French corporate restructuring and insolvency procedures have recently been reformed pursuant to Ordinance 2008-1345 of December 18 2008 (Ordinance), which will come into force on February 15 2009. The Ordinance is a response by the French legislator in particular to the issues encountered by debtor companies facing difficulties over the last three years since the introduction of the safeguard proceedings.
The Ordinance is principally aimed at making the safeguard proceedings, which came into effect on January 1 2006, more accessible to companies in difficulty, to clarify the rules governing the composition and operation of creditors' committees and bondholders, and generally to give flexibility in the mandataire ad hoc and conciliation procedures. The Ordinance also clarifies the liabilities and responsibilities of creditors and directors in relation to restructuring and insolvency proceedings.
The principal restructuring and insolvency regimes available for a company in France are as follows: special mediation (mandat ad hoc), conciliation proceedings (conciliation), safeguard proceedings (procédure de sauvegarde), rehabilitation proceedings (redressement judiciaire) and compulsory liquidation (liquidation judiciaire).
Insolvency test
Whether or not a restructuring procedure is available to a French company in difficulty will very much depend on whether the company is solvent or insolvent. A French company is insolvent (en état de cessation de paiements) if it is not able to meet its payment obligations as they fall due for payment with its available assets. This is essentially a cash-flow test. The Ordinance provides that a company will not be insolvent if it can demonstrate that its available credit reserves or any moratoria granted to it by its creditors are such that it can in fact meet its payment obligations that are then due for payment.
Special mediation (mandat ad hoc)
The special mediation procedure was formally introduced into the restructuring and insolvency legislation in July 2005 but has existed in practice for many years. It is a pre-insolvency procedure, which is a confidential and not a public procedure.
The legal representative of the company in difficulty may formally request the president of the court to appoint a special mediator (mandataire ad hoc) provided that the company is solvent (not in cessation de paiements, as above). The Ordinance provides that the company may choose the mandataire ad hoc that it wishes to appoint when applying to the court. The period for which the special mediator can be appointed is not limited by law but will usually be for three months and may be extended for further periods.
The special mediator will report to the president of the court on the economic and financial situation of the company in difficulty and assist the company in seeking an agreement with its creditors. Management of the company remains in the hands of the chairman/board. The special mediation procedure is not coercive and the opening of special mediation proceedings does not give rise to any suspension of creditors' rights or remedies. In practice, however, the special mediator will ask creditors to standstill to ensure the solvency of the company during the mediation period.
If the special mediator's mission fails, there is a risk of an insolvency procedure being opened in respect of the company. Where the special mediator's mission succeeds, and an agreement is reached between the interested parties, this may be formally endorsed by the court (homologation) in conciliation proceedings.
Conciliation proceedings (conciliation)
Conciliation proceedings were introduced by the safeguard legislation of July 2005. The purpose of conciliation proceedings is essentially to enable the company and its main creditors (principaux créanciers) to come to a restructuring agreement. Conciliation proceedings are available to any company that:
- encounters legal, economic or financial difficulties, actual or anticipated; or
- has not been insolvent (see paragraph 2 above) for more than 45 days.
The company will be required to provide details of its financial, economic and social situation, including its financing requirements. The conciliator is a facilitator and may be assisted by experts when reporting on the company's economic and financial situation. The conciliation procedure is limited to four months and may be extended by the court by one month. The Ordinance provides that where the parties reach agreement and apply to have the restructuring agreement endorsed (homologué) by the court before the expiry of the conciliation period, this period will be extended until the date on which the court makes its decision formally to endorse the agreement.
Management of the company retains control of the debtor during conciliation proceedings. There is no suspension of judicial or legal proceedings during the conciliation period. The French social, tax and public administrations may grant write-offs of their debts as well as payment grace periods (Articles L 611-7 and L 626-6 of the French Commercial Code).
The Ordinance provides that where a creditor makes a formal demand (mise en demeure) for its debt during the conciliation proceedings, the debtor may make application to the court under Article 1244 and following the French civil code, with a view to obtaining payment grace periods if it wishes.
Where a restructuring agreement is reached between the parties to the conciliation proceedings, this may be endorsed at the request of the debtor by the court provided that:
- the debtor is not insolvent (see paragraph 2 above) or the restructuring agreement terminates such situation;
- the terms and conditions of the restructuring agreement are such as to ensure the continuation of the debtor's business; and
- the restructuring agreement does not prejudice the interests of creditors that are not parties to it.
Where the restructuring agreement is endorsed by a court judgment, this is filed with the court as a measure of publicity. The court endorsement of the restructuring agreement reached during the conciliation proceedings will provide protection to creditors in respect of certain lender liability issues. Absent fraud, the date on which a company can be deemed by the court to have been unable to pay its debts as they fell due cannot be a date before the date of the court judgment approving the restructuring agreement reached during the conciliation proceedings.
