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 to take into account the effect of the covid-19 crisis. They include in particular an extension of 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.
2021 should see a sustained recovery in activity after an unprecedented global economic shock in 2020 due to the covid-19 pandemic. This growth dynamic, driven by household consumption and business investment, should lead to a positive trend in the various economic activity indicators:
- 2020 recorded a historic 8 per cent recession but the economic growth forecast is 5 to 6 per cent for 2021;
- 2020 saw an overall decline in investment by French companies estimated at -13 per cent, but these investments should significantly recover in 2021, with an expected 10 per cent growth;
- the French household investments declined by 7.1 per cent in 2020 but should grow by 3.2 per cent in 2021. However, they are not expected to return to their pre-crisis level until 2023; and
- the various measures taken by the French government to support the economy and French companies strongly limited the impact of the covid-19 crisis on unemployment and even led to a decline in the rate of unemployment in France from 8.4 to 8 per cent; however, unemployment is expected to slightly increase in 2021, with an estimated unemployment rate of 8.7 per cent at the end of the year.
In 2020, the number of insolvency proceedings opened in France was at its lowest in 30 years. 28,166 businesses were subject to insolvency proceedings in 2020, compared to 45,819 in 2019. This is due mainly to the various measures taken by the French government to support the economy and French companies. The decline in the number of insolvency proceedings continued during the first half of 2021, with only 12,682 insolvency proceedings opened.
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 (73.4 per cent in 2020), followed by judicial reorganisation proceedings (23.9 per cent) and, far behind, safeguard proceedings (2.8 per cent);
- a quick overview of the companies undergoing insolvency proceedings shows that those employing fewer than 10 employees represented 90 per cent of all the insolvency proceedings opened, whereas companies employing more than 51 people represent about 0.9 per cent of the total in France in 2020; and
- in 2020, the sectors most affected by the crisis were the retail business, hotels and catering.
Plenary insolvency proceedings
Some of the most significant insolvency proceedings that took place in France during the past 12 months are described below.
i La Halle
La Halle is a French ready-to-wear retailer specialising in stores on the urban periphery, employing approximately 5,000 people in 850 stores and belonging to the Vivarte group. Despite a large distribution network, the company has suffered from serious financial difficulties in the past.
With almost zero sales and estimated losses of €106 million during the spring 2020 lockdown, La Halle requested and obtained the opening of safeguard proceedings by judgements of the Commercial Court of Paris rendered on 31 April 2020. A redundancy plan was adopted on 26 June 2020 in consultation with the unions, management and the judicial authorities.
Twenty-five potential buyers submitted bids to purchase a number of La Halle's stores, including Beaumanoir, Chaussea, Besson and Gemo. Only two bids were made for the warehouses. In a judgment issued on 8 July 2020, the Commercial Court of Paris chose several bids that covered a total of over 500 stores and 3,609 employees. The main buyer is Beaumanoir, which took over 366 stores and 2,250 employees.
Alinéa is a French furniture and decorative objects company, created in 1989 by Auchan, which now owns 27 stores in France and employs approximately 2,000 people. Despite this expansion, the company has experienced profitability issues since 2011, which led it to implement a restructuring plan in 2017. However, the covid-19 crisis has hampered these measures, and Alinea's recovery has not been successful. Alinea, therefore, requested and obtained the opening of judicial recovery proceedings by judgement of the Commercial Court of Marseille rendered on 13 May 2020.
When the recovery proceedings began, Alinea had liabilities of €12 million for an annual turnover of €257 million and a negative net result of €62 million. The court-appointed administrators launched an international call for bids. On 14 September 2020, the Commercial Court of Marseille approved the takeover of Alinéa by its former shareholders, avoiding a judicial liquidation. This bid, which saved only nine stores and half of the jobs, was, according to the Public Prosecutor's Office, 'the only possible alternative to a direct judicial liquidation'.
Camaïeu is a French low-cost fashion brand founded in 1984. Camaïeu had been suffering from difficulties for several years and, at the beginning of March 2020, had begun to implement a restructuring plan and was preparing to enter into a financing agreement with shareholders and banks.
However, Camaïeu was significantly affected by the covid-19 crisis and, lacking a prêt garanti par l'Etat state-guaranteed loan that would have enabled it to overcome this situation, it was forced to file for insolvency in May 2020. The Commercial Court of Lille opened judicial recovery proceedings on 26 May 2020. On 17 August 2020, it chose the bid made by Financière Immobilière Bordelaise (FIB), the investment fund of Michel Ohayon. This bid allows FIB to take over 80 per cent of the workforce, namely 2,659 jobs and 511 of the 634 stores. The second bid, made by the current CEO of the company and three shareholder funds, which was less attractive, was rejected.
Celio is a French men's ready-to-wear brand founded in 1978 that has more than 1,000 stores in 46 countries and 4,200 employees worldwide, including about 2,500 in France. Celio experienced difficulties due to the covid-19 crisis and the closure of its stores for a period of two months, which led to a loss of revenue for the group of nearly €100 million between March and May 2020.
As a result, it requested and obtained the opening of safeguard proceedings by judgment of the Commercial Court of Bobigny on 26 June 2020. Celio announced in October 2020 that it planned to close 102 stores and cut 383 jobs as part of a redundancy plan. The safeguard plan is to be presented in 2021.
v Office Depot France
Office Depot France is a company specialising in office supplies, which belongs to the Office Depot group, founded in 1986 in Florida (United States). Office Depot France employs about 2,000 employees and operates 60 stores, online shopping sites and a logistics centre. It has experienced difficulties in recent years and had begun to implement a turnaround plan in March 2019 intended to return the business to sustainable profitability. This goal could not be achieved due to the covid-19 crisis, as a result of which the company suffered a 20 per cent drop in turnover in 2020.
The company subsequently requested and obtained the opening of judicial recovery proceedings by judgement of the Commercial Court of Lille rendered on 5 February 2021. Three main bids were submitted to the court:
- Deham Management offered to take over the whole business and 930 employees;
- Adexgroup and Adveo offered to take over 628 employees and 58 stores; and
- Alkor group offered to take over 460 employees and 50 stores.
On 3 June 2021, the Commercial Court of Lille chose the offer made by the Alkor Group. Deham Management's offer was discarded due to a lack of agreement with the shareholders. The workers committee of Office Depot disagreed with this choice and appealed the decision of the Commercial Court. However, the Court of Appeals of Douai confirmed the decision, considering that the Commercial Court had sovereignly considered that Alkor's offer was the strongest in its various components.
Flunch is a French self-service restaurant chain belonging to the Mulliez group, which owns a large number of retail companies (including Decathlon, Auchan, Boulanger, Leroy Merlin, Kiabi and Saint-Maclou). The company employs about 5,000 people and directly owns 161 restaurants (66 others are franchises). Due to the covid-19 crisis, Flunch saw its turnover drop by almost 57 per cent in 2020.
The company, therefore, requested and obtained the opening of safeguard proceedings by judgement of the Commercial Court of Lille rendered on 29 January 2021. Flunch then disclosed a list of 57 restaurants to be sold, directly threatening 1,244 jobs. After the employees protested against the redundancy plan, Flunch improved the terms of the plan. Of the 57 restaurants that the management had announced it wanted to sell, between seven and 12 could be taken over by Flunch employees or franchisees, and between 10 and 15 by other fast-food chains. The exact number of restaurants to be taken over or permanently closed is expected to be approved at a forthcoming hearing before the Commercial Court on 15 September 2021.
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 2021 will see a significant increase in the number of insolvency proceedings opened in France. 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.