Evolution rather than revolution: reform of French insolvency proceedings
January 2015 | SPECIAL REPORT: DISTRESSED M&A AND INVESTING
Financier Worldwide Magazine
A reform of French insolvency proceedings was introduced on 12 March 2014 affecting all insolvency proceedings commencing after 1 July 2014 and delivering an overall positive effect for both creditors/third parties and debtors.
Improvement of creditors’ and third parties’ positions
Introduction of a pre-packaged asset sale plan (plan de cession). Prior to the reform, an asset sale plan could only be implemented during recovery or liquidation proceedings (with continuation of business activity). However, the benefit to a third party of presenting an asset sale plan (in order to purchase the assets of the debtor along with some employees, typically leaving behind most liabilities) was typically outweighed by the damage that the debtor’s business suffered as a result of spending a number of months in formal insolvency proceedings. To combat this, the reform provides that within the framework of confidential conciliation proceedings the debtor may request the President of the court (after hearing the opinion of participating creditors) to entrust the conciliator with the task of preparing an asset sale plan. The preparation of the asset sale plan can then be ‘front-loaded’ by being conducted in the context of the conciliation proceedings with implementation then taking place within the context of recovery or liquidation proceedings. It offers a new tool for debtors and practitioners to prepare, in the context of confidential proceedings (which reduces harm to the business), not only a future safeguard or recovery plan but also the ability to sell the business as a going concern to a third party by limiting the time spent under public recovery or liquidation proceedings.
The ability for creditors to present their own safeguard or recovery plan when creditors’ committees are formed. To date, the creditors’ ability to take control of a debtor in safeguard or recovery proceedings has been limited by the fact that the debtor benefits from the exclusive right to prepare a draft safeguard plan, which is then submitted to a vote of the creditors through the creditors’ committees (and the general meeting of all noteholders, if applicable). In practice, the creditors’ ability to take control of a debtor was, therefore, possible only after long negotiations during conciliation or safeguard proceedings. The reform now provides that, in addition to the draft safeguard or recovery plan prepared by the debtor, creditors may also prepare their own safeguard or recovery plan. The creditors’ committees (and, if applicable, the general meeting of all noteholders) then vote on each draft safeguard plan and the court makes its decision after the vote.
In the event that the creditors’ recovery plan envisions a change of shareholders, getting shareholder approval will remain essential because the shareholders remain able to refrain from voting in favour of the sale of their shares or any capital increase required by the proposed transaction. During the preparatory work on the reform provisions, there was some discussion as to whether an ‘expropriation’ of the former shareholders’ shares should be included, but this idea was ultimately dropped. However, this new power for creditors to present their own safeguard or recovery plan will certainly lessen the power of the threat that debtors have used for many years in pre-insolvency amicable proceedings (mandat ad hoc/conciliation) that if a deal is not done consensually, the court will implement a 10-year rescheduling plan. As a result of the reform, creditors are now empowered to draw up their own ‘Plan B’.
New-money priority is strengthened. New money priority granted in the framework of conciliation proceedings is strengthened in the event of subsequent safeguard or recovery proceedings. Until now, a priority ranking was granted to new money creditors with respect to the proceeds of a subsequent sale of assets completed pursuant to recovery proceedings. The reform provisions provide that, in addition, within the framework of a safeguard or recovery plan, the creditors’ committees (and the general meeting of all noteholders, if applicable) or the Court will not be entitled to impose to a creditor benefiting from new-money priority any rescheduling or write-off of his claim, without his consent.
Filing a proof of claim is facilitated. The deadline for filing a proof of claim remains the same (i.e., two months from the publication of the opening judgment, four months if the creditor is located outside France) but there will no longer be any uncertainty as to the identity and the authority of the person submitting the proof. Creditors are now entitled to ratify the filing made in their names by a third party until such time as the judge is obliged to accept or reject the claim, i.e., several months after the opening of proceedings.
The second main simplification applies with respect to a creditor who fails to file a proof of claim within the deadline. Until now, a second filing period was only available for a period of up to six months after publication of the opening judgment and where the creditor was able to prove that the debtor intentionally failed to mention the claim to the creditor’s representative, which was very difficult to prove in practice. The reform removes the wilful misconduct element and therefore a second filing period will be available if a creditor can prove, as a matter of fact, that its claim was not mentioned by the debtor to the creditor’s representative irrespective of whether such failure was intentional.
