. However, since the 2014 Ordinance, competing restructuring proposals can be filed at the same time by any member of the class of financial institutions or of the class of major trade creditors.

Credit insurers are also important players. Shareholders are not a class, but for corporate law reasons need to be dealt with in case of a debt-equity-swap.

Sale plan in rehabilitation or liquidation proceedings. The administrator, or as the case may be the liquidator, has the most significant role as he is responsible for organising the sale process with a view to paying the creditors to the extent that funds are available.

Creditors (except when they benefit from a right of retention) have no say on the choice of the purchaser, which is made by the court when approving the sale plan.

Influence on outcome of procedure

The objectives of French reorganisation procedures, in order of priority, are to:

  • Safeguard a company's activities and prospects of recovery.

  • Save jobs.

  • Pay creditors.

In a safeguard or rehabilitation, the restructuring plan is submitted to creditors for approval. Creditors can be consulted through classes or on an individual basis. Eventually, a ten-year maximum term-out can be imposed by the court on reluctant creditors consulted on an individual basis (that is, creditors that are not members of the classes or where these classes rejected the plan circulated by the company) but the court cannot impose any write-off.

If a conversion of debt into equity is contemplated by the plan, the consent of the shareholders is also required under the current statute (see however Question 6).

 

Liability

9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

Director

Liability can arise where, as a result of management errors, a company's assets do not cover its debts. An action for mismanagement, which only applies in liquidation proceedings, can lead to an insolvent company's management being liable for all or part of its debts. This liability can extend to formally appointed directors or managers with representation powers, and to any individual or entity that is not officially a director or manager but, that repeatedly influenced the company's management or strategic decisions (that is, shadow (de facto) directors/managers).

A parent company can also be held liable for an insolvent subsidiary's debts if it has been appointed as a director or is deemed a shadow director or manager of that subsidiary (through (an) individual(s) appointed at the shareholders' request).

The liquidator or the prosecutor can initiate the action. In addition, the majority of the supervising creditors (contrôleurs) (which would have been appointed by the court to assist the liquidator) can summon the liquidator to bring an action or commence proceedings on their own initiative if he does not do so after such summoning.

Directors found liable for certain specific breaches can be (independent of any liability action or criminal prosecution based on the same facts):

  • Forced to assign their equity interest in the company.

  • Prohibited from managing any business for up to 15 years and holding any public office for up to five years.

Breaches include:

  • Using the company's assets or credit for their own benefit, or the benefit of another corporate entity in which they have a direct or indirect interest.

  • Using the company to conduct and conceal business transactions for their own benefit.

  • Carrying out business activities at a loss to further their own interests, knowing that this would lead to the company's insolvency.

  • Fraudulently embezzling or concealing all or part of the company's assets.

  • Fraudulently increasing the company's debts.

Partner

In a general partnership (société en nom collectif) (SNC), each partner is individually liable to the creditors for all the partnership's liabilities. Accordingly, a partner in an SNC cannot require a creditor to sue other partners before suing him for an outstanding debt of the partnership. Although an SNC has legal personality under French law, it is transparent in some respects (for example, if the partnership proves insolvent and ceases to make payments as they fall due, the partners are likely to be deemed in the same situation).

Under other types of partnerships (known as sociétés civiles), partners only become liable for the partnership's liabilities if and when it is evidenced that creditors of the partnership will not receive payment from their debtor. In practice, this is when the partnership voluntarily or involuntarily files for liquidation proceedings.

Parent entity (domestic or foreign)

The main liability risks faced by a parent company when its subsidiary files for bankruptcy are as follows:

  • Liability action for mismanagement. A shareholder can be held liable for mismanagement if such shareholder was appointed as "de jure" director of the subsidiary or repeatedly exercised an influence on management decisions and can thus be deemed a "de facto" director (see above, Director). Liability can then arise where, due to management errors, the subsidiary's assets do not cover its debts.

