Vol 3 (2006) - Issue 4

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French Bankruptcy Law: Putting the Safeguards in Place

Background
In a previous article by the present authors (‘Chapter XI à la Française: French Insolvency Reforms’) published in this journal in 2004 there was a review of the then draft law which had by then been introduced by the French Justice Minister called a ‘projet de loi de ?sauve-sauvuve-- gardeedesenterprises des enterprises’. It was pointed out that there existed
certain parallels between the suggested reforms and United States Chapter XI-style procedures.
There was a brief review of the regime in existence before the reforms. The French system provided for two types of proceedings: on the one hand the so-called ‘prévvention’ proceedings – mandat ad hoc and règlement amiable – both of which were applicable to non-insolvent companies in difficulties and which do not trigger a stay and as such cannot be considered as insolvency proceedings; and, on the other hand, the ‘insolvency’ proceedings – redressement juudiciaire which in very general terms is the French equivalent of an English administration, and liquuidation juudiciaire available only to ‘cashflow insolvent’ companies. The insolvency proceedings were thus available only to cashflow insolvent companies. The company could get out of the insolvency proceeding either through the sanctioning by the court of a reorganisation plan of the company as a legal entity, in which case the court could impose on the creditors the deferment of repayment over a maximum 10-year period (plan de continuuation), or through the sale of its business as a going concern to a third party (plan de céssion), and if those were not possible the sale of its assets on a liquidation basis. In the cases of a sale of the business or of the assets, the purchase price was distributed amongst the creditors in satisfaction of their claims in the order provided for by the relevant legal provisions. There was therefore no possibility of imposing a protective stay prior to a cashflow insolvency. Nor could any cramdown mechanism be imposed, e.g. by the use and votes of creditors’ committees.
The need for reform: the underlying imperatives
In the years leading up to the draft law, it is perhaps not unfair to observe that French insolvency had failed in many instances to halt a company’s decline into a terminal condition. In recent years, and certainly in the period leading up to the draft law, about 50,000 enterprises per annum went into some form of insolvency process with the resultant impact upon a work force which involved a total of some 300,000 persons. Most of these enterprises were modest in size, often holding few assets of value and with a workforce of fewer than 10 persons. It appeared that most companies, which were under a duty to file in the 15 days from their cashflow insolvency but could not seek the protection of the court before this state of cashflow insolvency, filed at too late a stage
In addition, the coming into force of the EC Regulation on Insolvency Proceedings (Council Regulation (EC) 1346/2000 of 29 May 2000) on 31 May 2002 also prompted a review of French insolvency procedures and in particular an increased awareness of how other jurisdictions addressed the issue of corporate rehabilitation.
Another contributory factor was the perceived, if not in large part justified view, that the French insolvency regime is one which was somewhat pro-debtor, particularly when coupled with the perennial Gallic concern for employee protection. The process was largely debtor-driven with little if any effective creditor involvement. Such a view, whether justified or not, may well have helped discourage many creditors from otherwise actively participating in court-driven restructurings and rescues.