France: French Distressed Companies Law Modernized

Last Updated: 30 March 2014
Article by Laurent Assaya

Order No. 2014-326 of March 12 (the "Order"), adopted pursuant to enabling legislation No. 2014-1 of January 2, significantly modernizes French distressed companies law.  

The primary objective of the Order is to encourage recourse to mediation proceedings and conciliation proceedings, the efficiency and success of which have been demonstrated consistently in recent major financial restructurings. 

The Order also makes important changes to insolvency proceedings, the volume of which has greatly increased in recent years. For example, 509 safeguard proceedings were opened in 2006, versus 1,633 in 2013, and 46,950 reorganization and judicial liquidation proceedings were commenced in 2003, versus 63,101 in 2013. The increasing incidence of such proceedings has encouraged the government to make them more efficient by maintaining the architecture of insolvency proceedings established in 2006, but by modifying the way that such proceedings are organized. 

Safeguard proceedings will benefit from wider access with the introduction of the new accelerated safeguard proceedings. In reorganization proceedings, the rights and powers of the creditors have been improved in order to encourage solutions that enhance a debtor's prospects for recovery. 

Finally, the French government's intention is to improve the efficiency of liquidation proceedings for companies whose situations are irremediably compromised, and to accelerate the process for companies with no assets available for distribution to creditors or shareholders. 

The reforms have already been criticized for not being ambitious enough. As proposed, the Order would have made it easier to displace controlling shareholders, which would have significantly favored lender-led restructurings. These provisions, however, were not retained in the enacted legislation. Even so, the reforms appear to be fulfilling expectations regarding distressed M&A transactions. For instance, the Order includes a mechanism enabling corporate groups to transfer their assets and operations during conciliation proceedings. Moreover, the reforms incorporate procedures into French law that will facilitate pre-packaged sales akin to those that are commonly effectuated under UK law.

Measures Designed to Prevent Financial Distress 

The allure of pre-insolvency proceedings for dealing with financial distress has prompted the French legislature to diversify the tools available to practitioners.

Among the most important aspects of the reforms are new provisions allowing a debtor to file a motion with the president of the commercial court requesting that the conciliator supervise a partial or total transfer of the debtor's assets (article L. 611-7 of the French Commercial Code). 

In enacting the reforms, lawmakers intended to introduce, on a trial basis, procedures allowing for prearranged sales similar to those prevalent in the UK. The tools previously available in French insolvency proceedings (procedures collectives), which made pre-packs enforceable for recovery plans (e.g., accelerated financial safeguards dealing with the transfer of the outstanding capital of the debtor and allowing the creditors or third-party buyers to become the new shareholders of the debtor), have been supplemented with a new tool: a pre-pack for transferring assets. One of the undeniable advantages of a court-authorized prearranged sale in insolvency proceedings is the protection that is offered to the seller against the risk that an insolvency proceeding will fail. Without making a distinction between small and large companies, which would distort the statistics, recent data suggest that as many as 90 percent of French insolvency proceedings lead to a judicial liquidation. The assets pre-pack therefore appears to be a formidable trump in surmounting this stumbling block.

An assets pre-pack will be negotiated during conciliation proceedings and then finalized in reorganization or judicial liquidation proceedings. Because the Order is silent regarding the timing and conditions of such transactions, practice will refine the conditions for a transfer of assets in reorganization or judicial liquidation proceedings. Article L. 642-2 of the French Commercial Code specifies only that, in determining the conditions for approving a proposed transfer of a debtor's assets, the court "after having solicited the opinion of the public prosecutor department, can take into account the steps performed by the mediator or the conciliator."

Apart from an assets pre-pack, a transfer of a debtor's assets may continue to be effected under the auspices of a conciliator outside of reorganization or judicial liquidation proceedings. New article L. 611-7 of the French Commercial Code may be construed as sanctioning existing practice, which involves requesting a conciliator to supervise a transfer of assets during conciliation proceedings. There are clear benefits to structuring distressed M&A transactions as part of conciliation proceedings.

Court review of a prospective purchaser's business plan is deemed necessary to minimize "boomerang" risks for the seller in the event that insolvency proceedings for a transferred activity are commenced after the transfer. "Boomerang" risks include employees' claims for the nullification of the transfer and/or the payment of a large severance package from the seller in respect of employee claims. The reorganization proceedings of Kem One after its transfer by Arkema, or of LFoundry Rousset following its transfer by Atmel, have recently illustrated these risks. In these two cases, it has been argued—with hindsight—that the purchaser's business plan at the time of the transfer lacked credibility and was unlikely to succeed. In addition, the recent enactment of the Florange Law has heightened the advantages of using conciliation proceedings for the transfer of a debtor's assets. A conciliator will be able to certify to the commercial court that the seller has used its best efforts to find a purchaser for a profitable site with respect to which closure was contemplated by the seller.

