The Insolvency Review: France
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.
Temporary amendments were implemented in French insolvency law in March and May 2020 to take into account the effect of the covid-19 crisis. They include in particular a suspension of the obligation to file for insolvency until 23 August 2020 for companies that were not in cessation of payments as of 12 March 2020, as well as an extension of other various deadlines provided for by French insolvency law.
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.
The slowdown of economic growth that began in 2018 continued into 2019. During the first half of 2020, the covid-19 crisis has had a major impact on France's economic situation:
- in 2019, economic growth reached 1.2 per cent, showing a moderate slowdown compared to 2018 (+1.7 per cent). As a result of the covid-19 crisis, a decline of 10.3 per cent is expected for 2020;
- investments by French companies increased by 3.9 per cent in 2019 and are expected to decline by 23.3 per cent in 2020;
- the French household investment level improved moderately in 2019, with a growth of 1.3 per cent. but it is expected to decline by 9.3 per cent in 2020; and
- economic growth in 2019 allowed for a decline in the rate of unemployment in France from 8.8 to 8.4 per cent; however, unemployment is expected to increase significantly in 2020, with an estimated unemployment rate of 10.1 per cent at the end of the year.
The number of insolvency proceedings opened in France in 2019 decreased slightly compared to 2018, from 55,000 to 52,000. The second half of 2019 was particularly favourable, with the last trimester having the lowest number of insolvency proceedings opened in France since 2007.
This year will be unique because of the covid-19 crisis. During the first half of 2020, the number of insolvency proceedings opened decreased by 38 per cent compared to the first half of 2019. This is due to several factors, including the suspension of the obligation to file for insolvency until 23 August 2020 for companies that were not in cessation of payments as of 12 March 2020, the partial closure of commercial courts and the various measures taken by the French government to support the economy and French companies.
The principal features of recent French insolvency proceedings are as follows:
- with regard to the type of proceedings opened, judicial liquidation remains the most commonly used insolvency proceeding (67.5 per cent), followed by judicial reorganisation proceedings (30.5 per cent) and, far behind, safeguard proceedings (2 per cent);
- 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 0.28 per cent of the total, representing only 145 insolvency proceedings opened in France in 2019; and
- 2019 saw a decrease in the number of insolvency proceedings opened in almost all sectors, except in the road freight sector and, to a lesser extent, in the IT services sector.
Plenary insolvency proceedings
Some of the most significant insolvency proceedings that took place in France during the past 12 months are described below.
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.
In July 2020, the Antalis division of the group, which remained solvent, was sold to Japanese paper distribution group Kokusai Pulp & Paper Co. in a share deal including the sale of Antalis shares held by Sequana and by two other minority shareholders, as well as a tender offer on the free float capital.
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 Paris rendered on 23 May 2019. The purpose of these safeguard proceedings was 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. The Casino group made public the proposed safeguard plan in December 2020. The plan was accepted by the group's main bank creditors and then approved by the Commercial Court of Paris on 28 February 2020. The bank creditors secured the repayment of their existing debt over four years (with a requirement that 85 per cent of the debt must be repaid by the end of the third year, and the balance by the end of the fourth year) (whereas the Commercial Court could have imposed a 10-year repayment schedule), and in exchange agreed that the pledge over Casino shares that secured their claims would be subordinated to a senior pledge on Casino shares granted to new investors. By contrast, the plan provides that bondholders (who hold €1.6 billion in unsecured debt) will be repaid over 10 years, with 65 per cent of the debt being repaid in the last year.
iii Thomas Cook France
Following the bankruptcy of the British travel group Thomas Cook, its French subsidiary operating 174 travel agencies was forced to file for insolvency in September 2019. The Commercial Court of Nanterre opened judicial recovery proceedings on 1 October 2019, and set a three-week deadline for potential buyers of the business to submit their bids (as continuation of the business under a judicial recovery plan did not appear to be possible). The Court received 18 bids, but none covered the entire business and the 174 agencies.
