Types of liquidation and reorganisation processes

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

An insolvent debtor is required to file a request for the start of insolvency proceedings with the relevant court within 45 days of the date on which it became cash flow insolvent, unless, on the debtor’s request, a conciliator is appointed in the same time period. To file for liquidation proceedings, the debtor must demonstrate that it is cash flow insolvent and that recovery is obviously impossible. If the court orders the immediate liquidation of the debtor’s assets, it will appoint a liquidator and proceed with the sale of the debtor’s assets on a piecemeal basis, by way of private sale or auction. Alternatively, where there are prospects that all or part of the assets can be sold as a going concern to a third party, the court may authorise a temporary continuation of operations for up to six months (three months, renewable once at the request of the public prosecutor). In large cases, a judicial administrator will be appointed by the court in addition to the liquidator. The judicial administrator will be in charge of managing the debtor company and proceeding with the sale of the business during the temporary continuation of the debtor’s operations. The commencement of voluntary liquidation proceedings imposes a stay of payments on the debtor and a stay of proceedings on creditors. Also, the commencement of the liquidation renders all debts of the insolvent company immediately due (unless a sale of the debtor’s business is contemplated during the liquidation proceedings, in which case the debts will become due upon the expiry of the temporary continuation of the debtor’s operations).

Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

Out-of-court proceedings

When a debtor company finds itself in financial difficulty but is not yet insolvent according to the French cash flow insolvency test, it can request that the presiding judge of the relevant court appoints an insolvency practitioner (in the capacity of mandataire ad hoc) to help the management negotiate an amicable restructuring with all or part of its creditors, suppliers and possible new investors in the framework of a mandat ad hoc. The scope of the mandataire ad hoc’s mission is fixed on a case-by-case basis by the presiding judge of the court, and there is no statutory limitation to the length of the mission of the mandataire ad hoc, which is therefore determined and extended, where needed, by the presiding judge of the court. The role of the mandataire ad hoc is only to make suggestions and to persuade creditors to negotiate with the debtor. They have no coercive powers. A mandat ad hoc is informal and confidential. The commencement of a mandat ad hoc does not impose a stay of payments on the debtor or a stay of proceedings on creditors. At any moment, the mandat ad hoc proceedings may be converted into conciliation proceedings.

Alternatively, the debtor may seek from the presiding judge of the court the appointment of a conciliator in the framework of conciliation proceedings to negotiate a voluntary arrangement with key stakeholders, such as creditors, suppliers and possible new investors. Conciliation proceedings are also available to an insolvent debtor if the insolvency occurred no more than 45 days before the appointment of the conciliator. The conciliation process is informal and confidential and does not impose a stay of payments on the debtor or a stay of proceedings on creditors. However, during the conciliation proceedings, if a creditor serves a demand or brings an action against the debtor, or if a creditor does not accept, by the deadline set by the conciliator, a request made by the conciliator to defer payment of its claim for the duration of the conciliation proceedings, the debtor may petition the judge that commenced conciliation proceedings to grant, after having heard the conciliator, a grace period of up to two years pursuant to article 1343-5 et seq of the French Civil Code (except for claims of tax and social security authorities and institutions). The judge may also defer or reschedule, for the duration of the appointment of the conciliator, the payment of claims that are not yet due if the relevant creditor does not accept, by the deadline set by the conciliator, a request made by the conciliator to defer payment of its claim for the duration of the conciliation proceedings. The initial term of the conciliator’s mission is determined by the presiding judge of the court, within a four-month limit (which can be extended once, for up to one month).

The purpose of both mandat ad hoc and conciliation proceedings is for the debtor to come to a voluntary arrangement with its creditors that puts an end to its difficulties and ensures the continued operations of its business. Such voluntary arrangements may include a rescheduling or waiver of debts, and sometimes provisions relating to the company’s corporate structure (modification of share capital or by-laws, undertaking to sell certain assets and so on). In conciliation proceedings, the conciliation agreement reached may be either:

  • certified by the presiding judge of the court at the request of all parties to the conciliation agreement, thereby giving it the enforceability of a judgment while keeping it confidential; or
  • formally approved by the court at the debtor company’s request (homologation). The conciliation then enters the public record.

