Restructuring and insolvency law in France

Amicable Restructuring

The primary legislation governing insolvency and restructuring proceedings in France is:

• Book VI of the French Commercial Code, which is dedicated to companies facing difficulties
• Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings. 

In addition, restructuring proceedings are also governed by regular law provisions like corporate and labour law.

Amicable restructuring proceedings (i.e. mandat ad hoc and conciliation) can only be initiated by the debtor through the filing of a specific request to the President of the relevant Court. The President of the Commercial Court appoints a third party, the mandataire ad hoc or the conciliateur, which is generally an insolvency practitioner.

Two different amicable restructuring proceedings allow a company which is facing existing or foreseeable difficulties (legal, economic or financial) to seek a voluntary arrangement with its key stakeholders. These contractual and confidential proceedings aim at facilitating the conclusion of an agreement, allowing the difficulties to be solved outside a formal insolvency proceeding with the help of an officer (mandataire ad hoc or conciliateur) appointed by the President of the Court:

• a mandat ad hoc can be opened when a debtor is not in cessation of payments
• a conciliation can be opened before the debtor reaches a state of cessation of payments, or no more than 45 days thereafter. At the end of the negotiations, the agreement can either be approved (constaté) by the President of the Commercial Court or homologated (homologué) by the Commercial Court. During this proceeding, the company operates normally and can benefit, under certain conditions, from specific provisions protecting it from enforcement measures of its creditors. 

Both these proceedings are confidential (with the exception of an homologation judgement).

French insolvency law provisions relating to amicable proceedings do not differentiate between creditors.

The opening of amicable proceedings does not entail the freezing of the claims of creditors generated before the date of such opening. The debtor is free to involve any creditor it has identified within the negotiations carried out within the framework of the amicable proceedings, being specified that it is market practice that the creditors agree to grant a temporary standstill at the request of the appointed mandataire ad hoc or conciliateur.

Under specific conditions, the debtor can request the President of the Commercial Court to benefit from a judicial suspension of the obligation to pay the claim of some dissenting creditors.

The keystone in French insolvency law is cessation of payments (cessation des paiements), which is the situation where a company cannot pay its outstanding due debts for lack of sufficient available cash and liquid assets:

• if the company is not already in cessation of payments (or less than 45 days for the conciliation – see Q3 under Judicial Proceedings), but is faced with difficulties that it is unable to overcome by its own means, the opening of an amicable restructuring proceeding (mandat ad hoc, conciliation) is possible and can be requested by the debtor
• if the conciliation is intended to anticipate the opening of a sauvegarde (see Q2 and Q4 under Judicial Proceedings) with the set-up of classes of affected parties, the discussions may be segregated between creditors according to their future distribution in said classes, though this is not obligatory.

Managers and representative bodies of French companies are bound by a duty of care and diligence and owe duties to the company itself, its shareholders and third parties (including creditors).

The de jure manager must request the opening of an insolvency proceeding within 45 days starting from its cessation of payments if no conciliation proceeding has been opened in the meantime. If the manager fails to do so, they may be held liable in accordance with the specific liability actions provided for by French insolvency law.

Requesting the opening of amicable restructuring proceedings before difficulties arise could allow the managers of the debtor to justify that they have initiated some measures in order to try to find solutions.

In principle, for most companies, shareholders have no obligation in connection with amicable restructuring proceedings.

To that extent, they have no legal obligation to provide additional funding in the framework of such proceedings. Nevertheless, they can voluntarily contribute to fund business activity or to a restructuring plan, or agree to postpone the repayment of their debts, if any. 

Judicial proceedings

See Q1 under Amicable Restructuring.

Insolvency proceedings are opened by the Court, which examines a specific petition that may be initiated as follows:

• safeguard (sauvegarde or sauvegarde accélérée) – can only be initiated by the debtor itself
• judicial reorganisation (redressement judiciaire) or winding up (liquidation judiciaire) – can be initiated by either the debtor, a creditor or the public prosecutor.

The keystone in French insolvency law is cessation of payments (cessation des paiements):

• if the company is in cessation of payments for less than 45 days, a request to open a conciliation (amicable restructuring proceedings) can still be filed
• if the company is in cessation of payments and no conciliation proceeding has been opened, only the opening of a judicial reorganisation or winding up can be requested, and the debtor must file such request within 45 days starting from the date of cessation of payments.

