Restructuring and Insolvency in France 2024

Restructuring and Insolvency in France 2024 – Court of Cassation (France)

RESTRUCTURING AND INSOLVENCY 2024

FRANCE

Fabrice Grillo, Guilhem Bremond, Laurent Mabilat, Stéphanie Corbière

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The provisions relating to French insolvency proceedings are codified under articles L610-1 to L696-1, R600-1 to R695-4 and article L811-1 et seq of the French Commercial Code, and have been reformed recently by Ordinance No. 2021-1193, dated 15 September 2021, which entered into force on 1 October 2021 and was completed by Decree No. 2021-1218, dated 23 September 2021 (together, the 2021 Ordinance). The 2021 Ordinance contains provisions aimed at transposing Directive (EU) 2019/1023 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.

Aspects relating to cross-border insolvencies are governed by Regulation (EU) 2015/848 on insolvency proceedings (the EU Insolvency Regulation) and Ordinance No. 2017-1519 of 2 November 2017 and Decree No. 2018-452 of 5 June 2018 issued in relation to the EU Insolvency Regulation.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

Insolvency proceedings organized under the French Commercial Code apply to:

• self-employed individuals;
• corporate entities, whether of a commercial or civil nature;
• merchants; and
• farmers and craftspeople (i.e, individuals registered with the Répertoire National des Métiers, the specific registry for craftspeople).

The only persons excluded from these proceedings are:

• individuals who are not self-employed (employees or civil servants);
• entities regulated by public law that are not subject to any specific insolvency proceedings because of their particular status;
• entities that are not registered with the commercial register and do not have a legal personality (e.g, sociétés en participation, sociétés de faitand sociétés en formation); and
• the société de libre partenariat.

Out-of-court proceedings (mandat ad hoc and conciliation) are available to corporate entities, merchants and craftspeople only, to the exclusion of farmers or self-employed individuals who may be subject to specific preventive measures.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

The procedures followed in the insolvency of a government-owned enterprise will differ depending on whether the enterprise is governed by public or private law. Although with respect to some enterprises there can be uncertainty as to whether they are governed by public or private law, it is generally established that government-owned entities taking the form of industrial and commercial bodies (EPICs) are governed by public law and companies controlled by public entities (e.g, state or local authorities) taking the form of a state company, a nationalized company, a semi-public company or a local public company are governed by private law.

EPICs are not subject to standard insolvency proceedings applicable to private law companies, and French law does not provide for any equivalent insolvency proceedings for these types of enterprises.

Furthermore, pursuant to article L2311-1 of the General Code on Ownership of Public Entities, EPICs’ assets and funds cannot be attached or seized. Nevertheless, instead of implementing the usual methods of enforcement, creditors of EPICs may rely on the specific payment procedure against public entities provided in article 1-II of Law No. 80-539 of 16 July 1980. The objective of this procedure is to enforce a judicial decision, ordering a public entity to make a payment, for the benefit of one of its creditors.

Publicly owned companies governed by private law may be either wholly owned by public entities (e.g, a state company, a nationalized company or a local public company) or partly owned by public entities (e.g, a semi-public company). These types of companies are subject to standard insolvency proceedings like any other private commercial companies (although in very limited situations, the assets of some of these companies cannot be seized if they have a public service purpose).

However, the implementation of these proceedings can differ from other commercial companies, in particular, regarding semi-public companies and local public companies (see article L1531-1 of the General Local Authorities Code). Article L1523-4 of the General Local Authorities Code provides for the automatic termination of concessions and public service delegation contracts and the free return to the local authorities of the assets they contributed in the case of insolvency proceedings. The aim is to ensure the principle of continuity of the public service and the right of unilateral termination granted to the public contracting party.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

On 26 July 2013, France enacted specific legislation aimed at dealing with the financial difficulties of certain credit institutions and investment firms. This legislation has since been modified on several occasions, in particular, by Ordinance No. 2015-1024, dated 20 August 2015, to adapt French law to Directive 2014/59/EU.

Pursuant to this legislation, most credit institutions and investment firms (as well as certain financial holding companies) must prepare (on a solo or consolidated basis) and regularly update a recovery plan to be implemented in the event of financial difficulties, and notify this plan to the French banking regulator, the Autorité de contrôle prudentiel et de résolution (ACPR), which in turn is required to prepare a resolution plan for such institutions. If the recovery plan is deemed insufficient, the ACPR may request the institution to modify it and, if needed, to implement further measures such as:

• reducing its risk profile (including liquidity risk);
• enabling timely recapitalization measures;
• reviewing its strategy and structure;
• making changes to its funding strategy to improve the resilience of the core business lines and critical functions; or
• making changes to its governance structure.

The ACPR is also given broad powers to deal with the financial difficulties of defaulting institutions, including the power to impose specific resolution measures on such institutions. These measures include, in particular:

• the transfer of all or part of the equity instruments, assets, rights or liabilities of the institution to another entity;
• the temporary acquisition by a state-owned bridge institution of all or part of the equity instruments, assets, rights or liabilities of the institution;
• the transfer of all or part of the assets, rights or liabilities of the institution (or of a bridge institution) to an asset management vehicle in charge of managing them with a view to selling them at the best price; and
• ‘bail-in’ measures (i.e, measures consisting in the reduction or conversion into common equity tier 1 of certain liabilities and debt instruments of the institution).

This legislation aims to strengthen the framework for financial crisis management and prioritize the restructuring of institutions facing financial problems before any grant of public aid.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Courts

The courts that have jurisdiction over insolvency proceedings will differ depending on whether the debtor conducts a civil or commercial activity. In theory, for commercial debtors (e.g, limited companies, close corporations, partnerships, limited liability companies or individuals conducting trade activities), the court of first instance is the commercial court located where the debtor has its registered office. Specialized commercial courts have jurisdiction over insolvency proceedings opened against companies that meet any of the following criteria:

• companies with a number of employees exceeding 250 and a turnover exceeding€20 million;
• companies whose turnover exceeds €40 million;
• companies that hold or control other entities where the total combined number of employees is 250 or more and where they have a combined total turnover of a least€20 million; or
• companies that hold or control other entities, irrespective of the number of employees and where the combined turnover is at least €40 million.

These specialized commercial courts will also have jurisdiction over insolvency proceedings opened in France by foreign companies pursuant to the EU Insolvency Regulation. Pursuant to the EU Insolvency Regulation, foreign entities with no registered offices in France may file a petition for the start of main insolvency proceedings in the court that has jurisdiction where their center of main interests (COMI) is located. When the COMI of the debtor is located in another EU member state (other than Denmark), secondary proceedings can be commenced in France if the debtor has an establishment in France.

For civil debtors (companies of a civil nature and farmers), the relevant court of first instance will be the civil court. The same principles apply to the location of this court as for the commercial court above.

During insolvency proceedings, an insolvency judge is appointed by the court. The insolvency judge is given certain jurisdictional powers and is in charge of many procedural matters relating to the proceedings (e.g, the acknowledgement or rejection of most debt claims filed in the insolvency proceedings) and to hearing challenges of certain decisions made by the court-appointed insolvency officials.

Two specific proceedings are opened to allow a challenge of certain decisions of the judicial administrator in relation to the classes of affected parties.

The first proceeding allows creditors (in their capacity as affected parties), the debtor, the creditors’ representative and the Office of the Public Prosecutor to challenge the decision of the judicial administrator regarding the status of the affected party, the composition of the classes of creditors and the calculation of the votes corresponding to the claims or rights allowing the casting of a vote.

A filing must be made within 10 days of the notice of the judicial administrator notifying the creditors of the class to which they belong. The supervisory judge is required to provide a ruling within 10 days of the relevant filing and an appeal can be filed within five days of this ruling, the court of appeal being required to provide a ruling within 15 days. A final court decision on class formation will have to be rendered before the vote on the plan takes place.

The second proceeding allows affected parties who voted against the restructuring plan to challenge, within 10 days of the vote, the value of the debtor that has been determined to assess whether:

• the best interest of creditors’ test was met (as it is one of the conditions for the court to approve the plan);
• at least one class voting for the plan was ‘in the money’ in the case of a ‘cross-class cramdown’; or
• in the case of a cross-class cramdown, which applies to holders of equity, these holders of equity are ‘out of the money’.

The court will rule on any challenge relating to the value of the debtor in the decision in which it approves the plan. The decision approving the plan will be subject to a right of appeal by the creditor, the debtor, the creditors’ representative, the judicial administrator and the Office of the Public Prosecutor.

Appeal

The debtor that is the subject of insolvency proceedings has the right to appeal a judgment, within 10 days of the notification of the judgment, where the judgment:

• opens or extends to another debtor the safeguard, reorganization or liquidation proceedings;
• converts a safeguard into reorganization proceedings or opens judicial liquidation during the observation period; or
• approves, modifies or terminates a safeguard or reorganization

The debtor, the creditors’ representative, the judicial administrator and the Office of the Public Prosecutor can also appeal the judgment that approves or rejects a sale plan within 10 days of this judgment. Finally, the debtor can challenge certain orders of the insolvency judge before the court within 10 days of the notification of the order.

