Covid recovery: France introduces mini reorganization proceedings for very small businesses – Caractère magazine, September 2021
Column by our Restructuring partners Numa Rengot and Arnaud Pédron, published in Caractère magazine in September 2021 (editor: Guillaume Prudent).
Economic recovery is within reach. Government measures are bearing fruit: business failures are down by 40%, the CAC 40 is on the rise and so is the investor confidence index.
But that may just be the calm before the storm. French companies have lost €100 billion in equity, and many small businesses, which are often touted as the backbone of the French economy, are struggling in the wake of the pandemic.
It is in this context that, on May 31, 2020, a law was passed to introduce a new type of insolvency proceedings called “crisis recovery reorganization” (“traitement de sortie de crise” or “TSC”), which can be described as a simplified, fast-track mini-reorganization. Crisis recovery reorganization is designed for very small businesses (VSBs) with fewer than 20 employees and less than €2 million in revenue, that can no longer pay their debts but can still pay their employees’ wages, that put out reliable, unbiased and accurate financial statements, and that can demonstrate their ability to formulate, within three months, a plan to repay their creditors.
This new form of reorganization is primarily geared towards well-run VSBs facing financial hardship caused or exacerbated by the pandemic, as opposed to “zombie” VSBs that were already struggling before Covid hit. The lawmakers’ goal being to encourage these VSBs to seek court protection to quickly formulate a debt repayment plan, affordability (the appointment of only one creditors’ representative makes for considerably less costly proceedings) and efficiency (the shorter 3-month observation period reduces the risk of value loss) were paramount in designing these proceedings. No inventory of assets is required. It is also worth noting that creditors will not be required to file any proof of claim or ownership of assets. Since the VSB can pay wages, its employees are not eligible for coverage by the French wage guarantee fund.
Debt repayment plans have a maximum term of 10 years and, from the 3rd year onward, are subject to an 8 percent minimum repayment requirement, compared to 5 percent in standard reorganization proceedings. If the debtor is unable to submit a plan within three months, it will be placed in court-supervised reorganization or liquidation.
Only the owner of the business can file for crisis recovery reorganization and, during the three-month period, he or she cannot be compelled to sell the business. It remains to be seen whether crisis recovery reorganization and the recent introduction of a financial hardship detection system will suffice to keep VSBs from becoming direct business casualties of the pandemic. Bear in mind, however, that crisis recovery reorganization will only be around until June 1, 2023.
