SECTION 1: Market overview
1.1 What have been the recent bankruptcy and reorganisation trends or developments in your jurisdiction?
The enactment in 2005, before the financial crisis, of the conciliation and sauvegarde proceedings, combined with the development of the mandat ad hoc have provided French professionals with powerful and effective tools to restructure French distressed companies. In addition, several adjustments (principally to facilitate pre-packaged plans, allow creditors to propose alternate plans and facilitate debt-to-equity swaps) contributed to further improving the French legal regime, which provides for a well-built and well-tested legal framework to restructure stressed and distressed companies. It is now considered one of the most effective in Europe.
1.2 Please review some recent important cases and their impacts in terms of precedents or shaping current thinking.
An interesting recent French case is the acquisition of Fram's business by Karavel-Promovacances through a pre-packaged sale plan.
Pre-packaged sale plans consist of confidential negotiations with potential buyers before the debtor files for bankruptcy, followed by accelerated bankruptcy proceedings. Their impact on the debtor's business is therefore limited. They have been made possible by a recent change in French law allowing bankruptcy courts to have the conciliateur organise the sale of part or all of the business in subsequent bankruptcy proceedings.
SECTION 2: Processes and procedures
2.1 What reorganisation and insolvency processes are typically available for financially troubled debtors in your jurisdiction?
French law provides for a variety of pre-bankruptcy and bankruptcy processes.
Pre-bankruptcy processes include mandat ad hoc and conciliation. These pre-bankruptcy processes essentially consist of mediations conducted under the authority of a mediator (the mandataire ad hoc or the conciliateur) appointed by the court upon request of the debtor. The debtor can determine in its discretion which creditors will be involved in the process – typically only bank creditors.
These processes are confidential, subject to one exception: if the conciliation culminates in an agreement that is approved by the court, then such approval becomes public. The choice as to whether the agreement should be approved (homologué) or acknowledged (constaté) by the court – in which case the conciliation process remains confidential – is at the debtor's discretion.
Bankruptcy processes involve sauvegarde (with two variations: sauvegarde financière accélérée and sauvegarde accélérée); redressement judiciaire; and liquidation judiciaire. These bankruptcy processes are similar to processes existing in other jurisdictions. They are not confidential and must involve all the creditors. Sauvegarde is a debtor-in-possession process loosely inspired by Chapter 11 of the US Bankruptcy Code.
2.2 Is a stay on creditor enforcement action available?
All bankruptcy processes (sauvegarde, redressement judiciaire and liquidation judiciaire) result in a stay on creditor enforcement actions for pre-petition claims. In the sauvegarde financière accélérée, the stay applies only to financial creditors, meaning holders of a claim relating to the debtor's debt-for-borrowed-money.
By contrast, pre-bankruptcy processes (mandat ad hoc and conciliation) do not result in such a stay. However, creditors involved in pre-bankruptcy processes typically do not enforce their claims while the process is ongoing.
Ipso facto clauses providing that the commencement of pre-bankruptcy processes or bankruptcy processes would result in an event of default or permit the acceleration of a debt, are not enforceable.
2.3 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?
Plans (agreements) adopted in a pre-bankruptcy process typically provide for debt write-offs; debt rescheduling; debt-to-equity swaps; modifications of interest rates; amendments of financial covenants; and/or cash contributions to the debtor, by existing stakeholders or newcomers, by way of debt or equity. Plans also frequently contain downsizing commitments by the debtor, for instance to dispose of certain divisions or businesses, or to downsize the workforce and to change part or all the debtor's management team. The parties have full discretion to include in the plan any provisions they see fit and can agree upon. The plan may contain provisions that will be subject to the subsequent approval of the debtor's shareholders (for example, in the case of publicly traded debtors, if the plan contemplates the offering of equity securities to be issued by the debtor).