The creditor requesting the opening of insolvency proceedings can appeal the judgment opening (only if the creditor challenges the date retained by the court as the date on which the debtor company became insolvent) or refusing to open the reorganization or liquidation proceedings.

Other rights of appeal are opened to certain persons in certain circumstances. As a rule, rights of appeal of decisions made in insolvency proceedings are limited to ensure the efficiency of such proceedings.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

An insolvent debtor is required to file a request for the start of insolvency proceedings with the relevant court within 45 days of the date on which it became cash-flow insolvent, unless, on the debtor’s request, a conciliator is appointed in the same time period. To file for liquidation proceedings, the debtor must demonstrate that it is cash-flow insolvent and that recovery is obviously impossible. If the court orders the immediate liquidation of the debtor’s assets, it will appoint a liquidator and proceed with the sale of the debtor’s assets on a piecemeal basis, by way of private sale or auction.

Alternatively, where there are prospects that all or part of the assets can be sold as a going concern to a third party, the court may authorize a temporary continuation of operations for up to six months (three months, renewable once at the request of the public prosecutor). In large cases, a judicial administrator will be appointed by the court in addition to the liquidator. The judicial administrator will be in charge of managing the debtor company and proceeding with the sale of the business during the temporary continuation of the debtor’s operations.

The commencement of voluntary liquidation proceedings imposes a stay of payments on the debtor and a stay of proceedings on creditors. Also, the commencement of the liquidation renders all debts of the insolvent company immediately due (unless a sale of the debtor’s business is contemplated during the liquidation proceedings, in which case the debts will become due upon the expiry of the temporary continuation of the debtor’s operations).

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Out-of-court proceedings

When a debtor company finds itself in financial difficulty but is not yet insolvent according to the French cash-flow insolvency test, it can request that the presiding judge of the relevant court appoints an insolvency practitioner (in the capacity of mandataire ad hoc) to help the management negotiate an amicable restructuring with all or part of its creditors, suppliers and possible new investors in the framework of a mandat ad hoc.

The scope of the mandataire ad hoc’s mission is fixed on a case-by-case basis by the presiding judge of the court, and there is no statutory limitation to the length of the mission of the mandataire ad hoc, which is therefore determined and extended, where needed, by the presiding judge of the court.

The role of the mandataire ad hoc is only to make suggestions and to persuade creditors to negotiate with the debtor. They have no coercive powers. A mandat ad hoc is informal and confidential. The commencement of a mandat ad hoc does not impose a stay of payments on the debtor or a stay of proceedings on creditors. At any moment, the mandat ad hoc proceedings may be converted into conciliation proceedings.

Alternatively, the debtor may seek from the presiding judge of the court the appointment of a conciliator in the framework of conciliation proceedings to negotiate a voluntary arrangement with key stakeholders, such as creditors, suppliers and possible new investors. Conciliation proceedings are also available to an insolvent debtor if the insolvency occurred no more than 45 days before the appointment of the conciliator. The conciliation process is informal and confidential and does not impose a stay of payments on the debtor or a stay of proceedings on creditors.

However, during the conciliation proceedings, if a creditor serves a demand or brings an action against the debtor, or if a creditor does not accept, by the deadline set by the conciliator, a request made by the conciliator to defer payment of its claim for the duration of the conciliation proceedings, the debtor may petition the judge that commenced conciliation proceedings to grant, after having heard the conciliator, a grace period of up to two years pursuant to article 1343-5 et seq of the French Civil Code (except for claims of tax and social security authorities and institutions).

The judge may also defer or reschedule, for the duration of the appointment of the conciliator, the payment of claims that are not yet due if the relevant creditor does not accept, by the deadline set by the conciliator, a request made by the conciliator to defer payment of its claim for the duration of the conciliation proceedings. The initial term of the conciliator’s mission is determined by the presiding judge of the court, within a four-month limit (which can be extended once, for up to one month).

The purpose of both mandat ad hoc and conciliation proceedings is for the debtor to come to a voluntary arrangement with its creditors that puts an end to its difficulties and ensures the continued operations of its business. Such voluntary arrangements may include a rescheduling or waiver of debts, and sometimes provisions relating to the company’s corporate structure (modification of share capital or by-laws, undertaking to sell certain assets and so on). In conciliation proceedings, the conciliation agreement reached may be either:

• certified by the presiding judge of the court at the request of all parties to the conciliation agreement, thereby giving it the enforceability of a judgment while keeping it confidential; or
• formally approved by the court at the debtor company’s request (homologation). The conciliation then enters the public record.

The formal approval of the conciliation agreement requires the court to be satisfied that:

• the debtor company is not (or as a result of the agreement ceases to be) insolvent;
• the agreement appears to be such as to ensure the solvent continuation of the debtor’s business; and
• the agreement does not prejudice the interests of those creditors, not parties thereto.

The formal approval of the conciliation agreement entails the following specific consequences:

• funds, goods or services made available to the debtor company (otherwise than through subscribing to a share capital increase) during a conciliation that ended with a formally approved conciliation agreement may benefit from a privilege, givingpriority over most other claims in the event of subsequent safeguard, reorganization or liquidation proceedings – the ‘conciliation’ priority;
• the various implementation steps of the conciliation agreement, including security documents, entered into or taken on the date of the judgment will not, in the event of subsequent insolvency proceedings, be void or voidable on the grounds of suspect period rules; and
• debt deferrals that may be imposed on creditors during a subsequent safeguard or judicial reorganizationproceedings may not be imposed with respect to claims that have received the benefit of the ‘conciliation’ priority.

Any contractual provisions that, as a result solely of the opening (or a request for the opening) of mandat ad hoc or conciliation proceedings, would restrict the debtor’s rights or increase its obligations, are deemed null and void.

Safeguard proceedings

The legal representatives of a company that experiences difficulties that it cannot overcome but that is not yet cash-flow insolvent may apply to the court for the opening of solvent reorganization proceedings, known as safeguard proceedings. The judgment commencing safeguard proceedings opens a six-month period called an ‘observation period’ (renewable for up to a total maximum period of six months) during which the company will negotiate with its creditors a rescheduling or waiver of debt that arose before the start of the safeguard proceedings in the framework of a safeguard plan.

The court will appoint a judicial administrator to supervise or assist the debtor company’s management in the preparation of the safeguard plan and a creditors’ representative in charge of collecting statements of claims and verifying the debtor’s liabilities. Only the debtor can present a safeguard plan; creditors and affected parties (in a class-based consultation) cannot present an alternative safeguard plan. Safeguard proceedings are listed among insolvency proceedings within the meaning of Regulation (EU) 2015/848 on insolvency proceedings. During the observation period, the debtor company enjoys a stay of payments and proceedings. The safeguard plan is presented to the court for approval.

Accelerated safeguard proceedings

Expedited safeguard proceedings (accelerated safeguard proceedings) may also be opened following conciliation proceedings.

Reorganization proceedings

A debtor company that is insolvent must apply for the opening of insolvency proceedings within 45 days of the occurrence of cash-flow insolvency, unless it has requested the appointment of a conciliator or the opening of liquidation proceedings. If the court considers that the business may be continued as a going concern, it will order a six-month ‘observation period’ that can be extended up to a total maximum period of 18 months, during which a court-appointed judicial administrator will investigate the affairs of the debtor and make proposals for the reorganization of its business. At the end of the observation period, the court will make an order for:

1. the continuation of the debtor’s operations by way of a reorganizationplan (the features of which are similar to those of a safeguard plan);
2. the sale to a third-party purchaser of its assets as a going concern by way of a sale plan; or
3. failing (1) or (2) above, the liquidation of the debtor company.

Law No. 2021-689 of 31 May 2021 institutes a new procedure known as the crisis exit proceeding.

The crisis exit proceeding is a new and temporary insolvency proceeding instituted in the wake of the covid-19 pandemic, which is, in essence, a simplified version of existing reorganization proceedings designed to allow a swift court approval of restructuring plans addressing difficulties of small businesses caused or aggravated by the covid-19 pandemic. Subject to eligibility criteria, crisis exit proceedings were available until 2 June 2023.

Eligible debtors included debtors that:

• employed less than 20 employees and whose liabilities on the balance sheet were below €3 million on the last day of the past financial year;
• were cash-flow insolvent;
• had sufficient cash to pay salaries; and
• could provide evidence that they were able to prepare, within three months, a restructuring plan ensuring the continued operations of their business.

The opening judgment starts a three-month observation period during which the debtor prepares a restructuring plan. The proceedings end with the court approval of the restructuring plan or the conversion into reorganization or liquidation proceedings.

Successful reorganizations

8. How are creditors classified for purposes of a reorganizationplan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The safeguard or reorganization plan must provide for the continued operations of the debtor company in the long term, the preservation of employment and the settlement of the debtor’s liabilities.

Types of consultations

Creditors whose rights are affected by the plan must be consulted on the manner in which the debtor’s liabilities will be settled under the plan (debt write-offs, payment terms or debt-for-equity swaps) prior to the plan being approved by the court. The rules governing consultation will vary depending on the size of the business, and the consultation will either be a standard consultation or a class-based consultation.

