• Security over real estate property

The two most common types of security over real estate property are the mortgage (hypothèque) and the lender’s lien (privilège du prêteur de deniers). Both require a notarial deed and must be registered in order to take rank. A mortgage only takes rank upon the date of its registration, while a lender’s lien takes rank from the date of the acquisition provided that it is registered within two months (if not, it takes rank upon registration, like a mortgage). In either case, enforcement is effected by means of a court-supervised public auction or by court-ordered attribution of the property to the secured creditor (subject to the creditor paying the amount, if any, by which the value of the property as appraised independently exceeds the secured amount). In the case of a mortgage only, enforcement may also, if agreed in the mortgage deed (or at the time of enforcement), result from the direct appropriation of the secured property by the secured creditor (subject to payment of any excess as in the case of court-ordered attribution). Direct appropriation is seldom agreed by borrowers in normal financing circumstances but may more likely be imposed in a restructuring context.

A French trust arrangement (fiducie) may also be used for security purposes in relation to real estate. In a fiducie, one or several settlers transfer assets, rights or security interests to a trustee (fiduciaire) that manages those assets, according to the terms of the fiducie agreement, for the benefit of designated beneficiaries. The fiducie must be registered with the French tax authorities within one month of signing and, if granted over real estate, is subject to further publicity requirements. Compliance with these filing obligations is necessary to ensure validity and perfection of the security.

• Security over movable property

One of the main types of security over movable property is the pledge (known as gage in respect of tangible assets and nantissement in respect of intangible assets). Failing performance of the secured obligation, the pledged assets may be sold subject to the stay of enforcement actions triggered by the opening of insolvency proceedings. A written instrument is usually required to determine the terms and conditions of the enforcement of the pledge against third parties. A Dailly assignment of professional receivables, a retention of title clauses or a fiducie arrangement may also be used to secure payments.

• Security over shares

The most usual types of security are the pledge over shares (nantissement de parts) or over company’s securities accounts (nantissement de comptes-titres) depending on the corporate form of the company. In the latter case, pledgors will fictitiously retain the financial securities until they are fully paid up by the debtor, i.e. such securities cannot be sold without their claim being paid in full (L. 211-20 of the French Code monétaire et financier).

The practical issues raised by the enforcement of security interests by secured creditors depends commonly on the type of security right, the nature of the secured asset and also the factual context in which enforcement is requested.

The illustration is particularly relevant in case of insolvency proceedings, as the rights of secured creditors are generally paralyzed by the stay of payments and enforcement actions. However, some security interests remain effective, such as:

• security interests providing exclusivity rights over the asset. Most efficient are the property based security interests (e.g., fiducie arrangement without an agreement allowing the settlor to use the assets (contrat de mise à disposition), Dailly assignments and retention of title clauses);
• retention rights which usually ensure that creditors have an exclusive right over the value of the assets, e.g., pledges over tangible property (with or without dispossession), pledges over securities accounts and pledges over receivables. In the latter case, the enforcement of such retention rights in the frame of insolvency proceedings is still debated.

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 (cessation des paiements), taking into account available credit lines and moratoria. Within 45 days from the insolvency date, the legal representative of the insolvent company is required to file for reorganisation proceedings or liquidation proceedings.

In the event directors of the debtor knew of the insolvency and failed to file the appropriate proceedings within this required time period, they may be held personally liable in tort for an act of mismanagement (faute de gestion) and may also be subject to professional sanctions (e.g. prohibition to manage any business for up to 15 years in some cases).

It should further be noted that under the covid-19 exceptional and temporary changes to the French insolvency rules, adjustments have been made during the first lockdown to “crystallize” the test for insolvency. However, these measures have not been extended.

• Reorganisation proceedings (redressement judiciaire)

When a company is insolvent (i.e. not able to pay its debts as they fall due), reorganisation proceedings may be commenced either voluntarily (filing by the debtor) or involuntary (filing by the creditors or the Public Prosecutor or through conversion from safeguard). The management has a duty to request the opening of reorganisation proceedings within 45 days of becoming insolvent.

The court opens a six-month “observation period” (which is renewable up to 12 months and exceptionally up to 18 months upon request of the public prosecutor) during which the debtor will negotiate with its creditors a waiver of debt or rescheduling.

During the observation period, a judicial administrator will be in charge of assisting the management of the debtor’s business. The administrator may also be empowered by the court to take over the management and control of the debtor.

At the end of the observation period, the judge will make an order for (a) the continuation of the business through a reorganisation plan which must be adopted by creditors in the same conditions as for the safeguard plan (i.e. vote by creditor committees or individual consultation – please refer Section 8); (b) the sale of all or part of the debtor’s assets or business as a going concern through a sale plan; or (c) if the latter fails, the conversion into liquidation proceedings.

• Judicial liquidation proceedings (liquidation judiciaire)

Liquidation is the appropriate remedy when the company is insolvent, and its reorganisation or rescue appears obviously impossible. Liquidation proceedings may be commenced either voluntarily (by the debtor) or involuntarily (by the creditors or through conversion from safeguard or reorganisation).

The purpose of such a proceeding is to terminate the activities of the company and dispose of its assets to repay the creditors to the extent possible. In such a case, a judicial liquidator (liquidateur judiciaire) is appointed to wind up the debtor and (unless a judicial administrator is appointed) take over the management of the debtor.

