By Saam Golshani, Anne-Sophie Noury, Alicia Bali and Alexis Hojabr (White & Case)
Introduction
The restructuring and insolvency framework in France has undergone significant reforms in recent years, driven both by the willingness to harmonize European practices under the impulse of the European institutions and by the survival of measures initially introduced in response to economic challenges posed by the COVID-19 pandemic.
These reforms aim to facilitate the restructuring of distressed businesses while balancing the rights of creditors, particularly when their approach complicates to the restructuring process, even though their situation would not entitle them to any rights in the event of compulsory liquidation.
This article aims at giving a broad overview of the French bankruptcy law framework and its most interesting new features.
1. Types of proceedings
The French legal system offers several types of proceedings for businesses facing financial difficulties, each tailored to specific circumstances and depending mainly on the debtor’s ability to meet its debt obligations with its available cash.
Preventive proceedings (mandat ad hoc and conciliation)
Mandat ad hoc is a confidential, voluntary process for solvent debtors where management remains in control, supported by a “mandataire ad hoc” to negotiate with creditors. Approval requires unanimous consent from creditors, and it does not automatically halt payments or enforcement actions.
Conciliation proceedings are also available for solvent debtors experiencing difficulties, lasting up to five months. A conciliator aids in negotiations, and any agreement can be recognized by a judge or formally sanctioned by the court.
The attractiveness of the conciliation procedure has been enhanced by the introduction of measures enabling the debtor to summon a creditor who has refused a standstill, even in the case of claims that are not yet due and without any notice of default, thus strengthening the protection of the debtor during this procedure. Eventually, the legislator also introduced a “new money” privilege that can be granted to new financings made available during the conciliation period, which grants a priority repayment rank over all pre-petition claims in case the agreement is sanctioned by the court.
Safeguard Proceedings
Safeguard proceedings are designed for solvent debtors who anticipate financial difficulties. These proceedings involve a court-administered process that provides an automatic stay of payments, allowing the company to restructure its debts without immediate pressure from creditors. The goal is to enable the company to develop a restructuring plan that can be presented to creditors for approval.
This process is particularly beneficial for businesses that have viable operations but require time to reorganize their financial obligations without any risk of third parties offering an alternative reorganization plan or court-ordered sale plan.
The safeguard plan framework has been greatly reshaped by the ordinance n°2021-1193 of 15 September 2021 merging the existing accelerated safeguard and accelerated financial safeguard procedures. These new proceedings aim to rapidly implement pre-negotiated restructuring deals in conciliation, enforceable on dissenting creditors through mandatory class-based consultation.
Class-based consultation becomes mandatory if certain thresholds (250 employees and €20 million turnover or €40 million turnover) are met in safeguard proceedings but are mandatory in accelerated safeguard proceedings. These classes replace traditional creditor classes, balancing bargaining power among creditors, debtors, and shareholders. The judicial administrator determines the composition of classes based on common economic interests and compliance with subordination agreements.
Affected parties vote on the draft plan, which must be approved by a two-thirds majority within each class. The court can impose the plan on dissenting classes if certain conditions are met, including adherence to the absolute priority rule and ensuring no economic interest remains for dissenting equity holders.
The new safeguard plan framework offers a streamlined framework for implementing restructuring plans. It ensures creditor and shareholder involvement and enables debtors to implement turnaround solutions with the support of the most deserving creditors.
Judicial Reorganization
Judicial reorganization is available for debtors who are unable to pay their debts and are facing insolvency aiming at preserving business continuity, maintaining employment, and ensuring the repayment of creditors to the widest extent possible.
During these proceedings, the management of the debtor remains in place but operates under the supervision of a court-appointed judicial administrator. The administrator assists in preparing a reorganization plan, which may include measures such as debt rescheduling, debt write-offs, debt-for-equity swaps, or the sale of business assets.
The judicial reorganization can lead to various outcomes, including the sale of the business or its assets, depending on the viability of the restructuring plan.
Liquidation
When a company is deemed insolvent and unable to restructure, it may enter liquidation proceedings. In this scenario, the company's assets are sold off to pay creditors, and the business ceases operations. Liquidation is seen as a last resort, as it typically results in the loss of jobs and the dissolution of the business. However, it is a necessary process to ensure that creditors can recover some of their claims.
2. The enhancement of creditors' rights and protections
The recent reforms in the French restructuring and insolvency framework have introduced several creditor-friendly measures aimed at enhancing the rights and protections of creditors.
These privileges have been permanently incorporated through the 2021 ordinance, which also established the cross-class cram-down mechanism. This mechanism allows a continuation plan to bind dissenting creditors under specific conditions, reflecting creditors’ securitization levels and rebalancing their negotiating powers.
Valuation became a key topic to assess the “best interest of creditors” test or the “in the money” status of classes having consented to the plan or the absolute priority rule. French courts have supported lender-led restructurings, enabling lenders or investment funds to gain control of distressed businesses, sidelining existing shareholders.
Despite these creditor-friendly changes, the Ordinance has also maintained debtor protections, such as new standstill tools for debts in conciliation proceedings. Thus, while the French system can no longer be seen as debtor-friendly, it now better balances the protection of both debtor and creditor interests, particularly for creditors who are "in the money".
Overall, the French insolvency regime has evolved to be more mindful of the financial equilibrium of the restructuring and the true economic value of the insolvent creditor.
3. Evolution perspectives
As the European Directive has been transposed via the Ordinance and the Decree in 2021, no further reform of our insolvency law is currently contemplated, but informal consultations are ongoing to clarify or perfect recent reforms.
Overall, while some consider the French insolvency regime is becoming more creditor-friendly and less punitive for entrepreneurs, these areas may benefit from further clarification and adjustment to balance the interests of debtors and creditors effectively.
Firstly, the recent Ordinance 2021-1193 introduced a rule that prevents the increase of contractual security interests or retention rights, aiming to avoid hindering the continuation of the debtor's business. This rule, however, could restrict access to financing for distressed companies and lead lenders to demand more extensive collateral packages. A more precise framework may be required to ensure proportionality between the rule's purpose and creditor protection.
Secondly, restrictions on controllers, particularly prohibitions on acquiring the debtor’s assets and confidentiality obligations, may deter creditors from becoming involved as controllers, especially secured creditors. Reviewing and possibly easing these restrictions could make the controller role more transparent and effective in protecting the common interests of creditors.
Lastly, the legal uncertainty surrounding the sanction regime for asset shortfall liability may discourage managers from requesting preventive proceedings. Potential adjustments could include limiting liability claims to mismanagement during a defined period before insolvency proceedings, allowing settlements where managers make sufficient efforts to cover liabilities, and creating a safe harbor for managers who implement successful conciliation proceedings, with exceptions in cases of fraud.
(*) This post is a summary of an article which was first published in The Legal 500 in July 2024. For further in-depth analysis, please refer to the French Chapter of 8th Edition of "The Legal 500: Restructuring & Insolvency Comparative Guide".