  • Environmental issues. A parent company can be held liable for the clean-up costs, which otherwise should have been paid directly by its subsidiary (assuming such has become insolvent) under the following circumstances:

    • the parent company holds directly or indirectly at least 50% of the subsidiary's shares;

    • the liquidator or the Public Prosecutor launches a specific legal action against the parent company (no direct third party plaintiff action allowed);

    • the liquidation or the Public Prosecutor can prove that the pollution is the result of the parent's gross negligence (faute caractérisée). Such gross negligence can be the result of either a series of positive actions or from a failure to act.

  • Piercing the corporate veil. See below, Consolidation of insolvency proceedings (extension de la procédure).

  • Liability in relation to employees. Although under French law employees can seek indemnification in relation to their employment contracts against their legal employer, recent case law has created an exception to this general rule by developing the concept of co-emploi. Co-emploi can be translated as "de facto co-employment" (for cases where a second deemed-employer is considered to be a shadow employer of the concerned employee). To ascertain "co-employment", French courts must find either a:

    • direct relationship of subordination between the employee and the alleged co-employer; or

    • blending of interest, activities and human resources' management between the two co-employers.

In a group of companies, the second criterion is characterised by a systematic intrusion of the parent company in the management of its subsidiary, resulting in a total loss of autonomy of the subsidiary. If the above conditions are met, the employee will be entitled to sue both its legal employer and its shadow co-employer for any claim the employee may have (for example, in relation to redundancy payments, damages for unfair dismissal and so on).

Other party

Any individual or entity (even if not officially a director) can be held liable for mismanagement (see above, Director) if the individual/entity in practice repeatedly exercises an influence on management decisions (shadow management). Liability can then arise where, due to the management errors, the company's assets do not cover its debts.

Actions against a lender

All types of lender (not only financial institutions) are exempt from liability with respect to loans or credit facilities they have granted, except in the following circumstances:

  • Fraud.

  • Improper interference with the company's management.

  • Where the lender has obtained a security interest that is disproportionate to the amount of the loan.

The French Supreme Court ruled that, in order to trigger lender liability, the following conditions must be met:

  • One of the statutory triggering events occurred (that is, fraud, improper interference with management or disproportionate security package).

  • The loan itself was an act of wrongdoing (for example, abusive support in favour of a debtor that in fact was beyond any prospect of recovery, therefore creating a misleading appearance of solvency to the prejudice of other creditors).

Consolidation of insolvency proceedings (extension de la procédure)

Under French law, a corporation is deemed to be an autonomous and independent entity (principe de l’autonomie des personnes morales) and the company's assets should under normal circumstances not be affected by insolvency proceedings commenced against other companies within the same group. This is true of course provided group companies were incorporated as limited liability corporations (SA, SAS, SARL and so on).

As a consequence, where insolvency proceedings must be commenced for several group companies (for example if they become insolvent at the same time), there are no statutory or regulatory provisions that call for a joint procedure.

However, the court can order the debts of different companies to be paid from a larger consolidated pool of assets if:

  • A fictitious company (one without an independent management body) has been created in an attempt to disperse assets so that they are placed beyond the creditors' reach.

  • The estates of two or more companies are so closely connected that it is impossible to separate one company's activities from the other (confusion de patrimoines). This can be shown if, for example, the companies share the same management, the same assets, debts or bank accounts.

    Where a consolidation of estates is ordered, the various insolvency proceedings are merged into one single procedure. The effective date of the joint procedure (used, for example, for voidance purposes) is the opening date of the proceedings for the first company that filed.

  • Since the law of 12 March 2012 (enacted following the Petroplus case) it is now possible, where the consolidation of estates is ordered, to have protective measures ordered by the president of the court to freeze the assets of the legal entity to which insolvency proceedings are extended, and avoid asset misappropriation.