The commencement of liquidation stays payment and enforcement actions but, contrary to the rule governing safeguard and reorganisation proceedings, secured creditors recover their right to proceed with enforcement:

– 3 months after the commencement of the liquidation, unless the liquidator has already initiated the disposal of the secured property,

– if the court has set a deadline for the filing of offers for disposal plan (i.e. plans for the sale of the business), as from the expiry of such deadline if the secured property is not included in the disposal plan.

A temporary continuation of the business may be authorized (for 3 months renewable once) in particular for the purposes of enabling a disposal plan/sale of the business rather than a piecemeal sale of the assets.

The liquidation terminates upon the full repayment of the debtor’s liabilities or, most frequently, upon a shortfall of assets to repay the liabilities.

Insolvency proceedings end with distribution of the company’s value to the different claimholders amongst the selected assets of the debtor. The value distribution follows a predetermined rank order but the exact recoveries are rather unpredictable ex ante due to the high number of context-sensitive privileges (employees’, public creditors, etc.).

The ranking has limited application in safeguard or reorganisation proceedings as creditors are usually paid pursuant to the safeguard/reorganisation plans that are not based on the disposal of the debtors’ assets. It is however relevant where disposal of secured assets are implemented during the observation period or under the plan. In these limited circumstances, the ranking would usually be as follows (indicative and for illustrative purposes only):

1. employees’ super-privilege (wages for 60 days prior to the opening of proceedings);
2. proceedings fees;
3. claims benefiting from the ”New Money” privilege;
4. “meritorious” claims, i.e., (x) wages due for the observation period, (y) new credits and claims arising out post-opening and (z) other claims according to their ranking;
5. claims that have been granted security interests over the relevant asset (whether movable or real estate);
6. claims benefiting from other privileges, and
7. unsecured claims.

In case of liquidation proceedings, the priority rules of claims would usually be as follows (indicative and for illustrative purposes only):

1. employee super-privilege, i.e., wages for 60 days prior to the opening of proceedings;
2. proceedings fees (but note that fees related solely to the liquidation are paid before employee’s super-privilege);
3. Claims benefiting from the ”New Money” privilege;
4. In relation to disposal proceeds of real estate, claims that have been granted security interests over debtor’s real estate;
5. “meritorious” claims; i.e. (x) wages due after the opening of proceedings (where not paid by the AGS), (y) new credits and claims arising out post-opening and (z) wages due after the opening of proceedings (where paid by the AGS);
6. in relation to disposal proceeds of movable property, claims benefiting from security interests over such property (but without a retention right),
7. creditors benefiting from other privileges; and
8. unsecured claims.

That being said, it should be noted that some secured creditors are not included in the ranking and shall benefit from an exclusive right over the economic value of the assets, such as, property-based security interests (Dailly assignment, fiducie agreements and retention of title clauses).

French law provides for some rules which make it possible to declare certain transactions entered into by the company void or voidable during the so-called “hardening period” which is the period between the date of cash flow insolvency (which may be carried back up to 18 months prior to the judgement opening the insolvency proceeding) and the opening of insolvency proceedings.

Some transaction entered into during the hardening period are automatically void and include in particular:

• any deed entered into without consideration transferring title to movable or immovable property;
• any bilateral contract in which the debtor’s obligations significantly exceed those of the other party;
• any payment by whatever means, made for debts that had not fallen due on the date when the payment was made;
• all payments for outstanding debts, if not made by cash settlement or wire transfers, remittance of negotiable instruments, or “Daily” assignment of receivables;
• any mortgage or pledge granted to secure a pre-existing debt.

In addition, any payment made or any transaction entered into during the hardening period may be ordered null and void at the discretion of the court, subject to two conditions: (i) the payment or transaction took place during the hardening period and (ii) at the time of the payment or transaction, the contracting party knew that the debtor was insolvent.

The claw-back action may be filed by the judicial administrator, creditor’s representative, the plan supervisor or the public prosecutor.

The opening of insolvency proceedings triggers an automatic stay (moratorium) of payments and enforcement actions, which prevents creditors from suing the debtor for payment and enforcing their securities (with some limited exceptions).

The stay of actions has extraterritorial effect if the French insolvency proceedings are “main” proceedings within the meaning of EU Regulation 2015/848, or by virtue of their “universal” effect under common private international law (depending on the non-EU country where such effects are contemplated).

However, Article 8 of EU Regulation 2015/848 (Third parties’ rights in rem) provides a limit to that universal effect under the said Regulation: the opening of insolvency proceedings in a Member State shall not affect the rights in rem of creditors or third parties in respect of assets belonging to the debtor which are situated within the territory of another Member State.

• Mandat ad hoc proceedings

Mandat ad hoc proceedings are preventive and confidential proceedings which are not limited in time and available to debtors which are not insolvent (i.e., able to pay due debt with available cash). In such a context, the management remains in place and continues to run the business as usual, but with the support of a mandataire ad hoc appointed by the President of the commercial court. The main role of the mandataire ad hoc is usually to assist the debtor in negotiating with its main creditors on a confidential basis and reaching the most suitable and consensual solution. Approval by creditors, being on a voluntary basis, is based on a unanimous vote. If an agreement is reached between the company and its creditors, the mandataire ad hoc’s duties end.

