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
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
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
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
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
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
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.
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.
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