The ongoing financial crisis has not left France untouched. The number of company insolvencies rose considerably in 2013: while judicial rehabilitation proceedings remained stable, liquidation proceedings increased by 4% from 2012, and “safeguard” proceedings (a procedure inspired by “Chapter 11” proceedings in the United States) increased by 9%. Pre-insolvency proceedings such as judicially-supervised conciliation and ad hoc mediation reached an all-time high, 24% over 2012.
2014 does not look any better. But creditors can at least look forward to being able to benefit from changes in French insolvency legislation resulting from Ordonnance n° 2014-326 of 12 March 2014, which will enter into force on 1 July. In this article we will discuss how the new legislation affects each of the various pre-insolvency and insolvency proceedings available to financially troubled debtors. One point to make at the outset, however, is that what was widely expected to be the most significant aspects of the reform, i.e., the ability to oust shareholders who refuse to agree with a recovery plan which would result in the dilution of their shareholdings, was not included in the final version of the Ordonnance. However, the Ministry of Justice has announced that a new Ordonnance is in preparation which will contain such a provision in a form that will pass muster with the Conseil d’Etat, the French judicial institution which is often called upon to review legislation prior to passage.
Pre-insolvency amicable proceedings
The changes made by the Ordonnance make the use of amicable pre-insolvency proceedings more attractive. The following changes are of particular note:
- Obligation to inform the statutory auditor of the opening of ad hoc mediation (mandat ad hoc) proceedings, without such notice terminating any alert procedure which may have begun (contrary to what happens when a conciliation proceeding is opened).
- Employee works councils or delegates are informed by the debtor of the terms of a conciliation agreement when it is presented to the court for approval (homologation) – which probably means that such notice is not required at the earlier stage when an ad hoc mediation or a conciliation is first opened.
- The conciliator may be instructed, at the request of the debtor and following consultation with the creditors who are participating in the conciliation proceeding, to organise a partial or total sale of the company which can be implemented in the event of judicial safeguard, rehabilitation of liquidation proceedings. Such “pre-packaged sale” has the advantage of speeding up such sale in the event that the pre-insolvency proceedings are not successful and the debtor is placed in insolvency. Although there is some concern that such “pre-packaging” would mean that competing offers to purchase the business in the event of insolvency will be stifled, since one candidate will have had more time to prepare an offer during the pre-insolvency proceedings (which offer already has the support of the debtor and the conciliator), this is somewhat attenuated by the fact that the opinion of the public prosecutor must be sought before a court orders a sale that has been prepared during the conciliation phase.
- The regime relating to granting of grace periods is modified in favour of the debtor by entitling it, during the conciliation proceeding, to request application of articles 1244-1 to 1244-3 of the French Civil Code, which permits a court to reschedule outstanding debt for a period of up to two years, against any private creditor. Moreover, if a conciliation agreement is approved by the court, the debtor may also request application of the same provisions to reschedule debt owed to any creditor who was concerned by the conciliation proceeding but whose debt was not resolved in the conciliation agreement.
- Capitalisation of interest is neutralised for debts included in the conciliation agreement.
- The advantages granted to providers of “new money” are extended not only given to providers of new money recognised in a conciliation agreement approved by the court but to any providers of new money during the conciliation proceeding. Moreover, such creditors will not be subject to any grace period ordered by the court in the event that insolvency proceedings are opened following the conciliation process.
- Any contractual provisions which diminish the rights or increase the obligations of the debtor in the event of opening of ad hoc mediation or conciliation proceedings (including automatic termination provisions) will not be effective.
- More controversially, contractual provisions which require the debtor to pay the fees of the advisers of its creditors in the event of opening of ad hoc mediation or conciliation proceedings will also not be effective. While this is obviously beneficial to the debtor it runs counter to well-established practice and the provisions of most credit agreements.
- The practice, already well established, of designating a person charged with insuring the implementation of ad hoc mediation or conciliation proceedings and mediating in the event of difficulties, is recognised, at least in the case of conciliation proceedings, since an “implementation official” (mandataire à l’exécution) is appointed following judicial recognition or approval of a conciliation agreement, whose fees are subject to the same rules as those of an ad hoc mediator or conciliator.
