Vol 4 (2007) - Issue 5

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

This is the second part of an article on the new creditors’ regime under French insolvency law. The first part has been published in the previous issue of International Corporate Rescue and it included an overview of the environment regarding the treatment of distressed companies, which includes a description of the different corporate rescue/insolvency procedures under French law (i.e. ad hoc mandate, mediation, rescue procedure, judicial reorganisation and liquidation). It also included a description of the most important amendments to the creditors’ obligations resulting from the new act passed on 26 July 2005 (e.g. stay of proceedings, report of claims, etc.).
Part II of this article will address in detail the new creditors’ rights and will also provide an in depth analysis of the new mediation procedure to which creditors are now subject.

I. Improvement of creditors’ rights

The rights of creditors of a defaulting debtor were greatly reduced by the Act dated January 25, 1985. That statute had been viewed as being rather unfavourable to creditors, since by some estimates, 60% of secured claims and 5% of unsecured claims had been paid since that statute’s enactment as a result of the priority conferred on later creditors over creditors secured by special security interests.

The Act of June 1994 had sought to restore a balance between secured creditors and creditors resulting from the reorganisation of the company, by restoring the priority in favour of certain special security interests in relation to later claims (known as ‘Article 40 claims’). No additional special priority was granted in respect of funds contributed by investors during the reorganisation.

The legislature sought to provide creditors with even more room for manoeuvre by reconsidering their position as genuine partners of the company. The creation of creditors’ committees within the rescue procedure as well as within the procedure for judicial reorganisation is undoubtedly a step forward. In addition, the law has amended several rules, which are now more favourable to creditors.

(1) Creditors’ representation through the creation of committees

The practice of votes taken by a meeting acting in accordance with the wishes of certified creditors existed under the 1967 Act. What is new is the division of creditors into two classes: (1) lending institutions; and, (2) major suppliers. The composition of these two classes of creditors will vary according to size and turnover of the business, but their appointment can occur at the request of the debtor or administrator. The terms of their appointment are left to the discretion of the administrator, who has a 30 day period after the opening judgment to establish the committees. These committees are made up only of creditors existing prior to the date of the opening judgment. The establishment of the committees is designed to increase the creditors’ involvement in developing the plans for the company’s rescue or reorganisation. The plan will generally be contractual in nature by virtue of the role conferred on creditors’ committees.

The interests of minority creditors are protected, however, on account of a reviewing power vested in the courts. The importance of the role assumed by the committees will depend on whether the committees comprise the greatest possible number of creditors as representative of the parties most concerned in the development of the plan on the basis that the majority of those creditors can then impose its will on the minority. This decision is to be made by a majority of members representing at least two-thirds of the amount of claims, determined by the administrator no more than 8 days before the voting date. The practical terms of the vote are also a matter of the administrator’s discretion. The administrator will accordingly play an essential part in preventing the creditors from blocking the committees’ operations or from their evading any responsibility from participation in the running of the committees.

The reason for combining creditors in committees is that they can approve a draft plan for a term exceeding 10 years, with the possibility of having the first payment made after one year followed by annual instalments of no less than 5% of the accepted liabilities after the second year.