To ensure implementation of the provisions of an acknowledged (constaté) or approved (homologué) conciliation agreement, the Order provides that the debtor shall have the ability to petition the court for the appointment of a conciliator to act as a representative entrusted with implementing the agreement.

To make pre-insolvency proceedings more efficient, the Order reinforces the privileged status of new money. If a debtor is subject to safeguard or reorganization proceedings after having received new money in conciliation proceedings, the court no longer has the power to impose a uniform payment schedule for new money obligations. In such a case, the new money creditors shall be considered "off plan," and the debtor shall be obligated, subject to negotiations, to repay the new money obligations immediately and not under the schedule of the recovery plan, typically 10 years. The Order significantly encourages new financing in conciliation proceedings. Lawmakers omitted a provision in the final legislation that would have expanded the scope of privileged status to include the claims of French taxing authorities and social organizations "for overdue interest, enhancements, penalties and fines due on the debts that have been subject to discounts in the approved agreement."

Another important element of the reforms is a provision making "aggravating" clauses unenforceable in pre-insolvency proceedings as well as insolvency proceedings, in which such clauses are already void. Contractual provisions that penalize a debtor who is later the subject of a mediation proceeding or conciliation proceeding, such as provisions obligating the debtor to bear legal or professional costs of the creditors' legal or financial advisers, are now invalid.

Changes to Rules Governing Accelerated Financial Safeguard Proceedings

Accelerated financial safeguard proceedings, which were introduced into French law by the law of October 22, 2010, and for which eligibility requirements were made more flexible by the law of March 22, 2012, have already been subject to important structural modifications. These proceedings, which made the connection between conciliation and safeguard proceedings, enabling the implementation of prepackaged plans, have been split into two phases under the Order. Chapter VIII of Title II, which is entitled "De la sauvegarde accélérée" (accelerated safeguard proceedings), has been entirely rewritten to provide for accelerated safeguard proceedings and accelerated financial safeguard proceedings.

Accelerated safeguard proceedings are similar to accelerated financial safeguard proceedings in that only a debtor involved in ongoing conciliation proceedings who has formulated a plan may request the commencement of an accelerated safeguard proceeding. The principal distinction between the two lies in which creditors may be affected by the proceeding. An accelerated safeguard proceeding impacts only pre-existing creditors that have made a demand for outstanding debts owed to them, thereby excluding employees, ongoing vendors and landlords. The deadline for implementing a safeguard plan is three months, without any possibility for an extension. Thus, accelerated safeguard proceedings are now available to operating companies that have suppliers among their significant creditors.

The Order contains two additional provisions designed to clarify the distinction between accelerated financial safeguard proceedings and accelerated safeguard proceedings; namely, (i) as was the case prior to the reforms, accelerated financial safeguard proceedings affect only creditors that are members of credit institutions and bondholders, and (ii) the timeframe for implementing a plan in an accelerated financial safeguard proceedings (i.e., one month, with the possibility of a one month extension) remains unchanged.

The addition of the accelerated safeguard proceedings has been criticized by those who believe that the introduction of new safeguard proceedings will needlessly complicate the rules and procedures governing companies.1 Although the new regime may seem more complicated to business persons, practitioners have welcomed the change because it provides a greater range of options.

Adjusted Balance of Power Among Players in the Proceedings

The Order is also designed to re-level the playing field by giving creditors greater rights and powers. Most of the rebalancing mechanisms pertain to reorganization proceedings rather than safeguard proceedings, where debtors receive more favorable treatment as a matter of course.

First, the Order provides for a recapitalization mechanism for a company undergoing reorganization proceedings. In the event that the interests of equity holders will be impaired as part of a recovery plan over their objection, the court administrator can request that a representative be appointed to convene a shareholders' meeting and vote in lieu of the shareholders for a recovery plan providing for a modification of the capital structure. This provision has been subject to criticism by those who assert that a court administrator should have the power to appoint a representative in other situations where shareholders refuse or are otherwise unwilling to cooperate.

