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Insolvency procedures

What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Safeguard
  • Rehabilitation
  • Liquidation

Safeguard – A company that has not ceased to be able to pay its debts as they fall due but is nevertheless financially distressed can apply to court for safeguard proceedings, which provide for a moratorium on enforcement by creditors while a debt restructuring plan is prepared. The company has six months (extendable to 18 months) in which to negotiate and agree the rescheduling or compromise of all or part of its debts with its creditors. If the plan is successfully implemented the company returns to financial health.

Rehabilitation – An insolvent company can apply to court for rehabilitation proceedings, which provides for a moratorium on enforcement by creditors while a restructuring plan is prepared. The court approves the restructuring plan, which is binding on the creditors even though they have no say in it. If the plan is successfully implemented the company returns to financial health.

Liquidation – The purpose of liquidation is the realisation of a company’s assets and the distribution of the proceeds to its creditors.

Can a company obtain a moratorium whilst it prepares a restructuring plan?

A company can only obtain a moratorium while preparing a restructuring plan by applying for a safeguard or a rehabilitation.

To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

Safeguard - the company’s managers remain in control subject to the supervision and assistance of the court appointed administrator.

Rehabilitation – depending upon the terms of the order commencing rehabilitation the court appointed administrator will either supervise the directors, assist them or directly manage the company.

Liquidation - the powers of the directors cease and the liquidator takes control of the company.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Two months, provided that:

  • it is proven to the court that the company has ceased being able to pay its debts as they fall due; and
  • the company is not capable of being rescued by means of a restructuring plan

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Yes – insolvency proceedings commenced in the courts of other EU member states are automatically recognised under the EC insolvency regulation.

Achieving recognition of insolvency proceedings commenced in countries that are not EU member states is possible in theory but impractical in reality.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over immoveable property is taken by:

  • mortgage (hypothèque)
  • lender’s lien (privilège de prêteur de deniers)

Security over tangible moveable property is taken by various forms of pledges (gage), many of which require registration at various registries.

Security over different kinds of intangible movable property is taken by various forms of a different kind of pledge (nantissement).

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

Preferential status is given to debts owed to employees in respect of remuneration incurred after or in the two months prior to the judgment commencing insolvency proceedings.

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes, provided that creditors who reside outside metropolitan France lodged their claim within four months of publication of the insolvency judgment in the BODACCC (official publication).

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

No, they are void by law as a matter of public policy.

Retention of title
Are retention of title clauses effective?

Yes. Any demand for return of property under a retention of title clause must be made to the administrator by registered mail within three months of publication of the insolvency judgment.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

Certain transactions entered into within the 18 months prior to the insolvency judgment are automatically void including:

  • deeds assigning movable or immovable property
  • payment of debts prior to the due date
  • payments of debts by means that are not common business practice, eg payments other than in cash or cash equivalents
  • grants of security

Any other transaction entered into in the 18 months prior to the insolvency judgment can be avoided at the discretion of the court where the counterparty knew that the company was insolvent at the time of the transaction. Where such a transaction was with a company in the same group, the counterparty’s knowledge of the company’s insolvency is presumed.

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be held civilly liable for the company’s debts if they mismanaged the company and that mismanagement caused the company to become balance sheet insolvent.

Directors can be held criminally liable if their mismanagement of the company is sufficiently serious.

Directors found civilly or criminally liable for mismanagement may be disqualified from acting as directors.