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01 June 2007
The new Insolvency Law (Loi de Sauvegarde des Entreprises) was enacted on July 26 2005 and came into force on January 1 2006. The statute was completed by two State Council decrees dated December 28 2005 and February 22 2007. The new legislation - which now contains an additional tool, the US-style insolvency proceedings known as 'sauvegarde' (safeguard) - has made five routes available to debtors and/or creditors and investors:
Debtors and/or creditors and investors must select one of these options to protect their respective interests, as the suspension of payments no longer represents the dividing line between preventive and formal insolvency proceedings.
Certain high-profile cases (eg, Eurotunnel) have widely publicized the sauvegarde procedure as an innovative and efficient way for over-indebted debtors with sound operating business models to avoid insolvency (although a high price was paid by financial partners which were substantially crammed down in this particular instance). However, commentators have been more discreet about the equally appealing option of conciliation (this time from an investor's standpoint).
The reason for this is probably that the amicable settlement procedure - renamed conciliation by the new law - never matched the legislature's expectations due to major flaws. Although the objective was to allow debtors to reach a workout agreement with creditors so that the suspension of payments (which triggers formal insolvency proceedings) could be avoided, the amicable settlement procedure posed the following problems:
Investors were attracted by the business opportunities created by the amicable settlement procedure, but were often deterred by the risks involved, thus depriving debtors from the new money urgently needed to finance cash flows and secure a longer-term solution. No priority of payment secured newly injected cash or support. Under the previous regime and related case law, payments and transactions made or entered into before the date on which the court approved the arrangement could be annulled (where the workout agreement had failed) for having taken place when the company was already insolvent. New lenders were also at risk of being held liable on the grounds - quite foreign to common lawyers - that their financial support had worsened the debtor's situation, therefore opening the right for the court-appointed liquidator to claim damages against the lender.
Most of these flaws have been corrected and conciliation should now be considered as a source of business opportunities for investors, whether industrial or financial (eg, investment funds). Various improvements contribute to the attractiveness of conciliation as a means to achieve turnarounds successfully and safely.
First, the time period available to debtors and creditors to reach an arrangement is now five (four plus one) months. Combined with the fact that conciliation is now open to debtors where difficulties are simply foreseeable (or where payments have been suspended, provided that the suspension occurred less than 45 days before the start of the procedure), this extended period gives more time to find innovative solutions and makes this route available in a wider range of situations.
Second, confidentiality is now better (although not fully) preserved (until the court's approval is obtained, should the debtor decides to seek such approval and the legal effects attached thereto), since the debtor is no longer allowed to petition the court to seek a stay of the creditors' claims during the negotiations; the absence of such threat facilitates the negotiations.
Third, and most importantly, there are two key innovations. Firstly, under Article L611(11) of the law, new - as opposed to renewed or rescheduled - credit providers (as well as new services and goods suppliers) are granted, subject to court approval of the workout agreement entered into by the debtor and the participating creditors/investors, a priority right to repayment of the newly loaned money (or newly supplied services or goods) if sauvegarde, reorganization or liquidation proceedings are subsequently opened against the debtor. New money priority is superseded only by employee wages and court costs (ie, mainly court-appointed officers' fees); it prevails over tax and social security claims, as well as any other secured and unsecured claim arising before the opening of the conciliation proceedings.
Secondly, new money providers are no longer exposed (as a general rule applying to all creditors, regardless of the restructuring route selected) to potential tort actions, except:
Provided that the targeted debtor is not confronted with structural issues in terms of market positioning or operational profitability such that its future viability would require heavy restructuring (for which conciliation is not the most suitable avenue, as only formal insolvency proceedings provide for a derogatory redundancy regime and state-funded coverage of wage claims), conciliation will now provide a favourable route to invest in under-performing companies facing a cash-flow crisis. However, such investment would require an in-depth assessment of the company's assets since new money priority depends on it. In contrast to pre-allocated asset-based securities, such as hypothèque (on properties) or nantissement (on movable assets), a priority right is limited to assets existing when the priority right is exercised. Wise investors should secure their priority right (subject to court approval) by a pre-allocated asset-based security.
A successful investment in a French distressed company often requires that investors take control of the business restructuring process; investors may also have to favour an equity approach instead of the commonly observed debt-trader approach.
For further information on this topic please contact Constantin Achillas at Denton Wilde Sapte by telephone (+33 1 53 05 16 00) or by fax (+33 1 53 05 97 27) or by email (firstname.lastname@example.org). Alternatively, please contact Philippe Dubois at Cabinet Poulain & Associés by telephone (+33 1 53 23 43 00) or by fax (+33 1 53 23 43 09) or by email).
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