A significant factor in the success of restructurings negotiated in French out-of-court processes (whether ad hoc mandates or conciliations) is the absolute confidentiality of the discussions conducted by a company and the relevant stakeholders (usually creditors, existing or new sponsors or key clients) under the supervision of a court-appointed insolvency practitioner.
A statutory duty of confidentiality binds all parties invited to take part in these discussions, as well as persons who become aware of the discussions by reason of their 'functions'.(1)
The only permitted limitation to this confidentiality is the possibility of the debtor company requesting that the restructuring agreement entered into in a conciliation process be formally approved by the commercial court. In practice, this is usually done with the consent of the other stakeholders.
The commercial court's formal vetting of the restructuring (which provides reinforced security for the agreement in the event of subsequent insolvency proceedings) will reveal the existence of the restructuring agreement to the public. However, the content of the agreement will remain confidential to a large extent, subject to limited information such as the amount of new money secured by the so-called 'new money lien'.
In a remarkable decision of December 15 2015,(2) the Supreme Court affirmed the strength of the confidentiality of ad hoc mandates and conciliations and ruled that it prevails over the freedom of the press.
In July 2012 a group of companies initiated discussions about their debt restructuring with their sponsor and financial creditors. The discussions were initially conducted in the ad hoc mandate framework, before being successfully finalised in conciliation in late September 2012. In both cases, this was done under the supervision of the same insolvency practitioner.
In July 2012 an online provider of intelligence on distressed debt began publishing various articles on the commencement of the ad hoc mandate and the progress of the debt restructuring negotiation.
In October 2012 the group of companies and the insolvency practitioner initiated summary proceedings to obtain a gagging order against the website in relation to any information published on their debt restructuring.
On appeal, the Versailles Court of Appeals dismissed the request on the grounds that:
- the confidentiality duty in relation to restructurings did not extend to third parties to the discussions, and journalists conducting investigative work could not qualify as persons made aware of the discussions by reason of their 'functions';
- the claimants did not establish that they had suffered a loss from the publication of the relevant articles; and
- in accordance with the fundamental principles of the freedom of the press and the protection of sources, these articles were not a blatant violation of the law that could be remedied by judges ruling in summary proceedings.
The Supreme Court overruled the appellate decision. The ruling was made on the basis of Article 10.2 of the European Convention on Human Rights, which sets the conditions in which the exercise of freedom of expression may be restricted.
The Supreme Court decided as follows:
- The confidentiality duty is not limited to the persons expressly mentioned in the law, but extends to all third parties.
- The statutory confidentiality of out-of-court ad hoc restructuring processes is designed to protect the rights and freedoms of debtor companies. Accordingly, this confidentiality:
- is a necessary restriction of the press's freedom of expression; and
- yields only if the information is of general public interest.
- The breach of confidentiality in this context is detrimental per se to the debtor company and no further demonstration of a specific loss is necessary to obtain a gagging order in summary proceedings.
From the financial journalists' standpoint, the decision may appear as a disproportionate blow to their freedom to inform the public, particularly in relation to the restructuring of listed companies.
The Supreme Court gave no indication as to the circumstances in which information on restructuring discussions could be of general public interest. Such situations may prove scarce in practice.
However, from the practitioners' standpoint, the decision is a salutary reminder of the strength of the confidentiality protecting out-of-court restructuring processes.
This confidentiality is necessary to enable:
- a debtor company to be completely honest and present the reality of its financial situation without fears of unintended leaks to business partners and clients; and
- the stakeholders invited to participate in the discussions to freely discuss and potentially refuse the efforts requested from them without fears of their behaviour being later stigmatised.
On this last point, the decision echoes another ruling of the Supreme Court issued on September 22 2015.(3) In this matter, a court of appeals rejected an affidavit that had been communicated by a guarantor in a dispute initiated by the bank. The affidavit – drafted by the insolvency practitioner appointed in a previous and unsuccessful ad hoc mandate – criticised the bank's behaviour and blamed it for the failure of the attempted restructuring.
The Supreme Court upheld the court of appeal decision that the affidavit was a breach of the confidentiality of the ad hoc mandate and reaffirmed that creditors are under no obligation to accept the efforts requested from them in out-of-court restructuring processes.
With these two decisions, ad hoc mandates and conciliations appear more than ever to be the favoured framework in which to design and negotiate restructuring agreements.
For further information on this topic please contact Nicolas Morelli or Céline Nézet at Bird & Bird by telephone (+33 1 42 68 60 00) or email (firstname.lastname@example.org o email@example.com). The Bird & Bird website can be accessed at www.twobirds.com
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