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Historically, the French restructuring system has always been perceived as a debtor-friendly system. More recently, changes to the French legislation have favoured creditors’ interests and the courts have favoured a number of lender-led restructurings, enabling lenders to take control of the debtor from its existing shareholders.
The recent implementation of the possibility for the committees of creditors to submit an alternative plan competing with the plan prepared by the debtor, and the obligation to take into account the inter-creditor agreements concluded throughout the preparation of the plan, clearly demonstrates this reinforcement of creditors’ rights.
This evolution is not intended to make it more difficult for the debtor to find a solution. It simply allows for a better consideration of the rights of creditors by recognising the agreements that may have been concluded between them and the shareholders. Recent legislative changes have also introduced the possibility to squeeze out shareholders who are not willing to support the company in the context of its rehabilitation proceeding.
In line with these improvements, France has introduced new restructuring tools inspired by the Chapter 11 bankruptcy proceeding in the United States, at the crossroads of amicable restructuring proceedings and insolvency proceedings.
The creation of the fast-track financial safeguard proceeding has proven to be a very useful tool for the debtor to force a solution that federates most of the creditors during a conciliation proceeding with limited impact on the operations of the debtor. Order No. 2014-326, dated 12 March 2014, has also introduced the pre-pack sales system under amicable proceedings, which offers a new framework for the partial or total sale of a company’s assets in an insolvency proceeding but with one or several buyers of the business identified beforehand.
In addition, the Business Growth and Transformation Act (PACTE), dated 22 May 2019, has empowered the executive to implement the EU Directive 2019/1023 on restructuring and insolvency. This forthcoming reform should lead to a profound transformation of insolvency by further improving the treatment of creditors. The major innovations that should be introduced by this reform concern the procedure for adopting safeguard plans, with the creation of creditor classes and the introduction of a cross-class cramdown system.
The reform should also make it possible for the court to adopt a safeguard plan even when certain classes of creditors have opposed it. These new rules for adopting the plan are aimed at aligning the political power of creditors with their economic situation, by limiting the harmful power of creditors who are out of the money. The forthcoming reform should, therefore, work towards a rebalancing of the interests involved, without betraying the objective of safeguarding the company.
The French legislation has created bridges between court-assisted amicable proceedings and insolvency proceedings, with the idea that restructuring solutions could be negotiated during the amicable phase and implemented in the context of a subsequent insolvency proceeding. After providing a brief overview of the restructuring tools provided for in French law, this chapter will focus on the available prepackaging tools concerning both the implementation of traditional restructuring plans – through debt restructuring – and the sale of business.
Brief overview of key restructuring tools
Under French law, there are two categories of proceedings: court-assisted amicable proceedings and insolvency proceedings. The first category includes mandat ad hoc and conciliation proceedings. The second category includes safeguard, fast-track financial safeguard, fast-track safeguard, and reorganisation and liquidation proceedings.
Insolvency proceedings must be commenced if the debtor is insolvent according to the French insolvency test, defined as the debtor’s inability to pay its debts as they fall due with its immediately available assets, taking into account available credit lines and moratoria. If the debtor is not facing cash flow insolvency, it has the option to request court-assisted amicable proceedings or a safeguard proceeding.
However, the distressed debtor is required to file a petition for reorganisation of liquidation proceedings within 45 days from the date of insolvency, unless it has requested the court to appoint a conciliator. Reorganisation and liquidation proceedings can also be initiated by the court if it is brought to its attention that a company registered in its jurisdiction has become insolvent; at the request of the public prosecutor; or at the request of any creditor.
Court-assisted amicable proceedings
The mandat ad hoc and conciliation are preventive and confidential proceedings for resolving difficulties carried out under the aegis of a court-appointed officer under the supervision of the president of the court.
The duties of the mandataire ad hoc or the conciliator are determined by the order of the president of the court. Such mandataire ad hoc or conciliator are usually appointed to facilitate negotiations with creditors, but he or she cannot force the creditors into accepting any proposal: the restructuring agreement between the company and its creditors will consequently be negotiated on a purely consensual and voluntary basis.