Individual consultation

The administrator notifies the proposals for the settlement of debts to the court-appointed creditors’ representative, who informs each creditor who filed a claim. Creditors are consulted individually or collectively. Creditors whose payment terms are not affected by the plan or who are paid in cash in full as soon as the plan is approved are not required to be consulted.

Creditors who do not respond within 30 days of their receipt of the debt settlement proposal (other than write-off or debt-for-equity-swap proposals) made to them are deemed to have accepted it.

Class-based consultation

Class-based consultations apply mandatorily in the case of accelerated safeguard proceedings and, in the case of safeguard and judicial reorganization proceedings, to:

• companies that either:
• employ at least 250 employees and have a net turnover of at least €20 million; or
• have a net turnover of at least €40 million; and
• companies that hold or control another company (within the meaning of articles L233-1 and L233-3 of the French Commercial Code) and that meet, on an aggregate basis, the above thresholds.

The above could also apply, if these thresholds are not met, upon the debtor’s request (in safeguard proceedings) or upon the debtor’s or the judicial administrator’s request (in judicial reorganization proceedings), in each case with the consent of the bankruptcy judge.

Only affected parties are entitled to vote on the draft restructuring plan. These affected parties are creditors whose rights are directly affected by the proposed draft restructuring plan and equity holders, if their equity interest in the debtor, the articles of association or their rights are modified by the proposed restructuring plan.

The constitution of classes of creditors is made under the responsibility of the judicial administrator, who will, on the basis of objective and verifiable criteria, group within the same class creditors sharing sufficient common economic interest.

In determining the composition of each class the judicial administrator must ensure that:

• creditors benefiting from rights in rem security over the debtor’s assets and other creditors are in separate classes;
• the determination of each class complies with the subordination arrangements entered into before the opening of the relevant proceedings (provided that these subordination arrangements have been provided to the judicial administrator within 10 days of receipt of the notice sent by the judicial administrator or the publication of such notice inviting the affected parties to notify the existence of such arrangements); and
• equity holders are grouped in one or several classes.

The judicial administrator can also create ad hoc classes, for example, for public creditors or strategic suppliers.

At least 21 days prior to the date of the vote on the draft restructuring plan, the judicial administrator must notify each affected party of the methods of class allocation and the computation of voting rights corresponding to the affected claims or rights enabling them to cast a vote. Claims taken into account are those indicated by the debtor and certified by its auditor or auditors or, in the absence of an auditor, in a certificate from the debtor’s certified public accountant.

The methods used are also notified to the court-appointed creditors’ representative. In the event of disagreement, the matter may be brought before the insolvency judge at the request of the affected party, the debtor, the public prosecutor, the court-appointed creditors’ representative or the judicial administrator.

The restructuring plan will be adopted once each class has voted in favor of it with a two-thirds majority of the amount of the claims held by the members having cast a vote. The affected parties must vote within 20 to 30 days following receipt of the draft restructuring plan. This time frame may be increased or decreased following a request by the debtor or the judicial administrator to the judge but cannot be less than 15 days. Within each class, the vote on the approval of the plan may be replaced by an agreement from the required majority.

If the draft restructuring plan is approved by all classes under the required conditions and majority rules, the court will nevertheless have to ensure that certain conditions are met before approving the draft restructuring plan:

• the restructuring plan has been approved in accordance with the rules governing the constitution of classes of affected parties;
• creditors of the same class sharing sufficient common interests benefit froman equal treatment and are treated in proportion to their claims or rights;
• the restructuring plan has been duly notified to all affected parties;
• in the presence of dissenting creditors, the restructuring plan does not put those dissenting creditors in a less favorable position than the position they would have been in:
• if the order of priority of the distribution of asset sale proceeds in judicial liquidation proceedings, or the sale price of the business as a going concern via an asset sale planpursuant to article L642-1 of the French Commercial Code, were to apply; or
• in the event of a better alternative solution were the restructuring plan not to be approved; and
• to the extent applicable, any new financing provided for in the restructuring plan is necessary for its implementation and does not unduly affect the interests of the affected parties.

Even if these criteria are met, the court may refuse to approve a restructuring plan that does not offer a reasonable prospect of avoiding the insolvency of the company or ensure business continuity. The court must also ensure that the interests of all affected parties are sufficiently protected.

A safeguard or a reorganization plan relates to the liabilities of the relevant debtor – it cannot provide for the release of liabilities owed by third parties.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Any unpaid creditor may file an application for the start of liquidation proceedings against a debtor. The creditor must show that it has already tried to obtain payment of its overdue debt (eg, by attempting to seize the debtor’s assets) and that the debtor is unable to meet its debts as they fall due. The creditor must also prove that the debtor’s recovery is obviously impossible. Liquidation proceedings can also be started at the initiative of the public prosecutor. The effects of involuntary liquidations are similar to those of voluntary liquidations.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganizationand what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Out-of-court restructuring and safeguard proceedings

Under French law, creditors cannot request the appointment of a mandataire ad hoc or a conciliator or request the court to order the commencement of safeguard proceedings.

Reorganization proceedings

Any unpaid creditor may file an application for the commencement of reorganization proceedings against the debtor. The creditor must show that it has already tried to obtain payment of its debt and that the debtor is insolvent according to the French cash-flow insolvency test. reorganization proceedings can also be started at the initiative of the public prosecutor. Effects of involuntary reorganization proceedings are identical to those of reorganization proceedings opened at the request of the debtor itself.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (e.g, ‘prepackaged’ reorganizations)?

French law provides for a type of safeguard that is an expedited proceeding: the accelerated safeguard proceedings. The main features of the accelerated safeguard proceeding are the following:

• the maximum duration of accelerated safeguard proceedings is four months (provided the court has decided to extend the initial two-month period);
• class-based consultation is mandatory; and
• to be eligible for accelerated safeguard proceedings, the debtor must fulfil the following conditions:
• the debtor must not have been insolvent for more than 45 days when it initially applied for commencement of conciliation proceedings;
• the debtor must be subject to ongoing conciliation proceedings when it applies for the commencement of the accelerated safeguard proceedings;
• its accounts are certified by a statutory auditor or established by a certified public accountant; and
• the debtor must evidence that it has prepared a plan aiming at ensuring the sustainability of the business that is likely to attract sufficient support from affected parties to make its adoption likely.

If the accelerated safeguard plan is not approved by the court within the applicable deadline, the court will terminate the proceedings.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Out-of-court restructuring

Failure to reach an agreement in the framework of mandat ad hoc or conciliation proceedings will, in practice, often result in the start of safeguard or, if the cash-flow insolvency test is met, reorganization proceedings. Accelerated safeguard may also be opened by the debtor after conciliation proceedings if the conditions are met.

If the debtor company fails to perform its obligations under the conciliation agreement, any party to the conciliation agreement may request that the presiding judge of the court (for a certified conciliation agreement) or the court (for an approved conciliation agreement) to terminate it. Likewise, the opening of safeguard, reorganization or liquidation proceedings against the debtor company results in the automatic termination of the conciliation agreement. The termination of the conciliation agreement does not render ineffective the clauses whose purpose is to organize the consequences of such termination.

Reorganization proceedings with classes of affected parties

When classes of affected parties are set up and the classes of affected parties fail to approve the draft plan or the court does not approve the reorganization plan approved by the classes of affected parties, creditors are consulted on an individual basis.

In this case, even if creditors refuse the debtor’s proposals, the court may make them subject to a uniform rescheduling of their claims over up to 10 years, with no statutory minimum for the first two annual installments and a minimum of 5 per cent of the total liabilities (principal and interest) from the third instalment and a minimum of 10 per cent from the sixth instalment, noting that the repayment cannot start before the original contractual maturity. Such debt deferrals, however, may not be imposed with respect to claims benefiting from the conciliation priority granted in previous conciliation proceedings or from the S/R Lien.

Safeguard proceedings

At any time during the observation period of the safeguard proceedings or if no safeguard plan is approved by the court by the end of the observation period, the debtor, the judicial administrator, the creditors’ representative or the public prosecutor may request the opening of reorganization or liquidation proceedings, or the court itself may decide to do so, subject to the debtor company being insolvent or, in the case of liquidation proceedings, the absence of any prospects of recovery.

During the observation period, the debtor company may also request the conversion into reorganization proceedings if the approval of a safeguard plan is manifestly impossible and if the termination of the proceedings would lead to cash-flow insolvency in the short term. If the court approves a safeguard plan and the debtor defaults on its obligations, the court may, after having consulted the public prosecutor, terminate the plan and, if the debtor is insolvent, order the opening of reorganization proceedings or (if there are no prospects of recovery) liquidation proceedings.

Reorganization proceedings

At any time during the observation period of the reorganization proceedings or if no reorganization plan is approved by the court by the end of the observation period, the debtor, the judicial administrator, the creditors’ representative, a controlling creditor or the public prosecutor may request the opening of liquidation proceedings or the court itself can decide to do so.

