Restructuring and insolvency law in France

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

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. Some of its provisions will be modified pursuant to Law No. 2019-486 of 22 May 2019 (PACTE Act) which authorises, in particular, the French Government to adopt ordinances to modify French legislation in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 [on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)]; and
  • 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 corporate and labour law provisions.

2. How are insolvency proceedings or restructuring proceedings initiated?

Amicable restructuring

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.

Judicial restructuring

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

  • safeguard (sauvegarde) – 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), 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 but is faced with difficulties that it is unable to overcome by its own means, the opening of an amicable restructuring proceeding or a safeguard proceeding can be requested
  • if the company is in cessation of payments for less than 45 days, a request to open a conciliation (amicable restructuring proceeding) 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 the said cessation of payments.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Amicable restructuring

Under French law, 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 main creditors. 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 appointed by the President of the Court (mandataire ad hoc or conciliateur):

  • 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 these proceedings, the company operates normally and can be subject to enforcement measures from its creditors. 

Both these proceedings are confidential.

Judicial restructuring

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.
The three insolvency proceedings provided for by French law are as follows:

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.

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 its 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. 

5. Are there several types of creditors and what is the effect of a difference?

Treatment of claims during the observation period

Creditors are classified into two main categories:

  • creditors whose claims arose before the opening of insolvency proceedings, or after its opening but which do not fulfil the specific criteria provided by the French Commercial Code (i.e. claims that arose in a proper manner after the opening of insolvency proceedings and to enable the conduct of the proceeding or the observation period, or as consideration for a service supplied to the debtor); these creditors must transmit 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 guarantee.

Treatment of claims within a safeguard or a judicial reorganisation 

Creditors’ committees can be set up if specific thresholds (notably turnover or number of employees) are reached to enable the adoption of restructuring plans under specific conditions. In such cases, the credit institutions and related entities and the main providers are divided into two different committees. The members of each committee vote on the approval of the restructuring plan which is adopted by a specific majority rule, allowing the committees to impose decisions on dissenting creditors who are also part of the committees. In addition, the bondholders’ committee, if any, is also consulted if the two above-mentioned committees adopt the restructuring plan they have been presented with.

In the absence of committees, 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 (or the creditors’ committees) accept them.
The creditors’ committees mechanism should shortly be modified in accordance with Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.

Treatment of the claims within a winding up 

The creditors mentioned under the first category above 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

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

A company must file for the opening of a judicial reorganisation or winding up within 45 days starting from its cessation of payments if no conciliation proceeding has been opened in the meantime. 

Failure to comply with this legal obligation may constitute a management fault which may lead to liability action against the de jure and/or de facto managers of the company.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

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 or de facto managers shall 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. (See point 6 for the consequence of a belated filing.)

The involvement of the representative bodies of a legal entity placed under an amicable restructuring or insolvency proceeding varies depending on the proceedings opened:

  • if an amicable restructuring proceeding (mandat ad hoc or conciliation) is opened, the company is managed as usual
  • if a safeguard is opened, the loss of control of the company is variable and depends on the appointment by the Court of an administrateur judiciaire with a mission of either monitoring or assistance
  • if a judicial reorganisation is opened, the loss of control of the company is variable and depends on the appointment by the Court of an administrateur judiciaire with a mission of either assistance or representation
  • if a winding up is opened, the loss of control is almost total.

In addition, the representative bodies are involved in various operations (e.g. verification of the claims and revendication of ownership processes, preparation – with the help of their legal and financial advisors – of an insolvency or reorganisation plan).

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

In principle, shareholders have no obligation in connection with restructuring and/or insolvency 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 the funding of the activity or to a restructuring plan, or agree to postpone the repayment of their debts, if any.

Note that within the framework of an insolvency proceeding, the relationship between the debtor and its shareholders might be carefully analysed and, if relevant, provide the grounds for liability actions notably against the de jure or de facto managers and/or the shareholders.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

The involvement of the shareholders of a company placed under restructuring or insolvency proceedings is not mandatory. Nevertheless:

Safeguard or judicial reorganisation

In the framework of a safeguard or judicial reorganisation proceeding, the adoption of a restructuring plan may be conditional upon the reconstitution of the company’s equity.

Judicial reorganisation

In the framework of a judicial reorganisation: 

  • the court can order the non-transferability of shares held by the de jure or de facto managers
  • the transfer of shares of the de jure or de facto managers can be forced
  • the voting rights attached to shares owned by the de jure or de facto managers can be exercised by a proxy designated by the court
  • when the termination of the activity of a company employing at least 150 people, or considered as dominant, is likely to cause “a serious disturbance to the national regional economy or its employment”, the court may, if it appears to be the only serious solution:
    • appoint a proxy to vote in place of the shareholders a decrease, followed by an increase, in capital, or
    • order the sale of shares held by the de jure or de facto managers.

In addition, shareholders are frequently requested to financially support the company in restructuring or insolvency proceedings.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

An out-of-court liquidation proceeding can only be opened if the amount of assets to be realised is higher than the company’s liabilities. However, if the company is in cessation of payments, the debtor must file for 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.

As mentioned above (point 4), French legislation already provides for a legal framework for preventive restructuring (i.e. mandat ad hoc and conciliation proceedings). In addition, the sauvegarde – the insolvency proceeding which can be opened before any cessation of payments – allows the debtor to restructure its business in the early stages of its difficulty (see point 4).

13. What is the average success rate after completed restructuring / insolvency proceedings?

Usually, satisfaction rates are much higher in amicable proceedings (mandat ad hoc and conciliation proceedings – which are confidential) than in insolvency proceedings. 

According to the official statistics for between 2010 and 2016, companies which entered into:

  • a safeguard (sauvegarde – noting that such proceedings represent only 6% of the total insolvency proceedings opened):
    • 62% presented a restructuring plan 
    • 5% had their activity and assets sold to a third party 
    • 33% ended up in a winding up
  • a judicial reorganisation:
    • 27% presented a reorganisation plan 
    • 6% had their activity and assets sold to a third party 
    • 67% ended up in a winding up.
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