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Coronavirus – Rule changes for businesses facing difficulties – France

  • France
  • Coronavirus
  • Corporate

24-06-2020

Ordonnance n°2020-341 of 27 March 2020 had already introduced several adjustments to the rules relating to the difficulties faced by companies in the context of the current health emergency.

Ordonnance dated 20 May 2020 was adopted in order to make these rules more effective, in order for companies to avoid becoming insolvent at a later stage.

The aim to deal more effectively with difficulties at an early stage has led to changes affecting, in particular, the conciliation proceedings and the safeguard procedure. Some of these changes are presented below.

Purpose of the conciliation proceedings

Pre-insolvency tools provide, inter alia, for conciliation proceedings. These proceedings are initiated by a company facing legal, economic or financial difficulties, whether actual or contingent, with a view to reaching an arrangement with its main creditors in order to overcome these difficulties.

The conciliation proceedings are undertaken under the supervision of a court-appointed agent whose role is to facilitate negotiations between the company and its main creditors. The aim of these negotiations is to reach a conciliation arrangement between a company and the creditors who have agreed to enter into such conciliation arrangement.

The creditors who grant new credit within the framework of a conciliation agreement approved by a court decision are given preference over most of the other creditors. This is the "new money" privilege. The same privilege applies to credit resulting from new goods or services being made available to the company with a view to ensuring the continuation of its activity.

The main feature of these proceedings is that they are voluntary and do not impose any (i) restrictions upon the powers of the company’s managers, (ii) obligations on any of the creditors to enter into a conciliation arrangement or (iii) restrictions upon the rights of the creditors.

New temporary rules for conciliation proceedings in connection with COVID-19

The new regulation resulting from the ordonnance n°2020-596 dated 20 May 2020 has substantially amended the rules for conciliation proceedings by extending the duration of such proceedings and by giving the courts the powers to impose restrictions on the rights of the creditors involved in conciliation proceedings upon request of the company which filed for conciliation proceedings.

Time limit

Any ongoing conciliation proceedings or any conciliation proceedings to be initiated until 23 August 2020 (inclusive) can be extended up to a maximum of a five month period.

By way of a reminder, the “normal” duration of conciliation proceedings is four months, which can be extended by an additional 1 month period.

Restrictions on the creditors’ rights

Under this new regulation, the president of the relevant court can, upon the company’s request and within a defined time period, impose certain measures on a creditor with a view to suspending the enforcement of its receivable for the duration of the conciliation proceedings. Such measures may consist of the following:

  • interrupting or prohibiting any legal action from such creditor which aims to (i) obtain the payment of any money from the company or (ii) order the termination of any agreement based on the ground of a default of payment
  • interrupting or prohibiting any enforcement proceedings initiated by such creditor in connection with the company’s assets
  • postponing or rescheduling the payment of any sums owed by the company. In this case, the interest surcharges or penalties provided for in case of delay are not incurred during the period set by the president of the relevant court

The measures ordered by the president of the relevant court will have effect only until the end of the mission entrusted to the court-appointed agent.

Another tool is available to a company before a creditor has made a formal request for payment. This tool relates to any receivable regardless of whether such receivable has fallen due before, during, or is to fall due after the conciliation proceedings. In this case, and by way of anticipation, the company can request for the president of the relevant court to grant a moratorium. This moratorium can postpone the payment of this receivable for a two-year period and provide that the interest surcharges or penalties provided for in case of delay are not incurred during the period set by the president of the relevant court.

Prior to the new Ordonnance, the company’s request could be made only after the creditor had delivered a formal request for payment. Now, the company is allowed to request a moratorium as soon as the creditor has expressly or tacitly refused the request made by the conciliator to suspend the payment of its claim.

These new arrangements are applicable until 31 December 2020 only.

Purpose of the safeguard procedure

The safeguard procedure is also a pre-insolvency tool but, unlike conciliation proceedings, it is a collective procedure.

Its purpose is to promote the reorganisation of the company in difficulty in order to allow for the continuation of its economic activity, the maintenance of employment and the discharge of its liabilities.

The manager of the company retains his/her powers of management in the company, with the court-appointed administrator carrying out only a mission of assistance and supervision.

In principle, this procedure leads to the drawing up of a plan to safeguard the company, which may, in particular, spread the payment of its liabilities up to a maximum period of 10 years.

New temporary rules FOR the safeguard procedure in connection with Covid-19

The purpose of the new Ordonnance is to allow the acceleration of proceedings leading to a safeguard plan in court. A shortening of the time limits for consulting creditors may be authorised. A reduction in the formalities for consulting creditors is also provided for, it being reminded that the creditor's silence is tantamount to acceptance, in particular with regard to the proposals for debt remission.

Moreover, in the same way as the above mentioned privilege of “new money” within the framework of conciliation proceedings, Ordonnance dated 20 May 2020 creates a new privilege. This new privilege is for the benefit of those who agree to make a new cash contribution to the debtor during the observation period with a view to ensuring the continued operation of the business and of those who undertake, for the execution of the safeguard plan, to make such a contribution. The order of priority of this new privilege is lower than the privilege of “new money” within the framework of conciliation proceedings. These new provisions shall apply to the safeguard procedures initiated before the entry into force of another expected Ordonnance and, in any case, no later than 17 July 2021.

Rules changes for businesses facing difficulty in France: conclusion

French government has sought to reinforce the effectiveness of procedures which may help companies facing difficulties to reach an agreement with their creditors at a time when it is still possible for these companies to avoid insolvency proceedings.

It is thus apparent that there is now a clear contrast between the “old” regulations governing conciliation proceedings and the “new” temporary rules brought on by ordonnance n°2020-596 which provides for potential restrictions on the creditors’ rights.

Similarly, in order to prompt creditors to support a safeguard plan, they may now enjoy the benefit of a new privilege which was, until now, only been made available to those agreeing to contribute fresh cash within the framework of conciliation proceedings.

It is therefore crucial for all companies which anticipate difficulties in the coming months to assess their financial capacities and consider the options available to them under French law, and, in particular under these new temporary measures, to mitigate any risk of insolvency.

Likewise, creditors should anticipate what their strategy should be if they are concerned that one of their main debtors could initiate such proceedings in the near future.

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