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. A major reform took place in 2005, with the introduction of a Chapter 11-type debtor-in-possession procedure known as 'safeguard', and subsequent adjustments have 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 a situation.

Fraudulent conveyance rules apply to transactions entered into by a 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 have been made to the law to improve the situation for creditors, in particular to facilitate pre-packaged sale plans, allow creditors to propose alternative reorganisation plans and facilitate debt-to-equity swaps when existing shareholders refuse to vote in favour of such a 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, 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 these 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 the request of the debtor company, then the 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 the following 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 the creditors. They result in a stay on creditors' enforcement actions for pre-petition claims.

Safeguard and judicial reorganisation proceedings are intended to reorganise a debtor through the implementation of a reorganisation plan that may provide for debt write-offs, debt rescheduling, debt-to-equity swaps, modification of interest 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 (those 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 two-thirds of the creditors expressing a vote, based on value. In addition, if the debtor has issued bonds, bondholders must also approve the plan subject to 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 a creditors' committee, 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) and in judicial liquidation proceedings, all or part of the debtor's business can also be sold to a third party under a sale plan.

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

iv Starting proceedings

Pre-insolvency proceedings (i.e., mandat ad hoc and conciliation) are available when a 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 a 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 a debtor is in cessation of payments and, with respect to liquidation proceedings, when a 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 a main insolvency proceedings, of a 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 who 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 that has jurisdiction over the debtor.

When commencing safeguard or judicial reorganisation proceedings, the court usually appoints an administrator to supervise a 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 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 interests 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 be commenced with respect to a French credit institution only after prior authorisation of the Prudential Supervisory 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 Recast Insolvency Regulation 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 the Recast Insolvency Regulation, if the foreign debtor has its centre of main interests in France. Any insolvency proceedings opened in France (excluding pre-insolvency proceedings) will be recognised throughout the European Union.

As far as non-EU debtors are concerned, while a French court may agree to commence insolvency proceedings if a 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 2019 confirm the slowdown of economic growth that began in 2018, with an international environment that is less favourable than last year's, in particular because of the possibility of a hard Brexit and commercial tensions with the United States:

  1. In 2018, economic growth reached 1.7 per cent, showing a moderate slowdown compared to 2017 (+2.3 per cent). This slowdown is expected to continue, with an economic growth for 2019 estimated at 1.3 per cent.
  2. Investments by French companies increased by 3.9 per cent in 2018 and are expected to reach 3.3 per cent in 2019.
  3. The French household investment level has improved moderately in 2018, with a growth of 0.9 per cent. This growth is expected to accelerate in 2019, with a 1.3 per cent forecast.
  4. Economic growth in 2018 allowed for a decline in the rate of unemployment in France from 9 to 8.8 per cent; this reduction is expected to accelerate in 2019, with an estimated unemployment rate of 8.3 per cent at the end of the year.

The number of insolvency proceedings opened in France in 2018 remained stable compared to 2017, at about 55,000. However, the second half of 2018 was less favourable than the first half: while company failures decreased during the first half by 11 per cent, they increased during the second half by 10 per cent. The first half of 2019 shows a slight improvement compared with the first half of 2018, with a decrease of 3.6 per cent of the number of insolvency proceedings opened during that period.

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

  1. with regard to the type of proceedings opened, judicial liquidation remains the most commonly used insolvency proceeding (68.1 per cent), followed by judicial reorganisation proceedings (29.9 per cent) and, far behind, safeguard proceedings (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 100 people represent about 0.25 per cent of the total, representing only 136 insolvency proceedings opened in France in 2018; and
  3. while the first semester of 2018 has seen a decrease in the number of insolvency proceedings opened in almost all sectors, except in the agri-food industry, the second semester was less favourable, especially for the manufacturing sector.

III PLENARY INSOLVENCY PROCEEDINGS

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

i Ludendo/La Grande Récré

Ludendo is the parent company of France's largest toy store chain, La Grande Récré, which achieved a turnover of €460 million in approximately 400 stores in 2017, but which also has debts in the order of €150 million. Owing to the shrinking toy market and increasing competition from online players, Ludendo 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 worked on a reorganisation plan focusing on its French home market, which provided that only its 104 most profitable French stores would be retained, that 62 stores in France and all 16 stores in Belgium would be closed, and that the stores in Spain and Switzerland would be sold. One-third of all jobs in the chain's headquarters would be cut under this plan and the repayment of the €150 million in debts would be spread over the next 10 years. This plan received the financial support of Financière Immobilière Bordelaise (FIB), a French investor specialised in commercial real estate, which committed to buy most of the company's debt, to make a €10 million cash advance, and to take immediately a 36 per cent interest in the company, to be increased to 95 per cent by the end of 2018.

In parallel, Fnac Darty 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.

In a judgment issued on 2 October 2018, the Commercial Court of Paris decided in favour of the reorganisation plan proposed by the company, and rejected Fnac Darty's offer.

ii France Loisirs

France Loisirs is a book publisher and distributor founded in 1970 based on the model of the book club, whereby 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 had fallen 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.

