I INSOLVENCY LAW, POLICY AND PROCEDURE

i Statutory framework and substantive law

French law provides for a well constructed and well tested legal framework to restructure distressed companies, with various pre-insolvency and insolvency proceedings intended to address a wide range of situations. The major reform that took place in 2005 with the introduction of a Chapter 11-type debtor-in-possession procedure known as 'safeguard' and subsequent adjustments significantly improved French insolvency law, which is now considered one of the most effective in Europe.

A French company is considered to be insolvent (in 'cessation of payments') when due and payable debts exceed available assets. It must file for insolvency within 45 days of the occurrence of such situation.

Fraudulent conveyance rules apply to transactions entered into by the debtor between the date of the debtor's cessation of payments (which the court can determine occurred up to 18 months before the insolvency filing) and the commencement of the insolvency proceedings. They provide that certain transactions or payments2 entered into during that period are void, and that any other transaction or payment entered into during that period is voidable if the counterpart was aware of the debtor's cessation of payments.

ii Policy

Traditionally, French insolvency law favours the continuation of business and the preservation of employment over the interests of the creditors. However, several adjustments improving the situation of the creditors were recently made in the law, in particular to facilitate pre-packaged sale plans, allow creditors to propose alternate reorganisation plans and facilitate debt-to-equity swaps when existing shareholders refuse to vote in favour of such measure.

iii Insolvency procedures

Pre-insolvency proceedings include mandat ad hoc and conciliation. Both essentially consist of a mediation conducted under the authority of a mediator appointed by the court upon request of the company, in order to help it reach an agreement with its creditors, in particular by reducing or rescheduling its indebtedness. The debtor can determine, at its discretion, which creditors will be involved in the process. Agreements reached through such proceedings are non-binding on third parties, and the court-appointed mediator has no authority to force the parties to accept an agreement. These proceedings are confidential, subject to one exception: if the conciliation culminates in an agreement that is approved by the court upon request of the debtor company, then such approval becomes public. In addition, if such an approval is granted, creditors that provided new money during the conciliation proceedings or as part of the conciliation agreement will enjoy a priority of payment over all pre-petition and post-petition claims in the event of subsequent insolvency proceedings. Mandat ad hoc has no maximum duration, but typically lasts between a few months and a year. Conciliation cannot exceed five months.

Insolvency proceedings include safeguard proceedings – with two variations: accelerated safeguard and financial accelerated safeguard, judicial reorganisation proceedings and judicial liquidation proceedings. These insolvency proceedings are similar to proceedings existing in other jurisdictions. They are not confidential and must involve all of the creditors. They result in a stay on creditors' enforcement actions for pre-petition claims.

Safeguard and judicial reorganisation proceedings are intended to reorganise the debtor through the implementation of a reorganisation plan that may provide for debt write-offs, debt rescheduling, debt-to-equity swaps, modification of interests rates, amendments of financial covenants or cash contributions to the debtor, by existing stakeholders or newcomers, by way of debt or equity. Plans also frequently contain downsizing commitments by the debtor, such as commitments to dispose of part of the business, or to downsize the workforce and to change all or part of the management team.

In the case of large companies (companies with more than 150 employees or annual sales of more than €20 million), the reorganisation plan must be approved by two committees comprised of the financial creditors and the main trade creditors. In each committee, the majority required for approval is a two-thirds majority of the creditors expressing a vote, based on value. In addition, if the debtor has issued bonds, bondholders must also approve the plan based on the same two-thirds majority. All bondholders vote as a single group, even if there are several bond issues, series or tranches. In the absence of creditors' committees, or if the committees or bondholders did not vote in favour of the proposed reorganisation plan, creditors are consulted individually on the debt write-offs and debts rescheduling proposed by the debtor.

The maximum duration of the safeguard or reorganisation proceedings is 18 months. Accelerated safeguard and accelerated financial safeguard are significantly shorter, as there are pre-packaged proceedings intended to adopt a reorganisation plan negotiated during conciliation proceedings that is supported by at least two-thirds of the members of each creditors' committee and of the company's bondholders. The duration of the accelerated safeguard cannot exceed three months. Accelerated financial safeguard, which applies only to financial creditors and bondholders, has a maximum duration of two months.

Judicial liquidation proceedings are intended to liquidate the assets of the debtor and settle its liabilities when there is no prospect of recovery. This process has no maximum duration, and generally lasts several years. In judicial reorganisation proceedings (if it appears that a reorganisation plan will not permit the recovery of the debtor), as well as in judicial liquidation proceedings, all or part of the debtor's business can also be sold to a third party under a sale plan.

