Vol 2 (2005) - Issue 1

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The Reform of French Insolvency Proceedings

Over the past 20 years, the French insolvency regime has been amended by successive laws, in each case with the stated objective of promoting the rescue and recovery of companies in distress. The Commercial Court of Paris has, over the last ten years, promoted a treatment of the financial difficulties of the companies at an earlier stage.
Yet almost 90% of the 45000 insolvency cases decided each year end in liquidation; hence the cry for a new reform. After a long process of elaboration and consultation of relevant professions and institutions, a new legislation, under government preparation since October 2003 (the so-called ‘Perben law’, by reference to the name of the French Minister of Justice), will be presented and discussed at the parliament during Spring 2005 (the ‘Bill’).
This article provides an overview of some of the major changes proposed by the Bill.

A modified conciliation procedure

The Bill redefines the existing ‘amicable settlement’ procedure (‘règlement amiable’) as ‘conciliation’ which provides a breathing space for a debtor anticipating problems with cash flow to negotiate with its creditors at an early stage.
Creditors granting facilities, advances or new loans to the debtor during the conciliation phase will be paid on a priority basis if the conciliation procedure fails and the debtor company is subject to an insolvency procedure; protections for lenders of new money are therefore enhanced.
Under the terms of the Bill representatives of the works council or staff representatives must be heard before the court sanctions the terms of any creditors’ agreement. Once it is sanctioned, the court judgment must be filed at the clerk’s office where any interested party can read it. These provisions have been heavily criticized because they will undermine the confidentiality of creditor agreements and, consequently, the company’s prospects of survival.

The new safeguard procedure

The Bill introduces a completely new procedure known as the ‘procedure de sauvegarde’ which has been inspired by US Chapter 11. The safeguard procedure is only available to a company that is ‘undergoing difficulties which are likely to lead to an inability to pay its debts’ (i.e. in more serious difficulties than those who might avail themselves of the conciliation procedure). A company in this situation may obtain the protection of a moratorium by applying to the court.
The new protection procedure is implemented by a court judgment at the sole initiative of the debtor company. The court order triggers an ‘observation period’ (‘pèriode d’observation’) during which there is a general stay of proceedings for claims that exist at the time of the court judgment. The company’s situation is then assessed and a recovery plan (‘plan de sauvegarde’) is drawn up with the aim of rescuing the company (e.g. by a disposal programme).
If the size of the company so justifies, an administrator may be appointed by the court to assist the directors in their management but without replacing them. The debtor company stays in possession of its business throughout the process.
New money lent during this observation period is paid as it falls due, or in the event that this is impossible, on a priority basis over all other debts (whether secured or not) but only when created ‘for the purposes of the proceedings ... or due to a service rendered to the debtor, for its operations, during that period’. Accordingly, priority status is conferred more restrictively than in the existing regime, where this criteria is not required.
At the end of the observation period, the plan is then put before creditors. The Bill introduces two creditors’ committees, which vote on the draft reorganization plan: one for credit institutions, and the other for main suppliers. These committees need to vote in favour of the reorganization plan. To approve the plan, a two thirds majority (with reference to indebtedness), and a numerical majority of creditors on each committee is required.