If the court approves a reorganization plan and the debtor defaults on its obligations, the court may, after having consulted the public prosecutor, terminate the plan and, if the debtor is insolvent and if there are no prospects of recovery, order the opening of liquidation proceedings. In the case of a sale plan, the court may terminate the plan if the third-party purchaser defaults on its obligations.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

A company may be liquidated and wound up outside the scope of insolvency proceedings and outside court proceedings if it is in a position to repay all its debts. In this case, the shareholders or the court will appoint a liquidator who will be in charge of the distribution of the company’s assets and payment of the company’s debts.

When all distributions have been made and debts paid (which must be done within three years from the start of the liquidation), the shareholders will decide in a general meeting whether the liquidation process should be closed. The corporate entity will only cease to exist when the liquidation has been completed. In this event, the liquidator will request that the company be removed from the National Register of companies.

Conclusion of case

14. How are liquidation and reorganizationcases formally concluded?

Out-of-court restructurings are formally concluded when:

• parties agree on a restructuring agreement (whether inmandat ad hoc or conciliation proceedings), if no approval from the court is required by the parties;
• the conciliation agreement has been either certified by the presiding judge of the court or formally approved by the court; or
• at the end of a maximum five-month period of the opening of conciliation proceedings if no agreement has been reached by the parties.

Safeguard and reorganization proceedings are formally concluded upon the court approving the safeguard or reorganization plan. Also, once the safeguard or reorganization plan is fully implemented, the court official in charge of supervising the implementation of the plan will draft a report confirming the completion of the plan to the court.

Liquidation proceedings are formally concluded when all debts are repaid or the liquidator is able to obtain sufficient proceeds to repay all debts, or when the continuation of the liquidation proceedings is impossible because of a shortfall of assets or the continuation of liquidation proceedings is considered to be no longer justified because of difficulties in selling the remaining assets. If the debtor is in ongoing judicial proceedings, the court may, however, close the liquidation proceedings, subject to a representative being appointed that must continue the ongoing judicial proceedings on behalf of the liquidated debtor and allocate the proceeds obtained from such proceedings to the creditors of the liquidated debtor.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

The French insolvency test is a pure cash-flow test, defined as the debtor’s inability to pay its debts as they fall due with its immediately available assets, taking into account available credit lines and moratoria.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

Certain proceedings must be commenced if the debtor is cash-flow insolvent. The manager of the debtor company is required to file for insolvency proceedings (whether in the form of reorganization or liquidation proceedings) within 45 days of the date of insolvency, unless the presiding judge of the court has been asked to appoint a conciliator.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if acompany carries on business while insolvent?

If the manager of the debtor company fails to file for insolvency within the required time period, they can be held personally liable in tort for the whole or part of the company’s debts, as failing to apply for insolvency proceedings can be considered to be an act of mismanagement if the failure to file for insolvency proceedings within the required time period is intentional.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

Managers (whether officially appointed or de facto managers) of an insolvent company may be held personally liable for the debts of the company if they are found to have mismanaged the company’s business – before the opening judgment of liquidation proceedings – and if their mismanagement contributed to the shortage of assets in the debtor company. Criminal and professional sanctions may also apply to corporate officers and managers in certain circumstances.

Directors’ liability – defenses

19. What defensesare available to directors and officers in the context of an insolvency or reorganization?

Defenses available to directors and officers defending claims for mismanagement are subject to a case-by-case analysis of each dispute.

However, some general defenses include the following:

• the directors and officers acted in good faith, and their decisions and actions to address the company’s difficulties included requesting adequate advice and audits from legal and financial advisers. In this regard, requesting the opening of preventive restructuring processes (mandat ad hocor conciliation) may be seen as an act of good management and mitigate liability risks;
• according to French case law, directors of a board of directors are presumed to be jointly and severally liable if they are found to have mismanaged the company’s business. The French courts consider that, although directors do not assume the general management of the company, they have the status of legal managers and can therefore be held liable in the case of mismanagement in the context of a compulsory liquidation (eg, Cass com 31 May 2011, No. 09-13975). In respect of board members, mismanagement will be evidenced when they failed to exercise their supervisory duties. However, the presumption is simple and can be rebutted by one or several defending directors by demonstrating that they have acted prudently and diligently, including by opposing a faulty decision made by the board of directors; and
• courts have a discretionary power to determine the amount of the assets shortfall to be borne by the defendant if found at fault. However, the courts must respect a principle of proportionality between the fault and the quantum of the sentence.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

There is no shift of fiduciary duties whereby duties owed by directors of a French company would, post-opening of proceedings, become owed to the company’s creditors, and directors keep their duty of promoting the corporate interest of the company as a whole.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganizationproceedings are commenced by, or against, their corporation?

Out-of-court restructuring

There are no specific provisions relating to supervision of the business of the debtor during mandat ad hoc or conciliation proceeds as well as while the voluntary arrangement entered into with creditors is in force.

Safeguard and reorganization proceedings

During the observation period of safeguard and reorganization proceedings, the debtor’s management usually remains in charge. In safeguard proceedings, the court-appointed judicial administrator is tasked with either overseeing or assisting the management of the debtor’s affairs. In reorganization proceedings, the judicial administrator is tasked with assisting the management or, in rarer cases, taking over the management. The debtor continues its operations while preparing the restructuring proposals to be submitted to its creditors. The conduct of the debtor company’s operations is, however, affected by the key effects of the opening of the proceedings, which include the following:

• the debtor is prevented from making payments in respect of any debts incurred before the judgment opening the safeguard or reorganizationproceedings;
• all actions and proceedings against the debtor are stayed insofar as they relate to the payment by the debtor of a sum of money, or the termination of a contract for payment default;
• secured creditors are not entitled to enforce their security interests over the debtor’s assets; and
• all transactions outside of the ordinary course of business, including the disposal of assets, must be authorized by the insolvency judge.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Safeguard and reorganization proceedings

Secured and unsecured creditors are subject to a stay of proceedings during the observation period, insofar as they relate to the payment by the debtor of money, or to the termination of a contract for payment default. Therefore, secured creditors cannot foreclose during the observation period. Also, all proceedings against the debtor that were started before the court decision ordering the start of the safeguard or reorganization proceedings are stayed.

They may continue during the safeguard or reorganization proceedings only for the purposes of fixing the amount of the creditor’s claim. Proceedings may be commenced during safeguard or reorganization proceedings if they concern the payment of sums of money due by the debtor after the commencement of the insolvency proceedings for the purpose of the proceedings or in exchange for goods or services provided to the debtor during the observation period.

Any contractual provisions that provide for the termination of a contract solely as a result of the opening of safeguard or reorganization proceedings is deemed null and void.

Liquidation proceedings

During the course of liquidation proceedings, most secured and all unsecured creditors are subject to a stay of proceedings in conditions similar to those applicable to the stay of proceedings in safeguard and reorganization proceedings. Creditors whose claims are secured by a pledge may enforce their security interests subject to certain conditions.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

Out-of-court restructuring

There is no restriction on the conduct of the debtor’s business during the course of mandat ad hoc or conciliation proceedings, except to the extent that restrictions are provided for by the agreement entered into with the creditors.

Safeguard and reorganization proceedings

Claims that come into existence after the commencement of the safeguard or reorganization proceedings and that are incurred for the purpose of the proceedings, or in exchange for goods or services provided to the debtor during the observation period, must be paid on their due date. Failing timely payment, they enjoy a priority, known as ‘post-filing claim’ priority, that will take priority over most other claims.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Mandat ad hoc or conciliation proceedings

During mandat ad hoc or conciliation proceedings, a debtor may obtain secured or unsecured loans or credit. Also, in conciliation proceedings only, new financing granted to the debtor company (other than by way of equity) during a conciliation that ended with the execution of a conciliation agreement formally approved by the court, may enjoy priority over most other claims if formal proceedings are subsequently commenced against the debtor, with the exception of certain claims that include the ‘super-privileged’ claims of employees covering all outstanding claims of employees (the conciliation priority).

Safeguard, reorganization and liquidation proceedings

A lien (the S/R Lien) applies to all new cash contributions made, with the exception of those made through a share capital increase, by any person:

• during the observation period in safeguard or judicial reorganization proceedings or the temporary continuation of business operations in judicial liquidation proceedings, to ensure the continuity of the debtor’s business during such proceedings, in which case these cash contributions must be authorized by the insolvency judge; or
• for the implementation of the safeguard or reorganization plan, including when such plan is being amended, it being specified that the judgment endorsing or modifying the plan must mention all claims benefiting from the S/R Lien, as well as the relevant amounts.

Claims benefiting from the S/R Lien enjoy a priority of payment over pre-commencement and post-commencement claims in the event of ongoing or subsequent safeguard proceedings, judicial reorganization proceedings or judicial liquidation proceedings, with the exception of certain claims that include claims secured by the super-privileged claims of employees and claims secured by the ‘conciliation’ priority. Claims benefiting from the S/R Lien cannot be the subject of any rescheduling or waiver without the consent of their holders.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

Conciliation proceedings

The conciliator may, upon request by the debtor and after consultation with the creditors, arrange a partial or total sale of the business that could be subsequently implemented in the context of further safeguard, reorganization or liquidation proceedings.