The opening of such proceedings do not trigger an automatic stay of payments and enforcement actions, but the debtor may still request a rescheduling of debt in accordance with general law. Any contractual provisions lessening debtor’s rights or increasing its obligations as a result of the commencement of a mandat ad hoc is deemed null and void (i.e. events of default based on such commencements are unenforceable).

Mandat ad hoc is not listed in Schedule A of the EU Regulation on Insolvency Proceedings, i.e. may be commenced with regard to a debtor even if its centre of main interest is not (or not yet) in France, or even if main proceedings are opened with regard to such debtor in another EU Member State.

• Conciliation proceedings

Conciliation proceedings are available to debtors (upon their request) that face legal, financial or economic difficulties that are actual or foreseeable, provided that they are solvent or have not been insolvent for more than 45 days. Conciliation proceedings are confidential and may last up to five months.

Management remains in place and continues to operate the business, but negotiations are facilitated through the involvement of a court appointed conciliator. The agreement reached between the debtor and its creditors is negotiated on a purely consensual and voluntary basis and can be either acknowledged by the judge (accord constaté) or formally approved by the court (accord homologué) in which case, the cash flow insolvency date cannot backdated to a date falling before the court order approving the conciliation agreement.

The following should also be noted:

• any contractual provisions lessening the debtor’s rights or increasing its obligations as a result of the commencement of a conciliation is deemed null and void (i.e. events of default based on such commencement are unenforceable); and
• if creditors attempt to enforce their rights while a conciliation is pending or if.during the implementation of an agreement that was acknowledged or approved by the court, a party creditor seeks the payment for a debt which is not covered by such agreement, the judge who appointed the conciliator may, upon the debtor request, reschedule the debt for up to two years.

Conciliation is not listed in Schedule A of the EU Regulation on Insolvency Proceedings, i.e. may be commenced with regard to a debtor even if its center of main interest is not (or not yet) in France, or even if main proceedings are opened with regard to such debtor in another EU Member State.

Please refer to Section 9 for a “New Money” privilege description.

• Safeguard proceedings

Safeguard proceedings are judicial proceedings available to debtors that are solvent but face difficulties (financial or otherwise) that they cannot overcome – this trigger is broadly construed to allow wide access to safeguard proceedings.

The management of the debtor will continue the daily management of the business. The judicial administrator will only exercise ex post facto control over decisions of the management or assist it to make all or some of the management decisions.

The opening of safeguard proceedings has the following effects:

• an automatic stay of payments and enforcement actions for up to 18 months (observation period),
• interest in relation to loans with a maturity of less than 1 year (from the initial entry into the loan) ceases to accrue,
• any contractual provisions lessening the debtor’s rights or increasing its obligations as a result of the commencement of a safeguard in its regard is deemed null and void (i.e. events of default based on such commencement are unenforceable),
• obligation for creditors to file a proof of claim within 2 months from the date of the publication of the judgement commencing the proceedings (4 months for creditors located outside of France), and
• shareholders may be forced to pay any balance of the share capital not fully paid-up yet.

During such proceedings, the debtor shall submit a draft plan to creditors which may include debt write offs and rescheduling (for a max. period of 10 years), but a write-off/cram down may only be imposed on dissenting creditors subject to the approval by committees.

The safeguard plan will be adopted (subject to court confirmation):

– either through individual consultation of affected creditors; or
– if (inter alia) the company exceeds certain turnover (20m€) or employees (150 employees) thresholds (or, under such thresholds, if authorized by the supervisory judge), by a 2/3 majority of the members (in claim value) of each of:

• the committee of financial creditors (except bondholders),
• the committee of trade creditors and
• the bondholders’ assembly (if any).

Once adopted individually by the creditors or by the committees, the plan may be confirmed by the court. If no safeguard plan is confirmed (e.g. because the creditors have rejected it and the court consider that a court-imposed term out is not a viable option or if creditors benefit from the “New Money” privilege), the proceedings may be converted into reorganisation proceedings at the request of the debtor, the judicial administrator, creditor’s representative or the Public Prosecutor.

Please note that if a safeguard plan is not approved by committees or by the individual creditors (as applicable), the court may eventually decide to impose a rescheduling/term out of the debts of the dissenting creditors (except for creditors benefiting from a “New Money” privilege) but:

• the rescheduling shall not exceed 10 years,
• as from the 3rd anniversary of the plan, each rescheduled creditor shall receive a yearly payment equal to at least 5% of its total claims (i.e. the worst case term out for creditors would be payment of 5% of their claims on each of year 3 to 9 of the plan, and the remaining 65% on year 10), and
• the debtor shall be able to demonstrate that this plan is likely to preserve its business.

Members of the financial creditors committee or of the trade creditors committee (but not members of the bondholders’ assembly, nor creditors consulted individually) may also submit alternative plans to the committees and the bondholders assembly, and if adopted by them to the court – this serves as a deterrent for the debtor to submit a blunt term out plan and to construe the 10 year term-out plan as a last resort option in proceedings with committees.

• Fast-track financial safeguard (sauvegarde financière accélérée)

The purpose of these proceedings, limited to a maximum length of two months, is to restructure financial debt in a very short time frame.

Fast-track financial safeguard are only available to debtors which meet certain thresholds and provided that a conciliation proceeding is pending in which at least a majority in value of financial creditors and, as the case may be, bondholders are likely to approve the restructuring proposals prepared by the company.