The formal approval of the conciliation agreement requires the court to be satisfied that:

  • the debtor company is not (or as a result of the agreement ceases to be) insolvent;
  • the agreement appears to be such as to ensure the solvent continuation of the debtor’s business; and
  • the agreement does not prejudice the interests of those creditors, not parties thereto.

The formal approval of the conciliation agreement entails the following specific consequences:

  • funds, goods or services made available to the debtor company (otherwise than through subscribing to a share capital increase) during a conciliation that ended with a formally approved conciliation agreement may benefit from a privilege, giving priority over most other claims in the event of subsequent safeguard, reorganisation or liquidation proceedings – the ‘conciliation’ priority;
  • the various implementation steps of the conciliation agreement, including security documents, entered into or taken on the date of the judgment will not, in the event of subsequent insolvency proceedings, be void or voidable on the grounds of suspect period rules; and
  • debt deferrals that may be imposed on creditors during a subsequent safeguard or judicial reorganisation proceedings may not be imposed with respect to claims that have received the benefit of the ‘conciliation’ priority.

Any contractual provisions that, as a result solely of the opening (or a request for the opening) of mandat ad hoc or conciliation proceedings, would restrict the debtor’s rights or increase its obligations, are deemed null and void.

Safeguard proceedings

The legal representatives of a company that experiences difficulties that it cannot overcome but that is not yet cash flow insolvent may apply to the court for the opening of solvent reorganisation proceedings, known as safeguard proceedings. The judgment commencing safeguard proceedings opens a six-month period called an ‘observation period’ (renewable for up to a total maximum period of six months) during which the company will negotiate with its creditors a rescheduling or waiver of debt that arose before the start of the safeguard proceedings in the framework of a safeguard plan. The court will appoint a judicial administrator to supervise or assist the debtor company’s management in the preparation of the safeguard plan and a creditors’ representative in charge of collecting statements of claims and verifying the debtor’s liabilities. Only the debtor can present a safeguard plan; creditors and affected parties (in a class-based consultation) cannot present an alternative safeguard plan. Safeguard proceedings are listed among insolvency proceedings within the meaning of Regulation (EU) 2015/848 on insolvency proceedings. During the observation period, the debtor company enjoys a stay of payments and proceedings. The safeguard plan is presented to the court for approval.

Accelerated safeguard proceedings

Expedited safeguard proceedings (accelerated safeguard proceedings) may also be opened following conciliation proceedings.

Reorganisation proceedings

A debtor company that is insolvent must apply for the opening of insolvency proceedings within 45 days of the occurrence of cash flow insolvency, unless it has requested the appointment of a conciliator or the opening of liquidation proceedings. If the court considers that the business may be continued as a going concern, it will order a six-month observation period that can be extended up to a total maximum period of 18 months, during which a court-appointed judicial administrator will investigate the affairs of the debtor and make proposals for the reorganisation of its business. At the end of the observation period, the court will make an order for:

  1. the continuation of the debtor’s operations by way of a reorganisation plan (the features of which are similar to those of a safeguard plan);
  2. the sale to a third-party purchaser of its assets as a going concern by way of a sale plan; or
  3. failing (1) or (2) above, the liquidation of the debtor company.

Law No. 2021-689 of 31 May 2021 institutes a new procedure known as the crisis exit proceeding.

The crisis exit proceeding is a new and temporary insolvency proceeding instituted in the wake of the covid-19 pandemic, which is, in essence, a simplified version of existing reorganisation proceedings designed to allow a swift court approval of restructuring plans addressing difficulties of small businesses caused or aggravated by the covid-19 pandemic. Subject to eligibility criteria, crisis exit proceedings are available until 21 November 2025.

