The 2014 Reform of the French Bankruptcy & Insolvency Proceedings
By Didier Bruère-Dawson
Posted: 24th February 2015 09:22The European Commission enacted a recommendation of a new approach to business failure and insolvency on 12 March 2014. The Commission’s proposal extends the scope of the Council Regulation number 1346/2000 promoting preventive procedures. The aim of this recommendation is to enable restructuring as soon as insolvency becomes likely therefore maximising the debtors' total value to creditors, employees, owners and the economy as a whole.
In parallel to the European Commission enacting this recommendation, on 12 March 2014 the French Government enacted a new regulation effective 1 July 2014 amending French bankruptcy law. Key features are:
- Encouraging consensual pre-insolvency procedures (Conciliation and Ad Hoc Mandate) and the pre-pack sale practice covered by law;
- New stay and new money privileges in consensual pre-insolvency proceedings;
- Facilitated debt for equity swaps;
- Creditors rights in safeguard procedures, accelerated safeguard procedures, improved insolvency procedures regarding the set-up and agreement of a recovery plan, new majority rules in creditors’ committees;
- Debtor’s shareholders meeting their duties with regards to debtors’ recapitalisation needs.
The new French insolvency law is a major reform within the lines of a global evolution that creates a new balance between creditors' and debtors' interests. This reform should encourage the development of distressed M&As in France where there are major targets to be found.
This evolution of French law does not come as a surprise. Many European practitioners have been involved in reflections around this subject since 2012 leading to the European Commission’s recommendation, but also to (i) the 2012 German Reform Act including the German protection scheme "schutzschirmverfahren", (ii) the Italian "concordato preventivo", (iii) 2013 the Spanish “Entrepreneurs Act” reforms.
Given this evolution, creditors may no longer have leverage to set up artificial (and fragile) schemes leveraging the debtor’s Center Of Main Interest or COMI.
Moving forward it will be in the creditors' best interest to set up their securities in France and involve themselves (not only as controllers) in procedures striking a new balance between debtor management and creditors.
The main points of the reform underlined below concern both pre-insolvency, formal insolvency and safeguard procedures.
1) Pre-insolvency procedures (Ad Hoc mandates and Conciliation):
A restructuring framework should enable the debtor to address financial difficulties while insolvency can still be prevented. Anything that may adversely affect negotiations and the restructuring of the business should be averted; for example, protection of the debtor should have the sole aim of restructuring.
- Contractual provisions triggering consequences detrimental to the debtor on the sole grounds that Ad Hoc Mandate or Conciliation proceedings are open will be deemed null and void;
- The courts can impose a grace period of up to two years to all creditors, including public creditors. This goes further than the European Commission proposal about stay of enforcement action;
- Capitalisation of claims' interests will no longer be allowed during the procedure;
- Priority of payment for creditors lending or refinancing during the conciliation (new money lien) has been reinforced, and this prior to formal Court approval of the conciliation outcome. If there is any subsequent safeguard or insolvency proceeding, those claims cannot be rescheduled without the creditors' consent;
- Upon the debtors’ request, and after hearing the conciliation's participating creditors, the conciliator may be entrusted with a partial or entire sale of company's business and /or of restructuring its capital.
This "pre-pack" procedure has long been a central tool for restructuring in England and in Australia and is now being applied for some major French groups restructuring. This tool preserves goodwill and retains value because it lies outside a formal insolvency procedure context and with the main creditors consent. Time is of the essence in this procedure and encourages "business as usual" during the undisclosed negotiation, avoiding insolvency stigma, preserving brand integrity and preventing attrition of key customers and employees - key assets for a takeover. Of course it is critical to right size the balance sheet and ensure that all parties adhere to the swift and seamless handover of the business according to a plan under the conciliator’s supervision.
Shareholders cannot be obliged to embark on a pre-pack and/or to give up their stake and/or to sell a debtor’s going concern, but the conciliators capacity to inform the court of a viable plan for business versus a lack of another sustainable solution may cause shareholders to hesitate. If conciliation fails and if debtor goes into a formal insolvency procedure, court would bear in mind that a viable offer was proposed and refused by shareholders. The restoration of the debt-equity ratio and/or sale of the going concern could be imposed by the court if their plan is not considered viable or is criticised by creditors who can propose an alternative recovery plan.
Despite an increasing volume of pre-packs in the UK following the Enterprise Act of 2002, and good results so far, there has been some criticism concerning this practice. This was mainly addressed in the Statement of Insolvency Practice and relating to the sale of assets to the debtor’s connections but also to the lack of information disclosed upstream to unsecured creditors. Given French Law, none of these criticisms concern the French pre-pack.
2) Formal insolvency procedures and safeguard:
In safeguard and judicial insolvency the aim is still to save the business with a viable and sustainable solution. But the new regime enacts some rules that strengthen creditors' rights, increase debtors’ shareholders duties, and ensure distressed M&A.
- Opening of a safeguard judgment allows a creditors' representative to call shareholders to pay their portion of unpaid capital. If there is a need for a restoration of shareholders equity in judicial recovery, the judicial administrator can request the appointment of a judicial representative who convenes a shareholders' meeting, and voting in lieu of any opposing shareholders the restoration of shareholders' equity by existing shareholders or third parties (if there is no viable plan from debtor's management, the court can order a going concern’s sale).
- Members of the creditors' committees can propose an alternative restructuring or safeguard plan and each member of the creditors’ committees vote on the plans that are then submitted to the court. Mezzanine lenders are more likely to seize this opportunity rather than classic banks hampered by ratios commitments. Of course mezzanine lenders or bond holders will try to get the support of the secured creditors who will hope to get a better return with the new management.
- The approval of these safeguard plans are achieved by a majority of two-thirds in value of claims held by creditors present, dissenting creditors are bound by this 2/3 vote. The court cannot impose a reduction of claim, but can impose deferral of payment and rescheduling of debt for a maximum of 10 years.
- A new procedure, the accelerate safeguard, has been added to the pre-existing accelerated financial safeguard. Similar to the financial one except in scope, there is no need for the debtor to be solvent to benefit from this safeguard as long as the insolvency has not been for more than 45 days. This ensures that a debtor can obtain a restructuring plan approved by court and sufficiently supported creditors within three months.
In summary, on one hand still there is a priority for a recovery plan presented by debtors’ shareholders, but on the other, shareholders’ duties and creditors’ powers are strengthened in order to ensure the viability and sustainability of the recovery plan.
Perhaps France could strengthen rules yet further in favor of investors, but without a doubt there is now an environment favourable to distressed M&A in France. This should save some businesses that have, in the past, been suffocated by restructuring plans limited to rescheduling debts, starving creditors and the credit flow.
Didier Bruère-Dawson represents various groups, investment funds and investors as part of their investments, divestments and real estate projects in France and abroad by managing the risks and issues linked to insolvency proceedings, conciliation procedures, ad hoc mandates and recovery takeovers.
His transactional and litigation expertise in M&A, financing projects and the acquisition of ailing businesses is well recognised.
Didier Bruère-Dawson holds a post graduate degree (DEA) in Business and Economic Law (Paris-II University, 1988), a master’s degree in Management (Paris-I University, 1986) and he is a graduate from the Institute of Higher International Studies (IHEI - Institut des Hautes Etudes Internationales Paris-II University).
Partner, de Gaulle Fleurance & Associés
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