French “conciliation” proceedings made more appealing – Caractère magazine, May 2021

French lawmakers and turnaround professionals encourage businesses to rely on prevention mechanisms to stave off financial distress. The French Commercial Code establishes two such mechanisms, namely “mandat ad hoc” and “conciliation” proceedings. The purpose of the latter, as described in Article L.611-6 of the Commercial Code, is to enable a debtor to reach a confidential out-of-court agreement with its main creditors to solve its debt issues. Unlike bankruptcy filing, filing for conciliation proceedings does not prohibit unpaid creditors from pursuing individual claims. This means that any creditor wishing to assert a claim may file a proof of claim with the proper court and, ultimately, collect the debt. Nonetheless, decree (ordonnance) 2020-596 of May 20, 2020, which expires on December 31, 2021, has made conciliation proceedings even more appealing. It provides that a debtor in conciliation proceedings may petition the presiding judge of the court to stay or prohibit any legal action by recalcitrant creditors. The purpose of this new measure is to prevent dissenting creditors from blocking an out-of-court agreement and force them to yield to the common desire to strike a deal. The presiding judge may also grant a debt deferral pursuant to Article L.611-7 of the Commercial Code. Where a creditor’s objection jeopardizes an out-of-court arrangement, the debtor may request up to 24 additional months to pay its debts. The issue of payment deferrals found its way into case law only recently, when a Court of Appeals ruled that a distressed company could not be granted a deferral that would only artificially postpone insolvency, just so that it can delay filing for bankruptcy (Court of Appeals of Aix-en-Provence, March 18, 2021, ruling 20/06472). That is because the lawmakers’ intent was to ensure that conciliation proceedings actually lead to an agreement. The point of allowing the presiding judge to grant a debt deferral was to prevent a creditor’s refusal to engage in negotiation from ruining any chance of an agreement.