Eligible debtors include debtors that:

  • employ fewer than 20 employees and whose liabilities on the balance sheet are below €3 million on the last day of the past financial year;
  • are cash flow insolvent;
  • have sufficient cash to pay salaries; and
  • can provide evidence that they are able to prepare, within three months, a restructuring plan ensuring the continued operations of their business.

The opening judgment starts a three-month observation period during which the debtor prepares a restructuring plan. The proceedings end with the court approval of the restructuring plan or the conversion into reorganisation or liquidation proceedings.

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability and, if so, in what circumstances?

The safeguard or reorganisation plan must provide for the continued operations of the debtor company in the long term, the preservation of employment and the settlement of the debtor’s liabilities.

Types of consultations

Creditors whose rights are affected by the plan must be consulted on the manner in which the debtor’s liabilities will be settled under the plan (debt write-offs, payment terms or debt-for-equity swaps) prior to the plan being approved by the court. The rules governing consultation will vary depending on the size of the business, and the consultation will be either a standard consultation or a class-based consultation.

Individual consultation

The administrator notifies the proposals for the settlement of debts to the court-appointed creditors’ representative, who informs each creditor who filed a claim. Creditors are consulted individually or collectively. Creditors whose payment terms are not affected by the plan or who are paid in cash in full as soon as the plan is approved are not required to be consulted.

Creditors who do not respond within 30 days of their receipt of the debt settlement proposal (other than write-off or debt-for-equity-swap proposals) made to them are deemed to have accepted it.

Class-based consultation

Class-based consultations apply mandatorily in the case of accelerated safeguard proceedings and, in the case of safeguard and judicial reorganisation proceedings, to:

  • companies that either:
    • employ at least 250 employees and have a net turnover of at least €20 million; or
    • have a net turnover of at least €40 million; and
  • companies that hold or control another company (within the meaning of articles L233-1 and L233-3 of the French Commercial Code) and that meet, on an aggregate basis, the above thresholds.

The above could also apply, if these thresholds are not met, upon the debtor’s request (in safeguard proceedings) or upon the debtor’s or the judicial administrator’s request (in judicial reorganisation proceedings), in each case with the consent of the bankruptcy judge.

Only affected parties are entitled to vote on the draft restructuring plan. These affected parties are creditors whose rights are directly affected by the proposed draft restructuring plan and equity holders, if their equity interest in the debtor, the articles of association or their rights are modified by the proposed restructuring plan.

The constitution of classes of creditors is made under the responsibility of the judicial administrator, who will, on the basis of objective and verifiable criteria, group within the same class creditors sharing sufficient common economic interest.

In determining the composition of each class, the judicial administrator must ensure that:

  • creditors benefiting from rights in rem security over the debtor’s assets and other creditors are in separate classes;
  • the determination of each class complies with the subordination arrangements entered into before the opening of the relevant proceedings (provided that these subordination arrangements have been provided to the judicial administrator within 10 days of receipt of the notice sent by the judicial administrator or the publication of such notice inviting the affected parties to notify the existence of such arrangements); and
  • equity holders are grouped in one or several classes.

The judicial administrator can also create ad hoc classes, for example, for public creditors or strategic suppliers.

At least 21 days prior to the date of the vote on the draft restructuring plan, the judicial administrator must notify each affected party of the methods of class allocation and the computation of voting rights corresponding to the affected claims or rights enabling them to cast a vote. Claims taken into account are those indicated by the debtor and certified by its auditor or auditors or, in the absence of an auditor, in a certificate from the debtor’s certified public accountant. The methods used are also notified to the court-appointed creditors’ representative. In the event of disagreement, the matter may be brought before the insolvency judge at the request of the affected party, the debtor, the public prosecutor, the court-appointed creditors’ representative or the judicial administrator.

The restructuring plan will be adopted once each class has voted in favour of it with a two-thirds majority of the amount of the claims held by the members having cast a vote. The affected parties must vote within 20 to 30 days following receipt of the draft restructuring plan. This time frame may be increased or decreased following a request by the debtor or the judicial administrator to the judge but cannot be less than 15 days. Within each class, the vote on the approval of the plan may be replaced by an agreement from the required majority.