The opening of such proceedings only has effects in relation to financial creditors and, as the case may be, bondholders (excluding therefore suppliers from the process).

• Fast-track safeguard (sauvegarde accélérée)

This proceeding is a variation of the fast-track financial safeguard proceedings. It is governed by the same rules, with two major exceptions: (i) it can last up to three months and (ii) suppliers will be able to vote on the plan.

It is intended to facilitate the negotiation of pre-packaged plans with the ability to eventually cram-down dissenting minority creditors through the vote of creditor classes, including trade creditors. It should be noted that some measures regarding safeguard proceedings have been modified by the temporary framework implemented as a result of the Covid-19 health crisis (as described in section 20) and will be significantly reformed in the coming months by the transposition of the EU Restructuring Directive (as described in section 21).

When a conciliation agreement is approved (homologué) by the court, creditors that have provided new financings (other than via a share capital increase), goods or services during the conciliation proceeding to ensure the continuation of the business will benefit from a “New Money” privilege (privilège de conciliation) which grants a priority repayment ranking over all pre-petition claims (except for certain employee-related liabilities and post-filing procedural fees) and prevents forced cram-down and rescheduling in subsequent proceedings.

Please note, however, that where the debtor petitions the court for the approval of the agreement, employee representatives shall be informed of the contents of the agreement and shall be heard by the court prior to the confirmation. The confirmation judgment will also filed with the registry of the commercial court and be publicly available.

It should also be noted that Ordinance n° 2020-596 of 20 May 2020 has introduced a new “Post Money” privilege in safeguard and reorganisation proceedings (further detailed in sections 20 and 21), inspired by the existing “New Money” privilege, so far subject to the provisional law related to the Covid-19 health crisis, but which should be permanently implemented under French law by the forthcoming entry into force of the Insolvency Directive 2019/1023.

The efficiency of guarantees in case of proceedings mainly depends on whether the guarantor is a natural or a legal person, as an incentive for managers (oftentimes acting as personal guarantors) to open proceedings.

• In case of conciliation proceedings, guarantors (either legal or natural persons) benefit from any rescheduling or waiver of debt contained in the agreement against creditors, as well as from any individual grace period granted to the benefit of debtors.
• In safeguard proceedings, only guarantors who are natural persons benefit from favorable rules: an automatic stay on claims against them during the observation period, a halt to interest rates and the possibility to claim rescheduling or waiver of debt contained in the safeguard plan.
• However, in reorganisation proceedings, guarantors do not benefit from any stay on interests and cannot claim any measures granted to the debtor under the reorganisation plan.

Creditor committees are formed in order to adopt the safeguard (or restructuring) plan for companies whose annual turnover is superior to € 20M or whose number of employees is superior to 150 or upon request of the debtor for smaller companies; or under such thresholds, if authorized by the supervisory judge following the request of the debtor or the judicial administrator.

Creditor committees are of two types: committee of the main suppliers and committee of credit institutions. The bondholders, if any, are also grouped into a single assembly to be consulted on the plan. Unlike creditors’ committees, the bondholders cannot propose an alternative plan.

It should be noted that as a result of the transposition of the EU Restructuring Directive (as described in section 21), creditors’ committees will be replaced by classes of creditors, where creditors will be classified not according to the nature of their claims but according to a sufficient commonality of interest.

In safeguard or judicial reorganisation proceedings, the judicial administrator has the exclusive power to continue or terminate the debtor’s contracts. The judicial administrator may request the termination of a contract which is deemed necessary to the safeguard of the debtor and if the contract involved does not excessively prejudice the other party’s rights. Moreover, the other party may request that the judicial administrator decide whether to continue the performance of the contract or not; absent any answer within one month, the contract is automatically terminated.

• If a contract is continued, all its provisions remain the same as prior to the opening of the proceeding. The creditor shall continue to honor its commitments despite the default of payment by the debtor prior to the proceedings. However, if the debtor fails to perform its obligations after the option to continue the contract is exercised, the other party is free to initiate any legal or enforcement actions in relation to such failure.
• If a contract is terminated, the effect may also be favorable to the debtor since the burden will be reduced. The creditor will have to file its claim (stemming from the termination of the contract).

In liquidation proceedings where a temporary continuation of the business is ordered, the same provisions will apply.

In amicable proceedings, if the debtor intends to use or sell its assets, there will be no permissions required other than contractual consents of creditors.

During safeguard proceedings, however, if the observation period has started, the debtor is allowed to carry out day-to-day transactions and any transaction that would entail the sale of an important asset of the business would be subject to the supervisory judge’s authorisation. The supervisory judge may indeed authorise the sale of certain assets on a standalone basis if the situation so requires.

In judicial reorganisation, the same rules as for safeguard proceedings apply to standalone disposals of assets, but a reorganisation plan might also provide for a disposal of all or part of the debtor’s business as a going concern.

If the court orders the liquidation of the debtor’s assets, a liquidator is appointed. The liquidator will liquidate all the assets of the company in order to distribute proceeds as efficiently as possible and according to the ranking of the creditors. Either the debtor’s business can be sold as a whole in the framework of a sale plan or its assets can be sold on a piecemeal basis either through a public auction or by mutual agreement.

Directors, while managing the distressed business, need to act in the ordinary course of business. As a matter of corporate law, directors have fiduciary duties towards the company first and as such need to preserve it as a going concern and act in accordance with its corporate interest.

