French insolvency law reform of 15 September 2021: beyond a simple transposition of the EU Directive of 20 June 2019

The Covid-19 pandemic has proved to be a crisis of unprecedented proportions, which French companies have been facing for the past year and a half. This crisis was initially a health crisis and then an economic crisis, resulting in a recession of 8.2% of gross domestic product in 2020 and 13.8% in the second quarter of 2020 in France.

Although the health situation now seems to be under control and the economic recovery is encouraging, the state of the French industrial fabric remains fragile. This is particularly true because of the latent undercapitalisation of companies that lost more than 100 billion euros of equity during the pandemic and the gradual end of the exceptional aid put in place by the French government. The “whatever it takes” (“quoiqu’il en coûte”) approach has led to a 40% fall in business failures by 2020. But there are concerns about a catch-up effect following the phasing out of these aids, especially as between 20,000 and 25,000 businesses would currently be kept alive by these measures[1].

However, while this crisis has highlighted the shortcomings of insolvency law in dealing with business failures, it has also revealed the strategic importance of insolvency law in cushioning the impact of an economic recession.

After having taken exceptional measures until now, the government has just transposed the Restructuring and Insolvency Directive of the European Parliament and the Council n°2019-1193 of 20 June 2019 (Directive “on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt”) by order n°2021-1193 of 15 September.

Supplemented by an implementing decree promulgated on 24 September, the order of 15

September applies to proceedings commenced as from 1 October 2021. The legislator has also seized the opportunity of this transposition to perpetuate the measures taken within the scope of order No. 2020-596, known as “Covid” of 20 May 2020. The order of 15 September reforming Book VI of the French Commercial Code thus aims to improve the efficiency of restructuring proceedings. Yet, t does not bring about major changes in the insolvency law, as the legislator did not find it necessary “to call into question its general architecture, but rather to ensure the legibility of the law “[2]. It should be noted that this reform sought by the Directive of 20 June 2019, which constitutes the first attempt to harmonise national insolvency laws within the European Union, brings into French law concepts from Anglo-Saxon law.

The main contributions of this reform are the following:

• The substitution of creditor committees by classes of affected parties
• Cross-class cram-down which allows classes of creditors to impose a reorganisation or safeguard plan on other classes of creditors
• Promoting prevention to detect business difficulties earlier
• Strengthening the conciliation proceedings to limit the actions of reluctant creditors and to strengthen the legal security of the conciliation agreement
• The reduction of the observation period in the safeguard proceedings, which is somewhat more distinct from the receivership proceedings
• Limiting the progressivity of creditors’ repayment instalments in a safeguard or reorganisation plan to put an end to past abuses
• The possibility for the court to impose on shareholders a forced modification of the share capital of their company within the scope of a safeguard or a receivership proceedings
• Confirmation of the rule that the silence of creditors is equivalent to acceptance in case of modification of the safeguard or reorganisation plan
• The abolition of the accelerated financial safeguard proceedings created in 2010
• The confirmation of the accelerated safeguard proceedings created in 2014 which becomes the framework for preventive restructuring within the meaning of the Directive of 20 June 2019
• To promote the financing of companies in difficulty, confirmation of the “post money” privilege in insolvency proceedings, like the “new money” privilege already applicable in conciliation proceedings since 2006
• Greater access for individual entrepreneurs to simplified compulsory liquidation and professional recovery proceedinds to promote their rebound and second chance
• A better articulation between insolvency law and security law in the interest of preferential creditors but also of third-party guarantors and the debtor himself.

This reform will be explained in more detail in several thematic chronicles that we will publish regularly.

Here is a short overview.

The introduction of classes of creditors is the major innovation of the order. It replaces the traditional creditors’ committees with “classes of affected parties”, which are creditors whose rights are directly affected by the proposed plan.

The constitution of the affected party classes will be required as soon as the company exceeds 250 employees and EUR 20 million turnover or simply exceeds EUR 40 million turnover. Regardless of these thresholds, classes will be mandatory in an accelerated safeguard proceeding. The allocation of creditors to these classes is the responsibility of the court appointed receiver. In particular, he must use the concept of “community of economic interest” to allocate the latter. Finally, it seems that the criteria for grouping creditors in the same class is no longer the quality of the creditor (banks, suppliers, or bondholders), but the quality of the claim, for example privileged or only unsecured. To preserve the interest of the creditors, the reorganisation or safeguard plan proposed by the debtor will be adopted if most of the classes vote in favour. The plan can thus be imposed by the Court on dissenting classes. The forced cross-class application of the plan thus enshrines ‘cross-class cram-down’. However, this solution is subject to several mechanisms. First, the Court must verify that forced implementation of the plan does not further deteriorate the situation of the creditor who refused it compared to the situation that would be his in a compulsory liquidation. This first safeguard corresponds to the “best interest of creditor test”. In addition, at least one class of privileged creditors must have accepted the plan. A so-called “absolute priority rule” is also imposed. According to the latter, a senior class of creditors who voted against the plan must be fully satisfied by the same or equivalent means for a junior class to be entitled to a payment or retain an interest.