If the draft restructuring plan is approved by all classes under the required conditions and majority rules, the court will nevertheless have to ensure that certain conditions are met before approving the draft restructuring plan:

  • the restructuring plan has been approved in accordance with the rules governing the constitution of classes of affected parties;
  • creditors of the same class sharing sufficient common interests benefit from an equal treatment and are treated in proportion to their claims or rights;
  • the restructuring plan has been duly notified to all affected parties;
  • in the presence of dissenting creditors, the restructuring plan does not put those dissenting creditors in a less favourable position than the position they would have been in:
    • if the order of priority of the distribution of asset sale proceeds in judicial liquidation proceedings, or the sale price of the business as a going concern via an asset sale plan pursuant to article L642-1 of the French Commercial Code, were to apply; or
    • in the event of a better alternative solution were the restructuring plan not to be approved; and
  • to the extent applicable, any new financing provided for in the restructuring plan is necessary for its implementation and does not unduly affect the interests of the affected parties.

Even if these criteria are met, the court may refuse to approve a restructuring plan that does not offer a reasonable prospect of avoiding the insolvency of the company or ensure business continuity. The court must also ensure that the interests of all affected parties are sufficiently protected.

A safeguard or a reorganisation plan relates to the liabilities of the relevant debtor – it cannot provide for the release of liabilities owed by third parties.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Any unpaid creditor may file an application for the start of liquidation proceedings against a debtor. The creditor must show that it has already tried to obtain payment of its overdue debt (eg, by attempting to seize the debtor’s assets) and that the debtor is unable to meet its debts as they fall due. The creditor must also prove that the debtor’s recovery is obviously impossible. Liquidation proceedings can also be started at the initiative of the public prosecutor. The effects of involuntary liquidations are similar to those of voluntary liquidations.

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Out-of-court restructuring and safeguard proceedings

Under French law, creditors cannot request the appointment of a mandataire ad hoc or a conciliator or request the court to order the commencement of safeguard proceedings.

Reorganisation proceedings

Any unpaid creditor may file an application for the commencement of reorganisation proceedings against the debtor. The creditor must show that it has already tried to obtain payment of its debt and that the debtor is insolvent according to the French cash flow insolvency test. Reorganisation proceedings can also be started at the initiative of the public prosecutor. The effects of involuntary reorganisation proceedings are identical to those of reorganisation proceedings opened at the request of the debtor itself.

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

French law provides for a type of safeguard that is an expedited proceeding: the accelerated safeguard proceedings. The main features of the accelerated safeguard proceeding are the following:

  • the maximum duration of accelerated safeguard proceedings is four months (provided the court has decided to extend the initial two-month period);
  • class-based consultation is mandatory; and
  • to be eligible for accelerated safeguard proceedings, the debtor must fulfil the following conditions:
    • the debtor must not have been insolvent for more than 45 days when it initially applied for commencement of conciliation proceedings;
    • the debtor must be subject to ongoing conciliation proceedings when it applies for the commencement of the accelerated safeguard proceedings;
    • its accounts are certified by a statutory auditor or established by a certified public accountant; and
    • the debtor must evidence that it has prepared a plan aiming at ensuring the sustainability of the business that is likely to attract sufficient support from affected parties to make its adoption likely.

If the accelerated safeguard plan is not approved by the court within the applicable deadline, the court will terminate the proceedings.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

Out-of-court restructuring

Failure to reach an agreement in the framework of mandat ad hoc or conciliation proceedings will, in practice, often result in the start of safeguard or, if the cash flow insolvency test is met, reorganisation proceedings. Accelerated safeguard may also be opened by the debtor after conciliation proceedings if the conditions are met. If the debtor company fails to perform its obligations under the conciliation agreement, any party to the conciliation agreement may request for the presiding judge of the court (for a certified conciliation agreement) or the court (for an approved conciliation agreement) to terminate it. Likewise, the opening of safeguard, reorganisation or liquidation proceedings against the debtor company results in the automatic termination of the conciliation agreement. The termination of the conciliation agreement does not render ineffective the clauses whose purpose is to organise the consequences of such termination.