New money providers who make credit available within the terms of the court-endorsed restructuring agreement for the purposes of ensuring the continuation of the company's business during the conciliation period will have priority to claims of creditors (other than super-priority salary claims and court fees and expenses) that arose before the date of the opening of the conciliation proceedings if the company is subsequently placed into rehabilitation proceedings, safeguard proceedings or judicial liquidation. Similar provisions also apply to suppliers of new services or assets for such purposes. These provisions do not apply to shareholders making contributions in respect of share capital increases.
The Ordinance also extends the benefit of certain provisions that were previously only applicable to the court-endorsed restructuring agreement and that now extend also to the restructuring agreement itself. For example, neither creditors party to the restructuring agreement nor the court-endorsed restructuring agreement can take legal action against the debtor in order to obtain the payment of their debt, and this extends the categories of the guarantors of the debtor that may rely on the restructuring agreement itself. Where the restructuring agreement or the court-endorsed restructuring agreement is subsequently terminated by the court, as a result of non-performance of the restructuring agreement, the court may, but is not obliged to, declare the payments automatically due and payable.
Safeguard proceedings (procédure de sauvegarde)
Safeguard proceedings are aimed at improving the chances of survival of a company facing difficulties by anticipating the situation at an early stage and seeking to negotiate a safeguard plan with its creditors to ensure the continuation of the company's business, to maintain employment and to restructure the company's indebtedness. Safeguard proceedings have been used successfully in a number of high-profile matters in France, including Eurotunnel.
Safeguard proceedings can only be initiated by a debtor company if it is solvent and demonstrates that it is encountering difficulties that it is not able to overcome. The Ordinance has relaxed the conditions for the opening of safeguard proceedings firstly as regards the solvency test and secondly because there is no longer any need for the company to demonstrate that the difficulties that it is facing would lead to it becoming insolvent, as there was previously. This was often difficult to demonstrate where safeguard proceedings were sought at an early stage by the debtor company. From our initial discussions with French judges and practitioners, it seems that the notion of "difficulties" encountered by the debtor company are likely to be interpreted widely by the courts.
Where safeguard proceedings are opened, the procedure becomes public knowledge, as it does for rehabilitation proceedings (redressement judiciaire). The court order opening Safeguard Proceedings will result in a freeze on debt payment, acceleration and enforcement of security, as it does for rehabilitation proceedings. The court order will also lead to the appointment of a safeguard administrator whose role it will be to assist the company, but he will not take over the management of the company.
A number of measures have been introduced by the Ordinance with a view to making the safeguard proceedings more attractive and more accessible to the debtor company and to seek to clarify the role of the debtor and the safeguard administrator. These include the ability for the debtor to propose a specific safeguard administrator when making an application to the court for the opening of safeguard proceedings and for the debtor to make application to the court to dispose of assets outside the ordinary course of business during the safeguard observation period or to seek to substitute security or sell part (but not all) of the business during the safeguard observation period.
Further measures, with a view to improving the attractiveness of the safeguard proceedings to French companies in difficulty have also been introduced by the Ordinance. For example, claims that have not been regularly declared by creditors in the safeguard proceedings are inopposable to the debtor company and to certain third-party guarantors and security providers during the execution of the safeguard plan.
Where a company has granted fiduciary security (fiducie sûretés) over its assets or rights and where the debtor has the right to use those assets or rights pursuant to a use agreement (convention de mise à disposition), the fiduciary security cannot be enforced solely as a result of the commencement of safeguard proceedings, the non-payment of debts incurred by the opening of the safeguard proceedings or the adoption by the court of a safeguard plan. Creditors' that have the benefit of a right of retention (droit de retention) pursuant to Article 2286 of the French civil code in respect of certain security are restricted from enforcing their retention rights during the safeguard period, unless the asset subject to the retention right is included in a sale of part of the business. This restriction does not apply to retention rights created as a result of specific legislation.
The Ordinance introduces greater flexibility with regard to the payment of debts that were incurred before the opening of the safeguard proceedings – for example, payments may now be made to exercise a purchase option in a finance lease agreement if it can be demonstrated that exercise of the purchase option is needed for the continuation of the company's business and is an amount which is less than the market value of the assets subject to the purchase option.
Subject to certain thresholds as to a company's turnover and number of employees, the safeguard legislation provides for two creditors' committees to be established, a financial institutions creditors' committee and a trade creditors' committee. The Ordinance has made significant changes to the composition and rules relating to the committees. The composition of the committees is determined on the basis of the debts incurred before the judgement opening the safeguard proceedings and the committees are established by the safeguard administrator.
The Ordinance provides that a financial institutions creditors' committee will now be composed of financial institutions (établissements de credit) and also creditors that are assimilated to credit financial institution (to be determined by decree). Special rules apply to creditors that hold security by way of a fiducie as regards their inclusion (or not) on this committee.