Conciliation and mandat ad hoc do not trigger an automatic stay of payment. Pursuant to Article 1343-5 of the French Civil Code, French courts may, in any civil or commercial proceedings involving the debtor, whether initiated by the debtor or the creditor, taking into account the debtor’s financial position and the creditor’s financial needs, defer or otherwise reschedule the payment dates or payment obligations over a maximum period of two years.
In principle, banks and credit funds tend to advocate a supportive approach to their debtors to the extent that a debtor provides a proper independent business review to its creditors and that its shareholders are ready to support, if need be, their subsidiaries. Otherwise, banks and credit funds may be tempted to sell their claims to distressed debt investors that may take a more aggressive approach towards the debtor and its shareholders. It is, however, important to note that there are a limited number of cases where banks or credit funds have triggered a default and, therefore, an insolvency of their debtors.
These amicable proceedings do not provide for a cramdown system and the agreement of every creditors is required. As explained below, if a dissenting creditor refuses to enter an agreement with the debtor in the context of an amicable proceeding, a safeguard or reorganisation proceeding could be opened whereby the cramdown system is applied.
Conciliation proceedings can last for a period of four months, which can exceptionally be extended by another month. However, mandat ad hoc are not limited in time. In practice, debtors often combine the use of mandat ad hoc and conciliation proceedings. A mandat ad hoc is usually commenced first, as it is not subject to any time constraint.
If the debtor is able to reach an agreement with its creditors, applying to the court to convert the mandat ad hoc into conciliation proceedings permits the arrangement to be either acknowledged by the president of the court or approved by the court.
Where investors would be willing to provide new money, goods or services to ensure the continuation of the business, it will be necessary to convert the mandat ad hoc into a conciliation proceeding. As new money providers, these investors will benefit from the ‘new money’ priority allowing them to be reimbursed before all other creditors except for certain employee-related liabilities and post-filing procedural fees – provided that these new money financings are approved by the court.
Pre-pack solutions: possible first step to fast-track safeguard or fast-track financial safeguard or for sale of business
There are several interactions between amicable proceedings and the insolvency process. Court-assisted amicable proceedings are never mandatory under French law and remain the option of the debtor, who will, when possible, likely opt for these procedures as they present numerous advantages (e.g., preventing financial difficulties at an early stage, confidentiality and considerable flexibility with creditors).
Certain insolvency proceedings cannot be implemented without an in-court proceeding beforehand. Fast-track safeguard proceedings and fast-track financial safeguard proceedings are only available to a debtor that: is subject to an ongoing conciliation proceeding; has elaborated a draft plan to ensure its viability; and has not been insolvent for more than 45 days. Pre-pack sales enable a debtor to prepare a restructuring plan during an out-of-court proceeding while negotiating with its main creditors, with the plan being implemented at a later stage during an in-court proceeding.
The safeguard proceeding
The safeguard proceeding is a public proceeding commenced at the request of a debtor experiencing financial difficulties that it cannot overcome on its own, provided it is not insolvent. The purpose of this proceeding is to enable the debtor to continue its business, maintain employment and repay its debts. In that respect, the debtor will prepare, with the assistance of the judicial administrator, a draft safeguard plan to be negotiated with its creditors. During this proceeding, the debtor benefits from the suspension of payments and automatic stay, which prevents creditors from suing the debtor for payment and enforcing the securities.
The draft safeguard plan must be submitted to the creditors during a consultation and prior to the plan being approved by the court. The rules governing consultation vary according to the size of the business. For companies employing more than 150 employees or with an annual turnover in excess of €20 million, or with the consent of the court at the judicial administrator or debtor’s request, the judicial administrator sets up two creditors’ committees, on the basis of the debts that arose before the initial judgment. The first committee includes the credit institutions and the other committee includes suppliers having a claim that represents more than 3 per cent of the total amount of the claims of all the debtor’s suppliers and other suppliers invited to participate in such committee by the judicial administrator. If any, the bondholders are gathered in a single general assembly and consulted on the safeguard plan.
Following approval by the creditors’ committees (and the bondholders’ general meeting where relevant) and determination of a rescheduling or partial cancellation against cash payment of the claim of creditors that are not members of the committees (or bondholders), as discussed hereafter, the plan has to be approved by the court. In considering such approval, the court has to verify that the interests of all creditors are sufficiently protected. Once approved by the court, the safeguard 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).
