New contingency measures for distressed business in France

Introduction

Paris, on 20 May 2020, President Macron, Prime Minister Edouard Philippe, the Ministry of Justice and Ministry of Economy and Finance, executed an ordinance n° 2020-596 with a view to increase the pace and efficiency of out-of-court work-out, safeguard and insolvency proceedings for French distressed debtors; and to bail out businesses from insolvency and preserving jobs in France in light of the COVID-19 consequential economic crisis.

For more information see our COVID-19 timeline.

1. What you should know about the Ordinance of 20 May 2020

This ordinance follows and relates to the early ordinance n°2020-341 of 27 March 2020 which relaxed insolvency criteria and obligations to file for insolvency allowing a suspension of the state of insolvency during the COVID-19 emergency period. The rationale was then to avoid that distressed situations resulting or escalating as a consequence to the COVID-19 pandemic increase drastically the volume of insolvency proceedings.

It is statistically true that once under an insolvency proceeding, it is difficult for businesses to recover from it and irreversible jobs losses are consummated.

While we are entering into progressive deconfinement, continuous support to the economic recovery for corporates is needed. Clearly the intent of this new body of regulations is to promote fast turnaround. This will increase pressure on the overall ecosystem, debtors, statutory auditors and accountants, judicial trustees and creditors representatives, commercial courts members, creditors and investors, to tag along with such faster pace at the cost of concessions to the greater goal of bailing out businesses and saving jobs. It will be interesting though to follow how this ecosystem is receiving such increased pressure from the regulator, in an already overly complicated environment, and whether it will support or passively resist an. Ordinance 2020-596 which is no less than French public policy in its making.

1.1. Article 1 : An expansion and acceleration of information Statutory Auditors can communicate to Presidents of Commercial Courts exempted from confidentiality obligations

In addition to the traditional right of alert that statutory auditors could use to alert courts’ presidents in case of concerns in relation to liquidity issues or endangered business continuity after debtors had be warned and did not address sufficiently said warning; Article 1 of the new ordinance allows a more expedite concomitant warning of debtors’ representatives and courts’ presidents with more detailed reporting from statutory auditors to said presidents. The information provided by the statutory auditors has to be sufficiently detailed for a fair assessment of the situation. Its communication is exempted from professional confidentiality obligations of statutory auditors.

1.2. Article 2 – Enhanced authority granted to President of Commercial Courts to suspend enforcement actions of creditors and maturity of their debt within Conciliation work-out proceedings

For all current and future conciliation proceedings opened up to 31 December 2020, should a creditor not respond or refuse the suspension of maturity date of its receivable within the timeframe set by the conciliator, the debtor can petition the President of commercial court to issue a court order to:

• Suspend such maturity during the conciliation proceeding;
• Suspend any enforcement action in relation to said receivable; and/or
• Postpone and reschedule said receivable freezing late interests and
  penalties up to two years maximum.

As a reminder a conciliation proceeding is (was) an amicable confidential out-of-court proceeding available for debtors which state of insolvency was not greater than 45 continuous days. With the prior 27 March 2020 the duration of the conciliation proceeding which was limited to maximum 5 months was extended for the emergency period (see timeline in exhibit 1).

1.3. Article 3 – Favouring the recourse to accelerated safeguard proceedings by enhancing the scope of eligible debtors to such proceedings

Article 3 unlocks the requirements for more debtors to become eligible to an accelerated safeguard proceeding under article L628-1 of the French Commercial Code. Should a plan not prosper, either of the debtor, judicial trustee, creditors representative or public prosecutor will have authority to petition the conversion of such accelerated safeguard proceeding into an insolvency or liquidation proceeding.

1.4. Article 4 – Expediting the adoption of safeguard and recovery plans

Either of the judicial trustee, creditors representative or appointed supervisory judge (juge-commissaire) to the safeguard or insolvency proceeding may petition the court to reduce to 15 days delays to consult creditors in order for a safeguard or recovery plan to be adopted at a faster pace (versus prior 30 days). The plan will bear on estimated claims based on a certificate issued by the debtor’s accountant or statutory auditor.