 

Setting aside transactions

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

In rehabilitation or liquidation, any transaction entered into during the hardening period (période suspecte) (including transactions entered into with members of the same corporate family) can be subject to clawback provisions. The hardening period runs from the date when the company is deemed insolvent, and can be backdated by the court by up to 18 months before the insolvency judgment. If rehabilitation or liquidation proceedings are preceded by a pre-bankruptcy conciliation workout, the insolvency date cannot be backdated to a date before the court order approving the workout agreement.

The following transactions are automatically void (that is, the court must declare these transactions void on petition by the administrator, the liquidator or the Public Prosecutor) if performed during the hardening period:

  • Any deed entered into without consideration transferring title to movable or immovable property.

  • Any bilateral contract in which the debtor's obligations significantly exceed those of the other party.

  • Any payment by whatever means, made for debts that have not fallen due on the date when payment is made.

  • All payments for outstanding debts, if not made by cash settlement or wire transfers, remittance of negotiable instruments, or Dailly assignment of receivables (see Question 1, Movable property) or any other means commonly used in business transactions.

  • Deposits or consignments of money made under Article 2350 of the Civil Code (governing pledges over certain intangible assets, including claims) in the absence of a final judgment.

  • Any mortgage or pledge (both conventional and judicial) granted to secure a pre-existing debt.

  • Any protective measure, unless this measure gave rise to a recordation or registration before the date of insolvency.

  • Any granting, exercise or reselling of stock options made under Article L225-177 et seq. of the Commercial Code.

  • Any transfers of movables or assignment of rights into a trust estate, unless this transfer or assignment occurred as a guarantee of a debt concurrently undertaken.

  • Any amendment to a trust agreement affecting the rights and movables already assigned or transferred to a trust estate as a guarantee of debts undertaken prior to such amendment.

  • Any declaration of non-seizability required by the debtor, under Article L526-1 of the Commercial Code. A declaration of non-seizability can be cancelled if made during the previous six months before the insolvency date

Any payment made, or any transaction entered into during the hardening period is also subject to optional voidance (that is, subject to the court's discretionary decision on petition by the administrator, the liquidator or the Public Prosecutor) if proper evidence is brought before the court that, at the time of the payment or transaction, the contracting party knew the company's insolvency. When dealing with intra-group transactions, this knowledge is presumed for companies belonging to the same corporate group.

Third party rights, including bona fide third parties, can be affected by those voidance provisions.

 

Carrying on business during insolvency

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

Ad hoc proceedings and conciliation proceedings

The court agent does not have any management responsibilities in these types of proceedings. There are no restrictions on the company's business activities.

Safeguard proceedings

The company can continue to operate the business and prepare a safeguard plan. The administrator is in charge of monitoring or assisting the management, but cannot take over any management responsibility. Any decision that does not fall within the scope of day-to-day management must be approved by the bankruptcy judge. The bankruptcy judge must also approve any decision to settle pending dispute(s).

Rehabilitation proceedings

The scope of the administrator's responsibilities is determined by court order. The administrator can simply assist the management to make decisions or can be appointed to take control of the company's management in whole or in part. Any decision that does not fall within the scope of day-to-day management must be approved by the bankruptcy judge. The bankruptcy judge must also approve any decision to settle pending dispute(s).

Liquidation proceedings

The liquidator has sole authority to bind the company and assumes all management responsibilities.

 

Additional finance

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

Conciliation proceedings

A debtor can seek super-senior new money financing within the voluntary framework of a conciliation procedure. This super-senior status (privilège de conciliation) is achieved if the new money financing is approved (homologué) by a full court judgment, which is both docketed and public (as opposed to a simple stamping by the president of the court).

In case of subsequent liquidation, lenders of new money benefiting from the privilège de conciliation are paid before all other creditors, except for court costs and a portion of pre-liquidation wages benefiting from a super-priority ranking (that is, the last 60 days' wages in arrears before the liquidation judgment).

