On 15 september 2021, a major reform of French insolvency law was enacted, mainly to implement the European Restructuring Directive.
This directive made it mandatory for all EU Member States to offer a « preventive restructuring framework » for companies facing financial difficulties, thus allowing debtors to place themselves under the protection of the court before they actually become insolvent. But paradoxically, from a French perspective, its implementation is generally viewed as shifting the balance of powers in favor of creditors, by comparison with our existing insolvency law. The reason for that is simple: on the one hand, several types of preventive restructuring proceedings already exist in France - namely mandat ad hoc, conciliation, and the various types of procédure de sauvegarde (safeguard proceedings), but on the other hand, the directive includes a number of rules protecting creditors which are totally new in the French restructuring landscape, such as the absolute priority rule and the best interest test. Similarly, the directive now allows to « cram down » shareholders, thus avoiding scenarios where shareholders would be able to block a debt restructuring (by refusing any share capital increase) although they were out of the money.
The situation is all the more complex as, because of the COVID-19 sanitary crisis, new legal provisions increasing debtors' protection have also been enacted since 2020, in particular in the framework of our « conciliation » proceedings. Some of those additional protections will be maintained, although amended.
In light of such reforms, the question arises as to whether foreign lenders should now consider that they will benefit from legal tools allowing them to take the lead in French restructurings.
1. Why was France viewed as « debtor-friendly »?
Back in 2011, the famous CSur Défense restructuring had a major impact on how foreign lenders viewed the French market.
A real estate special purpose vehicle, holding the CSur Défense building, had placed itself into French « safeguard proceedings » to prevent the risk that its sole creditor (a securitization vehicle) might decide to accelerate the loan which had financed the acquisition of the building. Simultaneously, its parent company, a Luxembourgish entity, had also placed itself under the protection of French safeguard proceedings (on the ground that its center of main interest was actually located in France), thus preventing the enforcement of the pledge it had granted over the shares of the French SPV. Then, French courts imposed a debt rescheduling plan upon the sole creditor, whereby the debt was frozen for four years.
Thereafter, various strategies have been used by lenders to try to avoid facing a similar scenario. The famous « double luxco » structure was invented to circumvent French insolvency law by creating two Luxembourgish entities above the French borrowers, thus allowing the lenders to benefit from a Luxembourg law share pledge. Alternatively, in some cases, lenders were granted a French law fiducie over the shares of the borrower, whereby the ownership of the shares was transferred to a trustee. In a limited number of cases, golden shares have also been used.
As a matter of fact, though, the use of so-called « hostile » safeguard proceedings, in the same way as in the CSur Defense case, remained very exceptional.
Another specific feature of French restructurings was the treatment of shareholders. Unlike in a number of other jurisdictions, they did retain the possibility to prevent any debt-to-equity swap. Therefore, lenders had to accept, in some cases, that shareholders would not be totally wiped out (e.g. they would retain a small portion of the share capital) although they were out of the money.
2. Does the « court-imposed debt rescheduling plan » still exist after the reform?
The concept of « court-imposed plan » traditionally refers to a debt rescheduling, over up to ten years, which the court is entitled to impose upon creditors, even if a majority (or all) of them expressly refused to grant it. Such a scenario is particularly feared by creditors, also because the rescheduling plan may provide for very low installments on the first years (e.g. 1% of the debts to be paid on year 1 and 2; 5% each year as from year 3 to year 9; and 63% on year 10).
This traditional « court-imposed plan » will no longer exist in safeguard proceedings, except for entities which are too small for classes of creditors to be created. Instead, the court will now be in position to impose a « cross-class cram down » upon dissenting creditors and / or shareholders, but only if at least a class of creditors voted for the plan and if a number of other conditions are met, including the absolute priority rule (i.e. a class of creditors must be paid in full if the restructuring plan includes any type of payment in favor of a class of a lower ranking). In other words, the support of at least some creditors will be necessary for the debtor to obtain the adoption of a debt restructuring plan.
The situation will be quite similar in the framework of redressement judiciaire (rehabilitation proceedings). The possibility to adopt a « traditional » court-imposed plan still exists, but only if no plan has been adopted through the vote of the classes of creditors and, interestingly, creditors may elaborate and put to the vote their own restructuring plan (which they are not allowed to do in safeguard proceedings).
3. Is security enforcement easier after the reform?
The reform does not facilitate security enforcement in the framework of insolvency proceedings.
The French Cour de Cassation (the highest civil and commercial court) had adopted on 25 November 2020 a case law which was extremely favorable to creditors, by allowing them to enforce security interest granted by a company to secure the debt of a third party (e.g. a subsidiary), even in case of insolvency proceedings. For example, according to this case law, the creditor of a subsidiary was entitled to enforce the pledge granted by its parent company over its shares, even if the parent company itself was subject to insolvency proceedings.
Interestingly, the reform aims to annihilate this case law. Double luxco or fiducie structures will therefore remain attractive tools for creditors.
In addition, the reform makes it easier for debtors to obtain a grace period, in summary proceedings, against creditors refusing to negotiate a consensual restructuring in the framework of confidential conciliation proceedings.
It is also worth noting that the law now weakens security interest granted over future assets (such as future receivables), by providing that as from the date of the commencement of insolvency proceedings, future assets are excluded from the scope of the existing security interest (except for the so-called « Dailly law » assignments of receivables which can be granted to financial institutions).
4. Have shareholders lost their ability to block debt to equity swaps?
The answer is yes (at least in companies of a significant size), and that is one of the key features of the reform.
In safeguard proceedings and in rehabilitation proceedings, the court now has the power to « cram down » not only the classes of dissenting creditors, but also shareholders.
This being said, it is worth noting that shareholders may benefit from a derogation to the absolute priority rule if such derogation proves « necessary to reach the goals of the plan and if the plan does not excessively affect the rights of the affected parties ». It remains to be seen whether this derogation will often be invoked in practice.
Conclusion – In light of the above, there is no doubt that the reform will dramatically change the way restructurings of large companies are handled in France, in particular because the debtor will no longer be able to rely on a credible « plan B» consisting of a court-imposed debt restructuring over ten years. That does not mean, however, that the French legal system is no longer « friendly » to debtors. Very efficient tools are available for debtors to negotiate and, if necessary, impose a debt restructuring upon all stakeholders, thus preserving the viability of the business. It would be more appropriate to say that the French restructuring environment is no longer « shareholder-friendly », as shareholders will now face the risk of being crammed down in the same way as creditors.
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