Safeguard (sauvegarde)

This is opened by the court when the applying debtor is facing difficulties that it is unable to overcome on its own, but it is not already in cessation of payments. It allows the debtor to keep performing its activity and to pay its debts through the implementation of an instalment plan. If the company does not manage to draft a reorganisation plan, a subsequent redressement judiciaire or liquidation judiciaire will be opened.

Judicial reorganisation (redressement judiciaire)

This is opened by the Court when the applying debtor is in a state of cessation of payments. It allows the debtor to keep performing its activity and to pay its debts through the implementation of an instalment plan or the sale of its assets and activities to a third party (i.e. disposal plan).

Winding up (liquidation judiciaire)

This is opened by the Court when the applying debtor is in a state of cessation of payments and turnaround is impossible. It usually implies the immediate closure of the business and the sale of assets for the satisfaction of creditors. However, the Court might authorise the continuation of the activity for a short period of time in order to sell the activities and/or the assets under the best conditions possible. 

In contrast to amicable restructuring proceedings, the opening judgement of an insolvency proceeding entails the freezing of claims arising before said judgement and the stay of corresponding recovery actions and proceedings against the debtor.

For the treatment of claims during the observation period (i.e. the period starting from the date of the opening judgement), creditors are classified into two main categories:

• creditors whose claims arose before the opening of insolvency proceedings, or after the opening but which do not fulfil the specific criteria provided by the French Commercial Code (i.e. claims that arose regularly after the opening of insolvency proceedings, either to enable the continuation of the observation period or as consideration for a service supplied to the debtor). These creditors must transmit to the relevant insolvency practitioner proof of claims within short time frames
• creditors whose claims arose after the opening of insolvency proceedings and which fulfil the specific criteria.

Employees are treated separately; and some of the claims benefit from a specific rank of payment, notably tax liabilities which benefit from specific privilege.

Treatment of claims within a safeguard or a judicial reorganisation 

Pursuant to Ordinance No. 2021-1193 of 15 September 2021, the approval of the plan by groups of creditors (former creditors’ committees) has been modified in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.

Henceforth, classes of affected parties must be set up if specific thresholds (notably based on turnover or number of employees) are reached or, in the event of the opening of sauvegarde accélérée proceedings, without consideration of those thresholds, to enable the adoption of restructuring plans under specific conditions. If the thresholds are not met, these classes may be set up at the debtor’s request. In such cases, affected parties are dispatched in different classes.

The members of each class must have a sufficient common economic interest and vote on the approval of the restructuring plan (prepared by the debtor, or exceptionally, by one or several creditors) which is adopted by a specific majority rule. Under specific conditions (notably the respect of the best interest of creditors test, or the absolute/relative priority rule), the plan can be adopted notwithstanding the vote of dissenting classes (cross-class cram down).

In the absence of classes of affected parties, the creditors are individually consulted and a postponement of the repayment of their claims can be imposed on them by the Court.

Should a restructuring plan be adopted, claims of creditors are still frozen and repaid in compliance with the provisions of said plan. Debt write-offs can be implemented if the concerned creditors accept them. If the concerned creditors are classes of affected parties, write-offs can be accepted or imposed (cross-class cram down).

Treatment of claims within a winding up 

The creditors are paid depending on the available assets and on the subcategory they belong to:

• secured creditors – a category that is itself subdivided (i.e. benefiting from securities, warranties, legal privileges, etc)
• unsecured creditors

being specified that the determination of rankings of privileges is highly complex and must be assessed on a case-by-case basis.

An amicable liquidation proceeding (“liquidation amiable”) is possible under specific conditions. However, as soon as a company under amicable liquidation is in a state of cessation of its payments, its amicable liquidator has to file for the opening of a redressement judiciaire or liquidation judiciaire. 

Financial restructuring from the creditors’ perspective

Many options are given to a lender depending on its strategy:

• monitoring the activity:
• covenants relating to the provision of operating and/or treasury forecast
• clauses mandating meetings for updates on a quarterly/semestrial/yearly basis.
• trying to trigger its involvement within the framework of amicable proceedings:
• cross-default clauses (group companies involved)
• disclosure about amicable proceedings.

Any clauses of any contract entered into by the debtor which:

• provide for the termination of such contract because of the opening of the insolvency proceedings or the acceleration of the debt, or
• more generally, deteriorate the situation of the debtor (for instance, clauses providing for an increase in the interest rate because of the opening of insolvency proceedings)
• are deemed null and void on the sole basis of the opening of amicable proceedings and will not have any effect. 

French insolvency law urges the involvement of the creditor in the turnaround of its debtor. Indeed, some special provisions may be very advantageous to creditors, providing for new credit facilities or support to the debtor, notably within the framework of amicable proceedings (“new money” privilege). Even within the framework of insolvency proceedings, French insolvency law provides for favourable treatment of new credit facilities granted by creditors (“post money” privilege).

However, the extension and/or granting of new credit facilities may generate risks for the creditor:

• risk that, within the framework of insolvency proceedings, its frozen claims generated before the opening judgement may be only partially or never repaid within the framework of a reorganisation plan
• claw-back provisions under specific conditions
• creditor offering new credit facilities or new support which may be abusive (i.e. if the credit is fraudulent, clear interference in the management of the debtor or if the guarantees guaranteeing the credit are disproportionate).

Each situation must be carefully assessed, being specified that amicable proceedings, especially conciliation proceedings which end with the homologation of a conciliation agreement by the Commercial Court, provide better legal security. 

Non Performing Loans

Generally, non-performing receivables are grouped into portfolios. Sellers may set up a bidding process (appel d’offre) through which they will:

• select a certain number of potential purchasers (candidats)
• provide them with a sample (échantillon) of the loans requested by the candidats, allowing them to make a financial offer
• provide them with a template agreement on which a candidat may make comments to be provided along with the financial offer.

The sale of loan receivables generally occurs pursuant to a receivables purchase and servicing agreement entered into by the relevant seller and the purchaser which sets out more particularly the:

• characteristics of the receivables
• terms and conditions of the purchase and transfer
• conditions of servicing the receivables after transfer.

There are different legal regimes for the transfer of receivables:

‘Common’ legal regime

Under article 1326 of the French civil code (code civil), this is open to any type of individual or entity and enforceability against third parties (opposabilité aux tiers), contingent upon proper notification of the debtor.

‘Dailly’ legal regime

Under articles L. 313-23 et seq. of the French monetary and financial code (Code monétaire et financier), this is open only to receivables held by credit institutions (établissements de crédit) or financial companies (sociétés de financement) or any entities benefiting from an exemption against legal entities or professionals. Its validity is subject to execution by the parties of a transfer deed which is void if it does not follow all the formal requirements.

‘FCT’ legal regime

Under article L. 214-169 of the French monetary and financial code (Code monétaire et financier), this is specifically dedicated to financing entities (organismes de financement) such as a mutual securitisation vehicle (fonds commun de titrisation); it is a particularly facilitating regime with little formal requirements and no formal notification needed.

Most NPL receivables which are transferred originate from bank account overdrafts, buy-now-pay-later services, consumer credit, mortgage loans or loans to professionals.

Primary sales

Assignability prohibition clauses are very rare, mostly because underlying credit agreements are standard template agreements imposed on borrowers and it is unlikely that a borrower has sufficient leverage to negotiate such a restriction. When they do exist, the clauses generally provide for the possibility of a borrower to waive such restriction in writing. 

Secondary sales

This may be more common, but again, it is most probable that the clause will provide for the possibility to waive such restriction.

One of the ways to work around the issue and to transfer the economic risk of the receivable is through a synthetic securitisation where only the risk associated with the receivable is transferred and the title of the receivable remains with the original lender.

Sub-participation agreements are not common.

Only credit institutions (établissements de crédit) or financial companies (sociétés de financement) with the necessary licence are allowed to lend money. This is the banking monopoly rule.

Purchasing non-performing receivables, the term of which has not been declared lapsed (déchue de son terme), is a credit operation.

There are formalities and content requirements for a receivable’s term to be considered lapsed (déchue). A formal notice (mise en demeure) – sent by the original lenders to the debtor via letter, with acknowledgement of receipt – is required, which must state for instance:

• the original loan
• the defaulted instalments
• the fact that this is the ultimate request for repayment
• the fact that in the absence of any repayment, the term of the receivable will be considered to become due (déchue).

Market practice is that when receivables become defaulted, the original lenders give such a formal notice (mise en demeure).

Defaulting natural persons may file a personal over-indebtedness procedure (procedure de surendettement), pursuant to which the Banque de France may grant the defaulting debtor a new repayment schedule (plan de rééchelonnement de la dette). The market generally admits that a receivable which is subject to such a procedure has a new term (even if its term has duly lapsed as explained above), and therefore its sale and purchase is a breach to banking monopoly.

One of the means to purchase the above-mentioned receivables is to purchase them through a mutual securitisation vehicle (fonds commun de titrisation) which benefits from an exemption to the banking monopoly rules.