The reorganisation proceeding
The reorganisation proceeding is commenced upon the request of an insolvent debtor, a creditor or the public prosecutor. Under this proceeding, the administrator appointed by the court will assist the debtor to make all or some of the management decisions or may be empowered by the court to take over the management of the company.
The administrator will propose the reorganisation of the company by assisting the debtor to elaborate a reorganisation plan, it being specified that rules governing the adoption of the safeguard plan are applicable. If the elaboration of a reorganisation is not possible, the administrator will organise the sale of the business through an open bid process. Either the reorganisation plan or the sale plan will be sanctioned by the court.
The liquidation proceeding
The liquidation proceeding may be initiated by an insolvent debtor, a creditor or the public prosecutor if the company’s recovery is manifestly unfeasible. A liquidator is appointed vested with the power to represent the debtor and perform the liquidation operations, with mainly consist in the liquidation of the assets.
In that respect, there are two possible outcomes of such liquidation scenario: a sale plan as in the reorganisation proceeding or sale of individual assets.
Can a restructuring be implemented on a pre-packaged basis?
As indicated above, the French legislation has recently created bridges between court-assisted amicable proceedings and insolvency proceedings, with the idea that restructuring solutions could be negotiated during the amicable phase and implemented in the context of a subsequent insolvency proceeding. These evolutions concern both the implementation of traditional restructuring plans – through debt restructuring – and the sale of business.
While mandat ad hoc and conciliation proceedings have the advantage of confidentiality, their positive outcome requires that debtor’s creditors called up to participate in the negotiations agree to make the efforts that are necessary to ensure the continuation of business. Neither the court-appointed officer nor the debtor have the power to impose those efforts to dissenting creditors in the context of amicable proceedings.
To overcome the opposition of dissenting creditors preventing the adoption of a restructuring agreement negotiated in the context of the amicable proceedings, the practitioners were using safeguard and reorganisation proceedings to benefit from the cramdown system and force the adoption of the restructuring plan.
Thus, the French legislation has enshrined the practice of pre-packaged plan by introducing the fast-track financial safeguard and the fast-track safeguard. These new proceedings have been specially designed to force the adoption of a restructuring plan that could not be implemented in amicable proceedings owing to dissenting creditors.
In addition to this, the Order dated 12 March 2014 has introduced a major innovation in French law, with the possibility to prepare the sale of business in the context of an amicable proceeding, which will be implemented in the context of a subsequent insolvency proceeding.
The premises of the French pre-packaged plan: Autodis case
Even before the introduction of specially designed pre-pack proceedings, the practitioners found a way to use existing proceedings – with the combination of the conciliation and safeguard proceedings – to carry out a pre-packaged plan. The restructuring of the Autodistribution group, which took place in 2009, was its first illustration.
In this case, the LBO documentation provided that significant restructuring steps were subject to the unanimous consent of Autodis’s lenders, which made it difficult for Autodis to implement a restructuring agreement in the context of the amicable proceeding. As a unanimous vote was impossible to reach, given the plurality of creditors, the only solution was to try to obtain the agreement of the two-thirds majority of the members of creditors’ committees in the context of a safeguard proceeding.
In this context, a safeguard proceeding has been opened while the terms and conditions of the financial restructuring had been decided by the debtor and its main creditors before the commencement order, pursuant to a memorandum of understanding concluded under the aegis of a mandataire ad hoc. In contrast to the defensive safeguards – which traditionally aim for the automatic stay – the main attraction of the safeguard in this case was the possibility to use the cramdown system provided for in safeguard to impose the adoption of the plan to the dissenting creditors.
Insofar as the restructuring plan had been prepared before the opening of the proceeding, the implementation of the plan took no longer than six weeks, with a vote in committee organised less than a month after the commencement order and a judgment approving the plan 15 days later. The swiftness of the process mitigated the value-destroying effect traditionally induced by a safeguard proceeding.
Despite the lack of dedicated proceedings at the time, the wide range of tools offered by French law had permitted to implement a pre-packaged plan and brought to light its numerous advantages.
