December 8, 2021

Volume XI, Number 342

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December 07, 2021

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December 06, 2021

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An Introduction to France’s New Restructuring Laws

In the context of the EU Directive 2019/1023/UE of 20 June 2019 (“Directive”) and in the aftermath of the Covid crisis, France has reformed its insolvency legislation. The purpose of the legislation is both to implement the requirements of the Directive into the French legislation, but also to tackle the consequences of the Covid crisis and endorse some of the measures that have been taken in this respect and have brought the number of insolvency proceedings to a historic low, as well as other measures.

To do so, France has very recently published various pieces of legislation to implement the required changes. In particular, France has adopted a first set of legislation aiming at implementing measures to assist companies in surpassing the economic effects of the sanitary crisis (Law n°2021-689 du 31 May 2021 on the exit of the sanitary crisis and Decrees n°2021-1354 and n°2021-1355 du 16 October 2021 on the procedure applicable). It has also adopted a second set of legislation – Order n°2021-1193 of 15 September 2021 and Decree n°2021-1218 of 23 September 2021 – which amended Book VI of the French Commercial Code concerning Insolvency.

The overall purpose of the reform is (i) to reinforce the efficiency and speed of insolvency proceedings, by improving the tools available to detect the difficulties of companies at an early stage and offer prompt restructuring solutions to maintain the activity of the companies concerned through preventive measures, (ii) to simplify the procedures applicable and (iii) to ensure a proper balance of the rights of all concerned parties by reinforcing the powers of “interested parties” (i.e. creditors, but also shareholders).

The reform is dense, but the main features are briefly presented below.

Reinforcement of early preventive measures

The French legislation already contained various measures in this respect. The reform has improved and expanded the existing tools on the early detection of difficulties.

To do so it has (i) accelerated the alert mechanism, in particular through an increased role of external auditors who can inform the President of the Commercial Court, (ii) increased the powers of the President of the Commercial Court for instance by allowing them to undertake an investigation without having to wait for an audition of the Director of the company concerned.

The reform also reinforced and clarified the provisions applicable during the “conciliation” proceedings, a pre-existing confidential pre-insolvency measure. It includes measures aiming at suspending payment of receivables during the conciliation phase and preserving securities granted during that period to creditors in case of subsequent insolvency and/or failure of the conciliation measures.

To achieve greater transparency regarding the costs of the conciliation, debtors must now file (with the assistance of their conciliator) a statement of all conciliation-related costs, as well as all costs related to the intervention of an ad hoc administrator (including administrator/conciliator costs, but also lawyers, financial experts etc.). To reinforce the confidentiality of conciliation, third parties will only be able to obtain the conciliation agreement should their opposition be declared admissible.

Reinforcement and acceleration of safeguard proceedings

The measures concerning safeguard proceedings (one of the three available insolvency proceedings under French law, in addition to administration and liquidation proceedings) aim at increasing the efficiency and speed of these proceedings, the purpose of which is to assist in the restructuring of companies that are not yet insolvent, but face serious financial difficulties.

In this respect, the reform has improved the “standard” safeguard proceedings and enforced the following measures:

  • The duration of the observation period (a period that immediately follows the opening of insolvency proceedings and at the end of which the situation of the company is reassessed)  is reduced from 18 to 12 months maximum (i.e. a 6 months period that can be extended once by another 6 months), with any extension limited to a “specially reasoned” request;

  • Introduction of the possibility of establishing the list of receivables based on statements of the accountants of the company’s external auditors;

  • Payments under the restructuring plan that is adopted will be subject to an annual minimum payment of 10% of the total claims from the 6th year of the plan;

  • Any classes/categories of “affected parties” constituted during the safeguard proceedings are maintained in case the proceeding is converted into administration proceedings;

  • Introduction of a form of safeguard “privilege” (also applicable for administration proceedings), whereby any creditor that introduces “new money” will benefit from extra security that can be paid in priority to other receivables (after salary receivables);

  • Introduction of the rule that “silence equals acceptance” from creditors where there is a substantial amendment of the restructuring plan (excluding cases where classes/committees of “interested parties” are constituted and must be consulted);

The reforms also extends the scope of accelerated safeguard proceedings pursuant to the Directive. While it maintains some of the Covid related measures (removal of thresholds, possibility of limitation to financial creditors, prior conciliation required; solid plan required), it also added new features. In particular, the duration of the proceedings has been reduced to 2 months (extendable up to 4 months maximum); companies resorting to this procedure are obliged to create classes/committees of “interested parties” whatever their size. It is worth noting that any failure to adopt the plan in the required time frame will result in the termination of the proceedings (no conversion into administration proceedings is possible). However, the companies concerned can always file a new application for administration proceedings should it actually become insolvent.