The Order also provides that, in a safeguard or reorganization proceeding, a creditor that is a member of one of the committees has the ability to propose and submit to the administrator a competing plan. Unlike chapter 11 proceedings under U.S. law, in which the debtor has the exclusive right to propose and solicit votes for a plan for up to 18 months, the Order does not provide for any such exclusivity, even in safeguard proceedings. However, a creditor's ability to submit a competing plan for court review and approval is a major improvement that should encourage the participation of new players in French investment markets.

The Order does not make any significant changes to the rules governing committees of creditors. The statutory majority required for approval by a committee remains at two-thirds of the amount of the receivables held by voting members. The Order also retains existing rules governing the composition of committees. Proposals for merging the bondholder and credit institution committee representatives were not included in the final legislation.

The Order introduces significant changes pertaining to the recognition and enforcement in interim proceedings of voting and subordination agreements. This is expected to be a welcome development in international markets and among senior creditors intent upon enforcing their preferred status vis-à-vis junior or mezzanine creditors.

The Order also modifies the rules governing the validity and enforcement of shares transfer consent clauses (clauses d'agrément) contained in the articles of association of a company. Under the reforms, such clauses are enforceable only in reorganization proceedings and no longer in safeguard proceedings.

An important proposal in the draft legislation for involuntary transfers of the equity capital of shareholders or controlling partners under certain circumstances was not retained in the Order. It is anticipated that this controversial measure will be included in reforms to be implemented later in 2014.

The Order slightly modifies the criteria for subordination of the terms of a transfer plan (plan de cession) to the provisions of a recovery plan. Previously, the adoption of a transfer plan was possible only if the debtor was faced with an "inability to ensure rehabilitation without assistance." Going forward, a partial or complete transfer of a debtor's assets will be possible only if "it is obvious that the recovery plan(s) proposed for the company cannot result in successful rehabilitation."

The Order also eliminates the requirement under previous law that, in safeguard proceedings, the company must pay its trade creditors immediately. The company subject to safeguard proceedings will be able to continue to rely on more favorable terms of payment. The insolvent company subject to reorganization proceedings will continue to be obliged to pay its trade creditors immediately.

Improvements to Liquidation Proceedings

Possible reforms to Title IV of Book VI of the French Commercial Code have long been discussed. Efforts toward simplification and acceleration of liquidation proceedings initially resulted in the introduction of simplified judicial liquidation proceedings. However, the protracted nature of liquidation proceedings under French law is still of great concern. So much so that in 2011, France was reprimanded by the ECHR for violations of article 6, § 1 (regarding failure to comply with reasonable timeframes) and article 1 of protocole n°1 (regarding due respect for property rights).2 The Order is intended to mollify these concerns. The reforms are aimed at improving liquidation proceedings by introducing "ultra simplified judicial liquidation" proceedings as well as various measures designed to accelerate the administration of liquidation proceedings.

Along the lines of the provisions governing simplified judicial proceedings, the Order introduces new proceedings referred to as "du rétablissement professionnel" (professional recovery). These new "ultra simplified" proceedings are available only to individual debtors who: (i) are not subject to existing insolvency proceedings; (ii) have not hired any employees during the six months prior to commencement of the proceeding; and (iii) own assets of only nominal value. The duration of a professional recovery proceeding is four months, after which the court will order that the proceeding be closed, triggering a discharge of debts that have been disclosed by the debtor to the court. The aim of professional recovery proceedings is to provide expedited financial relief to individuals who have a professional occupation of the micro-entreprise type.

The Order also modifies various rules and procedures governing "ordinary judicial liquidations" with the goal of facilitating the closure of liquidation proceedings and alleviating constraints imposed on debtors. The reforms introduce a new basis for closure—namely, "when the interest of continuation is disproportionate compared with the difficulties associated with selling the remaining assets." This change is significant, particularly in liquidation proceedings involving negligible assets, and should reduce the number of unclosed liquidation proceedings languishing in the charge of bodies entrusted with recovering assets. The Order also empowers the court to appoint a representative for the purpose of "continuing the pending proceedings and distributing any amounts received upon closing the proceedings when such closure does not follow a court ordered discharge of liabilities." As noted previously, the objective of the Order is to remove impediments to the closure of liquidation proceedings, even if, at the time of closure, certain disputes regarding the grounds for closure remain unresolved and must be resolved afterward.

The Order shall enter into force on July 1. With certain exceptions, it will apply only to insolvency proceedings commenced on or after that date.

Lawyer

Footnotes

1 Observatoire consulaire des entreprises en difficultés, La réforme du droit des entreprises en difficulté, CCI Paris Ile-de-France.

2 ECHR, September 22, 2011, 60983/09, Tetu v. France.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions