Main Criteria for Choosing and Commencing French Pre-insolvency Versus Insolvency Proceedings

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

proceedings

2. And/or preparing the total or partial sale of the debtor’s business, with the possible

implementation of a prepack sale.1

Advantages of mandat ad hoc: This procedure stands out for its high degree of flexibility, and minimal formal requirements. The mandat ad hoc is widely used by courts and well understood by institutional creditors. It

can be used on its own as a negotiation tool or to prepare subsequent conciliation and/or safeguard or administration proceedings to renegotiate debt, revise key contracts, or arrange the sale of all or part of an underperforming business or subsidiary.

Specific advantages of conciliation in the  event of court approval of the agreement  reached with the main creditors:

10 years (15 years for ‘agro related businesses’).

Creditors express their position on the proposed safeguard plan, (i) on an individual basis, or (ii) as applicable through a vote within the class of affected parties2 to which they have been allocated by the administrator (for more details

on the criteria for forming classes of affected parties, the voting procedures, and the conditions for the court’s final approval of the

Creditors express their position on the proposed administration plan

(i) on an individual basis, or (ii) as applicable through a vote within the class of affected parties to which they have been allocated by the administrator (for more details

on the criteria for forming classes of affected parties, the voting procedures, and the conditions for the court’s final approval of the

Isolated assets are sold at public auctions or via negotiated sale, with the Supervising

Judge’s authorization.

Caution: purchasers should carefully assess and define the scope of the assets being acquired:

while the acquisition of an isolated

asset in liquidation proceedings does not, in principle, involve the transfer of employees, this may change if the asset qualifies as a standalone business

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

(i) recorded by the Presiding Judge of the relevant court, rendering it enforceable without publication (this is called the ‘constat présidentiel’), or (ii) approved by the court, provided that (a) the debtor company is not in cessation of payments, or the conciliation agreement puts an end to the debtor’s cessation of payments, (b) the agreement’s terms ensure that the debtor can continue operating, and (c) the conciliation agreement does not prejudice creditors who are not party to it (this court approval is called ‘homologation’).

Homologation also allows a creditor who, during the conciliation, financed the company to ensure the continuation of its activity, to benefit from the ‘new money privilege’, giving said creditor a

preferential ranking in future distributions in the event of any subsequent insolvency proceedings commenced against the debtor.

In the event of any subsequent insolvency proceedings, homologation also has

the advantage of preventing the retroactive extension of the debtor’s date of cessation of payments beyond the date of the homologation judgement, thereby securing the transactions provided for in the agreement, which cannot be challenged later as being null and void under the rules on the relation back period (‘période suspecte’)3 transactions.

New cash contributions provided to finance the safeguard plan benefit from the ‘post-money’ privilege: the resulting claims will not be subject to the deferrals or reductions provided for in the plan

and will benefit from a priority ranking in the event of subsequent liquidation.

The debtor cannot be forced by the court to sell all or a part of its business, as is the case in administration proceedings (where there is no serious continuation plan) or liquidation proceedings.

New cash contributions provided to finance the administration plan benefit from the ‘post-money’ privilege: the resulting claims

will not be subject to the deferrals or reductions provided for in the plan and will

benefit from priority ranking in the event of subsequent liquidation.

2. And/or to implement the total or partial sale of the debtor’s ongoing business with the transfer of certain employees and key contracts according to the scope defined by the bidder and approved by the court (this is commonly called the ‘sale plan’ – ‘plan de cession’).

As soon as administration proceedings are opened, the  company’s business  and assets are

for sale, and any interested party may submit a takeover bid with the administrator (except for (i) parties related to the directors, or (ii) creditors who have been appointed in

contracts). In such cases, a court may recharacterize the transaction, leading to the forced transfer of the employees attached to the asset to the purchaser.

The business may also be sold under a sale plan approved by the

court. In this regard, the court may

grant temporary authorization to continue business operations at the start of liquidation proceedings (see below).

Liquidations proceedings may be initiated directly (‘immediate

liquidation’) or result from the conversion of safeguard or administration proceedings where a plan is not feasible.

Liquidation proceedings are also ordered following the sanction (‘adoption’ in French) of a sale plan, with a view to realizing the

remaining assets not

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

payments, or if so, for less than 45 days.

Unlike conciliation, the opening of

a mandat ad hoc does not suspend the 45-day

legal deadline within which the company’s statutory management must file for the commencement

of administration or liquidation proceedings, under penalty of incurring personal liability for mismanagement.

It is therefore essential to obtain temporary moratoriums quickly with the support of the

mandataire ad hoc to avoid or put an end to an existing state of cessation of payments.

payments, or if so, for less than 45 days.

In the event of cessation of payments, the

directors of the debtor company must file, within 45 days thereof, for the opening of conciliation, administration, or liquidation

proceedings, under penalty of incurring personal liability for mismanagement.

must face difficulties that it is unable to overcome.

Liquidation may be ordered directly, with immediate cessation of business and dismissal of employees, where there are insufficient cash reserves and no prospect of selling the business as a going concern.

