La Revue Squire

Review of the 2008 Order amending the law relating to companies in financial difficulty: what are the implications for creditors?


Rédigé par Nicolas BAUCH-LABESSE le 18 Décembre 2009


By Order No. 2008-1345 (in force 15 February 2009) French authorities made a significant effort to make insolvency procedures more accessible and efficient for companies in financial difficulty.

These procedures are :

• "Out of Court" procedures : “mandat ad-hoc” and "conciliation",

• Court-led procedures : "procédure de sauvegarde" (safeguard procedure), "redressement judiciaire" (recovery procedure) and "liquidation judiciaire" (liquidation).

We will focus below on the main additions or changes which may impact a contracting party in the conciliation and safeguard procedure.

Conciliation

Conciliation is a procedure that is used when a company, which is not insolvent or which has not defaulted on payment for more than 45 days, faces financial difficulty requiring a conciliator to be appointed by the Court to help to restructure the company.

The aim of conciliation is to reach an agreement between the company and its creditors. This agreement could either be official and approved by the Court, or be confidential.

The Order has strengthened the conciliation procedure since:

• Once a conciliation agreement has been reached, creditors are prevented from taking legal action against a debtor for payment of any debt covered by the agreement;

• People who are jointly bound, have agreed to a personal guarantee, or have assigned or sold a property as collateral may benefit from the provisions of the agreement;

• If the agreement is breached, the payment deadlines expire at the request of either party to the agreement, rather than by law.

These modifications aim at increasing the use of such preventive procedure, in order to avoid insolvency proceeding that very often ends up in a liquidation of the company.

Safeguard procedure ("Procédure de sauvegarde")

The procedure de sauvegarde can be commenced as soon as a company “proves it is having financial difficulties which it is unable to overcome”. The aim of the procedure is to continue the business, safeguard employment and the payment of debts.

The legal recovery procedure ("Redressement Judiciaire") is similar to the procedure de sauvegarde, the main difference being that the recovery procedure should only be used for companies that are already insolvent.

At the beginning of the Safeguard or Recovery procedure, the Court appoints :

• a supervisory judge ("Juge-Commissaire"), who monitors the proceedings;

• an administrator ("Administrateur judiciaire") who supervises the management or provides assistance to the debtor;

• a creditor's representative ("Mandataire judiciaire").

Creditors submit their claims to the creditor's representative ("déclaration de créances") process. Any debts which are not submitted within a certain time limit will be unenforceable against the debtor during the Safeguard plan. Since February 2009, these "non-submitted" claims also remain unenforceable against the debtor after the Safeguard plan, if the debtor has performed all the requirements of the plan.

In addition, the administrator now has the right to ask the Supervisory Judge to terminate the outstanding contracts, if the administration of the debtor requires it and if such failure does not prejudice the interests of the other party.

The restitution of assets process is also amended: under the new procedure, if the owner of an asset which is possessed by the debtor wants its property rights over the goods to be enforceable against the debtor, he must claim within three months from the publication of the Court judgment, even if the contract is still in force. However, the right to restitution cannot be implemented until the end of the term or the termination of the contract. For instance, if a lessor wants its rights on the leased goods to be enforceable against a lessee who is undergoing the Safeguard or Recovery procedures, the lessor must claim within three months from the beginning of the procedure and may enforce its rights only when the lease is terminated.

The rules on creditor committees have been modified, both in their composition (extended) and rules relating to their operation (period of six months from initiation of proceedings to adopt a draft plan). Moreover, all creditors may now suggest draft plans and recapitalisation plan under certain conditions (debts can be converted into securities giving access to capital).

The concept of a trust (“fiducie”) has been taken into account by the Order, which prohibits any assignment or transfer of property rights or assets in a trust for the benefit of the trustee or a third party, simply due to the commencement of an insolvency procedure. Failure to comply with this prohibition will mean that the provision is null and void.





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