Vol 11 (2014) - Issue 4

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Distressed Companies Law Reform: Order of 12 March 2014

Order No. 2014-326 of 12 March 2014 (the 'Order'), adopted pursuant to enabling legislation No. 2014-1 of 2 January 2014, significantly modernises French distressed companies law.
The primary objective of the Order is to encourage recourse to mediation proceedings and conciliation proceedings, the efficiency and success of which have been demonstrated consistently in recent major financial restructurings.
Safeguard proceedings will benefit from wider access with the introduction of the new accelerated safeguard proceedings.
In reorganisation proceedings, the rights and powers of the creditors have been improved in order to encourage solutions that enhance a debtor's prospects for recovery.
Finally, the French government's intention is to improve the efficiency of liquidation proceedings for companies whose situations are irremediably compromised, and to accelerate the process for companies with no assets available for distribution to creditors or shareholders.
The reforms have already been criticised for not being ambitious enough. As proposed, the Order would have made it easier to displace controlling shareholders, which would have significantly favoured lender-led restructurings. These provisions, however, were not retained in the enacted legislation. Even so, the reforms appear to be fulfilling expectations regarding distressed M&A transactions. For instance, the Order includes a mechanism enabling corporate groups to transfer their assets and operations during conciliation proceedings. Moreover, the reforms incorporate procedures into French law that will facilitate pre-packaged sales akin to those that are commonly effectuated under UK law.

Measures designed to prevent financial distress
The allure of pre-insolvency proceedings for dealing with financial distress has prompted the French legislature to diversify the tools available to practitioners.
Among the most important aspects of the reforms are new provisions allowing a debtor to file a motion with the president of the commercial court requesting that the conciliator supervise a partial or total transfer of the debtor's assets (article L. 611-7 of the French Commercial Code).
In enacting the reforms, lawmakers intended to introduce, on a trial basis, procedures allowing for pre-pack administration sale similar to those prevalent in the UK. The tools previously available in French insolvency proceedings (procedures collectives), which made pre-packs enforceable for recovery plans (e.g. accelerated financial safeguards dealing with the transfer of the outstanding capital of the debtor and allowing the creditors or third party buyers to become the new shareholders of the debtor), have been supplemented with a new tool: a pre-pack for transferring assets. One of the undeniable advantages of a court authorised prearranged sale in insolvency proceedings is the protection that is offered to the seller against the risk that an insolvency proceeding will fail. Without making a distinction between small and large companies, which would distort the statistics, recent data suggest that as many as 90 percent of French insolvency proceedings lead to a judicial liquidation. The assets pre-pack therefore appears to be a formidable trump in surmounting this stumbling block.
An assets pre-pack will be negotiated during conciliation proceedings and then finalised in reorganisation or judicial liquidation proceedings. Because the Order is silent regarding the timing and conditions of such transactions, practice will refine the conditions for a transfer of assets in reorganisation or judicial liquidation proceedings. Article L. 642-2 of the French Commercial Code specifies only that, in determining the conditions for approving a proposed transfer of a debtor's assets, the court 'after having solicited the opinion of the public prosecutor department, can take into account the steps performed by the mediator or the conciliator'.
Apart from an assets pre-pack, a transfer of a debtor's assets may continue to be effected under the auspices of a conciliator outside of reorganisation or judicial liquidation proceedings. New article L. 611-7 of the French Commercial Code may be construed as sanctioning existing practice, which involves requesting a conciliator to supervise a transfer of assets during conciliation proceedings. There are clear benefits to structuring distressed M&A transactions as part of conciliation proceedings.