Reorganisation proceedings with classes of affected parties

When classes of affected parties are set up and the classes of affected parties fail to approve the draft plan or the court does not approve the reorganisation plan approved by the classes of affected parties, creditors are consulted on an individual basis. In this case, even if creditors refuse the debtor’s proposals, the court may make them subject to a uniform rescheduling of their claims over up to 10 years, with no statutory minimum for the first two annual instalments and a minimum of 5 per cent of the total liabilities (principal and interest) from the third instalment and a minimum of 10 per cent from the sixth instalment, noting that the repayment cannot start before the original contractual maturity. Such debt deferrals, however, may not be imposed with respect to claims benefiting from the conciliation priority granted in previous conciliation proceedings or from the S/R Lien.

Safeguard proceedings

At any time during the observation period of the safeguard proceedings or if no safeguard plan is approved by the court by the end of the observation period, the debtor, the judicial administrator, the creditors’ representative or the public prosecutor may request the opening of reorganisation or liquidation proceedings, or the court itself may decide to do so, subject to the debtor company being insolvent or, in the case of liquidation proceedings, the absence of any prospects of recovery. During the observation period, the debtor company may also request the conversion into reorganisation proceedings if the approval of a safeguard plan is manifestly impossible and if the termination of the proceedings would lead to cash flow insolvency in the short term. If the court approves a safeguard plan and the debtor defaults on its obligations, the court may, after having consulted the public prosecutor, terminate the plan and, if the debtor is insolvent, order the opening of reorganisation proceedings or (if there are no prospects of recovery) liquidation proceedings.

Reorganisation proceedings

At any time during the observation period of the reorganisation proceedings or if no reorganisation plan is approved by the court by the end of the observation period, the debtor, the judicial administrator, the creditors’ representative, a controlling creditor or the public prosecutor may request the opening of liquidation proceedings or the court itself can decide to do so. If the court approves a reorganisation plan and the debtor defaults on its obligations, the court may, after having consulted the public prosecutor, terminate the plan and, if the debtor is insolvent and if there are no prospects of recovery, order the opening of liquidation proceedings. In the case of a sale plan, the court may terminate the plan if the third-party purchaser defaults on its obligations.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

A company may be liquidated and wound up outside the scope of insolvency proceedings and outside court proceedings if it is in a position to repay all its debts. In this case, the shareholders or the court will appoint a liquidator who will be in charge of the distribution of the company’s assets and payment of the company’s debts. When all distributions have been made and debts paid (which must be done within three years from the start of the liquidation), the shareholders will decide in a general meeting whether the liquidation process should be closed. The corporate entity will only cease to exist when the liquidation has been completed. In this event, the liquidator will request that the company be removed from the National Register of companies.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

Out-of-court restructurings are formally concluded when:

  • parties agree on a restructuring agreement (whether in mandat ad hoc or conciliation proceedings), if no approval from the court is required by the parties;
  • the conciliation agreement has been either certified by the presiding judge of the court or formally approved by the court; or
  • at the end of a maximum five-month period of the opening of conciliation proceedings if no agreement has been reached by the parties.

Safeguard and reorganisation proceedings are formally concluded upon the court approving the safeguard or reorganisation plan. Also, once the safeguard or reorganisation plan is fully implemented, the court official in charge of supervising the implementation of the plan will draft a report confirming the completion of the plan to the court.

Liquidation proceedings are formally concluded when all debts are repaid or the liquidator is able to obtain sufficient proceeds to repay all debts, or when the continuation of the liquidation proceedings is impossible because of a shortfall of assets or the continuation of liquidation proceedings is considered to be no longer justified because of difficulties in selling the remaining assets. If the debtor is in ongoing judicial proceedings, the court may, however, close the liquidation proceedings, subject to a representative being appointed that must continue the ongoing judicial proceedings on behalf of the liquidated debtor and allocate the proceeds obtained from such proceedings to the creditors of the liquidated debtor.