Safeguard proceedings

During the observation period of safeguard proceedings, the debtor is generally permitted to sell its assets in the ordinary course of business. Disposals out of the ordinary course of business require the authorization of the judge in charge of supervising the safeguard proceedings. Safeguard proceedings are designed to allow the debtor company to restructure and to continue its operations. Accordingly, a safeguard plan cannot provide for the sale of all of the debtor company’s assets.

However, during the observation period or as part of the safeguard plan, the court may make an order for the sale of certain assets, either on a piecemeal basis or as a going concern if such assets form an autonomous branch, provided that the debtor company can continue its operations. If the court orders the sale of a branch, it will occur pursuant to the rules applicable to the sale plan.

Reorganization proceedings

During the observation period of reorganization proceedings, the debtor is generally permitted to sell its assets in the ordinary course of business. Disposals out of the ordinary course of business require the authorization of the supervisory judge. At the end of the observation period, if the debtor company proves unable to present a reorganization plan providing for the continuation of its operations, the court may approve the transfer to a third party of all or part of the assets as a going concern by way of a sale plan.

Liquidation proceedings

If the court orders the liquidation of the debtor’s assets, a liquidator is appointed and the debtor is divested of all rights pertaining to the disposal of assets. The role of the liquidator is to collect and liquidate all the debtor’s assets with a view to maximizing proceeds. The debtor’s business can be sold as a whole or in part in the framework of a sale plan or its assets may be sold on a piecemeal basis, either at public auction or by private sale.

Sale of assets by way of a sale plan

A sale plan is a restructuring plan that provides for the transfer to a third-party buyer of assets, contracts and employments of the debtor company.

The sale plan is an asset deal and not a share deal. Accordingly, the debts of the debtor do not transfer to the purchaser of the business. The main exception is that financings that were granted to the debtor to acquire assets and that are secured by security interests (pledge or else) over those same assets automatically transfer to the purchaser of the business, who becomes liable for the amounts due under the relevant financing, the debtor being discharged of such payments. Other debts remain with the debtor.

All offers are submitted to the judicial administrator or liquidator, where applicable, who in turn submits them to the court that will, after having sought the public prosecutor’s advice and consulted the debtor, the workers’ council and the controlling creditors, select the offer most likely to:

• ensure the highest level of employment;
• ensure the payment of creditors; and
• provide the best guarantees as to its performance.

The court may also order that the purchaser will not be authorized to sell the business during a certain period.

In practice, bids for the purchase of the debtor’s business must all be sent to the debtor or to the judicial administrator or liquidator by a certain date fixed by the latter. Offers will then be examined by the insolvency practitioner and will be presented to the court with the insolvency practitioner’s recommendation as to which offer to approve. Once the sale plan is approved by the court and the assets are transferred to the purchaser, the court official settles the debtor’s liabilities with the available sale proceeds according to the waterfall of claims and the company is dissolved.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

There are no ‘stalking horse’ bids in the sale plan process. Also, there is no possibility of implementing a proper credit bid, as French law does not authorize a creditor seeking to purchase assets from the debtor’s estate to make payment of the purchase price by reducing the amount of its claim against the debtor; this would be in breach of the legal ranking of creditors for the distribution of sale proceeds.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

As a rule, unfavorable contracts to which the debtor company is a party cannot be rejected or disclaimed during the observation period of the safeguard or reorganization proceedings. However, the judicial administrator may apply to court to terminate an agreement to which the debtor company is a party, provided that the judicial administrator can establish that the termination of the agreement is ‘necessary to protect the debtor company’ and it does not ‘excessively prejudice’ the other party’s rights.

In this case, the agreement terminates upon the court’s decision. Once safeguard or judicial reorganization proceedings have been opened against a debtor, the contractual counterparty may require the judicial administrator to specify whether the contract will be continued. The judicial administrator must reply within one month. If they do not reply, they are deemed to have refused to continue the contract and the contract is automatically terminated.

If, however, the judicial administrator has decided to continue the contract, the original contractual provisions will apply. If, once the judicial administrator has decided to continue the contract, the debtor breaches the contract, the contract will be automatically terminated (unless the contractual counterparty agrees to continue the contract once it has been breached by the debtor).

However, if the contractual counterparty is a landlord acting with respect to a lease agreement entered into by the debtor in relation to the premises where its activity is carried out and the debtor breaches the contract, the tenancy may automatically terminate only after a period of three months starting from the judgment opening the safeguard or reorganization proceedings. If the breach is remedied within this period, no automatic termination may occur.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

licenses to use intellectual property (IP) rights cannot automatically terminate upon the debtor company becoming the subject of safeguard or insolvency proceedings. However, license agreements may be terminated during the safeguard or insolvency proceedings like any other agreements if the conditions are met. Once the debtor’s agreement with an IP licensor or owner is terminated, for any reason, the judicial administrator cannot continue to use the IP for the benefit of the estate.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

Use of personal information or customer data in insolvency proceedings

Use of personal information (including customer personal data) in insolvency proceedings is permitted as long as this use complies with Regulation (EU) 2016/679 (the General Data Protection Regulation or GDPR) provisions, and the use of personal information should comply with the principles of lawfulness, fairness, transparency, purpose limitation, data minimization, accuracy, storage limitation, integrity, confidentiality and accountability mentioned in the GDPR. In addition, the use of personal information is considered a processing activity as such and therefore implies that the information of the data subjects is in compliance with articles 12 to 14 of the GDPR, and there is a valid legal basis pursuant to article 6 of the GDPR.

Transfer of personal information or customer data to a purchaser

Transfer in France or in an EU member state

The transfer of personal information (including customer personal data) to a purchaser inside the European Union is allowed, as long as:

• the data subjects have been informed about the transfer in compliance with articles12 to 14 of the GDPR, which includes informing them of the purpose of the transfer and of the category of recipients of their personal data (e.g, subcontractors, partners and subsidiaries); and
• the transfer (which is a processing activity as such) is based on a valid legal basis (e.g, legitimate interest).

Transfer outside the European Union

Transfer of personal information (including customer personal data) outside the European Union is forbidden unless it is to countries that are considered by the European Commission to offer a sufficient level of data protection (i.e, countries benefiting from an adequacy decision), appropriate guarantees have been provided for the transfer or one of the derogations of article 49 of the GDPR applies.

Appropriate guarantees are, for instance, standard data protection clauses adopted by the European Commission or binding corporate rules for transfers within a group of companies. Moreover, the data subjects must be informed about the transfer of their personal information to a recipient outside the European Union and of the existence or absence of an adequacy decision by the European Commission or of the appropriate guarantees chosen. The transfer (which is a processing activity as such) should also be based on a valid legal basis (e.g, legitimate interest).

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

Insolvency proceedings may not be arbitrated and, therefore, the court cannot direct the parties to an insolvency dispute to submit it to arbitration. Arbitration proceedings that were commenced before the start of the safeguard, reorganization or insolvency proceedings may only continue during the safeguard or insolvency proceedings for the purposes of fixing the amount of the creditor’s claim and provided that the creditor filed a statement of claim and that the court-appointed creditors representative and, as the case may be, the judicial administrator, or the person appointed to supervise the implementation of the plan, have been asked to appear in the arbitration court.

Arbitration proceedings may be commenced during safeguard or insolvency proceedings only if they concern the payment of sums of money due by the debtor after the start of the safeguard or insolvency proceedings. Otherwise, arbitration proceedings are stayed during the safeguard or insolvency proceedings, insofar as they relate to the payment by the debtor of a sum of money or to the termination of a contract for payment default and may resume only for the purposes of fixing the amount of the debt owed by the debtor.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Once safeguard, judicial reorganization or liquidation proceedings are started against a debtor, its assets may not be seized (as there is an automatic stay of proceedings in place). This is without prejudice to the rules provided under Regulation (EU) 2015/848 on insolvency proceedings for assets located in a member state other than France on the date of the opening of the safeguard or insolvency proceedings.

Notwithstanding the above, a creditor that legitimately retains possession of one of the debtor’s assets may obtain full payment of its claim in exchange for the release of the asset (subject to the asset being necessary to the debtor’s operations). Also, a creditor secured by a pledge over one of the debtor’s assets may, under certain conditions, be granted full ownership of this asset in payment of its debt in the event of liquidation proceedings.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Before the start of safeguard or insolvency proceedings, provided the debt is overdue, an unsecured creditor may try to obtain an attachment order and seize one or more of the debtor’s assets. The enforcement judge or the presiding judge of the commercial court can also grant a preliminary freezing order in connection with assets located in France, where the order is necessary to cover a risk of non-recovery of the applicant’s debt.

The preliminary freezing order is not intended to be a permanent measure and must be converted into an enforcement measure once the creditor is awarded an enforcement order. In general, unless the seizure is completed before the start of safeguard or insolvency proceedings against the debtor and before the date of cessation of payments, such seizure is automatically null.

