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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
The voluntary restructuring procedures are the following:
- mandat ad hoc/conciliation
The judicial restructuring and insolvency procedures are the following:
- safeguard
- rehabilitation
- liquidation
Mandat ad hoc/Conciliation – provided that it is not insolvent or is insolvent for less than 45 days, a company’s director may ask the commercial court to appoint a mandataire/conciliator in order to negotiate with the creditors either a sale of business assets plan and/or a restructuring plan. These proceedings are confidential during the negotiation phase and remain fully confidential as regards the mandat ad hoc (whilst under conciliation, the restructuring plan has to be court-approved and becomes public). Both procedures offer a new monies security, but only the conciliation offers a moratorium. A mandat ad hoc procedure’s duration is not limited by law but is defined by the decision appointing the mandataire and it generally lasts three months, which can be renewed as many times as necessary, whereas a conciliation lasts for a maximum of four months, renewable for a maximum of one month, at the request of the conciliator alone, unless the appointment of the conciliator has been proposed by the debtor. . Additionally, a new conciliation procedure can be opened upon the expiration of a three-month period from the end of the previous one.
Safeguard – a company that has not ceased to be able to pay its debts as they fall due but is nevertheless financially distressed can apply to court for safeguard proceedings, which provide for a moratorium on enforcement by creditors while a debt restructuring plan is prepared. The company has six months (extendable to 12 months) in which to negotiate and agree the rescheduling or compromise of all or part of its debts with its creditors. If the plan is successfully implemented, the company returns to financial health. A derivative of this procedure also exists, where a restructuring plan must be adopted within two months (extendable to four months) of the opening of the proceedings, in relation to all kinds of debts, including financial debts: it is called the fast-track safeguard. In practice, a fast-track safeguard procedure is used after a preparatory conciliation has been conducted (prepack cession or restructuring).
Rehabilitation (or receivership) – directors are obliged to file for insolvency proceedings within 45 days after their company became insolvent (unless a conciliation procedure has been opened in the meantime). Rehabilitation proceedings provide for a moratorium on enforcement by creditors while a restructuring plan is prepared. The court approves the restructuring plan, which is binding on the creditors even if they expressed their opposition to it. If the plan is successfully implemented the company returns to financial health.
Liquidation – the purpose of liquidation is the realization of a company’s assets and the distribution of the proceeds to its creditors.
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
A company can only obtain a moratorium while preparing a restructuring plan by applying for a conciliation, a safeguard or a rehabilitation procedure. The moratorium prevents the initiation or the continuation of legal proceedings, the enforcement of debts and the termination of contracts.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
Two months to commence and 12 to 18 months to achieve, provided that:
- it is proven to the court that the company has ceased being able to pay its debts as they fall due
- the company is not capable of being rescued by means of a restructuring plan
How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
In France, a distressed sale process is available when the debtor goes into either of the three court-ordered proceedings available under French law: (i) safeguard proceedings (‘sauvegarde judiciaire’) (ii) receivership proceedings (‘redressement judiciaire’), or (iii) liquidation proceedings (‘liquidation judiciaire’).
However, rules governing distressed sales vary depending upon the type of proceedings. Whereas the debtor can only sell branches of his business’ activities in safeguard proceedings, the whole business’ assets may be subject to a distress sale in receivership and liquidation proceedings.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
Only persons appointed by the commercial court and qualified as “administrateurs judiciaires” may act as insolvency office-holders in the course of safeguard or rehabilitation procedures, and only those appointed by the commercial court and qualified as “mandataires judiciaires” may act as insolvency office-holders in the course of liquidation procedures. These are regulated professions. Accountants or qualified lawyers, even specializing in insolvency law, cannot act as such.
This does not apply to non-judicial liquidation, when the partners/shareholders of the company wish to close and liquidate it although the company is able to meet its liabilities and is profitable.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
The insolvency office-holder is appointed by the commercial court opening the restructuring/insolvency procedure. In addition to the restrictions stemming from the regulated nature of the professions, restrictions due to conflicts of interest with the insolvent company are also in place.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
The insolvency cases are heard by the specialized chambers of the commercial court named “chambre du conseil”. Judges sitting in this chamber are experienced and de facto specialized in insolvency matters. The commercial court judges are elected business people who should undertake continuous training. Although there is no legal obligation to do so, appointed judges are often judges who are specialized in insolvency cases (specialization acquired with experience and continued training). Regarding important restructuring/insolvency procedures, appointed judges are very experienced and knowledgeable.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
Safeguard – the managers remain in control subject to the supervision and assistance of the court appointed administrator.