Considering the necessary staff and turnover thresholds, the introduction of affected party classes will be reserved for large caps and will affect only a minority of proceedings.

Nevertheless, the legislator has introduced other measures applicable to a broad-spectrum of companies to improve the attractiveness and efficiency of French pre-insolvency and insolvency proceedings.

Firstly, through two useful but still insufficient measures, the order aims to improve the prevention of difficulties. The first of these strengthens the power of the President of the Tribunal, who can now initiate an investigation phase as soon as the director is summoned without having to wait until the end of the interview. The second measure aims to accelerate the warning procedure by perpetuating Article 1 of the order of 20 May 2020. This article allows the external auditor to alert the president of the court of the debtor’s difficulties, when the director refuses to take the necessary measures.

In order to make the conciliation proceedings more attractive, the legislator has also maintained the possibility for the President of the Court, at the request of the debtor, to suspend the enforceability of the claim as well as the individual proceedings that the creditor would initiate.

Furthermore, to promote the celerity of proceedings, the legislator has wished to reduce the observation period of a safeguard proceedings. The latter can no longer exceed 12 months as opposed to 18 months previously.

The judgment opens an observation period of 6 months, which can now be renewed only once for 6 months on a specially motivated decision.

With the same objective, the order introduces the possibility to accelerate the observation period and the examination of the plan. Indeed, when commitments for the settlement of liabilities are established based on a certificate from the accountant or the auditor, there is no longer any need to wait for the end of the claim’s verification proceeding.

At the same time, the order deletes the provisions specific to accelerated financial safeguard proceedings and modifies the provisions relating to the accelerated safeguard proceedings.  Accelerated safeguard proceedings will now have a duration of 2 months, extendable up to a maximum total duration of 4 months, producing effects only with respect to the parties affected by the proposed plan. The legislator also perpetuates the measure resulting from the order of 20 May 2020 abolishing the thresholds for opening accelerated safeguard proceedings.

In addition to the legislator’s desire to improve the attractiveness and efficiency of French pre-insolvency and insolvency proceedings, he also wishes to encourage the recapitalisation of distressed companies to promote their recovery.

Thus, the order confirms the “post-money” privilege, originally introduced by the Covid measures of May 2020. A privilege will be granted to creditors who have made a new cash flow injection during the observation period of a court driven restructuring proceedings (receivership or safeguard proceedings) to ensure the maintenance of the debtor’s activity. These “post-money” claims will thus be settled just after the wage claims in the order established by Article L. 622-17 of the Commercial Code.

Finally, the order confirms the legislator’s wish, which was also mentioned by the joint mission for companies affected by the health crisis at the National Assembly on 21 July 2021, chaired by Romain Grau, Member of the French Parliament for the Pyrénées-Orientales, to promote the rebound of the manager following insolvency proceedings.

Firstly, the legislator has maintained the measures, which are considered positive and stem from the order of 20 May 2020. Simplified compulsory liquidation proceedings is now open to all individual entrepreneurs, subject only to the absence of real estate. In addition, concerning the professional recovery proceedings without liquidation, the value of the main residence is set aside to determine the assets of the individual debtor. The limit on the value of assets held has also been raised from €5,000 to €15,000 to facilitate access to this proceedings.

Although this order does not radically transform French insolvency law, it is part of a particular economic context with the emergence of a new kind of global crisis, that of supply difficulties, which may prove disastrous for certain business sectors. The tsunami of business bankruptcies that was prophesied has not occurred, but French public authorities are still afraid of it. This reform aims to protect distressed companies by making French restructuring proceedings more attractive and efficient, while reorganising the balance of power between the debtor, its shareholders and its creditors and encouraging recovery and second chances.

[1] Information report of the National Assembly by the joint information mission on companies in difficulty due to the health crisis, 21 July 2021

[2] Report to the President of the Republic on order 2021-1193