Where main insolvency proceedings are pending in another EU country (except Denmark) and the debtor has an establishment in France, EU Regulation 2015/848 on insolvency proceedings allows for the opening in France of secondary insolvency proceedings (safeguard, judicial reorganisation or judicial liquidation). The effects of such secondary insolvency proceedings are limited to the debtor's assets located in France.

iv Starting proceedings

Pre-insolvency proceedings (i.e., mandat ad hoc and conciliation) are available when the debtor anticipates legal, economic or financial difficulties and is not in cessation of payments (or has not been in cessation of payment for more than 45 days, in the case of the conciliation). They are commenced by order of the president of the court upon petition of the debtor.

Safeguard proceedings are available when the debtor experiences difficulties that it is not able to overcome and is not in cessation of payments. They are commenced by judgment of the court upon petition of the debtor.

Judicial reorganisation and judicial liquidation proceedings are available when the debtor is in cessation of payments and, with respect to liquidation proceedings, when the debtor's recovery is manifestly impossible. They are commenced by judgment of the court upon insolvency filing by the debtor, or upon petition of an unpaid creditor or of the public prosecutor.

Secondary insolvency proceedings may be commenced by judgment of the court upon petition of the insolvency practitioner in the main insolvency proceedings, of the debtor, of an unpaid creditor or the public prosecutor (in the latter two situations, only if the secondary proceedings are judicial reorganisation or judicial liquidation proceedings).

Judgments commencing safeguard, judicial reorganisation or judicial liquidation proceedings or refusing to open such proceedings can be appealed by the debtor, by the creditor having requested the opening of the proceedings (if any), by the public prosecutor, and by interested third parties. The appeal of the judgment opening the proceedings does not stay such proceedings. It is not possible to obtain a stay of insolvency proceedings except for secondary proceedings, in which case the court that opened the proceedings must stay the process of realisation of assets if requested by the insolvency practitioner in the main insolvency proceedings.

v Control of insolvency proceedings

Insolvency proceedings are conducted under the supervision of the commercial court with jurisdiction over the debtor.

When commencing safeguard or judicial reorganisation proceedings, the court usually appoints an administrator to supervise the debtor's management and help in the preparation of a reorganisation plan and a representative of the creditors. In judicial liquidation proceedings, the court appoints a liquidator in charge of winding up the company. If a sale of the business is considered, the court will usually authorise a temporary continuation of the activity and appoint an administrator to manage the debtor during such continuation and organise the sale of the business. In addition, during insolvency proceedings, any disposal of assets made by the debtor outside the ordinary course of business, any mortgage, pledge, guarantee granted by the debtor, and any settlement entered into by the debtor must be authorised by the judge in charge of the insolvency proceedings.

At the end of the insolvency proceedings, any reorganisation plan or plan for the sale of the business must be approved by the court. In safeguard and judicial reorganisation proceedings, before approving a reorganisation plan that has been voted by the requested majority of the creditors' committees and bondholders, the court has to verify that the interests of all creditors are sufficiently protected. Once approved by the court, the reorganisation plan will be binding on all the members of the committees and all bondholders (including those who did not vote or voted against the adoption of the plan). If creditors were consulted individually (either because the creditors' committees or the bondholders did not vote in favour of the plan, or because the company was too small to have creditors' committees), the court that approves the plan can impose uniform debt-deferrals for a maximum period of 10 years on non-consenting creditors, but the court cannot impose debt write-offs or debt-to-equity swaps.

The main duty of the directors in connection with insolvency proceedings is to file for insolvency within 45 days of the company's cessation of payments. After the commencement of insolvency proceedings, there is no shift of fiduciary duties whereby duties formerly owed by directors of a French company to the company's shareholders would, post-petition, be owed to the company's creditors. Rather, the duty of the directors will remain, before and after the commencement of a pre-bankruptcy or bankruptcy process, to promote the corporate interest of the debtor, that is, to promote the course of action that, on the whole, will best preserve the interests of all stakeholders, including the debtor's employees, shareholders, creditors and customers.

vi Special regimes

The general insolvency regime provided by French law is applicable to all legal entities, but regulated entities such as credit institutions and insurance companies are subject to specific additional rules.

With respect to credit institutions, French law was amended to implement Directive 2001/24/EC on the reorganisation and winding up of credit institutions. Insolvency proceedings may only be commenced with respect to a French credit institution after prior authorisation of the Prudential Supervision and Resolution Authority (ACPR). A specific ranking applies to claims against credit institutions, and specific rules are intended to protect certain kinds of financial arrangements, such as netting and repurchase agreements.