Rehabilitation – depending upon the terms of the order commencing rehabilitation, the court appointed administrator will either supervise the directors, assist them or directly manage the company.
Liquidation – the powers of the directors cease and the liquidator takes control of the company.
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
Yes. Directors are obliged to file for insolvency proceedings when their company is unable to meet its due liabilities with its available assets, and within 45 days after this situation arose.
3.3 – What are the risks facing the directors of an insolvent company?
Directors can be held civilly liable for the company’s debts if they mismanaged the company and that mismanagement caused the company to become balance sheet insolvent. However, if the mismanagement solely constituted “simple negligence”, then the directors are exempted from liability.
Directors can be held criminally liable if their mismanagement of the company is sufficiently serious.
Directors found civilly or criminally liable for mismanagement may be disqualified from acting as directors.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
- mortgage (“hypothèque”)
- lender’s lien (“privilège de prêteur de deniers”)
Security over tangible moveable property is taken by various forms of pledges (“gage”).
Security over different kinds of intangible movable property is taken by various forms of a different kind of pledge (“nantissement”).
Most of the above securities require registration at the Registry of moveable property pledges and associated transactions (“Registre des sûretés mobilières et autres opérations connexes”).
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
The rights of the secured creditors are unaffected by the opening of insolvency proceedings, except that the security is unenforceable, secured creditors will only be paid by the receiver or liquidator, and depending on their ranks and on the proceeds of the insolvency process.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
Yes. The creditor is entitled to claim for the shortfall as an unsecured creditor.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
Preferential status is given to:
- debts owed to employees (wage claims) in respect of remuneration incurred after or in the two months prior to the judgment commencing insolvency proceedings;
- new monies privilege, i.e. cash contribution made in the context of a conciliation procedure before a judicial insolvency procedure is opened;
- claims that arose after the opening of the insolvency procedure (subsequent meritorious claims), for example claims related to goods or services that have been supplied or provided to the debtor who sought the performance of a contract.
There is a very detailed hierarchy of preferences. Unsecured claims that arose prior to the opening of the insolvency proceedings would be the most subordinated.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
Yes. Creditors must lodge their claim (“declaration de créances”)within a certain timeline after the publication of the insolvency judgment in the BODACCC (official publication). The deadline is 2 months for creditors with some presence in Metropolitan France and 4 months in total for creditors with no presence in Metropolitan France. A branch or the localisation of some key employees may qualify as presence in France and case-law has been changing on this appreciation, so it is general advisable to file a proof of claim within 2 months after the BODACC publication. If creditors do not lodge their claim in due course, then their claim becomes inadmissible. This means that the claim still legally exists but might not be recovered in the course of the insolvency proceedings and remains unenforceable until the end of the proceedings. In other words, the creditor’s only chance of recovery is that his debtor is successfully rehabilitated.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
No. The opening of restructuring/insolvency procedures (at the exception of mandate ad hoc) prevents any form of payment of the creditors by the debtor company, including through such mechanisms. In some instances, and by exception, legal (and not contractual) rights of set-off might apply.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
No, they are void by law as a matter of public policy, regardless of the law that applies to the contract.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
Yes, provided that it can be evidenced that the ROT clause has been accepted before the asset was purchased by the debtor.
Any demand for return of property under a retention of title clause must be made to the administrator or to the liquidator by registered mail within 3 months of the BODACC publication of the opening of insolvency proceedings. However, the creditor cannot take back the assets under a ROT clause itself, this needs to be authorised by the administrator or by the liquidator. This ownership claim (“demande en acquiescement à revendication”) may only be accepted regarding the assets that were in the hands of the debtor on the day of the opening of insolvency proceedings, or to the products sold before, provided that the sale price has been paid afterwards .If creditors do not lodge their ownership claim in due course, then their claim becomes inadmissible. This means that the claim still legally exists but might not be recovered in the course of the insolvency proceedings and remains unenforceable until the end of the proceedings.
4.9 – Are foreign creditors treated equally to domestic creditors?
Yes.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
Certain transactions entered into within up to 18 months prior to the judgment opening insolvency proceedings, may be declared void, including:
- deeds assigning movable or immovable property
- payment of debts prior to the due date
- payments of debts by means that are not common business practice, eg payments other than in cash or cash equivalents
- grants of security
Any other transaction entered into within the same period can be voided at the discretion of the court where the counterparty knew that the company was insolvent at the time of the transaction. Where such a transaction was with a company in the same group, the counterparty’s knowledge of the company’s insolvency is presumed.