The plan is subject to the unanimous approval of the debtor and all creditors involved in the process. If the creditors include lenders who are parties to a syndicated loan agreement, the majority rules provided for in the loan agreement will apply.
Plans adopted in conciliation must be submitted to the court for its acknowledgement (constatation) or approval (homologation).
In the context of bankruptcy processes: plans adopted in sauvegarde and redressement judiciaire typically contain the same type of provisions as those outlined above in respect of pre-bankruptcy plans.
In the case of large companies (companies with more than 150 employees or annual sales of more than €20 million ($21.4 million)), the plan must be approved by two committees comprised of the financial creditors and the main trade creditors. In each case, the majority required for approval is a two-thirds majority of the creditors of the applicable committee expressed in a vote, based on value. In addition, if the debtor has issued bonds, bondholders must also approve the plan based on a two-thirds majority. All bondholders vote as a single group, even if there are several bond issues, series or tranches.
In the case of smaller companies, the court can decide to use the same committee-based process for approval of the plan upon request by the debtor or the court-appointed administrator. Otherwise, creditors will be consulted on an individual basis, and asked whether they accept the provisions of the plan that affect their claims.
If a plan is rejected after having been submitted to committees, then creditors will be consulted on an individual basis according to a process similar to that applicable to the smaller companies where no committees are being formed. It should be noted that plans submitted to creditors on an individual basis cannot span more than 10 years and must provide for certain minimum payments each year.
Plans adopted in sauvegarde and redressement judiciaire must be submitted for court approval.
The court may impose uniform debt deferrals (with interest for debt with a maturity over one year) for a maximum period of up to 10 years with respect to the claims of non-consenting creditors, but cannot impose debt write-offs.
2.4 How can a creditor or a class of creditors be crammed down?
As discussed above, in a sauvegarde or redressement judiciaire process, a plan can be approved based on a two-thirds majority vote of the creditors' committees and, if applicable, the bondholders, which results in the plan being potentially crammed-down on the minority members of the committees and, if applicable, the minority bondholders.
Plans adopted in a pre-bankruptcy process are subject to the unanimous approval of all creditors involved in the process. In principle, no cramming-down is therefore available in a pre-bankruptcy process, except indirectly as a result of the majority rules provided for in syndicated loan agreements.
However, if the plan prepared in conciliation has the support of a substantial majority of the creditors involved in the process, which makes it likely that the plan would be approved by a two-thirds majority based on value of the creditors' committees, then the debtor may request the opening of a sauvegardeaccélérée or a sauvegarde financière accélérée (if the restructuring concerns only financial claims), which will in effect result in a pre-packaged sauvegarde being conducted on an expedited basis for the purpose of cramming down the plan on the minority of dissenting creditors. The duration of a sauvegarde accélérée cannot exceed three months, and the duration of a sauvegarde financière accélérée cannot exceed two months. Those proceedings are not available for very small companies.
2.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
In redressement judiciaire, if it appears that the proposed reorganisation plan(s) will not permit the recovery of the debtor, the court can order the sale of all or part of the debtor's business to a third party under a sale plan. Third parties can submit offers for the purchase of all or part of the business at any time after the commencement of the redressement judiciaire proceedings. If the court decides the sale of all or part of the business, it will choose between the offers which best preserve the workforce, offer the best price and provide the highest execution certainty.
In a liquidation judiciaire, the court will order the sale of the debtor's business under the same conditions if possible. If not, the liquidator will sell the assets of the debtor by public auction or by way of private transactions upon authorisation of the court. The proceeds of the sale of the business and/or assets of the debtor are allocated for the repayment of the creditors according to the ranking of their claims.
2.6 What are the duties of directors of a company in financial difficulty?
The main duty of directors of a French company in financial difficulty is to report to the court the company's cessation of payments, ie the fact that due and payable debts exceed available assets, within 45 days of the occurrence of such situation. Failure to report the cessation of payments in time may expose directors to personal liability and civil sanctions.