1.5. Article 5 –Enhancement measures to secure the execution of safeguard and recovery plans

• Article 5 grants authority to public prosecutors and judicial
  trustees appointed as supervisor to execution of the safeguard or
  insolvency plans to require an increase by up to an additional 2
  years of the duration for said plans, hence recovery to creditors may
  ramp up from 10 to 12 years. This extension may be combined with
  other extension provisions provided by the ordinance of 27 March 2020
  (see timeline in exhibit 1);

• In case of substantial modification of safeguard or recovery plan,
  the lack of response from creditors shall constitute acceptance of
  the proposed changes (except for where debt write-off or debt
  conversion into equity);

• Inspired by article 17 of the EU Directive 2019/1023¹ , the ordinance
  creates two new privileges of safeguard and recovery, which shall
  rank junior to conciliation privilege of new money but rank senior to
  other receivables. It allows parties who finance debtors in safeguard
  or insolvency proceeding during said proceeding easing the adoption
  of their safeguard or recovery plan, to benefit from a more senior
  ranking to other creditors and not subject to term out of their
  unpaid receivables in case of subsequent insolvency. These new
  privileges may extend to all third party post-money financings and
  shareholders loans and exclude shareholders capitalization funding.
  It does not trump the super-senior privileges (wages, courts costs
  and certain taxes).

1.6. Article 6 – Expediting the liquidation of unrecoverable businesses and single jobs safeguard for merchants and craftsmen

Article 6 extends the scope of accelerated liquidation to certain SMEs and allows merchants and craftsmen having less than €15,000 in assets value (as opposed to prior €5,000) to clear their debt and continue their activity subject to conditions. This is clearly a governmental measure favouring preservation of small merchants and craftsmen who are numerous in France and mostly self-employed or with a less than 5 employees base.

1.7. Article 7 – Expediting the sale and transfer of unrecoverable businesses view a view to preserve jobs

When insolvent companies may not manage a recovery plan as their future available proceeds may not suffice to repay creditors; an alternative in-court sale and transfer of their going concern is the next best option to preserve business continuity and employment.

Upon filing of a request by the Debtor or judicial trustee, article 7 provides that the delay for convening contractors or collateral holder for their prior information about such sale and transfer of going-concern may be reduced to 8 days (versus 15 days).

Contrary to prior prohibition of article L.642-3 of the French Commercial Code for existing shareholders, managers, spouses and affiliates, such transfer may be ordered in favour of the shareholders/managers of said corporate in distress, if they offer the most beneficial jobs saving alternative plan. The public prosecutor will be the guardian from shareholders and managers’ abuse in a tempting wiping out of their debts while carrying afresh the same business operation. As such, the public prosecutor may appeal the court decision which will suspend the sale and transfer.

1.8. Article 8 – Accelerated Clearance of debtors’ corporate records from past safeguard and recovery plans

The legal delay to redact from French corporate registry extract (extrait K-Bis) is reduced to one year following due execution of said plan (hence after the first repayment made to creditors following the first anniversary of the court judgment enacted said plan).

1.9. Article 9 and 10 – Limitation of the application in time of certain measures of the n°2020-341 ordinance of 27 march 2020 and of the present measures

• Article 9 states the duration of relaxation measures prior stated in
  the 27 march 2020 such as the relaxation from the state of insolvency
  shall run from 12 March to 23 August 2020 (so a long stop date has
  now been provided for)

• Article 9 further provides amongst other clarifications that
  conciliation proceedings may be prolonged by an additional 5 months
  (reaching a 10 months maximum period), please refer to exhibit 1 for
  an up to date timeline.

• Article 10 states the duration of the exceptional measures enacted
  under articles 1, 2, 4, 5 (to the exception of post-money
  privileges), and 7 which are set for a limited duration up to 31
  December 2020; and

• In relation to article 3 (increased scope for accelerated safeguards)
  and 5 (VII) (post-money safeguard and recovery privilege) these
  measures will apply to all current proceedings and proceedings opened
  on the date of entry into force of the ordinance of 20 May 2020 and
  the entry into force of the ordinance provided for in Article 196 of
  the PACTE Law (ordinance transposition of the Preventive
  Restructuring European Directive), and by no later than 17 July 2021.