Introduction of specially designed pre-pack proceedings: fast-track safeguard proceedings
Following this case, the French legislation has enshrined the practice by introducing two new proceedings: the fast-track financial safeguard proceeding (Law dated 22 October 2010) and the fast-track safeguard proceeding (Order dated 26 September 2014).
These proceedings have been designed for large companies. To be eligible for such proceedings, the debtor must publish accounts certified by a statutory auditor or established by a certified public accountant and have more than 20 employees, a turnover greater than €3 million excluding value added tax, or a total balance sheet exceeding €1.5 million. Companies that publish consolidated accounts in accordance with Article L. 233-16 of the Commercial Code are also eligible.
As described above, these proceedings are only available to a debtor that is: subject to an ongoing conciliation proceeding; has elaborated a draft plan ensuring the continuation of its business likely to receive sufficiently broad support from the creditors to make its adoption in the time limit probable; or faces difficulties that it cannot overcome and has not been insolvent for more than 45 days.
Negotiations in the context of a conciliation proceeding
Before the opening of the fast-track safeguard proceeding, the debtor must conduct negotiations with its creditors in the context of a conciliation proceeding. It is only if the restructuring agreement negotiated with its creditors cannot be implemented owing to dissenting creditors that the opening of a fast-track safeguard proceeding will be contemplated.
The simple threat to file for a fast-track safeguard proceeding is sometimes sufficient to obtain all creditors agreements on the plan. These accelerated safeguard techniques are indeed rarely used because their existence and the threat for the debtor to implement them are often sufficient to overcome blocking situations, creditors knowing that they will not be able to avoid company support measures imposed on them by the law of the majority both in fast-track safeguard and in fast-track financial safeguard.
Opening of a subsequent safeguard proceeding
The fast-track financial safeguard proceedings will benefit from most of the advantages attached to this proceeding, such as suspension of payments and automatic stay. However, the effects of the fast-track financial safeguard proceeding will be limited to the sole members of the credit institution committee and, if any, the bondholders committee.
Insofar as the safeguard plan has been prepared beforehand, the duration of the proceedings has been significantly reduced. It is limited to two months for the fast-track financial safeguard and three months for the fast-track proceeding.
In this limited amount of time, the draft safeguard plan must be submitted to the creditors’ committees and sanctioned by the court. As described above, the safeguard plan must be approved by each committee by a two-thirds majority. It is only once the majority is obtained in each committee that the court can approve the plan. Accordingly, the dissenting part of the creditors in each committee is ‘crammed down’.
It should be noted that the court has to verify that creditors are sufficiently protected with a kind of ‘best interest test’. In particular, the court will pay particular attention to the differentiated treatment of creditors that may have been provided for, and to the way in which any inter-creditor agreements have been taken into account.
Advantages of the pre-packaged plan
First of all, the pre-pack scheme strengthens the efficiency of amicable proceedings by making it possible to force the adoption of the restructuring plan prenegotiated with the majority of creditors in the context of a subsequent safeguard proceeding.
Although the search for a consensual restructuring solution is often preferred by the debtor and its stakeholders, it cannot always be implemented in the context of a mandat ad hoc or a conciliation. In most LBO cases, the implementation of a restructuring agreement requires the unanimous agreement of the main creditors, which can be difficult to obtain. The diversity of lenders and the opposing interests that may exist between them make it difficult to reach an amicable agreement.
The use of the safeguard proceeding – whereby the cramdown system is applied – allows the debtor and the main creditors supporting the restructuring plan to force its adoption, provided that two-thirds (as calculated by the value of the debt that is owed and disregarding any security or subordination) of the voting members of each committee and the bondholders’ meeting, as the case may be, vote in favour of the restructuring plan. It should, however, be noted that the court has to ensure that the interests of all creditors are sufficiently protected when sanctioning the plan voted by the committees.
As explained above, these techniques are rarely used because the mere possibility of implementing them is a deterrent and, therefore, contributes to the success of court assisted amicable proceedings. The mere assumption that a fast-track safeguard proceeding could be implemented is sometimes enough to rally the few dissenting creditors to the agreement, as they do not wish to assume publicly the failure of the amicable proceeding.
In addition, insofar as the restructuring plan is negotiated in the context of an amicable and confidential proceeding, the duration of the subsequent safeguard proceeding will be limited to the time required to vote and adopt the plan. Given the limited duration of the safeguard proceedings, the value-destroying effect and the loss of confidence of the debtor’s customers and suppliers will be significantly reduced.
As indicated above, the very existence of pre-pack proceedings has made court-assisted amicable proceeding more effective. This explains why the use of these pre-pack proceedings may seem low.
French geophysical services company CGG’s restructuring may be the most significant illustration of such pre-packaged plan. In this case, CGG had secured – in the context of a mandat ad hoc – a lock-up agreement with its main creditors providing for that they would support the contemplated restructuring plan. This restructuring plan was then implemented in the context of a subsequent safeguard proceeding after the vote of the creditors’ committees.
Overview of the traditional sale plan
As a general principle, the sale of business is initiated by the judicial administrator in the context of a reorganisation proceeding, if the adoption of a reorganisation plan is unlikely. It can also be implemented in the context of a liquidation proceeding with maintenance of the activities and, to the extent it is not a complete sale of business, in the context of a safeguard proceeding.
A sale plan provides for the transfer of assets, contracts and employment contracts of the debtor to a third-party purchaser. As the sale plan is an asset plan, the debts of the debtor are, therefore, not transferred to the purchaser of the distressed business. The sale plan process is construed as an open bidding process where there is no exclusivity to the benefit of one bidder.
At the end of the process, the court has to accept the offer that allows the most prolonged maintenance of employments attached to the assets assigned and the payment of the creditors, under the best conditions and that presents the best guarantees for its implementation.
While the sale plan has the merit to save employments, the interest of creditors tends to be sacrificed as the sale proceeds are most frequently far below the amount of debts of the debtor.
The new pre-pack sale legal framework
Preparation of the sale of business in the context of an amicable proceeding
Article L. 611-7 of the Commercial Code provides that, at the debtor’s request, the conciliator may be entrusted with a mission to organise the partial or the total sale of the business, which could be implemented, where appropriate, in the context of a subsequent safeguard, reorganisation or liquidation proceedings. Although not expressly provided for, this mission could also be entrusted to the mandataire ad hoc.
The law suggests that the mission to organise the sale of the business should be assigned to the conciliator in the course of the conciliation proceeding if an agreement could not be reached with the creditors. It provides that this mission can be assigned to the conciliator at the request of the debtor after having received opinion of the participating creditors, which suggests that the proceeding is already pending and that negotiations with creditors have already been initiated.
Since the implementation of the pre-pack mission may lead to a total or partial sale of the company, the employer must comply with the legal obligations to provide information and consult employees’ representative institutions.
As part of his or her mission, the conciliator will initiate a bidding process for the acquisition of the business in the context of the conciliation proceeding. In contrast to the bidding process provided for in the context of the reorganisation proceeding, this bidding process will not have to be public. It is, however, essential that the conciliator actions, in particular with the companies acting in the relevant business, ensure sufficient publicity.
The balance between the confidentiality that governs the amicable proceeding and the need to ensure sufficient publicity to maximise the chances of finding a purchaser is sometimes difficult to find. In most cases, the conciliator will use the same practices as those used for the sale of in bonis businesses. The potential buyers are approached by an investment bank, non-disclosure agreements are signed and a data room is set up.
The opening of a subsequent insolvency proceeding is not mandatory if the contemplated sale can be implemented within the framework of a share deal or an asset deal in which the creditors could be fully paid up. However, in practice, a reorganisation or a liquidation proceeding will systematically be opened to benefit from the advantageous framework of the sale in the context of these proceedings.
Implementation in the context of a subsequent insolvency proceeding
After the preparation of the sale in the context of the conciliation proceeding, the debtor will usually request the opening of a reorganisation or a liquidation proceeding, as a total sale of business cannot be implemented in the context of a safeguard proceeding. Although the opening of these proceedings is only justified by the implementation of the prenegotiated sale, the debtor will have to be insolvent in accordance with the conditions for their opening.
Even though it is not provided for in the law itself, the conciliator or mandataire ad hoc who conducted the bidding process beforehand is in most cases appointed as judicial administrator in the subsequent insolvency proceeding. This ensures a natural continuity between the preparation phase of the sale and its effective implementation.
At the opening of the proceeding, the court shall ensure that the actions conducted by the conciliator have ensured sufficient publicity for the preparation of the sale, in particular on the basis of the conciliator’s report and having regard of the public prosecutor opinion. If the actions conducted by the conciliator and the bids received in that respect prior the opening of the insolvency proceeding are considered to be satisfactory by the court, it may decide not to open a public bidding process and a set a date for the examination of the takeover bids.
As the pre-pack sale is implemented in the context of a reorganisation or a liquidation proceeding, the bids submitted to the administrator shall contain certain specific and mandatory provisions, such as:
- business and proposals, a specific description of the assets, rights and contracts to be assigned to the purchaser;
- the sale price of the business and terms and conditions of payment;
- the date of completion of the sale;
- the number of employment contracts to be transferred; and
- the guarantees provided for completion of the purchase.
As any sale in the context of an insolvency proceeding, and to the extent that dismissals on economic grounds may have to be conducted following the sale, the employees’ representative shall be informed and consulted on the bids submitted and on such potential dismissals.
At the end of the process, the court will have to accept the offer that allows the most prolonged maintenance of employments attached to the assets assigned and the payment of the creditors, under the best conditions and that presents the best guarantees for its implementation.
Advantages of the pre-pack framework
The main interests in using the pre-pack sale framework lie in – as in the pre-packaged safeguard plan – the confidentiality attached to the court assisted amicable proceeding during the preparation phase and the reduction of the duration of the subsequent insolvency proceeding.
As explained below, the opening of an insolvency proceeding has a negative impact on the value of the business and sometimes entails the loss of confidence of the debtor’s customers and suppliers. The adverse effects of such proceedings do not allow for the best valuation of the debtor’s assets and, in the worst case, can weaken the interest of potential purchasers.
The pre-pack scheme is of special interest in case of the sale of industrial businesses since the opening of insolvency proceedings generally leads to a significant increase in working capital requirements for such activities. The limited duration of the sale process allows the debtor to mitigate this risk and avoid a significant increase of its financing requirements.
The preparation of the sale in a confidential framework gives time to negotiate with potential buyers and thus contributes for the optimisation of the content of their respective offer. The interests of creditors will be improved, as the negative impact of the insolvency proceeding on the value of the company’s assets will be significantly reduced and the sale proceeds could, therefore, be optimised.
Since the introduction of the pre-pack sale in French law, some significant sales have been successfully implemented within this framework such as FRAM, NextiraOne, Tati or William Saurin. In each of these cases, an investment bank had been mandated to ensure a serious and complete search for potential buyers.
Whenever the sale of a distressed company of a certain size is contemplated, the search for potential buyers will systematically be initiated before the opening of an insolvency proceeding. Sometimes, it is the nature of the interests expressed by potential buyers that will lead the company to use the pre-pack sale framework, for example, when these potential buyers are not willing to take over the company’s debt or do not want to conduct the social restructuring.
Also, they have been cases – such as Doux or Toys ‘R’ Us France – where potential buyers have been identified and offers have been submitted in the conciliation proceeding, but a public bidding process have nevertheless been initiated in the context of the subsequent insolvency proceeding.
If a large majority of significant debtors uses the court-assisted amicable proceedings to search for potential buyers of their businesses in a confidential framework, the ‘complete’ pre-pack framework cannot always be implemented. When the bids submitted are not satisfactory or require further work, or when it appears necessary to open the process to new purchasers, it seems best to revert to traditional sale process.
Over the past 10 years, France has introduced a new range of restructuring tools at the crossroad of amicable proceedings and insolvency proceedings contributing to the development of pre-packaged solutions. The court-assisted amicable proceedings are now emerging as a privileged place to negotiate restructuring solutions, which will be implemented in subsequent insolvency proceedings.
Amicable proceedings offer a confidential and flexible framework allowing the conciliator or the mandataire ad hoc, the debtor, its shareholders and creditors to work on restructuring solutions without destabilising the business. The subsequent insolvency proceedings then allows to implement the contemplated solutions, which include both classic restructuring plan or sale plan.
1 Saam Golshani and Alexis Hojabr are partners at White & Case LLP.