The date of the cessation of payments has several consequences. In particular: filing for mandat ad hoc or sauvegarde is not permissible after the cessation of payments has occurred; filing for conciliation is permissible only for the first 45 days following the cessation of payments; and fraudulent conveyance rules are applicable as from the date of the cessation of payments.
There is no shift of fiduciary duties whereby duties formerly owed by directors of a French company to the company's shareholders would, post-petition, be owed to the company's creditors. Rather, the duty of the directors will remain, before and after the commencement of a pre-bankruptcy or bankruptcy process, to promote the corporate interest of the debtor, ie to promote the course of action that, overall, will best preserve the interest of all stakeholders, including the debtor's employees, shareholders, creditors and customers.
2.7 How can any of a debtor's transactions be challenged on insolvency?
Fraudulent conveyance rules apply to transactions entered into by the debtor between the date of the debtor's cessation of payments (which the court can determine occurred up to 18 months before the petition date) and the commencement of the bankruptcy proceedings (redressement judiciaire or liquidation judiciaire). They provide that certain transactions entered into after the cessation of payments are either void or voidable. They are not applicable in the case of sauvegarde or pre-bankruptcy proceedings.
Void transactions include: transfers of assets without consideration; contracts where the debtor's obligations are excessive and significantly unbalanced compared to the obligation of the other party; anticipated payments of debts that are not yet due; payments through means that are not commonly used in the ordinary course of business; security interests granted for debts that pre-date the security; the grant or sale of stock options; the transfer of any assets or rights to a trust (fiducie) except as collateral for a new debt; and, any amendment to an existing trust to secure pre-existing debt. They also include interim measures taken or requested by third parties and intended to protect their rights, unless the attachment or registration of the security interest pursuant to those interim measures took place before the cessation of payments.
Voidable transactions include transactions, payments and certain interim measures or foreclosure-type actions where the counterpart was aware of the debtor's cessation of payments.
In addition, transfers of assets without consideration are voidable if they occurred up to six months prior to the cessation of payments.
2.8 What priority claims are there and is protection available for post-petition credit?
In sauvegarde, redressement judiciaire and liquidation judiciaire, post-petition claims have the benefit of a priority of payment over pre-petition claims, provided they were incurred for the bankruptcy process or the debtor's business.
In addition, contributions of new money to the debtor by way of debt (but not by way of equity) in the context of a conciliation process will have the benefit of a similar priority if the conciliation plan is approved (homologué) by the court.
Finally, French insolvency law assigns priority to the payment of certain creditors, including employees, officials appointed by the court for purposes of the process, certain secured creditors (essentially in the event of liquidation judiciaire) and the French Treasury.
2.9 Is there a different regime for credit institutions and investment firms?
In addition to the specific resolution process applicable to French credit institutions under the EU Bank Recovery and Resolution Directive, bankruptcy processes applicable to credit institutions were amended to implement Directive 2001/24/EC on the reorganisation and winding up of credit institutions in France. Bankruptcy processes may only be opened in respect of a French credit institution after prior authorisation of the Autorité de contrôle prudentiel et de résolution. A specific ranking applies to claims against credit institutions and specific rules are intended to protect certain kinds of financial arrangements, such as netting and repurchase agreements.
SECTION 3: International/cross-border issues
3.1 Can reorganisation or insolvency proceedings be opened in respect of a foreign debtor?
Sauvegarde, redressement judiciaire and liquidation judiciaire can be opened in France in respect of a foreign EU debtor in accordance with EU Regulation 1346/2000 of May 29 2000, if the foreign debtor's centre of main interests is in France. It must be recognised throughout the EU. The Regulation does not apply to mandat ad hoc and conciliation.
As far as non-EU debtors are concerned, while a French court might agree to commence a bankruptcy or pre-bankruptcy process if the debtor has a significant presence in France, the effect of such proceedings overseas would be subject to significant uncertainties.
