A look at corporate, personal and, where relevant, partnership insolvency proceedings in France, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Mandat ad hoc
Preventive composition with creditors – Ad hoc proceedings
- An out-of-court procedure opened by the President of the Court at the request of the debtor’s legal representative for a debtor experiencing legal, economic or financial difficulties but which is cash flow solvent.
- A mandataire ad hoc – insolvency practitioner – is appointed in order to assist negotiations with the debtor’s principal creditors but the debtor maintains full control of its assets. The debtor must cooperate with the mandataire ad hoc and the major creditors to negotiate a solution to its difficulties.
- Major creditors are invited to consider debt rescheduling and/or cancellation and/or an injection of new money. In addition, the main shareholders can be invited to negotiate and potentially re-capitalise the company.
- A debt restructuring agreement accepted by some creditors cannot be imposed on other dissenting creditors, as the process is consensual and no cram-downs can be imposed.
- There is no stay on enforcement proceedings on the opening of ad hoc proceedings. However, management can apply for a moratorium (for a maximum of two years) if creditors attempt to enforce their rights while ad hoc proceedings are pending. Mandat ad hoc is fully confidential.
Preventive composition with creditors – Conciliation
- An out-of-court procedure opened at the request of the debtor’s legal representative. The debtor must face legal, economic or financial difficulties, and not be cash flow insolvent for more than 45 days.
- A conciliateur is appointed by the court for five months with a view to reaching an agreement between the debtor and its main creditors: (i) to put an end to the debtor’s difficulties; and/or (ii) to prepare a plan for the sale of the business via safeguard proceedings, a pre-pack or judicial reorganisation.
- Conciliation is not an insolvency proceeding and remains confidential provided that the agreement reached by the debtor and its creditors is not judicially sanctioned by the court. A restructuring plan accepted by some creditors cannot be imposed on others unless accelerated financial safeguard or accelerated safeguard proceedings are opened.
- The debtor remains in control of its assets. There is no freezing effect and the opening of conciliation proceedings does not trigger an automatic stay on creditor enforcement action. However, the judge may issue a debt deferral for up to two years against certain creditors.
- Parties to the agreement, once fully sanctioned or recognised by the court, are barred from initiating legal proceedings against the debtor.
Preventive debt and business restructuring procedure – Safeguard proceedings
- A court-supervised procedure to alleviate a debtor’s financial difficulties. It is opened at the sole request of a debtor’s representative and is only available to cash flow solvent debtors experiencing difficulties that cannot be overcome.
- Immediately following a judgment opening safeguard proceedings, an observation period starts for six months, renewable once for a further six months and under exceptional circumstances for a further six months after that (a total of 18 months).
- The observation period imposes an automatic stay on all actions against the debtor and the debtor is prevented from making payments of pre-procedure claims.
- An administrateur judiciaire is appointed by the court who supervises and/or assists the debtor or its management, who remain in control of the company and its assets.
- The court also appoints a mandataire judiciaire to represent creditors’ interests and assess proofs of claim and a juge-commissaire (supervisory judge) who supervises the proceedings.
- The debtor and administrator will prepare a plan de sauvegarde during the observation period. The content of the plan is flexible (rescheduling of debt, write-offs, debt for equity swap) and voted on by a creditors’ committee or creditors generally.
- If the debtor fails to comply with the terms of the plan or becomes cash flow insolvent, the court may open either a redressement judiciaire procedure if rescue remains possible or a liquidation judiciaire procedure if rescue is manifestly impossible.
Accelerated debt and business restructuring procedure (pre-pack plan)
- A court-supervised procedure that can be opened at the sole request of the debtor provided it has not been cash flow insolvent for more than 45 days prior to the request to open a conciliation procedure that preceded it.
- The debtor remains in control of its assets.
- Intended to facilitate the negotiation of a pre-packaged plan with the ability to cram-down dissenting minority creditors through the votes of classes of creditors.
- Available to mid-cap debtors that:
- have previously been subject to a conciliation procedure; and
- have drawn up a restructuring plan aimed at ensuring the sustainability of their business which is likely to be approved by at least a two-thirds majority in value of financial creditors and trade creditors (and, if relevant, bondholders) to enable the plan to be adopted within three months following the judgment opening the procedure.
- Imposes a stay on creditor enforcement action limited to three months from the date of the judgment opening the procedure.
Sauvegarde financière accélérée
Financial creditors debt restructuring agreement (financial debt restructuring pre-pack plan)
- A court-supervised procedure (a variant of sauvegarde accélérée) that can be opened at the sole request of the debtor provided the debtor has not been cash flow insolvent for more than 45 days prior to the request for the opening of the conciliation procedure which preceded it.
- It applies to financial creditors only and not trade creditors.
- The debtor remains in control of its assets.
- The debt restructuring plan must be adopted by the financial creditors within a period of one month, renewable once. The consent of a majority of at least two-thirds in value of financial creditors (represented at the meeting) must be obtained.
- An automatic stay of all actions against the debtor applies only to financial creditors.
- An insolvency procedure available only for debtors that are cash flow insolvent.
- Court-supervised, intended to safeguard the debtor’s activities and prospects of recovery. It can be commenced at the request of either the debtor’s legal representative, any creditor or the public prosecutor.
- A mandataire judiciaire is appointed by the court to represent creditors’ interests and deal with creditors’ claims.
- The court also appoints an administrateur judiciaire who manages the debtor’s assets and, in the case of a company, might either supervise the company, assist the directors in all or some management decisions, or be authorised to take over the management and the control of the company.
Judicial liquidation/bankruptcy proceedings
- A court-supervised procedure for debtors that are cash flow insolvent and where rescue is manifestly impossible.
- Can be opened at the request of the debtor, any creditor or the public prosecutor.
- The judgment opening the procedure starts an automatic moratorium and all enforcement actions against the debtor are stayed.
- The court appoints a liquidateur judiciaire whose task is to conclude the debtor’s business activities and sell its assets.
- Where the debtor is a company, its directors lose all powers of management and in all other cases the debtor loses all rights to dispose of its assets.
- The judgment opening the redressement judiciaire starts an observation period of six months during which an automatic stay on creditor enforcement action prevents creditors from taking action against the debtor and the debtor is prevented from making payments to any creditor in respect of claims arising before the opening of the insolvency proceedings.
Anticipated changes in the next two years
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States' restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States' national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Contact: Caroline Texier, Partner, Paris
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.