An attachment order can be obtained on an expedited basis. In the course of safeguard or insolvency proceedings, secured and unsecured creditors will generally be subject to the same rules with respect to the prohibition of payments and the stay of proceedings in relation to pre-insolvency claims. No special procedures apply to foreign creditors in this respect.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

Notices informing creditors of the start of insolvency proceedings are sent to all known creditors. Also, all major decisions taken by the court during the course of the safeguard or insolvency proceedings are published in the Official Gazette for Civil and Commercial Announcements (BODACC). Other key elements of the proceedings (e.g, the list of claims acknowledged in the safeguard or insolvency proceedings) are filed with the clerk office of the court and may be accessed by the creditors. The court-appointed officials (judicial administrator, creditors’ representative and liquidator) have various duties to report to the court the conduct of the proceedings, in conditions set out in the French Commercial Code.

A creditor may request to be appointed as a supervisor at the beginning of the proceedings. This will entitle them to request all the documents sent to the judicial administrator and the creditors’ representative, allowing them to be kept closely informed of any developments in the proceedings.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

In situations where classes of affected parties are set up, it is their power and responsibility to vote on the debtor’s plan proposal. Affected parties may also put forward alternative reorganization plans (in safeguard proceedings only the debtor can propose a plan). Affected parties may retain their own advisers and usually fund the corresponding expenses.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The creditors appointed by the court as supervisors may bring claims on behalf of the debtor company against third parties if the judicial administrator, liquidator or creditors’ representative fail to do so for the benefit of all of the debtor’s creditors (e,g, a claim on the grounds of mismanagement). The proceeds of actions taken by the supervisors belong to the safeguarded or insolvency estate and the supervisors are not granted any priority in respect of those proceeds. Claims and remedies that may be brought on behalf of the debtor company against third parties are not assignable.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Generally, creditors must file a statement of their claims in the insolvency proceedings within two months (four months if they are located outside mainland France) from the publication of the opening judgment in the BODACC. When the amount of the claim is contingent or unliquidated, the creditor must declare an assessment of the amount of its claim. Unless the creditors’ representative challenges the amount of the claim, it will be admitted on the basis of this assessment.

The creditor must declare, among other things, the amount of the claim and the maturity date, and if the claim is secured, it must specify the scope and nature of the security interest. Failure to file a claim within these time limits results in the creditor being unable to take part in the subsequent distributions of cash, except for where the debtor has filed this claim to the creditor (the debtor having a legal obligation to file a list of all its known creditors and the amount of their claims), in which case the debtor is deemed to have acted on behalf of its creditor.

The creditor may ratify the filing made by the debtor or an attorney of the creditor at any time until the court has made a final decision accepting or rejecting the claim. Also, the judge in charge of supervising the safeguard or insolvency proceedings may, in certain circumstances (including where the debtor has failed to include this claim in the list of claims it has filed), authorize a creditor to file a claim after the expiry of the original deadline mentioned above.

The creditors’ representative will give notice to all known creditors mentioned on the debtor’s list, including those creditors whose debts are protected by a registered security interest (essentially mortgages and pledges) or by leasing agreements, at the start of the proceedings. Other creditors will learn about the start of the safeguard or insolvency proceedings from the notice published in the BODACC.

The creditors’ representative will then verify the filed statements of claims with the

assistance of the debtor. If the creditors’ representative or the debtor intend to challenge the claim, the creditors’ representative will send a letter to the creditor indicating that the claim has been challenged (in whole or in part) on grounds also mentioned in the letter and the creditors’ representative and that it therefore intends to suggest to the supervisory judge to reject the claim.

In the absence of a reply by the creditor within 30 days of the receipt of the challenge letter, the creditor loses the right to appeal the decision of the supervisory judge that would follow the creditors’ representative’s position, thus rejecting the claim. Challenges of claims are brought before the supervisory judge, who will decide whether to accept or reject the claim. The decision may be challenged before the Court of Appeal within 10 days of the notification of the decision by the clerk office of the court.

As a rule, a creditor remains free to assign its claims to a third party after the opening of safeguard or insolvency proceedings. However, the transfer must be brought to the judicial administrator’s attention by registered post to ensure that the assignee is invited by the judicial administrator to take part in the vote of affected parties, if applicable. A claim acquired at a discount may be subsequently recovered for its full face value.

Accrual of interest is suspended during safeguard, reorganization and liquidation proceedings, except with respect to loans providing for a term of at least one year or contracts providing for a payment that is deferred for at least one year. Also, interest can no longer be compounded from the opening judgment.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

If the creditor and the debtor have reciprocal receivables that arose before the opening judgment, set off occurs in respect of receivables that are certain, liquid and due. Set-off may occur post-filing only if the two receivables are unquestionable, of a fixed amount, due and are connected. Receivables are connected when they share a high degree of ‘commonality’. Such ‘commonality’ can result from the following situations:

• the debts arise from a single contractual relationship; or
• the debts do not arise from a single contractual relationship but share a sufficient economic ‘link’.

The restrictions set out above do not apply to close-out netting provisions under financial arrangements covered by Directive 2002/47/EC on financial collateral arrangements, as implemented in French law by Ordinance No. 2005-171 of 24 February 2005 (article L211-36 et seq of the French Monetary and Financial Code).

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

In the framework of a safeguard or a reorganization plan, the constitution of class of affected parties must take into account the subordination agreements entered into before the commencement of the proceedings, provided that these subordination agreements have been provided to the judicial administrator within a certain time frame. In the framework of a sale plan or liquidation proceedings, the rank of a creditor’s claim is determined by law.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Priorities have been redesigned by Ordinance No. 2021-1193, dated 15 September 2021, which entered into force on 1 October 2021 and was completed by Decree No. 2021-1218, dated 23 September 2021. Priorities in liquidation proceedings are expressly set out as follows:

• the remuneration of the debtor (and, where it is not a natural person, the remuneration of the legal representative);
• the super-privilege of wages;
• certain legal costs incurred after the opening judgment;
• certain sums due to agricultural producers;
• claims secured by a ‘conciliation’ priority granted in conciliation;
• claims secured by real estate security;
• certain wage claims arising after the opening judgment;
• claims secured by the S/R Lien;
• claims resulting from the performance of the contracts being pursued;
• certain claims as provided for by article L641-13;
• other subsequent claims;
• claims guaranteed by treasury liens;
• claims guaranteed by the lessor’s lien;
• tax and social security claims; and
• unsecured claims, in proportion to their amount.

Priority under a security interest will depend upon the recognition of the retention right attached to the relevant security and whether such retention right is binding on the proceedings.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Employee claims

Employee claims encompass all unpaid salaries and benefits. Employees are exempt from filing a statement of their claims. Employees’ claims are guaranteed by a national fund (AGS), funded by employers. The AGS guarantees the payment of the employees’ claims up to certain caps in safeguard, reorganization and liquidation proceedings. For all sums paid to employees, the AGS is then subrogated to the rights of the employees against the debtor company. The AGS will therefore be reimbursed, as the case may be, according to the ranking of the employees’ claims (e.g, the AGS will be ranked first regarding unpaid wages for the 60 days of work preceding the opening of reorganization or liquidation proceedings).

Termination of employment contracts

In safeguard proceedings, the procedure to terminate employment contracts is the same as outside insolvency proceedings (although the applicable time periods in the case of collective redundancy are shortened).

In reorganization proceedings, employees may be made redundant during the observation period if the redundancies are urgent, unavoidable and necessary, and subject to the authorization of a judge. The judicial administrator must consult the employees’ representatives or social and economic committee (SEC) (as the case may be) and inform the labor authorities before submitting a list of positions that the judicial administrator would like to have removed. The insolvency judge must then authorize the dismissals based on such list. The judicial administrator can then make employees redundant in accordance with the list of positions to be removed.

In reorganization proceedings, where the proceedings end with the court approving the debtor’s restructuring plan, the judicial administrator must terminate employment contracts mentioned in the restructuring plan within one month of the judgment approving the restructuring plan. Severance payments are advanced by the AGS and repaid by the debtor to the AGS.

In liquidation proceedings, the liquidator must terminate all employment contracts within 15 days of the date of the judgment ordering the liquidation or at the end of the temporary continuation of the debtor’s operations, where applicable.

Termination of employment contracts must be preceded by the consultation with the relevant employees’ representatives or the SEC and the informing of the labor authorities. In the case of redundancies of at least 10 employees in a company with at least 50 employees, the relevant employees’ representatives must be consulted on a social plan that should then be approved by the labor authorities before being implemented.

If the business is sold by way of a sale plan (whether approved in reorganization or in liquidation proceedings), employment contracts included in the plan approved by the court automatically transfer to the purchaser (assuming the conditions for this automatic transfer are met). Non-transferred employment contracts are terminated by the judicial administrator or liquidator.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

In most cases in France, existing company pension plans or schemes must be externalized (ie, an entity independent from the debtor company is in charge of receiving the contributions and then distributing the pension to the employees when they retire). As a consequence, the insolvency of the debtor company has no impact on the pension plans or schemes.

