Vol 7 (2010) - Issue 1

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French Pre-packs: Key Stages and their Related Issues

This article should prove essential reading for those with an interest in restructuring businesses and distressed M&A transactions in France and who are looking at the possibilities offered by the new French safeguard procedure. It focuses on key steps of the accelerated turnaround process, commonly known as a 'pre-pack à la française', which can be achieved through the safeguard legislation. Interestingly, the current legislation does not specifically provide for a prepack process, but practitioners have recently bent it to this purpose.

'Europe appears to be one of the most promising regions for investors in distressed debt', Financial Times, 2 October 2009

The above headline reflects the market feeling that in Europe, through the recent crisis, companies have been able to delay but not avoid the need to restructure. In a recently reported survey with respect to France, two thirds of professionals polled were anticipating the number of restructurings over the coming year to double, with 16% anticipating even more than this.

For those having to address distressed debt in Europe, be it as a potential new investor or as a company looking to restructure internally, it is critical to understand the possibilities and limitations of the available legal and quasi-legal procedures in the country where the distressed company operates. Safeguard proceedings are the most recently introduced French mechanism by which a failing company can be speedily and efficiently turned around. Safeguard proceedings take their inspiration from US Chapter 11 proceedings. The concept was introduced into French law in 2005 but was significantly fine-tuned by the French legislator in 2008, with the amended legislation in force as from 15 February 2009. The central feature of safeguard proceedings is that the debtor remains largely in control of the business but under the supervision of a court appointed administrator, and ultimately the Court. One of its key features is that, with the support of major creditors, it enables a debtor to 'cram down' claims by minority creditors through voting procedures available in creditors’ committees.

In France, safeguard proceedings have paved the way for some innovative approaches to restructuring distressed companies. In particular, they offer the opportunity to implement 'pre-pack' arrangements – whereby the restructuring plan may be partly prepared in advance of court proceedings with the subsequent court proceedings serving (a) to allow the debtor and its major creditors to impose the plan over protests from minority recalcitrant creditors and (b) to formalise the plan under the protection of a Court process. Such 'pre-packs' à la française are not directly comparable to UK pre-pack administrations or US style pre-pack arrangements. For example, one key difference between a 'pre-pack' arrangement in France and the US Chapter 11 pre-pack equivalent is that the operative voting takes place after commencement of the court process, not before. In this sense, the French 'pre-pack' is more akin to a US styled pre-negotiated plan. Nevertheless, in all three countries the respective processes share the same core objective of achieving turn around of a struggling business in the shortest time possible so as to maximise value for stakeholders.