Legal News from France: Learning by doing, or Sauvegarde, the third variant

The French parliament has created a new form of sauvegarde insolvency proceedings by passing law No. 2010-1249 on Banks and Financial Regulation of 22nd October 2010. The sauvegarde insolvency proceedings were introduced in 2006 and had already been subject to extensive reform in 2009. The so-called “sauvegarde financière accélérée” (Sfa), a fast-track form of sauvegarde for financial restructurings will be in force from 1st March 2011. Based on the experiences of the “prepack à la française” in particular in the cases of “Autodistribution” and “Thompson”, new proceedings were envisaged that combine the confidential pre-insolvency proceedings of conciliation with shortened sauvegarde proceedings. Sfa is in fact a sauvegarde proceeding due to the fact that the conditions to open proceedings apply. The claimant has to prove that he is faced with financial – amongst other – difficulties that he cannot overcome and he also needs to show that he is not insolvent. Furthermore the opening of sauvegarde proceedings effectuates a ban on enforcement and payment, and they are recognised as insolvency proceedings throughout the European Union thanks to appendix A of the European Insolvency Regulation. Sfa is different from “normal” sauvegarde proceedings in two respects regarding the conditions to open proceedings. There are some limitations – companies which want to have a proceeding like this have to have more than 150 employees or a turnover of more than €20 million and it is necessary that conciliation proceedings were initiated and have not been concluded. Prerequisites of opening The conciliation proceedings allow a company that is in financial difficulties or has been insolvent for not more than 45 days to apply to the competent court to appoint a third person (usually an insolvency adminsitrator or a former commercial judge). This person then attempts to reach an agreement regarding the restructuring of the company by having confidential conversations. As the concilliation proceedings are purely “contractual” pre-proceedings, the company or the “conciliator” has no power to outvote minority creditors and to compel the minority or non-participating creditors to agree to a plan negotiated by the majority of the creditors that reduces the debts. Moreover, it is widely-recognised that in the context of complex structured business financing it is virtually impossible to reach a solution with the creditors that all parties can agree on. The cases of “Autodistribution” and “Thompson” attempted to eliminate this problem of agreement. Plans which were negotiated during the concilliation proceedings did not receive the consent of all creditors. However, they were approved by the creditor committees with two third majorities within a few weeks of sauvegarde proceedings being opened after the end of conciliation proceedings. Altering the requirement of a 2/3 majority amongst claims and creditors to a straightforward 2/3 majority amongst claims in creditor committees has made it easier to cram down on dissenting minorities. With Sfa there is now no longer a need for concilliation proceedings to end and for sauvegarde proceedings to be opened separately. As long as a restructuring plan is prenegotiated in concilliation proceedings and is not implemented because of a minority opposition, a request for “sauvegarde financière accélérée” can be made. The plan must be adopted by the court within 2 months of being accepted by the creditor committees. The time limit for the creditor committees to agree can for this purpose be shortened by a maximum of 8 days. Only financial creditors are affected A further characteristic of Sfa is that only the financial creditors should be affected by the effects of the opening of the insolvency proceedings. Suppliers and the state can enforce their claims. A proof of claim is also not necessary in the proceedings. The financial creditors that have taken part in conciliation proceedings are likewise no longer required to make a proof of claim although it is possible to do so. Rather the company compiles a list of these claims so that it can be published by the insolvency administrator and is accordingly deemed as having been registered as long as the creditors do not wish to make any amendments. This course of action is of particular significance bearing in mind that the time limit to file a claim is normally 2 months after publication in the French official gazette BODACC, Bulletin official des announces civiles et commerciales, (extended to a further 2 months for creditors residing abroad). Taking the impact of the financial crisis of the last year into consideration it remains to be seen whether the Sfa will develop into a successful model. It is also questionable whether and to what extent the creditors not affected by the Sfa will let go of the usual stigma attached to a company’s insolvency. Nevertheless, the French parliament has modernised its insolvency law as it did in 2009 (at that time on the basis of the EuroTunnel case) on the basis of practical experiences and the pragmatic solutions provided by the French commercial judges. Further amendments to French insolvency law 1) Law No. 2010-1249 on Banks and Financial Regulation of 22.10.2010 (In force from 1.3.2011) The possibility of implementing a debt to equity swap is extended to insolvency proceedings without creditor committees. Before this amendment debt to equity swaps were only possible in insolvency proceedings in which creditor committees were mandatory (for companies with more than 150 employees or a turnover of more than €20 million) or were appointed by court order. The insolvency administrator has to consult the creditors individually and obtain their consent. In contrast to forbearance or the waiver