An overview of French insolvency law
Jean-Michel Lucheux and Olivier Puech
Gide Loyrette Nouel
A new insolvency Act, the Loi de Sauvegarde des Entreprises, came into force in France on January 1 2006. Its main purpose is to promote restructuring rather than bankruptcy proceedings. Company managers are encouraged through the Act to restructure their business before the company declares the inability to pay its current debts with its available assets (the state of suspension of payments).
The Act not only implemented an adapted version of the US Chapter 11 through the introduction of safeguard proceedings, but also codified the practice of mandat ad hoc procedures (whereby a company's legal representative confidentially requests assistance from a receiver appointed by the court) and improved corporate voluntary arrangements through conciliation proceedings.
Strong incentives for conciliation
With the new conciliation and safeguard proceedings, French insolvency law now provides strong incentives for debtors to anticipate their difficulties, and for creditors to help businesses in difficulty and to participate in their financial recovery.
Conciliation proceedings are not only available to businesses experiencing a real or foreseeable difficulty, but also to those that have been in a state of suspension of payments for less than 45 days. Upon the manager's request, the court appoints a conciliator to help the company reach an agreement with its creditors.
Once an agreement has been reached, two types of judicial approvals might be envisaged. Firstly, the agreement can be simply certified by the president of the court, keeping the proceedings and the content of the agreement entirely confidential.
The agreement might otherwise be approved by a court judgement which is published (thus breaching the confidentiality of the existence of the proceedings and the agreement) without, in principle, disclosing the content of the agreement between the company and its creditors. Such a court approval offers at least two advantages:
(i) Co-contracting partners that grant new financing, new goods or new services in the agreement to ensure the continuity of the business benefit from a preferential claim if safeguard, reorganisation, or liquidation proceedings are subsequently commenced.
(ii) If insolvency proceedings are subsequently commenced, the court initiating these proceedings cannot fix a date for the suspension of payments that is prior to the agreement's approval. Securities granted or payments made during conciliation proceedings cannot be subsequently nullified on the grounds that they occurred during the suspect period.
The commencement of the new safeguard proceedings can be requested by debtors who are not in a state of suspension of payments, but can nonetheless demonstrate that they are experiencing difficulties which might lead to such a state. Here, safeguard proceedings result in the approval of a safeguard plan by the court to restructure the debt and/or the business.
Restructuring and liquidation
The reorganisation proceedings, available to debtors who are in a state of suspension of payments, follow most of the safeguard proceedings rules, including appointment of judicial agents, stay of lawsuits against the debtor for debts born before the opening of the proceedings, and statement of the claims to a creditors' representative.
The new Act has created creditors' committees in both safeguard and reorganisation proceedings in order to give creditors a more active role in the elaboration of a restructuring plan. Two committees are instituted: one for all credit institutions and the other for main suppliers. The creation of such committees is mandatory for large companies (i.e. companies with at least 150 employees or a turnover of at least €2 million), but is also available to smaller companies.
Liquidation proceedings remain the sole avenue for debtors where business restructuring is impossible.
The reform also insulates creditors who participate in a company's recovery – the risk of an action for damages for abusive extension of credit has almost vanished. The law now sets a presumption that creditors are not liable for credits given to businesses that later become insolvent. This presumption can only be rebutted (i) in the case of fraud, (ii) where there is an intermeddling with the business management, and (iii) where securities are granted in an amount disproportionate to the credit in question.
It is still too early to tell whether the Act will prevent the bulk of insolvency proceedings from ending up in liquidation proceedings, as was the case before 2006. Nevertheless, figures for 2006 already show the reform to be a great success. The number of conciliation proceedings initiated in 2006 has skyrocketed and 500 safeguard proceedings have already been initiated both for small and large companies.
The Eurotunnel proceedings, the safeguard plan of which was approved by the Commercial Court of Paris on January 15, is the most talked about to date due to the social and financial issues at stake. These proceedings, in view of the complexity of the group structure, have already resulted in lawsuits on several legal issues, notably the inclusion of hedge funds in the financial institutions committee (until now, the courts have ruled that hedge funds should be included in the committee) and the treatment of bondholders in the case of foreign bond issues.