  2. What are the current trends implemented by such new ordinance of 20 May 2020

2.1. A “new normal” environment where the role of auditors and accountants in witnessing reliable accounts is increased and some sacrifice of and corporate business autonomy and creditors’ rights

Although the objective of Article 1 of the new ordinance aims at early warning of Presidents of commercial courts by statutory auditors so they may invite legal representatives of corporates in distressed situation to take seriously and not postpone requisite actions to turnaround; it may induce two adverse side effects:

• An increased responsibility for statutory auditors not having
  performed such warnings information, which currently can render their
  professional exercise more difficult as some corporates may be less
  transparent to avoid their auditors mingling in their affairs; and

• An added negative perception of our jurisdiction which regulations
  giving authority to third parties to interfere with corporates
  business autonomy (which differs from the Anglo-Saxon approach of
  sacrosanct business autonomy). The original intention has probably
  weighted on the side of encouraging earlier work-out and preventive
  proceedings, fighting management denial or stalling. It could also be
  interpreted as an paternalist policymaking and a less -liberal
  approach to businesses management.

Article 4 constitutes a shift in paradigm in the assessment of debtors’ indebtedness to adopt at a faster pace safeguard and recovery plans. We no longer await all creditors to confirm their position thru their proof of claims, instead accountants and statutory auditors may issue a certificate which will be the initial base for the plan work out. This is likely to give rise to interesting debates of these professionals with their clients in particular in relation to disputed claims. It also implies that creditors have a vested interest to file faster their proof of claims irrelevant of the traditional delays in doing so 2 months extended to 4 months for creditors outside of France.

The use practitioners, debtors, judicial trustees, creditors representative, courts and prosecutors will make of these new measures will determine the success of the French state’s initiative in safeguarding its economy or relative increased unattractiveness of our jurisdiction. Will this limit future debt financing, limit access to lending for SMEs in particular? Will accountancy and auditing firms liability increase and with it the cost of their professional insurance? How will the justice system embody the increased authority vested in it?

2.2. A new normal where conciliation proceedings are no-longer purely consensual framework for debtors and creditors to agree to their work-out plans

OECD’s countries typically limit the public policy effects of (1) suspension of past owed payment and (2) freezing of enforcement actions; strictly in scenario where debtors undergo a public and collective insolvency proceeding. The fact that only bankruptcy scenarios escalate such effects is due to the great infringement to regular course of business that it entails. Only the direst of distressed situations and necessary recovery priority for insolvent debtors conceptually and historically justified such public policy.

France had already adopted, since the 27 July 2005 safeguard proceedings law, a most expansive view by extending the benefit of such public policy to non-insolvent companies filing a public collective proceeding in the form of said safeguard proceeding.

Although for a limited period of time (until 31 December 2020) and in a non-collective but purely bilateral approach in relation to singled creditors; France just expanded the authority of Presidents of commercial court to grant these effects in relation to non-cooperative creditors within the framework of conciliation proceedings. Conciliation until then were deemed amicable work out framework where a solution could not be coerced but had to be agreed among willing debtors and creditors to work out a distressed situation. This is a drastic shift of paradigm which is going to require a lot of pedagogy to explain to non-French creditors feeling the preservation of their rights is not secured when engaging with French debtors. Note that this is irrelevant to the choice of law of contracts whom said receivables derive from. All French corporates may avail themselves of conciliation proceedings irrelevant to the applicable law to their contract. If facing a conciliation scenario, creditors should definitely secure expert French legal advice from qualified attorneys.

The future will only tell the overall benefit of such policy and its costs to the overall economy.

See our coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.

¹DIRECTIVE (EU) 2019/1023 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 June 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).

Chapter 4 “Protection for new financing, interim financing and other restructuring related transactions”, Article 17 Protection for new financing and interim financing “1.Member States shall ensure that new financing and interim financing are adequately protected. As a minimum, in the case of any subsequent insolvency of the debtor: (a) new financing and interim financing shall not be declared void, voidable or unenforceable; and 26.6.2019 L 172/47 Official Journal of the European Union EN (b) the grantors of such financing shall not incur civil, administrative or criminal liability, on the ground that such financing is detrimental to the general body of creditors, unless other additional grounds laid down by national law are present. 2.Member States may provide that paragraph 1 shall only apply to new financing if the restructuring plan has been confirmed by a judicial or administrative authority, and to interim financing which has been subject to ex ante control. 3.Member States may exclude from the application of paragraph 1 interim financing which is granted after the debtor has become unable to pay its debts as they fall due. 4.Member States may provide that grantors of new or interim financing are entitled to receive payment with priority in the context of subsequent insolvency procedures in relation to other creditors that would otherwise have superior or equal claims.”