With respect to insurance companies, insolvency proceedings may only be commenced upon request of the ACPR, or upon request of the public prosecutor after prior authorisation of the ACPR.

Credit institutions and insurance companies also have to finance insurance funds intended to indemnify the depositors or insured party up to a certain amount in case of default.

There are no special insolvency rules relating to corporate groups under French law, except for the rules provided by the EU Regulation 2015/848 on insolvency proceedings in order to ensure the efficient administration of insolvency proceedings relating to companies of a corporate group located in different EU Member States. Those rules provide for cooperation and communication of information between insolvency practitioners, between courts, and between insolvency practitioners and courts, and allow an insolvency practitioner to request the opening of group coordination proceedings.

vii Cross-border issues

Insolvency proceedings can be opened in France in respect of a foreign EU debtor in accordance with EU Regulation 2015/848 on insolvency proceedings, if the foreign debtor has the centre of its main interests in France. Any insolvency proceedings opened in France (excluding pre-insolvency proceedings) will be recognised throughout the EU.

As far as non-EU debtors are concerned, while a French court may agree to commence insolvency proceedings if the debtor has a significant presence in France, this happens quite rarely in practice, and the effect of such proceedings overseas would be subject to significant uncertainties.

II INSOLVENCY METRICS

Overall, France's economic situation remains favourable, although the forecasts for 2018 are slightly below 2017 figures and are subject to significant uncertainties due to various factors including rising oil prices, US protectionist policy and tightening monetary policies:

  1. in 2017, economic growth reached its highest peak since 2007 (+2.3 per cent). In June 2018, the French national statistics institute (INSEE) released its forecasts for economic growth in 2018, which is expected to reach 1.7 per cent;
  2. investments by French companies have increased by 4.4 per cent in 2017 and are expected to reach 3.1 per cent in 2018;
  3. the French household investment level has improved moderately in 2017, with a growth of 1.1 per cent. This moderate increase is expected to continue in 2018, with a 1 per cent growth forecast;
  4. economic growth in 2017 allowed to reduce the unemployment rate in France from 10 to 9 per cent; this reduction is expected to continue in 2018, albeit at a slower pace.

Another sign of the favourable economic climate is the 5.8 per cent decrease in the number of insolvency proceedings opened in France in 2017, dropping from 57,947 to 54,572, compared to 2016. The first half of 2018 has shown a decrease of only 1.4 per cent in company failures compared to the previous year, confirming that 2018 should be less favourable than 2017.

The principal features of recent French insolvency proceedings are as follows:

  1. as regards the type of proceedings opened, judicial liquidation remains the most commonly used insolvency proceeding (67.9 per cent), followed by judicial reorganisation proceedings (29.8 per cent) and, far behind, by safeguard proceedings (2.2 per cent);
  2. a quick overview of the companies undergoing insolvency proceedings shows that those employing fewer than three employees represent three-quarters of all the insolvency proceedings opened, whereas companies employing more than 50 people represent less than 1 per cent of this total. Companies employing more than 250 employees only represent a handful of the total, with only 46 insolvency proceedings opened in France in 2017; and
  3. the construction and real estate market, traditionally representing one quarter of all company failures, specifically benefited from this trend with a 10 per cent decrease in insolvency proceedings opened, compared with 2016. The industrial sector (with the exception of textiles) also benefitted from this trend, with a 5 per cent decrease in insolvency proceedings opened. However, the number of insolvency proceedings in the agricultural sector is constantly increasing.

III PLENARY INSOLVENCY PROCEEDINGS

Some of the most significant insolvency proceedings that took place in France over the past 12 months are described below:

i Agripole

Agripole was a French food-processing group owned and managed by Monique Piffaut with more than 3,000 employees and about 20 subsidiaries specialising in ham and sausage products and pre-cooked dishes. The indebtedness of the group stood at €332 million.

In December 2016, following the death of Ms Piffaut, it was discovered that the accounts of the group had been manipulated on her initiative over a period of at least 10 years and included false invoices and fictitious advances on inventories for a total amount of approximately €250 million.

At the request of the companies of the group, the president of the Commercial Court of Paris opened a mandat ad hoc, which was later converted into conciliation proceedings. A financial audit of the group revealed that it would face a significant cash shortage within six months. A conciliation agreement was entered into in February 2017, under which the bank creditors of the group agreed to grant new financing for a total amount of €63.25 million, benefitting from a priority of payment over all pre-petition and post-petition claims in case of subsequent insolvency proceedings, and the French state agreed to grant a €70 million loan. In addition, all creditors agreed to grant a moratorium on their claims and to waive any event of default during one year. The companies of the Agripole group committed to searching for a new shareholder or a buyer for the business, in order to ensure the reimbursement of the creditors under the best possible conditions.

