United States: Reform Of French Bankruptcy Proceedings -- The Amicable Reorganizations Draft Project, A Flawed Attempt

The draft legislation relating to the protection of distressed companies, published on October 13, 2003, by the French Department of Justice, has come as quite a surprise to most commentators. The text, which was submitted for comment to law practitioners, unions, and representatives of the corporate world, clashes with what had seemed to be the original intent of the government. Indeed, where the government's reform proposal of the procedures appeared to focus on upstream prevention in order to promote the early restructuring and redressing of distressed companies, the current text leans squarely in the opposite direction. In particular, we will address the three principal obstacles that, in our view, will dissuade senior management from ever contemplating the amicable reorganization procedures.

First, it appears that the mediator's role in this procedure is overbroad. As contemplated in the draft legislation, the mediator should naturally be afforded the opportunity to make propositions aimed at saving the distressed company as well as assisting it in negotiations with its creditors. The mediator's questionable role is that of an overseer of management and operations. This latter role will undoubtedly have a chilling effect on executives that would otherwise be inclined to turn to amicable restructuring because of the associated loss of autonomy and thus of control over the company. Conversely, this role also exposes the mediator personally to professional responsibility risks. Indeed, following a failed amicable restructuring, if judicial reorganization or liquidation procedures are initiated against the company, the mediator would be subject to claims due to negligent supervision or as a de facto manager.

Second, the draft legislation does away with the quintessential principle of confidentiality. Once again, the arguments put forth by the government in order to promote the goodwill and the acceptance of the project by the business community, namely that the amicable restructuring would be discreet, confidential, and even sanctioned by the rules of professional privilege, have been completely abandoned in the draft legislation. Among other things, the draft legislation states that (i) a court will not have the authority to ratify the amicable agreement without having previously heard or summoned representatives of the company's employees, (ii) the amicable agreement will be available for review by any interested third party upon request to the court clerk, and (iii) that the court's ratification decision will be published. If they remained unaltered, these provisions will essentially turn this procedure into a public one, thereby permanently jeopardizing the distressed company's creditworthiness, which would only accelerate rather than prevent its demise.

The final hurdle is the increased role given to the court throughout the process. This enhanced role is evidenced in several areas. First, and despite some ambiguous drafting on this point, it appears that an amicable agreement would only become enforceable among the parties once ratified by the court. Second, the mandatory judicial ruling required before the debtor takes any acts outside the ordinary course of business adds an additional level of court involvement that will certainly act as an impediment to the widespread use of the amicable reorganization procedures. Instead, one could envisage that such matters be left to arm's-length negotiations between the distressed company and its creditors; as is the case with loan and credit agreements where the parties negotiate the negative covenants, and sureties, of the borrower.

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