Vol 4 (2007) - Issue 4

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Creditors’ Rights in France after the Reforms of 26 July 2005 – Part I

France does not enjoy a reputation abroad as a country with a good investment climate, at least in the sense that creditors’ rights are necessarily well protected.
Any ‘Doing Business’ report with regard to France appears to embody that perception and the French naturally consider such a perception to be incorrect: however, it must be admitted that France shares some of the blame for any impression of negativity owing to its relative lack of effort in explaining its legal system properly or clearly to those outside the jurisdiction. Moreover, misunderstanding necessarily entails distrust.
The way French commercial justice is organised does not make it any easier for foreigners to understand the French system, sometimes described as the ‘French exception’.

First, the judges are not professionals, but men and women drawn from the business world appointed by their peers. Secondly, the insolvency professionals, being administrators and liquidators, enjoy a real monopoly in France, designed to protect their independence, and they enjoy sole authority to handle insolvency proceedings.
In addition, unlike many countries and in particular, common-law countries such as the United Kingdom where pre-emptive proceedings prior to insolvency are not entertained, proceedings in France are opened for all companies which suffer some form of distress. Even if the company has no assets, all the pending salary claims are managed through the National Salary Guarantee Fund. This explains the fact that 90% of the proceedings opened in France result in judicial liquidation.

During the 1980s, the economic situation caused the legislature to give priority to, or focus its efforts upon, the protection of jobs to the detriment of creditors, who were in consequence asked to make heavy sacrifices. Bank creditors were concerned with the fairly high risk of incurring liability on the basis of undue support for distressed companies. The results achieved under the former legislation were therefore mediocre, owing largely to creditors’ lack of interest in prevention and in rescue procedures generally.

The question now arises as to what the situation in France presently is after the reform of the insolvency proceedings which took place on 26 July 2005.
All commentators of the new regime agree that it was designed to improve the balance by enhancing the protection of creditors generally. The new statute not only takes the creditors’ interests into account, but also involves them in the restructuring of the distressed company itself, whether through mediation in which they play a central part, or in various remedial procedures.

The legislature’s concern for restoration of creditors’ collective rights appears principally in the form of the creation of creditors’ committees and the fact that priority is now afforded to mediation together with the restriction of any grounds which might otherwise impose liabilities upon the company involved.
This article comprises two parts. The first part will consist of an overview of the environment in which the treatment of distressed companies is addressed which will in turn include a description of the different corporate rescue and insolvency procedures under the present French law in order to understand how creditors’ rights and duties are structured, i.e. the so-called ad hoc mandate, mediation, rescue procedure, judicial reorganisation and liquidation.1 The first part will also include a description of the most important amend-ments affecting creditors’ obligations resulting from the new Act passed on 26 July 2005, e.g. stay of proceed-ings, the reporting and lodging of claims, etc. In the next issue of International Corporate Rescue, the second part will address the new creditors’ rights and provide an in-depth analysis of the new mediation procedures to which creditors are now subject.