If the subsequent procedure is a safeguard or rehabilitation, the 2014 Ordinance provides that the court cannot impose a term-out plan on the new money claims unless the new money providers agree otherwise (see Questions 6 and 7).

Safeguard and rehabilitation proceedings

During the observation period of safeguard or rehabilitation proceedings, post-filing requests for debtor-in-possession (DIP) financing can qualify for a statutory priority if they are approved by the court as necessary to fund the business. These post-petition advances must be paid at maturity. If not, they rank ahead pre-filing claims, subject to arrears of wages (60 days maximum), court costs and new money facilities extended in a court-approved conciliation workout agreement.

 

Multinational cases

13. What are the rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to file claims in a local restructuring or insolvency process?

Recognition

If insolvency judgments are made in a jurisdiction that is party to a treaty with France, they are recognised and enforceable in France. In addition, Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) allows insolvency procedures in different EU member states to be automatically recognised. Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (Recast) reforming the Regulation 1346/2000 only applies to insolvency proceedings started after 26 June 2017.

If a company's centre of main interests (COMI) is in France, the main proceedings can be commenced before the French courts under the Insolvency Regulation. A company's COMI is presumed to be the place of its registered office unless it is proven that both:

  • Its COMI, as defined in the Eurofood decision of the European Court of Justice (case C-341/04, Eurofood IFSC Ltd), is in a country other than its place of incorporation.

  • The company's trade and financial partners are fully aware that the COMI of such company is not its place of incorporation.

Secondary proceedings can subsequently be commenced to liquidate an establishment's assets located in another EU member state. Secondary proceedings under the Insolvency Regulation are also appropriate if a company has an establishment in France, but its COMI is in another EU member state.

In the Belvédère case (Commercial Court of Beaune, 16 July 2008), the Commercial Court of Beaune (France) opened in 2008 insolvency proceedings for the French holding company, the French operating company and six Polish operating companies. Even though the Polish operating companies represented 80% of the total turnover and employed more than 3,000 employees whereas the group's headquarters, located in Beaune, employed less than ten executives, it was successfully argued by the petitioner that all strategic decisions were made in Beaune by the two individual directors, which were also together shareholders of Belvédère. The petitioner also managed to convince the Beaune Commercial Court that this situation was "perfectly known" within the group. This decision, although criticised by a vast majority of legal scholars, was nonetheless upheld by the Dijon Court of Appeals (at least implicitly, as the Court of Appeals denied access to the claimants trying to challenge the COMI finding on procedural grounds).

In the Mansford case (Court of Appeals of Paris, 25 February 2010), several Luxembourg holding companies filed for safeguard in France on the ground that their COMI was in France. In early 2010, the Paris Court of Appeals, applying the rationale of the Eurofood decision, held that French courts had jurisdiction over the matter for the following reasons:

  • All management and other meetings were held either in Paris or locally where the real estate assets were located.

  • The companies had no assets or activities other than a property asset and a letting activity in France (no Luxembourg activity whatsoever).

  • The two holding companies' sole purpose was to hold 100% of their ten subsidiaries (themselves carrying no activity in Luxembourg).

  • The ultimate parent company's sole purpose was to own 100% of holding companies that had no activity in Luxembourg.

  • The relationship with the lenders was initiated in France and the renegotiation of the financing documentation took place in France.

If the Insolvency Regulation does not apply and insolvency judgments are made in a jurisdiction that does not have a treaty with France, they are not automatically recognised. Foreign judgments can only be enforced if they have been subject to an inter partes procedure known as exequatur, which is intended to verify that the foreign court had proper jurisdiction, international public policy has been complied with and no fraud has taken place. Such exequatur process usually takes a couple of months, excluding appeal, which could lengthen the process.

Concurrent proceedings

The French court tends to consider an insolvency estate as a whole (universalité de patrimoine). This means that the court that has jurisdiction to open insolvency proceedings also has jurisdiction over all the company's assets, whether located in France or abroad. There are some exceptions to this for assets located in EU member states, which apply when secondary proceedings (which can only be liquidation proceedings) are opened to liquidate the assets of a company's branch(es) operating in another EU member state.