However, in cases where the employee pension plan is internal to the debtor company (which should normally not be the case since recent reforms), as a rule, the AGS refuses to guarantee the payment of the pension to the employees, who must therefore file a statement of their claim and will not benefit from any priority ranking. This rule adopted by the AGS is, however, subject to debate, and in at least one decision of the French Court of Cassation, dated 25 January 2005, it was considered that the AGS should guarantee payment. This payment will be limited to the maximum amount guaranteed by the AGS.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The environmental problems of a company in insolvency proceedings must be controlled by both its managers (if they are still in charge of the management of the company) and the judicial administrator, if it has been granted the power to oversee or assist with the management of the company (in safeguard or reorganization proceedings) or by the insolvency administrator or liquidator if it has taken over the management of the company (in reorganization or liquidation proceedings).

In the case of a company that operates one or more classified facilities for environmental protection (ICPE) within the meaning of Title I of Book V of the French Environmental Code, the insolvency administrator must also request an environmental audit during safeguard proceedings or reorganization proceedings and must ensure that the safeguard or reorganization plan that is presented to the court takes into account the environmental actions contemplated in such environmental audit.

Moreover, as of 1 June 2022, when an operator of an ICPE ceases to operate, it must obtain confirmation from a certified company that safety and rehabilitation measures have been implemented. When an ICPE is permanently shut down, the prefect may also set a binding deadline for the rehabilitation of the site.

Liabilities with respect to the environmental problems of a company in insolvency proceedings may be imposed on:

• the debtor’s managers, by an action for shortfall in the company’s assets, which can be brought in liquidation proceedings on the ground that such directors have, by acts of mismanagement, contributed to a shortfall in the company’s assets;
• the judicial administrator or the liquidator, in the event of liquidation proceeding of a company operating an ICPE, to ensure compliance with the obligations arising from the legislation on such facilities pursuant to article L171-8 of the French Environmental Code, but only in some limited circumstances, such as not having taken some urgent measures necessary to ensure the safety of the site (i.e, measures needed to prevent an immediate and proven risk for safety and public health) concerning the pollution caused by the company in insolvency proceedings;
• the majority shareholders (at least 50 per cent owners) either voluntarily (article L233-5-1 of the French Commercial Code) or by an action that has been introduced in French law (article L512-17 of the French Environmental Code) by the Grenelle 2 Law (Law No. 2010-788 of 12 July 2010), which provides that a parent company may be required by a court to bear all or part of the remedial costs incurred in relation to a polluting activity by one of its subsidiaries that is in liquidation proceedings, if this parent company has committed a fault having caused a shortfall in the insolvent subsidiary’s assets;
• the insurance companies, against whom the victims of the pollution caused by the company in insolvency proceedings have a direct action; or
• the French Agency for Ecological Transition, if all other liable persons are unknown, insolvent or defaulting.

Also, in some circumstances, the victims of pollution caused by an insolvent company can be indemnified by specific national or international compensation funds created in relation to certain types of pollution.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Generally, no further claims may be brought against the debtor once liquidation proceedings are closed because of the insufficiency of the debtor’s assets to settle liabilities. In contrast, pre-insolvency claims that were not acknowledged in the insolvency proceedings survive in the case where liquidation proceedings are closed because of the full repayment of the debtor’s liabilities. Also, subject to limited exceptions, the purchaser of the debtor’s assets in the framework of a sale plan purchases the assets free from any liens or past liabilities.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

Safeguard proceedings

Subject to their acceptance in the safeguard proceedings, pre-filing liabilities are repaid in accordance with the terms and conditions of the safeguard plan approved by the court with the profit generated by the continued operations of the business and, where applicable, the proceeds of the sale of certain assets of the debtor. Debts incurred after the start of the proceedings must generally be paid when due.

Reorganization proceedings

At the end of the observation period, the court will order either a reorganization plan or a sale plan. The rules set out above for distributions made under a safeguard plan also apply to the reorganization plan. A sale plan is implemented pursuant to the provisions set out in the French Commercial Code regarding liquidation proceedings. If the court approves a sale plan, the price paid by the third-party purchaser will be allocated to the repayment of the debts pursuant to the priority rules set out in the French Commercial Code. In this case, distribution will occur once sale proceeds have been collected and after the statements of all claims have been verified and are final.

Liquidation proceedings

In liquidation proceedings, distributions are made by the liquidator according to priority rules as sale proceeds are collected and after the statements of all claims have been verified and are final.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

The most usual type of security taken over immovable property in France is a mortgage.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The most common type of security taken over movable property is a pledge (known as gage in respect of tangible assets and nantissement in respect of intangible assets). Other types of security are:

• express contractual provisions relating to retention of title (in the case of asset sales);
• assignment of receivables by way of security;
• cash collateral; and
• trusts.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

When a debtor is the subject of insolvency proceedings (whether reorganization or liquidation proceedings), certain transactions entered into, and certain payments made, by the debtor during the hardening period are automatically void or voidable by the court.

The hardening period starts on the date on which the debtor falls in a state of cessation des paiements, which is deemed to be the date of the court order commencing the judicial reorganization or judicial liquidation proceedings, unless the court sets an earlier date, which may not be earlier than 18 months before the date of such court order. Also, except in the case of fraud, the insolvency date may not be set at a date earlier than the date of the final court decision approving a conciliation agreement (homologation) in the context of conciliation proceedings.

The rationale behind the possibility of setting aside such acts and transactions made during the hardening period is to restore the estate of the debtor and to cancel advantages granted by an insolvent debtor to one of its creditors, to the detriment of the collective interest of all its other creditors. There is no hardening period prior to the opening of safeguard proceedings, as the condition required to commence such proceedings is that the company is not in a state of cessation des paiements.

Automatically void transactions include transactions or payments entered into during the hardening period that may constitute voluntary preferences for the benefit of some creditors to the detriment of other creditors. These include:

• transfers of assets for no consideration or for a nominal consideration;
• contracts under which the obligations of the debtor significantly exceed those of the other party;
• payments of debts not due at the time of payment;
• payments of debts that are due, made in a manner that is not commonly used in the ordinary course of business;
• deposits of cash or monetary instruments ordered by a court decision that has not yet become final to serve as bond or as a precautionary measure in accordance with article 2350 of the French Civil Code;
• any security interest agreement or right of retention agreement granted on the debtor’s assets or rights for debts previously contracted unless they replace a previous security with at least an equivalent nature and scope and with the exception of the assignments of receivables made in execution of a framework agreement entered into prior to the date of cessation of payments;
• any legal mortgage resulting from a judgment against the debtor for debts previously incurred;
• provisional attachment or seizure measures (unless the attachment or seizure predates the date of insolvency), certain transactions relating to stock options;
• the transfer of any assets or rights to a trust arrangement (unless such transfer is made as security for a debt simultaneously incurred);
• any amendment to a trust arrangement that affects assets or rights already transferred in the trust as security for debt incurred prior to such amendment; and
• notarized declarations of exemption of assets from seizure.

Transactions that the judge can declare void include:

• transactions for consideration;
• payments made on debts that are due;
• notices of attachments made to third parties; and
• seizures and oppositions.

In each case, such actions are taken after the debtor was in a state of cessation des paiements and the court determines that the party dealing with the debtor knew that the debtor was in this state at the relevant time.

In addition, transactions relating to transfers of assets for no consideration and notarized declarations of exemption of assets from seizure pursuant to article L526-1 of the French Commercial Code are also voidable when entered into during the six-month period prior to the beginning of the hardening period.

If an act or transaction is annulled by the court, the creditor will be deprived of its rights and will have no claim under the act or transaction that has been declared null and void. A claim to annul a payment made, or a transaction entered into, during the hardening period may be brought by the judicial administrator, the creditors’ representative, the liquidator or the public prosecutor.

Moreover, since Ordinance No. 2021-1193, dated 15 September 2021, which entered into force on 1 October 2021 and was completed by Decree No. 2021-1218, dated 23 September 2021, the judgment opening safeguard proceedings prohibits by law any increase in the scope of a contractual security interest or a contractual right of retention, irrespective of the method used, by adding or supplementing assets or rights, in particular by registering securities or proceeds, or by transferring assets or rights of the debtor. The increase in the basis of assessment may, however, result from an assignment of professional claims made in execution of a framework agreement entered into prior to the date of the cessation des paiements.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

French law does not recognize any concept of equity subordination. Monetary claims of related parties, including shareholders, are therefore considered as actual monetary claims and not as equity. Related parties are required to declare their claims in the safeguard or insolvency proceedings.

However, the approval of a reorganization plan may be conditional upon the conversion of shareholders’ monetary claims into equity.

Also, all claims are reviewed and checked by the creditors’ representative, and the court has the power to reject such claims if deemed invalid. Transactions can be annulled if entered into during the hardening period under certain circumstances, in particular, contracts that impose unduly onerous obligations on the debtor and transactions entered into with a party that had knowledge of the fact that the debtor was already insolvent when it entered into the transaction.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

French law provides that where a debtor is subject to safeguard, judicial reorganization or judicial liquidation proceedings, creditors having provided a credit to that debtor cannot be held liable for damages suffered as a result of the provision of that credit. This principle should apply widely to all types of creditors and to all types of credit granted before and after the debtor started facing financial difficulties.