Within the scope of a liquidation proceeding, directors may be personally liable for acts of mismanagement that would have contributed to an insufficiency of assets in accordance with Article L. 651-2 of the French Commercial Code. Therefore, the liability of directors is only retained for having increased the financial difficulties of the company. Since the Sapin II Law n°2016-1691 dated 9 December 2016 (entered into force on 11 December 2016), the director’s liability would be excluded in the event of a mere negligence in the management of the company.

Directors may also incur criminal liability for criminal bankruptcy (“banqueroute”) set out in Articles L. 654-1 et seq. of the French Commercial Code or other criminal offences set out in Articles L. 654-8 et seq. of the French Commercial Code.

Under French law, the concept of shadow directorship or de facto management (gestion de fait) targets any person who, directly or indirectly, interferes or has interfered with the management decisions of the company. Creditors, but also shareholders or more generally anyone, can become a shadow director. A de facto manager has the same responsibilities as a de jure manager of the company.

Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

France has not adopted the UNCITRAL Model Law on Cross Border Insolvency. Therefore, the applicable rules are as follows.

• Companies incorporated in an EU Member State

Regulation (EC) 1346/2000 on insolvency proceedings allows “main” insolvency proceedings opened in an EU Member State to be automatically recognized across the EU (if such proceedings are listed in Annex A of the Insolvency Regulation). Main proceedings need to be opened in the EU Member State where the company has its center of main interests (COMI). A company’s COMI is presumed to be the place of its registered office. Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the “Insolvency Regulation”) replacing the EC Regulation 1346/2000 provides for the same rules, except that the presumption that COMI is the place of the registered office will not apply if the registered office has been transferred in the preceding three months.

Moreover, the presumption can be reversed through a cluster of evidence showing that the debtor conducts the administration of its interests on a regular basis as ascertainable by third parties in a different Member State.

Order n°2017-1519 dated 2 November 2017 and Order n°2018-452 dated 5 June 2018 have adapted French law provisions to the Insolvency Regulation.

• Companies incorporated outside an EU Member State

Absent any international treaty providing for an automatic recognition, a decision opening insolvency proceedings in a country outside of the European Union would have no effect in France, except after having obtained “exequatur” which is intended to verify that the foreign court had proper jurisdiction, international public policy has been complied with and no fraud has taken place.

The same rules apply where proceedings are opened in an EU Member State but are outside of the scope of the Insolvency Regulation (i.e. not listed in its Annex A), but it should be noted that such proceedings may be recognized under Regulation (EU) No 1215/2012 in some circumstances.

• • Companies incorporated in an EU member state

As stated above, a company incorporated in another Member State could enter into insolvency proceedings if its COMI is in France. However, if such debtor has only an “establishment” in France and “main” insolvency proceedings have already been opened in another Member State, French courts have jurisdiction to open “secondary proceedings”, restricted to the debtor’s assets located in France.

• Companies incorporated outside an EU Member State

When a company has a mere branch or establishment in France (which is not necessarily the COMI), French courts have jurisdiction to open insolvency proceedings to its benefit. French courts even have jurisdiction when the company has business relationships in France or of a “real commercial presence” in France.

The French insolvency regime did not include specific rules tailored for corporate groups until Law No. 2015-990 dated 6 August 2015.

Before that, insolvent corporate groups were obliged to initiate separate plenary insolvency proceedings for individual companies. The aforementioned law created specialised commercial courts which have jurisdiction in case of large insolvency cases. If a specialized commercial court has jurisdiction over the parent company, it will also have jurisdiction over its subsidiaries.

In addition, the corporate veil may be lifted and insolvency proceedings initiated against a company may be extended to another company on the ground either that (i) the debtor is held to be a fictitious legal entity, or (ii) that the assets and liabilities of another person (such as a parent company) and those of the debtor are so intertwined that they should be deemed to be one single entity.

Finally, European law tends to take into consideration the existence of a corporate group. The Insolvency Regulation has introduced a group co-ordination proceeding between all courts before which an insolvency proceeding is opened by an entity of a group.

Pursuant to the United Nations’ website, the UNCITRAL Model Law on Enterprise Group Insolvency (the Model Law), focuses on insolvency proceedings relating to multiple debtors that are members of the same enterprise group. It is designed to equip States with modern legislation addressing the domestic and cross-border insolvency of enterprise groups, complementing the UNCITRAL Model Law on Cross-Border Insolvency (as described in section 16 herein) and part three of the UNCITRAL Legislative Guide on Insolvency Law.

To our knowledge, France is not considering adopting it at this point.

As a consequence of the COVID-19 epidemic, the state of health emergency and the lock-down measures that have been enforced in France as from March 2020, recourse to preventive and insolvency proceedings has been appropriately modified by the implementation of a new temporary framework protecting the debtors.

Please note that the summary below does not provide details regarding the temporary aid measures introduced during the health crises (e.g., State-backed loan or French prêt participatif) but focuses on the restructuring / insolvency measures.

• Legal basis

French insolvency law has been amended in particular by way of:

1. ordinance n°2020-341 of 27 March 2020 ;
2. ordinance n°2020-596 of 20 May 2020;
3. law n° 2020-734 of 17 June 2020;
4. ordinance n°2020-1443 of 25 November 2020; and
5. law n°2020-1525 of 7 December 2020.