The strengthening of creditors’ rights is most clearly marked in the event of judicial safeguard proceedings. Prior to the new changes, the use of judicial safeguard proceedings, particularly in the case of holding companies created for the purposes of leveraged buy-outs or SPVs constituted to hold real property was strongly criticised as a means of protecting shareholders rather than prompting economic activity, since in such cases, there was no actual economic activity to speak of and no jobs to be saved. Attempts to exclude such debtors from the protection of judicial safeguard, approved by the lower courts, were disavowed by a decision of the French Supreme Court (Cour de Cassation), which held, in the “Cœur Défense” case, that, notwithstanding the absence of any economic activity or employees, SPV were eligible for judicial safeguard protection as long as the other conditions required by law were satisfied.
In order to reflect these concerns, the Ordonnance, although not excluding such holding or SPV entities from the scope of judicial safeguard, gives creditors the right to propose alternative recovery plans, which will make such proceedings less attractive for such debtors. Such plans will be submitted to the vote of the creditors’ committees and, where relevant, bondholders’ meetings. Thus, if creditors refuse the plan proposed by the debtor, they can propose one or more alternative plans which will be submitted to creditor committee approval; the plan chosen by the creditors’ committee will be presented to the court, which can choose between the plan proposed by the creditors and the plan proposed by the debtor (which cannot require any reduction in debt or modification of the terms of the relevant contracts but only a rescheduling of debt).
The debtor is therefore no longer the sole master of a recovery plan and incurs the risk that the plan adopted by the court will be proposed by its creditors – which can provide for a modification in shareholding by a conversion of debt into equity, so long as this is approved by resolution of a meeting of shareholders (the rules regarding quorum and majority of which are relaxed), resulting in dilution of existing shareholders in favour of creditors. The new Ordonnance currently in preparation might go even further by providing a mechanism for ousting recalcitrant shareholders entirely, as is permitted in US bankruptcy legislation, and which would mean that creditors would have full control over the procedure except for the opening of the procedure itself. Moreover, the judgement opening judicial safeguard proceedings automatically renders any portion of share capital not yet paid in immediately due, and the insolvency administrator can require the shareholders to pay in such amounts.
The opening of judicial safeguard proceedings will also no longer result in debts resulting from contracts concluded prior thereto which continue to be performed being payable in cash – periods for payment under such contracts will continue to apply.
Creation of a new accelerated safeguard procedure
In addition to the existing safeguard and accelerated financial safeguard (AFS) proceedings, the Ordonnance creates a new accelerated safeguard proceeding. As in the case of the AFS, this new procedure requires that the debtor first have benefited from a conciliation proceeding in the course of which it succeeded in presenting a plan approved by a sufficient majority of creditors to form the basis of a safeguard – i.e., a plan which, during the conciliation proceeding and prior to the opening of the accelerated safeguard proceeding, obtained a two-thirds majority, thus enabling the plan to be approved by creditors’ committees once the AFS proceeding is opened. In such case, the plan must be approved by the court within three months of the opening of the proceeding (one month in the case of an AFS).
Unlike the case of an AFS, the new accelerated safeguard proceeding encompasses all creditors and not only financial creditors. The debtor must file with the court a list of all of the debts owed to creditors who participated in the conciliation proceedings, which is deemed to constitute creditors’ claims for those creditors who have not filed their own creditors’ claims within the required time period. If the small number of AFS proceedings implemented since such procedure was created by prior changes to the law is any guide, the new procedure may not prove of great interest. The shortening of periods possible in a classic safeguard proceeding would pretty much lead to the same result. Still, as in the case of the AFS, the availability of such a procedure may result in recalcitrant creditors, who could otherwise be able to prevent the adoption of a plan where unanimity is required, being convinced that opposition would be in vain since the opening of an accelerated procedure would mean that a plan could be imposed on it. The real merit of such procedure thus lies in its threatened use rather than its actual use.