It quickly became clear that selling the group companies as is would not be possible owing to the amount of the indebtedness and the deterioration of the group's financial situation after the discovery of the fraud. Therefore, negotiations were conducted with potential buyers within the framework of new conciliation proceedings, with a view to selling the ham and sausage products business and the pre-cooked dishes business separately under pre-packaged sale plans.

The best proposal for the sale of the ham and sausage business was made by the cooperative group Cooperl, which committed to taking over all the employees of the branch and offered a price of €33 million for the purchase of the assets. Upon insolvency filing of the companies involved in that business, the Commercial Court of Paris commenced reorganisation proceedings on 2 May 2017, and approved the sale plan for Cooperl on 15 June 2017.

The best proposal for the sale of the Agripole group's pre-cooked dishes business was a joint offer made by two French groups, Cofigeo and Arterris, which committed to taking over all employees. Upon the insolvency filing of the main company involved in that business, the Commercial Court of Paris commenced reorganisation proceedings on 12 June 2017 and approved the sale plan for Cofigeo and Arterris on 3 October 2017.

ii CGG

CGG is a global, French-based group operating in the geoscience industry with subsidiaries in various countries, including in the US. The group provides geological, geophysical and reservoir capabilities to its customers, primarily in the global oil and gas industry. The group's financial distress is because of the decline in oil prices, which had a dramatic impact on its main clients' financial resources and, therefore, the demand for the services provided by CGG.

Negotiations with its creditors and shareholders took place in mandat ad hoc proceedings and led to an agreement in principle with key financial creditors on 2 June 2017, providing for the conversion of non-secured debt (US$1.95 billion) into equity, an extension of the maturity of secured debt (US$ 800 million), a US$125 million rights issuance with warrants, open to existing shareholders, and a US$375 million issuance of new second lien senior notes with penny warrants to be provided by eligible unsecured senior noteholders under the terms of a private placement agreement. CGG then entered into a lock-up agreement under which those key financial creditors committed to support all reasonable steps in order to ensure proper implementation of the restructuring plan, including a vote in favour of the plan within the framework of French safeguard proceedings and US Chapter 11 proceedings.

On 14 June, the Commercial Court of Paris commenced safeguard proceedings with respect to CGG SA, the group holding company. The company then filed for Chapter 15 proceedings in the US, in order for the French insolvency proceedings to be recognized as foreign principal insolvency proceedings in the US. In addition, 14 subsidiaries of the group filed for Chapter 11 proceedings in the US.

On 28 July 2017, CGG SA obtained the approval of the reorganisation plan in the French safeguard proceedings by the requested majority of the financial creditors' committee and the bondholders. The reorganisation plan was then approved by the general meeting of shareholders in November 2017, and by the Commercial Court in December 2017. It was recognised by the US court shortly thereafter. The financial restructuring was finalized in February 2018.

iii Doux

Doux is a French food processing group in the industrial poultry production business, exporting frozen poultry and poultry-based processed products, mainly in the Middle East. It had been subject to insolvency proceedings in 2012/2013 and to a reorganisation plan providing for debt rescheduling over 10 years.

However, owing to competition from cheaper Brazilian chicken in its main Middle Eastern markets after European Union export subsidies were scrapped, Doux lost approximately €35 million in each of the past two years. Therefore, it appeared, at the end of 2017, that Doux would soon be unable to meet its obligations under the reorganization plan and would have no other option than to undergo judicial liquidation by April 2018. The group began to search for potential buyers for the business in order to prepare a pre-packaged sale plan that would be implemented as part of the judicial liquidation and would allow for the preservation of the business and the jobs associated with it.

After several months of negotiation through mandat ad hoc proceedings, the best proposal appeared to be the one made by a consortium of several companies, including LDC, France's largest poultry processor, Terrena, a French agricultural cooperative that was the main shareholder of Doux, and Almunajem, that was the main client and a minority shareholder of Doux.

Doux then filed for insolvency, and the Commercial Court of Rennes opened liquidation proceedings on 4 April 2018, with a view to approving the pre-packaged sale plan within a few weeks, as Doux no longer had enough cash to continue its activity beyond May 2018. Despite the filing of a competing offer for the purchase of part of Doux's assets by Ukrainian company MHP, the Commercial Court issued a judgment on 18 May 2018 approving the sale of the assets to the consortium, as that offer allowed for the possibility of preserving more jobs (about 900 out of 1,200). The sale was supported by major French players in the poultry industry and offered real prospects of development, as LDC committed to build a new plant on the Doux site in Brittany.

iv Ludendo/La Grande Récré

Ludendo is the parent company of France's largest toy store chain, La Grande Récré, which reached a turnover of €460 million in approximately 400 stores in 2017, but which also has a debt of €150 million. Owing to the ever shrinking toy market and increasing competition from online players, it was forced to file for insolvency in March 2018 and has been placed into judicial recovery proceedings by the Commercial Court of Paris.