These amendments, favorable to debtors, are temporary in nature and were or are applicable until 31 December 2020, 17 July 2021 or 31 December 2021, as the case may be.

It should also be noted that some measures were effective until 23 August 2020 or until 31 December 2020 and are not detailed in this article as they are no longer in force, including for instance the facilitated option for a debtor to submit an offer for the sale of his business (as used by Phildar, Orchestra or Alinéa cases for instance). Also and until 23 August 2020 (included), a debtor’s cash flow insolvency was assessed with regard to its financial situation on 12 March 2020 (except in cases of fraud).

• Enhancement of the efficiency of conciliation proceedings

The duration of conciliation proceedings can be extended once or several times by the President of the commercial Court upon request of the conciliator, thereby increasing the maximum duration of conciliation proceedings from 5 to 10 months.

If a creditor does not accept, by the deadline set by the conciliator, a request made by the conciliator to defer payment of his claim for the duration of the conciliation proceedings, the debtor may request from the President of the Commercial Court, for the duration of the conciliation proceedings:

1. the stay or prohibition of any legal action for payment or for termination of a contract for a payment default;
2. the stay or prohibition of any judicial enforcement measure against the debtor’s movable or immovable property as well as any judicial procedure relating to the distribution of the debtor’s assets that would not have already transferred ownership away from the debtor; and
3. the deferral or rescheduling of the creditor’s claim which are due and payable.

The debtor may in addition to these measures, petition the judge that commenced conciliation proceedings for a grace period in accordance with Article 1343-5 of the French Civil Code even before the creditor sends any notice to pay or initiates any suit for payment.

These new provisions, applicable to ongoing proceedings and until and including December 31, 2021, have enabled the implementation of hybrid conciliation proceedings with similar effects to those of safeguard proceedings but without the disadvantages of the collective nature of safeguard proceedings.

• Easier use of fast-track and accelerated fast-track safeguard proceedings

The eligibility thresholds provided for in Articles L. 628-1 and D. 628-3 of the French Commercial Code relating to the number of employees (20), the total balance sheet (€1.5 million) and the turnover (€3 million) are no longer required for proceedings commenced between 22 May 2020 and 31 December 2021.

If such proceedings fail and no plan is drawn up within the period provided for in the first paragraph of Article L. 628-8 of the French Commercial Code, the court may immediately, at the request of the debtor, the judicial administrator, the creditors’ representative or the public prosecutor, open separate judicial reorganisation or judicial liquidation proceedings.

These provisions are applicable to proceedings initiated between 21 May 2020 until the earlier of 17 July 2021 (inclusive) and the date of entry into force of the EU Restructuring Directive 2019/1023 described in section 21 herein.

• Introduction of a new safeguard/reorganisation privilege

As an incentive for new financings granted to debtors in the context of safeguard or reorganisation proceedings, a new safeguard or reorganisation privilege is created, applicable exclusively to proceedings commenced between 22 May 2020 and 31 December 2021.

This privilege, inspired by the existing “New Money” privilege existing in conciliation proceedings (described in section 9 herein), should be permanently implemented under French law by the forthcoming entry into force of the EU Restructuring Directive 2019/1023 implementation provisions described in section 21 herein.

New cash contributions benefit from such privilege if the following conditions are met:

1. the procedure was opened after 22 May 2020;
2. the beneficiary made a new cash contribution to the debtor – which excludes contributions made by the debtor’s shareholders in the context of a share capital increase, but includes shareholders’ loans and other contributions considered as loans;
3. the beneficiary made such contribution in the context of the observation period, with the authorisation of the supervisory judge, or for the implementation of the safeguard or reorganisation plan adopted or amended by the court, and for the purposes of its execution, it being specified that the judgment must mention all claims benefiting from the privilege, as well as the relevant amounts; and
4. such contribution aims at ensuring the continuation of the business and its sustainability.

In case of subsequent insolvency proceedings (be it by way of conversion or should new insolvency proceedings be opened as a result of the termination of the safeguard/reorganisation plan), claims benefiting from this privilege:

1. shall be paid in priority, whether or not such claims benefit from privileges or security interests, with the exception of (a) claims benefiting from the employees’ super-seniority, (b) claims arising after the opening judgment for the purposes of the proceedings, (c) claims benefiting from the “New Money” privilege and (d) the subsequent salary debts not advanced by the AGS ; and
2. shall not suffer debt write offs or rescheduling which have not been accepted by the creditors.

• Easier adoption of safeguard/reorganisation plans

The duration of the safeguard or reorganisation plans may be extended for an additional period of up to two years:

1. either upon request filed by the plan supervisor or the public prosecutor, such extension being cumulated, as the case may be, with the extensions granted under ordinance no. 2020-341 (in which case the total duration of the plan could be of up to 13 years and 3 months), or
2. in the event of a substantial modification of the plan, in which case the total duration of the plan could be extended up to 12 years.

Where such an extension of the duration of the plan is granted:

1. the repayment schedule provided for by the plan may be adjusted to the new duration, without having to comply with the mandatory terms and conditions of payment applicable under general law (in particular, the obligation to pay at least 5% of the amount of each claim as from the 3rd year of the plan);
2. such prorogation can be combined with grace periods granted pursuant to article 1343-5 of the French Code civil (e.g. concerning the payments to be made under the plan).