of claims where the lack of an answer from a creditor in due time implies consent, the affected creditor’s silence has no consequences. This is in line with the far-reaching consequences of a debt to equity swap. 2) Law No. 2010-737 on the Reforming of Consumer Credit of 1.7.2010 (In force from 1.11.2010) The French parliament has reformed private debt consumer insolvency proceedings that take place before the so-called Over-Indebtedness Commission (“commission de surendettement”) which is exclusively for private debt cases, within the boundaries set by Directive 2008/48/EC of the European Parliament and of the Council of 23rd April 2008. The aim of this reform was to reduce the average length of proceedings and to rebalance the tasks allocated to the Commission and the enforcement judge. The Over-Indebtedness Commission in each French department will have a strengthened role because the decision on the admissibility of an application leads henceforth per se to a ban on enforcement. From now on the Commission can implement measures against dissenting creditors concerning the submitted debt resettlement plan such as forbearances, payment by installments, redemption orders, reductions in the interest rate and a moratorium of 2 years without judicial interference. A waiver of a claim can however still only be pronounced by the judge. In cases where there is no prospect of reducing some of the liabilities due to the debtor being unable to pay and a lack of assets that can be sold, the Commission can recommend implementing the new form of a bankruptcy proceeding without appointing a liquidator (“rétablissement sans liquidation judiciare”) without the debtor’s approval. When the judge has agreed to this the debtor is relieved of the rest of his debts. 3) Ordonnance No. 2010-1512 on the Amendment of the Insolvency Law concerning the Sole Trader with Limited Liability of 9.12.2010 (In force from 1.1.2011 or 1.1.2013) Before the Law on Sole Traders with Limited Liability came into force on 1.1.2011 (Law No. 2010-658 of 15th July 2010, see Schubra Upd@te France on 13.4.2010 regarding this proposed bill) the French government had to make sure that its insolvency statutes were in conformity with the changes in the law. Therefore, it should be ensured that the different restructuring and liquidation procedures only affect the parts of the sole trader’s assets which are recoverable assets assigned to his commercial activities. From 2013 the sole trader will be able to assign his assets into different commercial activities in relation to which separate insolvency proceedings that can then be opened. The sole trader can eventually take part in consumer insolvency proceedings before the Over-Indebtedness Commission with his non-assigned assets as long as it does not concern commercial debts. Filing a claim in France: The time limit for filing of a restitution claim to be put back in one’s original condition runs from the publication of the insolvency proceedings In its decision of 16th November 2010 the French Court of Cassation clarified the time limits for the filing of a restitution claim in relation to creditors residing in another EU country who failed to meet the deadline for filing a proof of claim, in this case Germany. The facts of the case are as follows: a German creditor had failed to file its claim with the French insolvency administrator within 4 months of the publication of the insolvency proceedings in the French official gazette for matters concerning civil and commercial law, BODACC (Bulletin official des announces civiles et commerciales). The application for restitution, that should generally be made within 6 months of the publication of the insolvency proceedings, was rejected by the Juge Commissaire, the appointed judge who supervises the insolvency proceedings in the French insolvency court, as well as the appeal court in Paris because the deadline had expired. The German creditor also had no success in its appeal to the Cour de cassation. The creditor argued primarily on the basis of Article 21(2) of the European Insolvency Regulation before the highest civil court in France that the time limit that concerned it did not begin to run from publication in the BODACC because it does not have an establishment in France. Furthermore it asserted that the time limit to make an application for a restitution should be extended to 1 year because it was not aware of the full details of the claim until after the 6 months deadline had expired. The French Court of Cassation rejected the argument. Article 21(2) of the European Insolvency Regulation is not applicable because it governs the publication of insolvency proceedings in a Member State other than that where insolvency proceedings were opened and where the debtor (and not a creditor) has an establishment. According to Article 2(2)(h) of the European Insolvency Regulation the law of the Member State of the opening of proceedings governs the proof of claim process, therefore, it is France. Finally it was held that an extension of the time limit for restitution is not possible because the creditor would have had the possibility to estimate the claim to be filed on the basis of the contract. The German creditor is therefore, only left with the possibility of bringing action against the insolvency administrator if he had failed to give notice of the opening of the proceedings. On the one hand, this judgment of the Court of Cassation shows quite plainly that French insolvency law has strict time limits for filing proofs of claim. On the other hand, it is apparent that in the context of reforming the European Insolvency Regulation, a Europe-wide system for the publication of insolvency proceedings should be created. In the meantime German creditors who have debtors in France only have the option of monitoring the BODACC,