There are, however, limited exceptions to this no-liability principle. A creditor can only be held liable if:

• they have committed a civil fault in granting the credit (providing ‘ruinous credit’ or providing credit while knowing of the debtor’s already irreversibly compromised situation, therefore creating a misleading appearance of solvency prejudicing other creditors); and
• one of the following conditions is also met:
• there is a case of fraud, which would be the case, for example, if acts or actions are made in bad faith with a view to prejudicing rights that must be respected;
• there has been de facto management or gross interference of the creditor in the debtor’s management, which would be the case, for example, if the creditor made real and independent management acts instead of the existing management; or
• the creditor has taken security that is disproportionate (in value) to the amount of the credit being granted, in which case a court may declare the relevant security interests or guarantees null and void or reduce them. The only guidance on how to determine if security is disproportionate has been provided by the French government, which indicated that the intent of the legislator was to proscribe security and guarantee that are unusual in light of market practice.

The above only refers to the liability of creditors resulting from the provision of credit and is without prejudice to liability that may be incurred by creditors on other grounds (to which the general rules governing liability would apply).

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

As a general rule, under French law, a company is a separate legal entity from other companies of the same group, including its shareholders and subsidiaries. As a result, its assets cannot be affected by insolvency proceedings commenced against other companies, even if these companies belong to the same group.

Nevertheless, the corporate veil may be lifted and insolvency proceedings commenced against one company may be extended to another (even if such other company is not insolvent) either on the ground that the debtor company is held to be a fictitious legal entity or that the assets and liabilities of the parent company and those of its subsidiary are so intertwined that they should, in fact, be considered to be one single entity.

Case law considers that a company is a fictitious legal entity where a separate legal entity exists in form only (i.e, the company has no autonomy and does not exist as an independent entity despite the existence of an independent legal structure or has been set up fraudulently, or both). The courts, however, only rarely extend insolvency proceedings commenced against one company to another company on the grounds that the company is a fictitious legal entity.

A French court may only hold that there has been a mix-up of two companies’ assets and liabilities if it finds that two conditions, theoretically alternative but most of the time used cumulatively, are met: there must be a commingling of accounts and abnormal financial streams (being analyzed by case law as systematic transfers of assets or of services without consideration).

This French rule, however, cannot be applied with respect to a company having its registered office in another EU member state, according to a decision of the Court of Justice of the European Union dated 15 December 2011 (Rastelli Davide e C Snc v Jean-Charles Hidoux (Case C- 91/10)), which was confirmed by a decision of the French Court of Cassation dated 10 May 2012. According to these decisions, a French court has jurisdiction to extend insolvency proceedings opened against a French company with its center of main interests (COMI) in France to another company whose registered office is located in another EU member state only if it is established that the COMI of such company is located in France.

There are specific actions relating to environmental liabilities whereby a parent company may be required by a court to bear all or part of the remedial costs incurred in relation to a polluting activity of one of its subsidiaries that is in liquidation proceedings.

Also, if a shareholder acted as a de facto manager of its subsidiary, it may be liable to bear all or part of the subsidiary’s shortage of assets if it is established that it mismanaged the subsidiary and thus contributed to the shortage of assets.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

When several entities of a group of companies are the subject of safeguard or insolvency proceedings, such proceedings are independent from one another and are not combined for administrative purposes.

The court that has jurisdiction over insolvency proceedings opened against a company that is part of a group of companies will also have jurisdiction over any subsequent insolvency proceedings opened against other companies of the same group.

There will be, however, an exception to this rule in cases where one of the companies against which insolvency proceedings are opened at a later stage meets the criteria required for the opening of insolvency proceedings in front of a specialized commercial court – in this situation, any insolvency proceedings already opened by the subsidiaries of such company will be transferred to this specialized commercial court. The same judicial administrator or creditors’ representative may be appointed with respect to insolvency proceedings opened against companies of the same group.

The only grounds allowing a court to order the combination of proceedings is where there is a ‘commingling of assets’ between the parent company and its subsidiaries or when the company subject to insolvency proceedings is held to be a sham. If the court makes a finding of commingling of assets or of the company being a sham, the insolvency proceedings from one company will be extended to the other entity of the group and the assets and liabilities of both companies involved will be pooled for distribution purposes. There are certain restrictions to the extension of insolvency proceedings in relation to foreign companies.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Rules concerning insolvency proceedings of companies with their center of main interests (COMI) located within the European Union (other than Denmark) are contained in Regulation (EU) 2015/848 on insolvency proceedings (the EU Insolvency Regulation). The EU Insolvency Regulation provides for an automatic recognition in France of insolvency proceedings carried out in another EU member state (except for Denmark). Outside the scope of the EU Insolvency Regulation, insolvency proceedings begun in another country have limited effects in France until they are officially recognized through an exequatur judgment and are made enforceable in France. Until then, creditors can take enforcement measures against the debtor’s assets and file to open insolvency proceedings in France.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

France has adopted neither the UNCITRAL Model Law on Cross-Border Insolvency, nor the UNCITRAL Model Law on Enterprise Group Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Foreign creditors are, in general, not treated differently from creditors that are incorporated or resident in France, subject to additional time granted to them for certain steps of the safeguard or insolvency proceedings. For instance, the two-month period to file a creditor’s statement of claim from the publication of the opening judgment in the Official Gazette for Civil and Commercial Announcements is extended by a further two-month period for creditors residing outside France.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

Cross-border cooperation between insolvency practitioners within the European Union, and insolvency protocols they may enter into, do not apply to transfer of assets.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

French courts are using the technique of a ‘body of corroborating evidence’ to determine the COMI of a debtor company or group of companies. The cumulative effect of several of the following pieces of evidence is used:

• the nationality and residence of the directors of the company;
• the location of the board meetings of the company;
• the location from where the strategic and operational management of the company is performed;
• the place where the main negotiations concerning the company are led;
• the location of the main creditors of the company;
• the location of the main assets of the company;
• the law governing the main contracts of the company;
• the place from where the supplies of goods are procured;
• the place where the strategic, operational and financial divisions of a group of companies are located; and
• the location of the majority of the employees of the company or group of companies.

There is, however, no definite line or principle followed or applied by the French courts in their analysis relating to the location of the COMI and the absence of established case law means that French courts may not necessarily apply the same criteria from one court to another when examining similar cases.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

The EU Insolvency Regulation provides for cooperation between an insolvency practitioner appointed in main insolvency proceedings opened in an EU member state (other than Denmark) and an insolvency practitioner appointed in secondary proceedings opened in another EU member state (article 41 of the EU Insolvency Regulation). Judicial administrators can enter into insolvency protocols or other arrangements with foreign courts, although it is not common practice in France and, in any event, it will be decided on a case-by-case basis.

French courts may refuse to recognize foreign insolvency proceedings based on the following grounds: with respect to EU insolvency proceedings, a conflict with the French international public policy (article 33 of the EU Insolvency Regulation) and, with respect to other foreign insolvency proceedings (outside the European Union), if one or more conditions for exequatur are not met. However, cases where foreign judgments have not been recognized are very rare.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The EU Insolvency Regulation provides for cooperation between an insolvency practitioner appointed in main insolvency proceedings opened in an EU member state (other than Denmark) and an insolvency practitioner appointed in secondary proceedings opened in another EU member state (article 41 of the EU Insolvency Regulation). Judicial administrators can enter into insolvency protocols or other arrangements with foreign courts, although it is not common practice in France and, in any event, it will be decided on a case-by-case basis.

French courts may refuse to recognize foreign insolvency proceedings based on the following grounds: with respect to EU insolvency proceedings, a conflict with the French international public policy (article 33 of the EU Insolvency Regulation) and, with respect to other foreign insolvency proceedings (outside the European Union), if one or more conditions for exequatur are not met. However, cases where foreign judgments have not been recognized are very rare.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

Pursuant to the EU Insolvency Regulation, a member state of the European Union has exclusive jurisdiction to open insolvency proceedings within the territory of which the debtor’s COMI is located.

In this context, a company registered in another state in the European Union could initiate insolvency proceedings in France if its COMI is located in France. Also, despite the fact that principal insolvency proceedings have already been initiated in another EU member state, secondary proceedings could subsequently be initiated in France for assets located in France if the debtor has an establishment located in France.

Regarding companies registered outside the European Union, and if no international treaty applies or dictates otherwise, case law shows that French courts have asserted jurisdiction to open insolvency proceedings in relation to foreign companies in the following instances:

• the company had an establishment in France (Cass Com, 21 March 2006, No. 04-17869);
• the company had business relations or operating facilities leased and located in France (Cass Com, 26 October 1999, No. 96-12946); and
• the company owned buildings in France and rented them out as part of its business (Cass Com, 1 October 2002, No. 99-11858).

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN FRANCE

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

A number of cases have proven the efficiency of the system, for instance, Pierre et Vacances, Orpéa and currently Casino. All cases were strongly related to France and no significant center of main interests shift has been tested. Orpéa was concluded in July 2023 as the first case where a cross-class cramdown was imposed on shareholders. The best interest test was based on two valuations conducted, on one side, at the request of the company and, on the other side, by a court-appointed expert. Courts have proven to be very careful in apprehending common interest in the classes constitution, taking into account crossholding in Orpéa.

* The information in this chapter was accurate as at July 2023.

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