In general, creditors consulted in writing that do not respond within 30 days of receipt of the debt settlement proposal (other than debt-for-equity-swap) made to them are deemed to have accepted it. Under the temporary Covid-19 framework, this period may be reduced to 15 days by the supervisory judge at the request of the judicial administrator or the creditors’ representative.

Proposals for the settlement of debts as well as any responses to these proposals may be communicated by any means enabling the creditors’ representative to establish with certainty the date of their receipt.

Besides, where the commitments to settle the liabilities included in the draft plans can be established on the basis of a certificate from the chartered-accountant or statutory auditor, they may be limited to claims that have been admitted or which are not disputed, as well as to identifiable claims (including those for which the deadline for filing has not expired). The assessment of current liabilities is therefore more flexible.

These provisions are applicable to ongoing proceedings up to and including 31 December 2021.

Apart from the temporary Covid-19 measures which may still be adapted if the health situation continues, a new European Directive providing a higher degree of harmonization in the field of restructuring at the European level, will be permanently transposed under French law this year and will significantly affect the French restructuring / insolvency regime.

• Legal basis and transposition

The EU directive 2019/1023 of the European Parliament and the Council of June 20, 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the “EU Restructuring Directive”) was published on 26 June 2019.

The preventive restructuring framework under the EU Restructuring Directive may be implemented through one or more procedures, measures or provisions, some of which may take place out of court, without prejudice to any other framework under national law.

Besides, Member States alternatively “may” or “shall” proceed with given actions. If they “shall” do so, discretion is given to the Member States to implement such action, thereby creating a lack of uniformity throughout the Member States. In other words, this high optionality creates room for competition between Member States to craft the most attractive framework.

The EU Restructuring Directive shall be transposed into national laws or regulations by Member States by 17 July 2021 (with certain exceptions relating to the use of electronic means of communication), subject to a maximum one-year extension of the transposition period for Member States encountering particular difficulties in the implementation.

In France, the Business Growth and Transformation Act (loi PACTE) n° 2019-486 dated 22 May 2019, has empowered the executive to implement the EU Restructuring Directive 2019/1023 and has granted the French government 24 months to enact appropriate measures through ordinances for the implementation of this EU Restructuring Directive.

Proposals for the forthcoming amendment of Book VI of the French Commercial Code have already been circulated by the Ministry of Justice and debated with various stakeholders of insolvency proceedings and are now being finalized.

• Objectives and scope

The primary objective of the EU Restructuring Directive is to ensure that viable companies and entrepreneurs facing financial difficulties have access to effective national preventive restructuring frameworks that enable them to continue operating.

The EU Restructuring Directive was initially inspired by the U.S Chapter 11 (especially regarding voting classes and cross-class cram down as will be detailed below), but it also incorporates various features of the French preventive framework.

Although which proceedings will be affected by the transposition of the EU Restructuring Directive into French law has not yet been officially determined, it seems likely that safeguard, fast-track safeguard, fast-track financial safeguard and judicial reorganisation proceedings will be substantially amended to take into consideration the provisions of the EU Restructuring Directive.

Indeed and since the European Restructuring Directive is compatible with the existing French framework, which consists in a combination of confidential out-of-court proceedings and public judicial safeguard proceedings, the European Restructuring Directive will likely be implemented through specific amendments to such framework rather than new proceedings, being specified that the most relevant amendments will affect safeguard proceedings, as reflected in the drafting proposals of the Ministry of Justice.

The provisions of EU Restructuring Directive preserve the debtor’s control over preventive proceedings and are thus relatively in line with the existing provisions under French law.

• New Money Financings

Providers of new financings (for the implementation of the restructuring plan) and interim financings (necessary for the continuation of debtor’s business during the negotiations) shall be provided with protections against liability and annulment actions in case of subsequent insolvency.

Protections against annulment action shall also apply to transactions that are reasonable and immediately necessary for the negotiation or implementation of the restructuring plan (e.g. advisors fees).

Member States may give providers of new or interim financings priority ranking in case of subsequent insolvency.

Under French law, this new privilege should be similar to the one granted under the Covid-19 measures as described in section 20 herein.

• Main differences with the current French restructuring / insolvency regime

Under the EU Restructuring Directive, the following provisions will, amongst others, have to be transposed into French law as not yet provided for:

• A reduced stay of individual enforcement actions by creditors against debtors to support the negotiations of a restructuring plan (potentially applicable to all types of claims with possible exclusions for certain categories) of an initial duration of 4 months, with possible extensions up to 12 months total;
• Introduction of classes of affected parties: based on a commonality of interests based on verifiable criteria (as a minimum, secured and unsecured claims shall be treated in separate classes for the purpose of adopting a restructuring plan), as opposed to the current classification of committees of creditors in accordance with the nature of their contractual relationship with the debtor and irrespective of their actual chances of repayment; i.e. as credit institutions, main suppliers or bondholders;
• Introduction of a cross-class cram-down mechanism: whereby a restructuration plan may be imposed by a judicial or administrative authority under certain conditions, even if the plan has not been approved by each and every class of affected parties; where the restructuring plan is not approved by each class, it may still be adopted if approved by either a majority of classes (provided that at least one of those classes is a secured creditors class or is senior to the ordinary unsecured creditors class) or at least one class that is ‘in-the-money’, i.e. creditors (not equity holders) that would receive a payment in a liquidation;
• Possibility to impose a plan on shareholders and bondholders: (a) the possibility to set up shareholders as one specific class when their rights may be impaired allows other classes of creditors to impose a plan on them, which can currently only occur in very restrictive circumstances under current French law; besides (b) bondholders may no longer deliberate on the proposed restructuring plan in a separate assembly and accordingly will no longer benefit from a specific veto right on this plan and their dissenting vote may possibly be overridden by a cross-class cram-down;
• Obligation to comply with the priority rule: in addition to the approval of the plan by classes (whether by a majority within each class or through a cross-class cram-down) and the regular confirmation requirements, to be confirmed the plan shall ensure that either (a) dissenting classes are treated “at least as favorably” as any class of the same rank and “more favorably” than any junior class (Relative Priority Rule); or (b) senior dissenting classes are satisfied in full if junior classes are to receive any payment (Absolute Priority Rule); it being specified that Member States have discretion to opt for one of these rules and provide reasonable exceptions;
• Confirmation of the plan subject to the best-interest-of-creditors test: this test is satisfied if no dissenting creditor would be worse off under the plan than such a creditor would be if the normal ranking of liquidation priorities under national law were applied in the event of liquidation or of the next-best-alternative-scenario; this test should however only occur in the event of a challenge; and
• Valuation challenges: dissenting affected parties shall be entitled to challenge at least the compliance of the plan with the best-interest-of-creditors test and/or whether a class is “in the money” for the purposes of the cross-class cram-down: complex valuation discussions are expected before the judicial/administrative authorities in this regard.

It should be noted that the transposition of the European Restructuring Directive also requires adapting French law in respect of security interests’ matters.

Historically, the French restructuring system has always been perceived as a debtor-friendly system. However, a certain shift has begun with regard to the various reforms that have taken place with a view to restoring balance in creditors’ rights.

Over the past few years, the courts have favoured a number of lender-led restructurings enabling lenders or a group of lenders to take control of the debtor out of the hands of its existing shareholders (mainly financial sponsors). Furthermore, a number of alternative funds have increased their focus on the French market and as such have provided liquidity to French banks willing to sell their claims on the secondary market.

The shift was further emphasized with Order dated 12 March 2014 which has readjusted the balance of powers between creditors and debtors with for example the possibility for creditors to propose alternative plans (when committees are constituted). This trend was confirmed by the “Loi Macron” dated 6 August 2015 with the introduction of a shareholder squeeze-out mechanism under which shareholders may be forced, under specific circumstances, to sell their shares if they do not consent to share capital increases required to redress the distressed business in case of reorganisation proceedings.

This pro-creditor trend is likely to be further reinforced with the implementation of the EU Restructuring Directive n° 2019/1023 dated 20 June 2019 described in section 21 above.

French trade unions tend to adopt fairly aggressive behaviors. This applies also in the context of restructuring proceedings where trade unions usually are very vocal when jobs are at risk.

The state may play a relevant role in relation to distressed businesses. Thus the CIRI (“comité interministériel de restructuration industrielle”) aims at helping distressed businesses turn around. The CIRI is competent for companies with more than 400 employees. However, companies with less than 400 employees can be assisted by the CODEFI (“comités départementaux d’examen des problème de financement des entreprises”) which are the local equivalent to the CIRI.

Historically, the French restructuring system has always been perceived as a debtor-friendly system.

However, over the last few years, various changes to the French legislation have favoured creditors’ interests and the courts have favoured a number of lender-led restructurings, enabling lenders to take control of the debtor from its existing shareholders.

The implementation of the possibility for the committees of creditors to submit an alternative plan competing with the plan prepared by the debtor, and the obligation to take into account the intercreditor agreements throughout the preparation of the plan, clearly demonstrates this reinforcement of creditors’ rights. This evolution is not intended to make it more difficult for the debtor to find a solution. It simply allows for a better consideration of the rights of creditors by recognising the agreements that may have been entered into between them and the shareholders. In addition, legislative changes have also introduced the possibility to squeeze out shareholders who are not willing to support the company in the context of its reorganisation proceeding. However, these squeeze-out provisions remain subject to restrictive conditions and equity holders still retain a fair ability to prevent the adoption of restructuring plans even where they would not receive any payment or other consideration if the normal ranking of liquidation priorities were applied.

In line with these improvements, France has introduced new restructuring tools inspired by the Chapter 11 bankruptcy proceeding in the United States, at the crossroads of amicable restructuring proceedings and insolvency proceedings. The creation of the fast-track financial safeguard proceeding has proven to be a very useful tool for the debtor to force a solution that federates most of the creditors during a conciliation proceeding with limited impact on the operations of the debtor.

Order No. 2014-326, dated 12 March 2014, has also introduced the pre-pack sales system under amicable proceedings, which offers a new framework for the partial or total sale of a company’s assets in insolvency proceedings but with one or several buyers of the business identified beforehand.

The transposition of the EU Restructuring Directive described in section 21 herein should lead to a profound transformation of insolvency by further improving the treatment of creditors and reducing the potential interference of equity holders, with the creation of creditor classes and the introduction of a cross-class cramdown system. These new rules for adopting safeguard plans (and potentially reorganisation plans) are aimed at aligning the political power of creditors and equity holders with their economic situation, by limiting the harmful power of creditors and equity holders who are out of the money.