Holders of debt transferred to them by financial institutions or assimilated institutions will now automatically be members of the financial institutions' credit committee. The Ordinance provides that the obligation or, as applicable, the right to be a member of a committee constitutes an accessory to the debt incurred before the opening of the safeguard proceedings and is automatically transferred to each successive holder of the debt, notwithstanding any clause to the contrary. However, the transferee will only be informed of the debtor's proposals and will only be entitled to vote on these as from the date on which the safeguard administrator has knowledge of the transfer (the precise method is to be determined by decree).
The Ordinance provides that it is the debtor, assisted by the safeguard administrator, which presents proposals to the creditors' committees. The Ordinance further provides that any creditor that is a committee member may also submit proposals to the debtor and the safeguard administrator. The draft plan proposed to the committees is not subject to certain provisions that apply to creditors that are consulted individually and not consulted in committee.
The draft safeguard plan that is put to the committees may include payment grace periods, debt write-offs and, where the debtor company is a company limited by shares and the shareholders support losses in the amount of capital contribution, conversion of debt or bond claims into securities giving access to share capital of the company directly or indirectly. However, the agreement of the shareholders to any such capital conversion will still be necessary. The draft safeguard plan may establish a different treatment between creditors if the situation of the debtor justifies this. In general terms, the plan needs to be made available and be voted on by the creditors within six months from the opening of the safeguard proceedings.
Creditors' committees must generally vote on a plan within a period of 20 to 30 days following its receipt. This time period may be increased or reduced (but not below a minimum 15-day period). The decision of each committee to approve the draft plan is taken by a two-thirds' majority of debt claims of members of that committee that have voted on the debtor's plan. The Ordinance removes the former requirement of 51% in number of creditors.
The threshold for membership of the trade creditors' committee has been reduced from more than 5% to more than 3% of the aggregate of trade creditors' claims.
Bondholders are not members of the financial institutions creditors' committee. The Ordinance provides that bondholders are to be consulted in one general meeting of all bondholders in relation to all bonds whether issued in France or abroad. Bondholders vote in a general meeting on the plan that has been adopted by both the creditors' committees. Bondholders decision is taken by a two-thirds' majority of the aggregate amount of bond claims held by bondholders that voted at the bondholders' general meeting on the proposal, notwithstanding any clause to the contrary and independent from any law governing the bond issue.
Where the safeguard plan has been adopted by each of the creditors' committees and, where applicable, by the general meeting of bondholders (and by shareholders' meeting in relation to any debt equity conversion), the court will ensure that the interests of all of the creditors are sufficiently protected. In this case, the court will approve the safeguard plan, which will become binding on all members of the committees.
Creditors that are not members of the committees or bondholders will be consulted individually by the mandataire judiciaire in respect of the debtors' requests for payment delay and/or debt forgiveness. In this case, the safeguard plan cannot impose debt forgiveness upon them and the duration of the safeguard plan cannot exceed 10 years. The court must impose uniform payment terms subject to the payment of any term debt where longer grace periods were stipulated by the parties before the opening of the safeguard proceedings and that can exceed the duration of the plan. The safeguard plan must also provide for an annual payment of no less than 5% of the accepted debt claims to be paid from year three to these creditors. Individual creditors that do not reply to the proposals made by the mandataire judiciaire within 30 days of receipt of its letter are deemed to have accepted these proposals.
The French public authorities may grant debt forgiveness (but not for indirect taxes other than penalties and late interest). There are other advantages to safeguard proceedings – for example, there are no hardening periods, and transactions entered into during the proceedings cannot subsequently be challenged.
The Ordinance provides that the debtor may apply to convert a safeguard proceedings into administration (redressement judiciaire) if the adoption of a safeguard plan is manifestly impossible and if the ending of the safeguard proceedings, in a certain manner and within a short period of time, will lead to the company's insolvency. The Ordinance also provides that where the debtor's insolvency arises during the course of the execution of the safeguard plan, the court, after hearing the public minister, may open administration proceedings or, if the rehabilitation of the company is manifestly impossible, the court may open judicial liquidation proceedings.
Rehabilitation proceedings (redressement judiciaire)
Rehabilitation proceedings are court-based, collective insolvency proceedings that were introduced by Law 85-88 of January 25 1985 (the 1985 Law) relating to the judicial rehabilitation and compulsory liquidation of businesses and were completed by Decree 85-1389 of December 27 1985. The provisions of the 1985 Law were amended in 1994 and 1999 and codified under Book VI and Article L 620-1 to L 628-3 of the French Code of Commerce. The previous legislation was recently modified by Law 2005-845, dated July 26 2005, and the enabling Decree 2005-1677 dated December 28 2005. Rehabilitation proceedings are submitted to the same legal regime as safeguard proceedings unless otherwise specified.