In a judgment issued on 28 November 2019, the Commercial Court of Nanterre chose several bids that covered a total of 149 agencies and half of the 685 employees of Thomas Cook France. The main bidder is a consortium of travel companies that will take over 141 of the Thomas Cook agencies.
iv Bourbon MaritimeBourbon
Bourbon MaritimeBourbon is a French group based in Marseille providing maritime services to oil platforms, which employs 8,200 people worldwide and operates 500 ships through 28 subsidiaries. In July 2019, the Chinese company ICBC Leasing that leases the ships to Bourbon operational companies called the guarantee granted by Bourbon Corporation on the rents of ships, for an amount of more than US$800 million. Bourbon Corporation requested the opening of safeguard proceedings but the Commercial Court of Marseille refused to do so because the company was already in cessation of payments as a result of ICBC calling the guarantee. Consequently, Bourbon Corporation filed for insolvency, and was placed into judicial recovery proceedings by the Commercial Court of Marseille on 7 August 2019. The sub-holding Bourbon Maritime was also filed for insolvency due to several French banks accelerating their loans on that company, for a principal amount of €720 million.
Several bids were submitted for the purchase of the business of Bourbon Corporation, but only one was considered valid by the Commercial Court: the bid submitted by SPP, a company held by a group of French banks representing 75 per cent of the debts of the Bourbon Corporation. They offered to purchase all the assets of the Bourbon Corporation, to convert €1.4 billion of loans into equity and €300 million of loans into bonds and to bring in €150 million of new financing.
On 23 December 2019, the Commercial Court of Marseille approved the sale of Bourbon Corporation's assets to SPP. To date, the sub-holding Bourbon Maritime is still in judicial recovery proceedings.
Presstalis is the leading press distributor in France. Owing to the recurring difficulties of the press sector that were accelerated by the covid-19 crisis, it faced its third major crisis in 10 years during spring 2020. Presstalis became insolvent on 20 April 2020, with no prospect of recovery despite repeated restructuring efforts and the support of public authorities. After several weeks of discussions, French daily newspapers as well as several magazines agreed on a takeover plan. On 15 May 2020, the Commercial Court of Paris agreed to place the company into judicial recovery proceedings for two months in order to finalise the sale. By contrast, its local subsidiaries, which employed more than 600 people, were placed into judicial liquidation.
On 1 July 2020, the Commercial Court of Paris approved the sale of Presstalis' business, including 250 employees, to the consortium of daily newspapers, France Messagerie, the sole bidder.
Technicolor is a French multinational group that provides services and products for the communication, media and entertainment industries. During spring 2020, it entered into discussions with several creditors and third-party investors to obtain new financing that would allow the group to weather the covid-19 crisis, and to implement a long-term sustainable financial structure for the group. In May 2020, Technicolor requested the opening of conciliation proceedings from the President of the Commercial Court of Paris, intending that it would help provide a suitable framework in the discussions between the group, its existing lenders and the potential investors. The President of the Commercial Court opened a conciliation on 2 June 2020.
Shortly thereafter, the group reached an agreement with a majority of its lenders (65.77 per cent) on a financial restructuring plan that met its objectives of obtaining new financing of €420 million, addressing the liquidity needs of the group and deleveraging Technicolor's balance sheet through the equitisation of up to €660 million of its bank debt.
On 18 June 2020, after having received waiver consents from the requisite majority of its lenders, Technicolor filed a request for the opening of an accelerated financial safeguard proceeding, a form of pre-negotiated safeguard procedure with financial creditors only that allows the court to impose a restructuring plan negotiated with a two-thirds majority of financial creditors on a dissenting minority. The Commercial Court of Paris opened accelerated financial safeguard proceedings on 22 June 2020. The group also requested the recognition of the accelerated financial safeguard proceeding in the US pursuant to Chapter 15 of the US Bankruptcy Code.
The lenders' committee approved the draft safeguard plan with a 100 per cent majority of the creditors who cast a vote on 5 July 2020, and the shareholders' general meeting of Technicolor approved all resolutions required to implement the financial restructuring plan on 20 July 2020. Finally, the Commercial Court of Paris approved Technicolor's accelerated financial safeguard plan on 28 July 2020.
Ancillary insolvency proceedings
We are not aware of any significant secondary proceedings for foreign-registered companies commenced in France during the past 12 months.
To date, the measures taken by the French government and the EU authorities to protect companies from the consequences of the covid-19 crisis have helped avoid mass bankruptcies. Nevertheless, it is likely that the second half of 2020 will see a significant increase in the number of insolvency proceedings opened in France, if only because of a catch-up effect owing to a delay of many insolvency filings during the first semester. In some pessimistic scenarios, France could be confronted in the coming months by an unprecedented wave of companies' failures. However, there are some encouraging signals that the recovery of the French economy may be more dynamic than expected, and there are reasons to hope that most companies will be able to overcome their current difficulties, with or without the help of restructuring tools provided by French law.