In December 2018, the court approved the reorganisation plan proposed by the company, which had two components. The first consisted of a savings plan that included a redundancy scheme to reduce the workforce from 1,800 to 1,350, the closure of 35 shops and the relocation of the head office. The second part of the plan provided for the group to refocus on the book, its historical business, after an unsuccessful diversification into cosmetics induced in 2013 by its former owner, the US group Najafi Companies.

iii Ascometal

Ascometal is a speciality steel maker 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 previous 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 steel maker 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 + Birkenbach's purchase offer, offers from third-party bidders were expected for the Ascoval site. The Court of Strasbourg finally approved a sale plan in favour of the holding company of British Steel in April 2019. However, the insolvency of British Steel (in May 2019) may jeopardise the implementation of the plan.

iv Toys R Us France

Further to the bankruptcy of US toy retailer Toys R Us in March 2018, its French subsidiary began to look for a buyer for its 53 stores, and was forced to file for bankruptcy in July 2018 owing to a cash shortage.

Several offers for the purchase of the business were filed with the Commercial Court of Evry. The first bidder, who was in negotiation with Toys R Us France for several months, was the owner of the French group Orchestra, which specialises in children's wear and childcare products. It offered to take over 1,068 employees and 43 stores for a purchase price of €39.5 million (including €35 million to be paid to secured creditors of Toys R Us US for the release of their pledge over Toys R Us France's real estate). Its competitor, Jellej Jouets (a company held by the US hedge fund Cyrus Capital, a creditor of Toys R Us US, in partnership with another French toy retailer, Picwic), made a very similar offer (to take over 1,036 employees and 44 stores for a purchase price of €40 million). A third offer was filed very late in the bidding process by Financière Immobilière Bordelaise (FIB) offering to take over 949 employees and 42 stores for a higher price (€46 million), and claiming that it should be able to create a French champion of the toy market by merging the activities of La Grande Récré (see above) with those of Toys R Us France.

Although it was the best bid, the commercial court of Evry disregarded FIB's offer, mainly because it did not put the purchase price in escrow before the court's hearing, as requested by law, and because its offer involved the relocation of the company's headquarters to a distant site.

The Court acknowledged that the two other offers were very similar, finally choosing Jellej's offer because it considered that the commercial project was easier to implement and the financing more secure.

v Sequana/Arjowiggins

Sequana is the listed holding company of a specialist group in the paper sector, with its Antalis division operating in the distribution of papers, packaging products and visual communication materials, and its Arjowiggins division operating in the production of recycled and speciality papers.

Further to a decision of the High Court of Justice of London ordering Sequana to pay US$138 million to British American Tobacco (BAT), the Commercial Court of Nanterre opened safeguard proceedings upon the request of Sequana in February 2017. This led to the approval by the Court of a reorganisation plan providing that the repayment of Sequana's debt would be spread over the following 10 years. However, this decision was annulled upon the request of BAT and the safeguard proceedings were reopened in September 2018 to allow Sequana to present a new reorganisation plan.

In the meantime, the situation for the Arjowiggins subsidiaries deteriorated as a result of unfavourable market conditions. Sequana tried to find solutions to reorganise its paper production activity through the sale of some facilities, but this did not succeed. As a result, the Commercial Court of Nanterre opened safeguard proceedings, or judicial recovery proceedings with respect to Arjowiggins companies, in January 2019, with the objective of trying to sell their businesses under a sale plan. For some of them, offers were made by third-party buyers and the Court was able to approve a sale plan. However, no serious offer was made for the main Arjowiggins facility, which led to the liquidation of the subsidiary operating it and the dismissal of its 580 employees.

In March 2019, further to the decision of the London Court of Appeal confirming the first instance judgment in the BAT litigation, the safeguard proceedings of Sequana were converted into judicial recovery proceedings. Finally, in May 2019, the Commercial Court placed Sequana in judicial liquidation as a result of the company's inability to present a reorganisation plan.

The Antalis division of the group, which remains solvent, initiated a search process for a new shareholder structure to provide the means for its development and the implementation of its strategic plan.

vi Rallye

The listed holding company Rallye is the majority shareholder of French mass retailer Casino, ultimately held by Casino chairman and chief executive officer Jean-Charles Naouri. A large part of the group debt (about €3.3 billion), which resulted from various acquisitions, is held by Rallye and other holding companies. The crisis of the retail sector made it more difficult for the group to repay its debt. In addition, Rallye and Casino's shares were subject to massive attacks from hedge funds speculating on the fall of those shares by short-selling them. Those attacks were particularly detrimental to the Casino group as Rallye pledged Casino shares to banks to secure its debt, and the number of shares to be pledged is affected by share price variations.

Under those circumstances, Rallye, its subsidiaries Cobivia and HMB, and their parents companies, Foncière Euris, Finatis and Euris, requested and obtained the opening of safeguard proceedings by judgments of the Commercial Court of Nanterre rendered on 23 May 2019. The purpose of these safeguard proceedings is to give the group time to restructure its debts within a secured framework. Safeguard proceedings suspend, pending the approval of a safeguard plan and for a maximum period of 18 months, the payment of the debts that arose prior to the opening of the proceedings, and the safeguard plan may allow the group to spread the repayment of its debts over 10 years.

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 is expected to increase during the coming year, as a result of a less favourable international environment.

Nevertheless, Brexit may contribute to an increase in insolvency activity in French courts regarding foreign EU companies. Indeed, a flourishing restructuring business has developed in the United Kingdom as English courts have approved schemes of arrangement affecting companies incorporated outside England. While the effects 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 European Union. As the French restructuring regime is on of 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.

In this respect, the transposition of Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks, which should take place in France within the coming year, could be key, as it will substantially affect French insolvency law.


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.