On 7 December 2022, the European Commission published a new proposal for a Directive that would make insolvency law uniform across the EU. This proposal, following the enactment of Directive (EU) 2019/1023, illustrates the strong desire to facilitate the free movement of capital within Europe.
In accordance with these goals, the proposed Directive provides for the harmonisation of avoidance rights. These rights could be defined as the right to render acts prejudicial to the general body of creditors declared void when those acts have been performed during a certain period before the opening of the insolvency proceedings.
Avoidance rights in the proposed Directive
The proposed Directive specifies three types of acts that may be declared void:
- Preferences rights granted to creditors within a three-month period before the filing for the opening of an insolvency proceedings if the debtor was unable to pay its mature debts or granted after the application has been filed.
- Acts without consideration (except for gifts and donations of symbolic value) entered into in the year before the filing for the opening of insolvency proceedings or entered into after the application has been filed.
- Prejudicial acts committed intentionally to the detriment of creditors within four years prior to the filing of insolvency proceedings or committed after this filing, provided that the debtor knew or should have known of the debtor's intention to prejudice the community of creditors. Knowledge of this intention would be presumed where the party was closely linked to the debtor.
Avoidance rights in French law
Under French law, such avoidance rights are already defined in the French commercial code, which provides for two types of cancelations that can be ruled by judges:
- cancellation by operation of law: in the cases limitatively enumerated by the provisions of Article L.632-1 of the French Commercial Code (e.g. gratuitous acts, unbalanced contracts, anticipated and abnormal payments, securities constitution for debt anterior to the opening judgment, conservative measures);
- optional cancellation: such as payments for outstanding debts, the execution of deeds for valuable consideration and any administrative seizure, in which case the counterparty must know when the acts/deeds are carried out and that the debtor was in cessation of payments.
However, French law limits the time period during which these avoidance rights are applicable. Indeed, under French insolvency proceedings, the acts or deeds entered into can only be cancelled after the date of cessation of payment of the debtor and before the opening of such proceedings. The date of cessation of payments is the moment, up to 18 months before the opening of insolvency proceedings (except for safeguard proceedings), at which the company is not able to face its outstanding debts for lack of cash and sufficient assets, and be brought back. Only a limited number of persons are entitled to use these rights, and include court-appointed bodies, a creditor appointed as a controller or the public prosecutor.
Modification of the French regime by the proposed Directive
It is hard to tell how this potential Directive will affect French law . Article 5 allows member states to adopt or maintain provisions for avoidance rights that provide for greater protection of the general body of creditors than those set out in the proposed Directive. Whether current French law provides for such “greater protection” is debatable.
In consideration of this rule, the limited French list of acts that can be cancelled could be considered to offer more protection to the general body of the creditors since this provision creates more legal certainty.
Furthermore, the possibility under French law to cancel wrongful acts up to 18 months before the opening of an insolvency proceedings should be considered compatible with the Directive. Even the cancellation of fraudulent acts up to four years before the application for opening insolvency proceedings provided by Article 8 of the Directive appears consistent with the current state of French law since such acts can be sanctioned through ordinary law.
At last, it is also unclear whether the avoidance rights provided for in Articles 7 and 8 of the proposed Directive will create a regime of avoidance rights when a safeguard proceeding is open. Indeed, safeguard proceedings can only be opened when the debtor is not in a state of cessation of payments. This, however, is not a condition for avoidance rights in the articles, but is a condition for avoidance rights under French law.
This absence of avoidance rights anticipates the opening of insolvency proceedings and should not be modified.
For more information on this proposed Directive and French insolvency law, contact your CMS client partner or these CMS experts.