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

third party (creditor, shareholder, court proprio motu…).

of the agreement reached with the main creditors, but its terms are not disclosed by law)

ad hoc representative)

The debtor can propose the name of the professional it wishes to be appointed by the Presiding Judge of the court.

The debtor can propose the name of the professional it wishes to be appointed by the Presiding Judge

of the court. But the latter retains discretion to appoint the relevant conciliator.

The debtor may, however, challenge the appointment and recuse the conciliator, under very limited and specific conditions. Needless to state that this rarely happens and that this course of action must be taken

only after careful consideration and for just cause.

The limited conditions for recusation include, inter alia:

The administrator plays also a key role in supporting the preparation of the safeguard plan by the debtor and if applicable, organizing creditors into classes of affected parties and setting the terms for voting within those classes (for more details

on the criteria for forming classes of affected parties, the voting procedures, and the conditions for the court’s final approval of the plan, please refer to footnote iii below).

The director nevertheless retains sole authority

over day-to-day management decisions (unless the court decides otherwise).

The administrator prepares the administration plan with the support of the debtor company and if applicable, he organizes creditors into classes of affected parties

and establishes the voting procedures within those classes (for more details on the criteria for forming classes of affected parties, the voting procedures, and the conditions for the court’s final approval of the

2.  In principle, no administrator

is appointed. However, one may be designated if the court authorizes the temporary continuation of the

business activity with a view to a sale of the business.

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

ii)      the conciliator having a direct or indirect relationship of whatever nature with a creditor or a manager of the latter,

iii)      there is cause for mistrust between the conciliator and the debtor.

Recusation then needs to be sought in a motivated request within

15 days from the date on which the conciliator’s appointment

is notified to the debtor. The

recusation is then submitted to the Presiding Judge of the court, if the conciliator disagrees with the recusation.

When the appointment goes as planned and a conciliation agreement is reached, the conciliator may be appointed

as supervisor, overseeing its implementation and ensuring that the parties respect their commitments.

however, the debtor company may propose the name of a candidate.

2.  « Mandataire judiciaire » (acting as the court-appointed creditors’ representative):

He invites known creditors to file their claims and verifies claims in consultation with the debtor, which are ultimately determined by the Supervising Judge. He also consults creditors on the settlement terms proposed by the debtor as part of a safeguard plan.

3.  The Supervising Judge (‘juge-commissaire’) oversees the proper conduct of the proceedings and ensures the protection of all parties’ interests.

He also rules on key issues such as the admission of claims and authorizes certain acts affecting the debtor’s assets or the course of the procedure.

4.  Certain creditors may be appointed as monitors (‘contrôleurs’) by the Supervising

If an administration plan is not feasible, he conducts a bidding process to facilitate the sale of the business through a sale plan.

The court has the final say in appointing the administrator,

however, the debtor company may propose the name of a candidate.

2.  « Mandataire judiciaire » (acting as the court-appointed creditors’ representative):

He invites known creditors to file their claims and verifies claims in consultation with the debtor, which are ultimately determined by the Supervising Judge. He also consults creditors on

settlement proposals as part of the preparation of an administration plan.

3.  The Supervising Judge (‘juge-commissaire’) oversees the proper conduct of the proceedings and ensures the protection of all parties’ interests.

He also rules on key issues such as the admission of claims and authorizes

He also rules on key issues such as the admission of claims and authorizes certain acts affecting the debtor’s assets or the course of the procedure.

4.  Creditors may be appointed

as monitors (‘contrôleurs’) by the Supervising Judge at their request to monitor the proceedings

on behalf of all creditors. Only 5 may be appointed per proceeding, and they are bound by strict confidentiality.

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

on behalf of all creditors. Only 5 may be appointed per proceeding, and they are bound by strict confidentiality.

5. When a safeguard plan is sanctioned

by the court, the latter appoints a plan supervisor (‘commissaire à l’exécution du plan’), who is responsible for overseeing

the proper implementation of the plan and ensuring that the debtor complies

with its obligations under the plan,

in particular, the payment of the plan dividends. This is generally the previously court-appointed administrator or creditors’ representative.

4. Creditors may be appointed

as monitors (‘contrôleurs’) by the Supervising Judge at their request to monitor the proceedings

on behalf of all creditors. Only 5 may be appointed per proceeding, and they are bound by strict confidentiality.

5. When an administration plan is adopted, the court appoints a plan supervisor (‘commissaire à l’exécution du plan’), who is responsible for overseeing

the proper implementation of the plan and ensuring that the debtor complies

with its obligations under the plan,

in particular, the payment of the plan dividends. This is generally the previously court-appointed administrator or creditors’ representative.

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

of payments and the period

during which the debtor company can finance its operating needs.

10 years, or to a sale plan or even liquidation, offering creditors much lower prospects of recovery (see adjacent columns).

(4 months maximum for accelerated safeguard proceedings)4

a going concern is contemplated – in this case,

continuation of the activity is authorized for a maximum

of three months, extendable for three months only at the request of the public prosecutor).