Although the changes to the law do not permit ousting of shareholders, several other creditor-friendly modifications have been implemented.
French company law normally requires a company in which net worth has declined to one half of its stated share capital to “reconstitute” its net worth within two years or risk being dissolved. Under a new provision added by the Ordonnance, in such case the insolvency administrator may request the designation of a special official to convene a meeting of shareholders and to vote on the reconstitution of share capital in the minimum amount required in the place of opposing shareholders when the draft recovery plan provides for a modification of share capital in favour of one or several persons who undertake to comply with the plan. This new provision should facilitate the assumption of control of the debtor by creditors since existing lenders will be required to reconstitute the net worth of the company before the increase of share capital reserved to lenders who agree to convert all or part of the debt owed to them into equity, the procedure known as “lender led”.
As in the case of safeguard proceedings, creditors will now be able to present recovery plans which compete with those of the debtor, on which creditors’ committees will vote. If a proposed recovery plan envisages increases in share capital or transfer of shares, provisions of the debtor’s articles of association which require corporate approval of share transfers are ineffective, in order to permit new investors to acquire shares.
While most of the changes in this area relate to physical person debtors, a few provisions concern corporate debtors:
- the term of office of corporate officers no longer ends automatically upon liquidation;
- if a sale of assets is ordered, the share of the purchase price to be allocated to a creditor with security over an asset must be determined on the basis of the proportion of the value of the asset to the value of all of the assets sold as determined by the inventory and the estimate effected when the liquidation procedure was opened; the court will no longer have discretion to determine the portion of the sales price to be paid to the secured creditor.
- A number of new provisions are intended to speed up the liquidation procedure. For example, the procedure may be closed even though some assets remain if the interest in continuing the procedure is outweighed by the difficulties in realising such assets. Similarly, the procedure may be closed even if litigation is under way, a special official being designated in order to continue such litigation and distribute any sums awarded.
Professional recovery (Rétablissement professionnel)
In a novel proceeding introduced by the Ordonnance, a physical person debtor who has not been the subject of insolvency proceedings and has not employed anyone within the past six months, and who owns assets not exceeding an amount to be determined by subsequent decree may request “professional recovery without liquidation” rather than judicial rehabilitation or liquidation. The procedure is opened for a period of four months and does not result in the debtor losing control of his or her assets. Although claims against the debtor are not suspended, the supervising judge may, at the request of the debtor, order the rescheduling of amounts due for a period of four months. Professional recovery has a remarkable effect because the closing of the procedure results in forgiveness of debt owed to creditors prior to the opening of the procedure.
Provisions applying to safeguard, rehabilitation and liquidation: the new system for filing of creditors’ claims
A new system for filing of creditors’ claims created under the Ordonnance is more favourable to creditors and should limit the number of disputes relating to such filings.
Henceforth, if the debtor has listed a debt in its own declaration opening the proceedings, it is deemed to have done so for the account of the creditor, which does not have to make its own filing. This puts an end to the ludicrous situation under which a creditor could be excluded from the proceeding by failing to file a creditor’s claim even if the debtor had already included the claim in the list which the debtor had submitted when it declared itself insolvent. The creditor is only required to file a claim if the relevant debt does not appear on such list or if the debt so listed does not correspond to the debt claimed by the creditor.
The foreclosure procedure, which enables a creditor who has not filed a creditor’s claim within two months from publication of the judgement opening the insolvency proceeding to obtain authorisation from the supervising judge to make such a filing on proof that the failure to file was not the creditor’s fault or resulted from a voluntary omission of the debtor to include the debt on the list of debts submitted at the opening of the proceeding, has also been modified to make it more creditor friendly. The creditor whose debt did not appear on the original list can now avail itself of the foreclosure procedure whether or not the omission was voluntary, and the time period for requesting foreclosure is now six months in all cases. However, the commencement of the period, although continuing to run from the date of publication of the judgement opening the insolvency procedure in most cases, but where it is impossible for the debtor to be aware of the obligation owed to it by the debtor, the period begins to run from the date on which the creditor could no longer ignore the existence of the debt owed to it.