Improvement of the debtor’s position
Wider scope for pre-packaged safeguard proceedings. Until the reform was implemented, pre-packaged safeguard proceedings were limited to financial restructurings within the framework of accelerated financial safeguard proceedings, applicable only to financial creditors. The reform does not remove accelerated financial safeguard proceedings, but they have been re-categorised to form only one type of a wider group of proceedings called accelerated safeguard proceedings. The purpose of the accelerated safeguard proceedings is to implement, within the framework of creditors’ committees (and if applicable, the general meeting of all noteholders), any restructuring (effected by a safeguard plan) that was not completed during the conciliation period due to the lack of unanimity among creditors. The accelerated safeguard proceedings may not last more than three months and, in contrast to the accelerated financial safeguard proceedings, trade creditors will be included within the plan.
A welcome measure for the financing of safeguard proceedings. Previously, safeguard and recovery proceedings were subject to a common rule for the financing of day-to-day business activities after the commencement of the proceedings: trade creditors had to be paid cash on delivery (regardless of pre-existing contractual terms of payment), which had a negative impact on the working capital of the debtor. This rule has been removed for safeguard proceedings (but remains in place for recovery proceedings) so that pre-existing contractual terms continue to apply in safeguard proceedings notwithstanding any previous payment default or the opening of proceedings.
Further protection granted to the debtor under mandate ad hoc and conciliation procedures. The reform provides that any contractual term that modifies the contract to the debtor’s detriment in the event of the opening of mandate ad hoc and conciliation proceedings is deemed void. Notably, this means that the triggering of the usual insolvency events of default in credit agreements would be deemed void on the opening of such proceedings (e.g., the acceleration of the debt based on the sole opening of mandat ad hoc or conciliation proceedings would not be possible, but it would remain possible if other events of default have occurred). In addition, any contractual term requiring that the debtor pay the creditors’ professional advisory fees on the opening of such proceedings is also deemed void in respect of 25 percent of the total amount of such fees (this percentage having been fixed arbitrarily by a decree). Finally, any agreement rescheduling debt that is completed under conciliation proceedings may not provide for the compounding of interest.
Improved monitoring of the conciliation agreement reached at the end of conciliation proceedings. Prior to the reform, if a creditor sued the debtor individually for payment of its claim during conciliation proceedings, the debtor had the right to petition the President of the Commercial Court who opened the conciliation proceedings to obtain a grace period (i.e., a deferral or a rescheduling of the due dates of payment obligations over a maximum period of two years). The ability to petition the President of the Commercial Court was limited to the duration of the conciliation proceedings, which meant that it was no longer available during the subsequent implementation of the conciliation agreement. The reform now provides that if, during the implementation of a conciliation agreement, a creditor who is party to the conciliation proceedings sues the debtor individually for payment of a claim that was not included in the conciliation agreement, then the President of the Commercial Court retains jurisdiction to defer or otherwise reschedule the due dates of the payment obligations for such claim over a maximum period of two years. In addition, to monitor the implementation of the conciliation agreement, the reform provides that the conciliator may be appointed at the end of the conciliation period as a “special representative for the implementation of the agreement” (mandataire à l’exécution de l’accord).
Specific measures to improve the financial situation of a distressed debtor. The reform also provides that from the commencement of safeguard or recovery proceedings, any portion of the debtor’s share capital that has not been paid up becomes immediately due and the creditors’ representative is empowered to recover such sums. In addition, after the commencement of safeguard or recovery proceedings and where interest continues to accrue on a debt, such interest may not be compounded.
Alexandra Bigot is a partner and Vincent Pellier is an associate at Willkie Farr & Gallagher LLP. Ms Bigot can be contacted on +33 1 53 43 4550 or by email: firstname.lastname@example.org. Mr Pellier can be contacted on +33 1 53 43 4539 or by email: email@example.com.
© Financier Worldwide
Alexandra Bigot and Vincent Pellier
Willkie Farr & Gallagher LLP