3.2 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?
Recognition in France of foreign EU bankruptcy or reorganisation processes is governed by the Regulation. Such recognition is automatic and, in principle, it is not possible to challenge in France the jurisdiction of the courts of the first EU country where a bankruptcy process was initiated.
In the event of secondary proceedings (which may only consist of liquidation) commenced in France following the commencement of a main proceedings in another EU jurisdiction, the administrators must provide information to each other and cooperate. They may enter ad hoc agreements to govern their assistance and cooperation. This possibility is not contemplated by the Regulation, but it is expressly mentioned by EU Regulation 2015/848 that will enter into force on June 26 2017. It increases the duties to cooperate between courts and administrators in the EU.
French law does not provide for any recognition or assistance with respect to non-EU bankruptcy or reorganisation proceedings. Recognition of a foreign bankruptcy judgment requires exequatur by a French court. In addition, ad hoc agreements could be entered into between a French administrator and its non-EU counterpart, provided the French administrator obtains the authorisation of the French bankruptcy court.
SECTION 4: Other material considerations
4.1 What other major stakeholders could have a material impact on the outcome of the reorganisation?
Tax and social security creditors may be significant creditors of French distressed companies, in which case they can be involved in pre-bankruptcy processes or in the development of a restructuring plan.
In addition, public or quasi-public institutions such as the Comité interministériel de restructuration industrielle (Ciri) or the médiateur du credit may be involved, generally at the request of the debtor and often in addition to the mediation of a mandataire ad hoc or a conciliateur, with a view to helping reconcile the interests of the various stakeholders and preserve the business as a going concern.
When the bankruptcy or reorganisation of the debtor could have a significant impact on the economy and employment at the local level, the government might express views as to what would be the best solution to preserve business and employment, in particular through the public prosecutor who attends court hearings and whose position may influence the court.
SECTION 5: Outlook 2017
5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?
The number of bankruptcy proceedings in France has slightly declined in 2016. In anticipation of the general elections scheduled for the spring of 2017, some French companies may have sought to postpone restructurings, and the number of bankruptcy proceedings may increase during the second half of the year.
However, the most interesting outlook for 2017 concernss the potential consequences of Brexit on the restructuring market. A flourishing restructuring business has developed in the UK as English courts have approved schemes of arrangement affecting companies incorporated outside of England.
While the impact of Brexit on the availability of UK schemes of arrangement as a restructuring tool for foreign companies remains unclear, EU companies may be more reluctant to petition UK courts, due to uncertainties regarding the recognition of their judgments within the EU. As the French restructuring regime is among the most effective in the EU , it could become an appealing alternative option for foreign companies looking for a forum that offers flexible tools for distressed debtors.
|About the author|
Partner, Cleary Gottlieb Steen & Hamilton
Fabrice Baumgartner is a partner at Cleary Gottlieb. He has a broad corporate practice for large and mid-size, public and private companies. In addition to his expertise on restructuring and bankruptcy matters, his background and experience with corporate finance, mergers and acquisitions and corporate law matters generally enable him to advise clients involved in complex reorganisations and financial restructurings.
He is distinguished by Legal 500 Emea for his insolvency work, and by Chambers Global and Chambers Europe as a leading equity capital markets lawyer in France.
He joined the firm in 1991 and became a partner in 2000. He is based in the Paris office and was resident in the New York office from 1991 to 1992, and the Hong Kong office from 1994 to 1997.
|About the author|
Senior attorney, Cleary Gottlieb Steen & Hamilton
Aude Dupuis is a senior attorney at Cleary Gottlieb. Her practice focuses both on litigation and restructuring matters. Her broad experience in these two areas enable her to advise clients involved in complex bankruptcy matters and related domestic and international disputes. She joined the firm in 2005 and became a senior attorney in 2014. She is based in the Paris office, and is a member of the Paris Bar and the New York Bar.