La Revue Squire

New French insolvency law enters into force on 01/01/2006


Rédigé par Antoine Adeline le 20 Janvier 2006


Inspired by the American bankruptcy law known as “Chapter 11”, the “law to safeguard businesses” is aimed at helping businesses to avoid financial difficulties and to allow companies in bankruptcy to avoid liquidation.

The law of 1985

According to statistics, the law of 1985 did not have the desired results – more than 50,000 businesses disappear every year.

The fact that the legislation of 25 January 1985, updated in 1994, lacked efficiency and was revealed to be incongruous with the actual economic context (globalisation, deindustrialisation, RTT) can also be attributed to the shortcomings of company directors.

Reform

The objective of the new text is to encourage research into the handling of the difficulties of companies. A declaration of suspension of payments is not an automatic indication that a company will be subject to the opening of a collective procedure.

The law of 1985 set out a wide variety of procedures which at times made the situation unnecessarily complex.

In the search for a solution that would allow the company to continue operating, the law considers that “the debtor is better placed to appreciate which procedure is better adapted to the situation”. During a set period, the director has the following choices: the ad hoc mandate, reconciliation, or the legal route.

Friendly procedures

The principle aim of friendly procedures is to facilitate negotiation between companies in financial difficulties and their creditors. The advantages of such an approach are as follows:

- anticipation – the principle cause of failure is when a procedure is opened too late

- confidentiality – since security of agreements is one of the reform’s objectives

The ad hoc mandate

The ad hoc mandate is aimed at “finding a solution when a company proves that its financial difficulties are compromising its ability to continue operating”.

This procedure is started by the chairman of the Commerce Court at the request of the head of the company.

The fact that an ad hoc mandate is flexible, confidential and does not have strict opening conditions makes it a preferred “friendly procedure” for companies in financial difficulties.

"Reconciliation"

The success of this procedure depends on the contractual nature and confidentiality of its application.

In replacing the old “friendly regime”, reconciliation can be requested “when companies run into financial, legal or economic difficulties whether known or foreseeable”.

During an observation period a company and its creditors will strive to reach a reconciliation agreement. If this is successful then the reconciliation agreement will be certified by the chairman of the Commerce Court. For a greater degree of security it could be recognised by the Court itself if three conditions are met:

- the company has not suspended payments for more than 45 days;
- the agreement aims to guarantee that the company will continue operating; and
- the agreement does not affect the interest of creditors who are not party to it.

The benefits of the agreement are important :

The agreement approved by the Court makes it difficult to challenge resolutions that were passed when the company was suspending payments at the time of the reconciliation, except in the case of fraud or abusive conduct.

The opening of a reconciliation procedure suspends all requests for the opening of a bankruptcy or liquidation procedure.

The head of the company does not lose control of the company.

Another advantage similar to that provided by Chapter 11, relates to creditors who bring funds to the company. They will be reimbursed in certain circumstances after employees and legal costs have been paid.

Legal procedures

When a friendly procedure is ineffective, the company in financial difficulties must ask for a bankruptcy or liquidation procedure to be opened within an eight day time frame starting from the notification of the end of the reconciliation procedure, or the final decision by the court to recognise the agreement.

The safeguard procedure

The safeguard procedure is an important part of the reform of the law in this area. It is put into place at the request of the director when a company is experiencing known or expected financial difficulties that are likely to lead to bankruptcy.

This procedure is actually an intermediary step between a friendly procedure and bankruptcy.

The safeguard procedure provides for the opening of a two month observation period with the aim of reaching a safeguard plan negotiated with the creditors. To this end, it also provides for two committees of creditors – one committee for the establishment of credit and a committee of principal suppliers.

The idea is that creditors are well placed to understand the urgency and complexity of the company’s situation and have a vested interest in making the procedure work.

The creditors who are due to be paid in the observation period must still be paid. If it seems that after the opening of the safeguard procedure that the debtor was already suspending payments at the time of the opening then the court takes note of this date.

A company that requested the safeguard procedure, but who does not suspend payments, may be put into liquidation if their financial state is brought to light during the course of opening the procedure.

On the other hand, if the company is suspending payments at the time of the opening of the safeguard procedure, then this can be converted into a bankruptcy proceeding.

Bankruptcy

The new law does not fundamentally change the bankruptcy procedure.

The head of a company must request the opening of a bankruptcy procedure within 45 days of officially suspending payments and if not then within this same timeframe request the opening of a reconciliation procedure.

A bankruptcy procedure can also be opened at the time of the incident that started the observation part of the safeguard period (if the company is unable to finance the observation period or when the continuation plan is not accepted by the creditor committees).

The administrator can help the debtor or can help manage the company.

Under the new law creditors with a surety will have enhanced rights.

Liquidation

Liquidation, which terminates the operations of a company or realises the capital of the company, is only for companies who have suspended payments and are completely unable to carry on activities even with a bankruptcy plan.

Liquidation is proceeded with directly. There is no need for the formality of opening a procedure of safeguard or a bankruptcy procedure.

If the total or partial liquidation of a company is planned, or if it is in the interest of the creditors, then the company may carry on its activities.

Alongside the procedure provided for by the general law, a simplified liquidation procedure could be available to SMEs.

This simplified liquidation procedure is possible if the following conditions are satisfied:

- if the company’s activities do not involve immovable goods

- if in the six months prior to the opening of the procedure the number of employees and the turnover not including tax is less than the threshold set out in the decree.

Sanctions

The law reduces and simplifies the sanctions regime by doing away with secondary causes at the end of sanctions and rendering incompatible the liability for insufficient assets with a safeguard or bankruptcy plan.

The text limits the liability of banks for negligently providing support to the following circumstances: fraud, involvement in the management of the company, taking inappropriate guarantees.

Conclusion

The new procedure seems to be a good move forward and any complexities are bound to be ironed out in case law and jurisprudence.





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