The introduction of classes of “affected parties”: a reinforcement of the rights of creditors and shareholders

This is again a provision stemming from the Directive. The reform has removed the existing committees of creditors to create “classes of affected parties”, thus creating an entire new section in the French Commercial Code in this respect (Title II, Chapter VI, Section 3 of the French Commercial Code). The objective is that more affected parties are involved in the early stages of the restructuring plan, ensuring they have a say and preserve their rights. While one of the objectives of the Directive was to harmonise the legislation throughout Europe, the French legislator has not gone as far as some common law countries or Germany in the influence granted to creditors on the proceedings. France has maintained a balance between the rights of the companies facing the difficulties and those of creditors.

In accelerated safeguard proceedings and, for other proceedings, to companies with 250 employees and over 20 million euros of turnover (or over 40 million euros of turnover) it is compulsory for there to be classes of “affected parties”.  Companies under that threshold can voluntarily constitute classes, although this appears unlikely.

“Affected parties” are defined as parties likely to be impacted by the restructuring plan. This include creditors (as was the case before). They also include shareholders, which is a novelty under French law.

The administrator decides the constitution of the classes based on the nature of the receivables and objective criteria (defined by the new commercial code as an “economic interest group”). As least two classes must be constituted and must include affected parties with security on the assets. All employee related receivables are excluded from this new system.

Once constituted the classes can then vote on the proposed restructuring plan (at a 2/3 majority of those voting). Only in administration proceedings can competing restructuring plans be proposed by creditors.

The Tribunal then endorses the plan as voted by the classes after verifying that the best interests of all parties are respected.

If certain affected parties have voted against the plan, the court must now check whether they obtain a payment that would be at least equal to what they would be entitled to if the company went into liquidation, there was an assignment of the business as a going concern (i.e. the sale of the business of the insolvent company) or the “best alternative solution”. This means that Tribunal will now need to assess the situation of each creditors that voted against the plan.

If certain classes of affected parties have voted against the plan, the Tribunal will have the power to impose the plan if at least one class has voted in favour of the plan, applying the absolute priority rule (i.e. checking if creditors of higher rank will be fully paid before any other creditor can receive payment).

Other relevant provisions

The reform has also introduced new rules for holders of securities and guarantors, some simply endorsing measures enacted as a response to the Covid crisis. These new measures include (i) the possibility of granting conventional securities on the assets of the debtor, (ii) the possibility of disposing of certain assets not necessary for the normal operation of the company, (iii) the possibility of paying transporters after the opening of insolvency proceedings, (iv) the possibility of obtaining a better position for any injection of “new money” (as 2nd ranking security holder after employee claims).

The order and decree also introduce an obligation on holders of securities and guarantors to declare their receivables.

Finally, the reform contains a certain number of provisions on the “second chance” given to directors of the insolvent company. Only directors that have acted outside of their duties may be sanctioned (prohibition to act as director of a company, financial sanctions). Others, will have another opportunity to restart or continue business while not being held accountable for the insolvency, even if some of their decisions, in the normal course of business, have caused their bankruptcy.

This reform entered into force on 1 October 2021, but is not applicable to insolvency proceedings already pending at that point.

While this reform contains a number of new measures, it is likely to only affect a limited number of companies given the thresholds imposed. Nevertheless, it preserves the existing applicable procedure but re-balances the powers and rights of all involved or “affected” parties.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 328
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About this Author

Laure Perrin Paris France International Dispute Litigation Senior Associate Attorney Squire Patton Boggs Law Firm
Senior Associate

Laure Perrin is a senior associate in our International Dispute Resolution Practice Group, based in our Paris Office.

Laure’s practice incorporates all aspects of civil, commercial and public law. She represents and advises French and international companies in disputes before civil, commercial and administrative Courts, as well as in national and international arbitrations.

Laure is fluent in French, English and Spanish.

+33 1-5383-7522
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