The company has worked on a reorganisation plan focusing on its French home market, which provides that only its 104 most profitable French stores will be retained, that 62 stores in France and all 16 stores in Belgium will be closed, and that the stores in Spain and Switzerland will be sold. One-third of all jobs in the chain's headquarters would be cut under this plan and the repayment of the €153 million in debt would be spread over the next ten years.

In parallel, Fnac Darty has filed an offer for the purchase of part of the business (106 stores in France) for an amount of €16 million, offering to take over 833 employees and to invest €115 million in the business, in particular to renovate the stores. The Commercial court is expected to choose between the reorganisation plan proposed by Ludendo and a sale of the business to Fnac Darty at the end of July 2018.

v France Loisirs

France Loisirs is a book publisher and distributor founded in 1970 based on the model of the book club, where subscribers regularly receive books at discounted prices that are chosen in a quarterly catalogue. After a peak at the beginning of the 1990s, the number of subscribers began to decrease in the 2000s, owing, in particular, to the development of screen culture and of online book purchases.

After its revenue fell from €400 million in 1998 to €180 million in 2016, France Loisirs was forced to file for bankruptcy at the end of 2017, and the Commercial Court of Paris opened judicial recovery proceedings. The company has already closed about 40 stores and will implement a redundancy plan to reduce the workforce from 1,800 to 1,350.

France Loisirs is currently seeking a third party to invest in the business and allow for the implementation of a reorganisation plan.

vi Ascometal

Ascometal is a specialty steelmaker employing 1,400 people in France with an annual turnover of €400 million. It was purchased in 2009 through a leveraged buyout by a US investment fund and was forced to file for bankruptcy in 2014 because it was not profitable enough to support its level of debt. The business was purchased a few months later by a French consortium for €230 million through a sale plan approved by the Commercial Court of Nanterre.

However, the company was again forced to file for insolvency in November 2017 owing to a cash shortage resulting from weak steel prices and rising oil prices in the past two years, despite the fact that the factories were operating at full capacity. Its subsidiary Ascoval (jointly owned with French steel pipe maker Vallourec), which employs 300 people, also filed for bankruptcy in January 2018. Several offers for the purchase of the business were filed with the Commercial Court of Strasbourg. UK-based Liberty House offered to invest €300 million in both Ascometal and Ascoval. The Swiss-based speciality steelmaker Schmolz + Birkenbach offered to invest €195 million in Ascometal only, but promised to support Ascoval by purchasing its steel for two years.

Although Liberty House seemed to be the best bidder, both in terms of preserving employment and the price offered, the court approved the sale of the business to Schmolz + Birkenbach by a judgment dated 29 January 2018, because it considered that its offer was more credible, with respect to the industrial project and the financing of the investments to be made in the production facilities.

As Ascoval was excluded from the scope of Schmolz + Bickenbach's purchase offer, offers from third-party bidders for the Ascoval site are expected to be filed in the coming weeks, and the Court of Strasbourg is expected to approve a sale plan in September 2018.

IV ANCILLARY INSOLVENCY PROCEEDINGS

We are not aware of any significant secondary proceedings for foreign-registered companies commenced in France during the past 12 months.

V TRENDS

Insolvency activity should slightly decrease during the coming year, as economic growth is expected to continue to strengthen to about 1.7 per cent in 2018.

Brexit may, however, contribute to an increase in insolvency activity in French courts regarding foreign EU companies. Indeed, a flourishing restructuring business has developed in the UK as English courts have approved schemes of arrangement affecting companies incorporated outside of England. While the impact of Brexit on the availability of UK schemes of arrangement as a restructuring tool for foreign companies remains unclear, EU companies may be more reluctant to petition UK courts, owing to uncertainties regarding the recognition of their judgments within the EU. As the French restructuring regime is among the most effective in the EU, it could become an appealing alternative for foreign companies seeking a forum that offers flexible tools for distressed debtors


Footnotes

1 Fabrice Baumgartner is a partner, and Aude Dupuis a senior attorney, at Cleary Gottlieb in Paris.

2 Transfers of assets without consideration, contracts that are significantly unbalanced, payments of debts that are not due, etc.