Rehabilitation proceedings aim at allowing the survival of a company, the preservation of its activities and employment, and the discharge of its liabilities. The court will order the opening of rehabilitation proceedings if it can be shown that the debtor is in a state of cessation of payments (cessation des paiements) (as described in paragraph 2 above) and has not ceased its activities, or if the company is capable of being rehabilitated. Any debtor in a state of cessation of payments will have 45 days to apply to the court to start rehabilitation proceedings or to open conciliation proceedings. If the debtor has ceased its activities or is incapable of being rehabilitated, the court will order the opening of compulsory liquidation proceedings with no period of observation.
Unlike safeguard proceedings, a creditor, the public prosecutor or the court are also able to request the opening of rehabilitation proceedings. When opening a rehabilitation procedure, the court will open an observation period for the purpose of assessing the company and either: (i) forming a plan for the reconstruction of the company (plan de redressement), which may take the form of a continuation plan or a transfer plan; or (ii) liquidating it under the compulsory liquidation procedure described below.
In its decision to open proceedings, the court will appoint three persons with different duties: an administrator (administrateur judiciaire), a representative of the creditors (représentant des créanciers) and a bankruptcy judge (juge commissaire) to preside over the administration. The court will also invite the employees to appoint a representative (représentant des salariés). The court can also appoint one to five controllers (contrôleurs) among the creditors, who ask to be appointed as such. The controllers are entitled to be informed of the procedure and will be asked to give their opinion before any important decision is taken and also have the power to take certain actions.
During the observation period, the debtor usually remains in possession and retains title to its property. The debtor remains in charge of the management of its business in respect of the part that has not been transferred to the administrator in accordance with the court decision.
Creditors are barred from taking any legal action against the company to obtain payment for claims that arose before the court order initiating the rehabilitation proceedings.
At any time during the observation period, the court will be able to order the transfer of part of the debtor's business or the start of liquidation proceedings.
Compulsory liquidation (liquidation judiciaire)
Compulsory liquidation (liquidation judiciaire) is one of the two dissolution procedures for companies under French law. It only applies to private entities that have ceased their activities, or that are incapable of being rehabilitated. The court can order the opening of immediate compulsory liquidation proceedings without opening rehabilitation proceedings (as described above), or the company can go into compulsory liquidation following the opening of rehabilitation proceedings. Compulsory liquidation involves the appointment of a liquidator to take control of the company, represent the creditors, and to collect, realise and distribute the company's assets or the proceeds of its assets. The court decision ordering compulsory liquidation also leads to the immediate dissolution of the company.
Sanctions
The safeguard legislation of 2005 significantly reduced the grounds upon which creditors' and directors' liability could be incurred. The Ordinance provides further clarification on a number of issues relating to directors' and creditors' liability. For example, the Ordinance provides that, where safeguard, rehabilitation or judicial liquidation proceedings have been opened, creditors may only be liable for fraud, consistent intervention in the management of the debtor, or where the guarantees and security taken are disproportionate to the credit facilities. The previous legislation provided for the disproportionate guarantees or security to be automatically null and void. The Ordinance relaxes this rule and provides that in such case the guarantees and security may be cancelled or reduced by the court, but are not automatically null and void.
The Ordinance also clarifies the maximum liability of directors for mismanagement (faute de gestion) by limiting the maximum liability to the amount of any insufficiency of assets. The Ordinance also abolishes liability of directors for corporate debts (dettes sociales).
| Author biography |
Rod Cork
Allen & Overy LLP
Rod Cork is a banking partner at Allen & Overy LLP based in the Paris office.
Rod has advised commercial lenders, banks, CLOs and funds in the public and private sector and has recently been involved in many major French restructurings, refinancings and numerous cross-border restructurings. He has recently acted on transactions including mandataire, ad hoc, conciliation and safeguard proceedings involving public companies, LBOs and structured transactions.
Rod is a solicitor of England and Wales and a member of the Paris Bar.
Marc Santoni
Santoni & Associés
Having founded of the law firm SCP Santoni & Associés 20 years ago, Marc's activity has since then been devoted to the management of French businesses in difficulty and investment funds advisory.
He advises buyers interested in company turnaround, as well as companies under special mediation (mandat ad hoc) or safeguard-rehabilitation-liquidation proceedings (sauvegarde-redressement-liquidation judiciaire).
Marc intervenes in the treatment of underperforming LBOs on behalf of many investment funds. At present, the firm is in charge of 19 underperforming LBOs.
Marc is a member of the Association pour le Retournement des Entreprises (Association dedicated to companies' survival and turnaround) and of the Turnaround Management Association (TMA) and takes part in the investment boards of many investment funds. |