Vol 1 (2004) - Issue 2

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Chapter 11 à la française: French Insolvency Reforms

Introduction: new French reforms and background

The French Minister of Justice has recently introduced new draft proposals (‘the Draft Law’) the overall aim of which is to cure a company’s financial problems even more quickly and efficiently than seems to be the case at the moment, largely through creditor input. This is also to be achieved by means of quick asset sales or by the use of a moratorium to stem any further losses created by the debtor company.

It is envisaged that there will be at least two committees of creditors representing largely trade and financial creditors respectively. The mechanics of operating the committees are still to be worked out but further mention will be made of this development below.

The perceived existing problem is that out-of-court procedures may be said to suffer from two fundamental defects, namely that the debtor will have not been granted complete or sufficient protection from continuing liabilities, whilst creditors equally will not have been afforded similar cover against increasing exposures. These problems, according to some, have meant that, far from saving companies from formal insolvency, the present system has in fact contributed
to the far more rapid decline of companies in difficulties into some form of insolvency process.

French insolvency law underwent substantial reform in 1985. The overriding aim behind those reforms was to help in the recovery of companies which had been placed into insolvency proceedings. Unfortunately that otherwise laudable aim has not really been achieved. About 90% of insolvency proceedings started against insolvent companies in France have ended up with some form of liquidation process. Out of the remaining 10% only 5% have been saved by virtue of a sale of the assets or by the continuation of the activities of the company over a limited term to allow it to repay some, if not all, of its creditors.
Further reforms in1994 failed to change the overall picture.

The new Draft Law

The present reform takes the form of a draft law dealing with the rescue of companies in a form to be called a ‘projet de loi de sauvegarde des entreprises’. It was presented by way of a first draft in October 2003. The Draft Law was subsequently revised and the second draft was published at the end of January 2004. The entire question is currently the subject of intense and fluid discussions involving both professionals and the government. There is certainly no guarantee that the reforms discussed in this article will see the light of day in anything like their present form. The reference to sauvegarde of itself indicates the intended similarity with a United States Chapter 11-style of rescue mechanism. Indeed in a discussion document published in October 2003 the French government indicated that the concept of Chapter 11 would be used as a template for the reforms, in particular the Chapter 11 concepts of an amicable settlement and the pro-active involvement of creditors in any ongoing settlement regime.

Impact on current procedures

Under the present regime, insolvency proceedings can take the form either of amicable proceedings represented by a mandat ad hoc or by a règlement amiable (both of which proceedings are in general referred to as ‘prévention’) which can be opened only when the debtor company is not insolvent, or alternatively of formal insolvency proceedings which can take the form of more formal procedures such as administration (‘Redressement Judiciaire’) or liquidation (‘Liquidation Judiciaire’), both of which must in general be opened at the request of the formal representative of the debtor company within a 15-day time span from the date on which the company becomes insolvent. For latter purposes the company will be regarded as insolvent when it is unable to pay its debts as they fall due out of its realisable assets.