Introduction

Inspired by the American “prepackaged restructuring plan,” the French authorities have yet again decided to reform French insolvency law, with the creation of an “accelerated financial safeguard procedure” (procédure de Sauvegarde Financière Accélérée). This procedure is available to debtors who start conciliation proceedings after 1 March 2011.

Though most French specialists refer to this procedure as the “SFA,” the full name of the procedure best describes what it encapsulates: an “Accelerated” procedure applied in a limited amount of time (maximum of two months) that only applies to “Financial” creditors with a view to the “Safeguard” for debtors facing difficulties.  

With this procedure, France seeks to improve its competitiveness in the restructuring and business rescue arena. However, some flaws inevitably remain.  

The Key Features of this Procedure

Only financial creditors are affected by this fast-track procedure:

Only financial creditors, comprised mainly of banking establishments and bondholders, are affected by this procedure. Trade creditors are not directly affected and their claim will be payable at term: they will not be under any obligation to notify the creditor’s representatives of the amount of their claim, nor will payment of their claim be frozen or rescheduled.

Furthermore, this procedure can only be taken advantage of by the debtor on the following conditions:

  1. The company’s accounts must be certified by a statutory auditor or prepared by an accountant; and
  2. The company’s turnover must equal or exceed €20 million per year; or
  3. The company has 150 or more employees on the date of filing for the SFA

A safeguard procedure:

Differentiating itself from the original safeguard procedure, the fast-track procedure directly follows on from a “conciliation procedure” during which a restructuring is negotiated. This is not necessarily the case for the original safeguard procedure, which can be started without a prior conciliation procedure.  

The conciliation procedure is a confidential procedure under which unanimous consent of the creditors involved in the negotiation is generally required. Before implementation of the new fast-track procedure, it was possible for a few recalcitrant creditors to block the restructuring negotiations and prevent the debtor from reaching an amicable agreement with its key creditors.

In this respect, a main objective of the reform is to act as a counterweight against dissenting minority creditors, by converting a conciliation agreement that does not have unanimous creditor approval into a mandatory restructuring plan. The underlying objective is to indirectly force minority creditors to consent to the agreement during the conciliation negotiations, by threatening to use this procedure during the conciliation period.

A debtor who wishes to invoke this procedure must convince the court that the restructuring plan will not only address the financial difficulties it faces, but will also be adopted by a qualified majority vote of the banking establishments’ committee and the bondholders in assembly (but not of the suppliers’ committee, as trade creditors are not involved in this procedure).

It is important to note that the vote is achieved with at least two-thirds of the total value of the claims of all the creditors who actually take part in the voting procedure (keeping in mind that committee members whose claims are not affected by the proposed restructuring plan are not allowed to vote).  

To obtain the court’s approval on the restructuring plan, the creditors must follow the same voting procedures as with the standard safeguard procedure. In this respect, this reform does not implement a new procedure, but an accelerated version of the standard safeguard procedure.  

It is a fast-track procedure:

After the court’s approval to proceed under an SFA, the financial creditors have one month (with a possible extension of another month), to vote on and adopt the restructuring plan in the creditors’ committee and among the bondholders, respectively, instead of six months under the standard procedure (with the possibility to extend this period by a further six months).

Before both groups of financial creditors, respectively, proceed to vote on the restructuring plan as mentioned above, the administrator must notify each banking establishment that it is a member of the banking establishments’ committee.

Instead of requiring the 20 and 15 days’ notice of the meetings of the committee of banking establishments and assembly of bondholders, respectively, under the standard safeguard procedure, only eight and 10 days’ notice, respectively, need be given under the accelerated procedure.

After the banking establishments’ committee and the bondholders in assembly have voted on the restructuring plan, disgruntled members of the committee or assembly have 10 days to object on the voting process. When this 10-day period has expired, the court has a minimum period of five days to reflect on the plan before giving its approval, including ruling on the appeal, if any, lodged by members of the committee and assembly.

If the plan is not adopted by the financial creditors, the court will bring the SFA to an end.

Comments

The reform is a welcome attempt to address the often lengthy process businesses in France have to go through to restructure their financial arrangements. It is also a highly competitive measure in the context of the EU as, unlike the conciliation procedure, the safeguard procedure is already recognised under the EC Insolvency Regulation. However, it is arguable that the reform was passed into law too quickly as it has omitted certain key aspects, which subsequent secondary legislation failed to address.  

For example, the legislation failed to take into account the fact that a great number of holding companies are non-operational. As a result, few holding companies involved in a leveraged buy-out will currently meet the required thresholds in turnover or number of employees, and therefore will not be able to benefit from the SFA. In this respect, less than two months after the SFA entered into force, the French parliament adopted an amendment bill introducing an alternative condition as to the application of the SFA. In effect, a debtor who does not meet the required thresholds would have been able to engage in an SFA if its assets as per its balance sheet met an amount to be determined by secondary legislation. However, before the bill entered into force, the French Constitutional Court cut out this disposition of the bill as it was inserted into a legislative article with which it had no direct relation. As this disposition was only cut out based on its form and not on its substance, we will most certainly be seeing a similar legislative or regulatory act come into force shortly. Whilst waiting for this amendment, the SFA still remains unavailable to non-operational holding companies, the first companies that were supposed to be targeted by this reform.  

Another question which may be raised is how this procedure is going to be applied in practice. With this reform, the restructuring plan will be discussed during the conciliation procedure before the SFA procedure starts. One issue that will arise is how the confidentiality of the conciliation procedure will be preserved as the provisional restructuring plan must be disclosed to the works council and, in certain circumstances, during a shareholders’ meeting.