The French legislator has published the Law on the Modernisation of 21st Century Justice (n°2016-1547) on 18 November 2016, in order to complete the regulation of the four ordonnances issued over the two years before that date modifying insolvency law. Key changes applying to insolvency proceedings opened after 19 November 2016 are as follows:
- Promoting a rescue culture It remains the case that debtor company management must file for insolvency proceedings within 45 days if the company has become (cash-flow) insolvent. However, if the conditions for commencing a ‘safeguard proceeding’ (procédure de sauvegarde) have not been met, the court will now advise the debtor to open a ‘conciliation proceeding’
- Enhancing confidentiality When opening pre-insolvency proceedings e.g. a ‘mandate ad hoc’ or ‘conciliation proceeding’, debtor company management is no longer obliged to inform the employees’ representatives
- Modifying constitutional documents The articles of association of the debtor company may now be modified prior to the adoption of the restructuring plan
- Ring-fencing of new monies during restructuringThe ‘new money privilege’ (‘please insert name in French’) applies to monies lent during the conciliation phase. The legislation confirms that new monies lending cannot be subject to write-offs or the extension of maturity without the agreement of those lenders. This is the case even if the plan is being implemented via a creditors’ committee process; there is no ‘cram-down’
- Improving transparencyIn case of a partial/entire debtor sale, the insolvency practitioner and the conciliator are now required to report to the insolvency court about the initiatives implemented to obtain offers from buyers
- Ensuring impartiality In relation to a particular debtor, the president of the court which dealt with preventive measures cannot subsequently be appointed as bankruptcy judge (juge commissaire) in insolvency proceedings
Future Role of French ‘Security Agents’ in Restructurings
Practitioners formerly used the ordinary mandate structure, since the French courts disregarded the ‘parallel debt’ concept under French law, but recognised it from case to case if it was established under foreign law (Belvédère safeguard proceedings - New York law).
In 2007, the French legislator introduced the concept of a ‘security agent’ into French law, seeking to implement a regime that is suitable for international financings. Practitioners, however, considered the wording of article 2328-1 of the French Civil Code too vague, and were very reluctant to utilise the provision.
The Sapin II Act now authorises the government to review the concept in order to render it acceptable to the market. Hence, the government will clarify that:
- the security agent will not only be entitled to hold a security interest in rem, but also personal guarantees
- the security agent will establish and hold guarantees in its name and keep them separate from its own estate. The creation and recognition of a separate estate dedicated to the management of the collateral should bring greater comfort to secured creditors, especially in the event that an insolvency practitioner brings proceedings directly against the security agent
- it may enforce security interests on behalf of the secured creditors; and receive the proceeds from execution
- it will be entitled to declare the claims of the secured creditors in the debtor’s insolvency proceedings.
Nevertheless, the Sapin II Act does not address questions surrounding the security agent (does it need to be a credit institution/insurance company/fund?) and whether the nomination of the security agent must be part of the agreement which creates the secured obligation.