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

Possibility of obtaining from the Presiding Judge of the court a temporary suspension of enforceability

against a specific creditor (up to 2 years).

commencement of the proceedings, or that arose thereafter but is not relevant to the proceedings or to the continuation of the debtor’s business.

Creditors must file proof of their claims arising before the opening of the proceedings within two months from the publication of the opening judgment in the Official Bulletin

(‘BODAAC’), extended by an additional two months for creditors located outside France.

As regards claims arising after the commencement of the proceedings that are not necessary for the conduct of the proceedings or the continuation of the debtor’s business, the time limit for filing a proof of claim runs from their due date

The proof of claim must specify the amount of the claim and any associated security, with the relevant supporting documents. It must be signed by the creditor’s legal representative or by any person properly and expressly authorized.

If the claim is not filed within the legal deadline, it will be unenforceable, and the creditor will not be allowed to participate in future distributions under the proceedings.

A creditor who fails to file its claim within the prescribed time limit may make request to the Supervising Judge for relief from foreclosure of its rights (‘relevé de forclusion’) provided the delay was not due to the creditor’s fault or resulted from the debtor’s omission when listing the claims. The time limit to do so is 6 months from the publication of the opening judgment. For creditors who could not have known of the existence of their claim, the 6-months period runs only from the date on which they should reasonably have become aware of it.

Once the proof of claim has been filed, the claim is subject to a verification procedure aimed at assessing its existence, amount, and ranking. The claim is reviewed by the mandataire judiciaire (in safeguard and administration proceedings) or the liquidator (in liquidation proceedings) together with the debtor, and in the event of a dispute, the Supervising Judge ultimately decides whether the claim should be admitted, partially admitted, on a preferential basis or as an unsecured claim, or rejected.

If the dispute requires a substantive review, the Supervising Judge first refers the parties to a judge with jurisdiction to hear the merits of the case. If the claim results from an agreement governed by foreign law/containing a jurisdiction clause in favor of foreign courts, the dispute resolution process may take years as it may have to be referred to a foreign court for decision. The foreign court must only determine the validity and amount of the claim and cannot order payment of any kind. This is due to the statutory suspension of legal proceedings brought by creditors whose claims were incurred prior to the commencement of proceedings and

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

The proceeds from a sale plan or from the sale of isolated assets in liquidation proceedings are applied to satisfy creditors in the following order, for reference only and in broad terms:

1.        super-preferential wage claims

2.        legal costs (fees of the court-appointed bodies and procedural expenses)

3.        agricultural producers’ claims

4.        claims benefiting from the privilege of conciliation (new money – see above)

5.        mortgage loans

6.        other employees’ claims

7.        claims benefiting from the post money privilege (financing of the proceedings or of the plans – see above)

8.        other preferential claims arising after the opening judgment

9.        secured claims of social security contributions (URSSAF), tax authorities, landlords

10.     unsecured creditors: suppliers, service providers and other contractors without special privileges.

administering, or controlling any company or one or several companies for a fixed period (up to 15 years)

in case of serious breaches of legal or managerial duties, notably:

•   misappropriation of assets,

•   continuation of an unprofitable operation,

•   payment to a creditor after

Directors may be ordered by the court to personally bear all or part

of the company’s shortfall of assets if their faulty management has

contributed to such shortfall of assets, notably:

•   failure to file for insolvency within the legal 45-day period,

thereby worsening the company’s financial situation,

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

•   failure to cooperate with the bodies of the proceedings,

•   maintenance of fictitious, manifestly incomplete, or irregular accounting,

•   knowingly failing to file for

insolvency within the legal 45-day period, without having otherwise requested the opening of conciliation proceedings.

This action may be initiated by the administrator, the creditors’ representative, or by a majority of monitors if they

(the administrator or the creditors’ representative) fail to act, or by the public prosecutor.

Criminal bankruptcy (‘banqueroute’): Directors may be sentenced to

imprisonment (up to 5 years) and fined (up to € 375,000) for having:

•   made purchases for resale below market value or used ruinous

•   failure to keep proper accounting records, or fictitious, incomplete, or irregular accounts,

•   misuse or misappropriation of the company’s assets,

•   making abnormal or preferential payments to certain creditors, particularly after the company has become insolvent,

•   taking excessive or reckless business risks disproportionate to the company’s financial position, etc.

The action may be initiated by the liquidator or by a

majority of monitors if the liquidator fails to act, or by the public prosecutor.

Ban from management (see previous column).

Criminal bankruptcy (‘banqueroute’): (see previous column).

Court-Ordered and Supervised Proceedings

Mandat ad hoc

Conciliation

Safeguard proceedings (« sauvegarde »)

(« redressement judiciaire »)

•   of administration or liquidation proceedings,

•   diverted or concealed part or all of the assets,

•   fraudulently increased the liabilities,

•   kept ficti-tious accounts, destroyed accounting documents, or refrained from keeping any

accounts when legally required to do so, or main-tained accounts that were mani-festly incomplete or irregular.

The criminal court may be seized by the public prosecutor

or through a civil action brought by the administrator, the creditors’ representative, the employee

representative, the plan supervisor or, in the event of inaction by the competent bodies, by a majority of monitors.