International treaties

France has not yet adopted the UNCITRAL Model Law on Cross-Border Insolvency 1997 and is party to very few bilateral conventions.

Procedures for foreign creditors

No special procedures apply to foreign creditors. They however benefit from a two-month additional period to file proof of claim.

 

Reform

14. Are there any proposals for reform?

Since 1 July 2014, the 2014 Ordinance and its implementing decree dated 30 June 2014 are applicable to pre-insolvency and insolvency proceedings.

Some practitioners however consider that the 2014 reform missed its initial purpose which was to allow a squeeze out of shareholders through a forced sale of their shares or a forced dilution of their equity stake. Even though viewed as essential by most practitioners to enforce a debt-equity-swap against dissenting shareholders when the equity has lost all value and conversion of debt is the only solution to preserve the business as a going concern, squeeze out provisions were not adopted as they could be assimilated to the creation of a new right to "expropriate", thus creating constitutional law issues, which needed further review.

The 2015 Bill sought to address this 'issue and provided for a limited squeeze-out of the shareholders in rehabilitation proceedings (see Question 6).

 

Online resources

Legifrance

W www.legifrance.com

Description. Official website. The English translation is potentially out-of-date and for guidance only. In France, there are no official translations of legislation and case law.

Eur-lex

W http://eur-lex.europa.eu/en/index.htm

Description. Official website and up-to-date. The English language version is binding.

Curia

W http://curia.europa.eu/juris/recherche.jsf?cid=2394473

Description. Official website and up-to-date.



Contributor profiles

Paul Talbourdet

De Pardieu Brocas Maffei A.A.R.P.I.

T+33 1 53 57 71 83
F +33 1 53 57 71 70
E talbourdet@de-pardieu.com
W www.de-pardieu.com

Professional qualifications. Paris Bar, 1992

Areas of practice. Substantial experience in insolvency and reorganisation proceedings, insurance transactions and litigation, both national and international. Main areas of practice also include complex real estate investments, corporate and real estate acquisitions and real estate finance.

Recent transactions

  • Coeur Défense. Representing the "A" bondholders of the securitisation senior tranche in the safeguard proceedings opened for Hold and its parent company Dame Luxembourg.
  • Nortel. Representing the finance lease creditors of Nortel Networks SA placed under main insolvency proceedings (administration) in the UK and under secondary proceedings (liquidation) in France.

Joanna Gumpelson

De Pardieu Brocas Maffei A.A.R.P.I.

T +33 1 53 57 71 82
F +33 1 53 57 71 70
E gumpelson@de-pardieu.com
W www.de-pardieu.com

Professional qualifications. Paris Bar, 2002

Areas of practice. Debt-restructuring and insolvency proceedings, both domestic and cross-border; representing French and foreign investment funds, banks, bondholders and so on, as well as issuers, French or foreign, in particular in failing leveraged buyouts.

Recent transactions

  • Nextiraone. Representing one of the largest creditors in the context of the first French pre-packed sale plan (pre-pack plan de cession) and debt restructuring at the level of the holding company.

  • JOA. Representing Alchemy having become the majority shareholder through a debt-equity-swap.

  • Orco Property Group. Representing the bondholders' committee.

  • Brealu. Representing Diversified Machine Inc (subsidiary of The Carlyle Group) in the takeover of Brealu's business in the framework of rehabilitation proceedings.

  • Belvédère. Representing the senior noteholders in the insolvency proceedings opened for Belvedere and its subsidiaries.

  • Coeur Défense. Representing the "A" bondholders of the securitisation senior tranche in the safeguard proceedings opened for Hold and its parent company Dame Luxembourg.

  • Mecachrome. Representing the bondholders of Mecachrome International Inc in the safeguard proceedings opened for the two French subsidiaries.


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