5.2 – Who is entitled to challenge transactions under these provisions?
The insolvency office-holder, the receiver/liquidator and the public prosecutor are the only ones entitled to challenge these transactions.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
Yes.
Insolvency proceedings commenced in the courts of other EU member states are automatically recognized under the EC insolvency regulation. Achieving recognition of insolvency proceedings commenced in countries that are not EU member states is possible in theory but impractical in reality.
Insolvency proceedings commenced in the courts of non-EU member states are not automatically recognized, unless an international treaty sets out otherwise. In order to be recognized in France, two conditions must be met:
(i) no insolvency proceedings have already commenced in France and (ii) the recognition (“exequatur”) of the judgment opening the foreign insolvency proceedings must have been granted. To be granted recognition, the foreign judgment must meet certain conditions, including that is has been produced by a competent authority, complies with international public order and does not constitute a fraudulent evasion of the law.
6.2 – If so, what assistance can your courts provide, following recognition?
When insolvency proceedings opened in a foreign jurisdiction are recognized in France, the recognition has effect retroactively at the date of the opening of the proceedings. Also, no insolvency proceedings can be opened in France.
In addition, and provided that the applicable foreign law provides for the below consequences, French law makes them effective in France (and French courts provide assistance to their consequences):
- the directors no longer have control of the company
- the debts cannot be enforced
- the recovery proceedings cannot be initiated or pursued
- certain transactions entered into before the opening of the insolvency proceedings can be declared void
However, if the debtor’s assets are to be recovered in France, French law of execution and enforcement is solely applicable.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
It is possible to commence insolvency proceedings in France in relation to a foreign company, as long as this other company has in France the place of its main interests. This notion differs from the center of main interests concept set out by EU Regulation and which corresponds, by assumption, to the company’s headquarters. The place of main interests might be broader and is determined by the courts on a case-by-case basis. The criteria might be the existence of a branch, the localization of assets, the conclusions of transactions in France, etc.
As stated above, it is however not possible to commence insolvency proceedings in relation to a foreign company if foreign proceedings have already commenced in a foreign jurisdiction and been recognized in France (exequatur).
As regards the concept of secondary proceedings, it only exists under the EC insolvency regulation.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
French insolvency law is said to be designed to protect the debtor’s business rather than to help the creditors to recover their claims.
This is further evidenced by the most recent reform of French insolvency law implemented by Decree No. 2021-1193 of 15 September 2021 under which, in the context of safeguard and rehabilitation procedures, the recovery plan can be forced on the dissident classes of creditors (cross class cram down), when such classes have to be created (certain threshold to be satisfied).
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
Administrative entities as well as the State may influence, as creditors, the outcome of a restructuring.
In particular, they may consent debt remission (including tax remission) in case a conciliation is ongoing between all creditors and the debtor, or during safeguard and receivership proceedings.
Specific intervention may be required by law in specific cases, e.g.:
- Debtors who conduct an activity in the area of the social and solidarity economy (‘économie sociale et solidaire’) must obtain the opinion of the relevant administrative authority that they depend upon, prior to the sanction of any restructuring plan by the court in safeguard and receivership proceedings, the regulatory entity intervening as amici curiae;
- In case of receivership proceedings concerning large-scale companies exceeding a certain threshold and whose insolvency “is likely to cause serious distress to the national or regional economy”, the restructuring plan may involve a company’s modification of its share capital, which its shareholders may refuse. In that context, the court can order that the share capital modification take place, provided that it sought the prior opinion of the AMF (‘Autorité des marchés financiers’) when the company is public and listed on the Paris stock exchange;
- The sale of branches of business or the business as a whole of an insolvent company carrying on an activity covered by article R. 151-3 of the French Monetary and Financial Code (foreign investment control regime in certain sensitive sectors) to a foreign investor buyer is subject to prior authorization by the Minister of the Economy.
More generally, the Interministerial Comité Interministériel de Restructuration Industrielle (Committee for Industrial Restructuring, CIRI) at national level for companies with more than 400 employees, and the Comités Départementaux d’Examen des Problèmes de Financement des Entreprises (Departmental Committees For The Examination Of Business Financing Problems CODEFI), at local level for companies with fewer than 400 employees, work alongside the insolvent companies’ management to define and negotiate a plan for transforming its financing with the various parties involved (shareholders, creditors, potential buyers, etc.).
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
There are currently no proposals for reform (a significant reform having occurred in 2014, and the EU Restructuring Directive (2019/1023) having been implemented by Law No. 2019-486 of 22 May 2019 and Decree No. 2021-1193 of 15 September 2021).
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