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13 April 2006
On July 26 2005 Parliament enacted the Corporate Protection Law, which entered into force on January 1 2006. It aims mainly to facilitate and encourage the prevention of insolvency proceedings through negotiated plans with creditors.
Under the new statutory regime, there are two types of insolvency procedure (ie, receivership and liquidation) and three types of pre-insolvency procedure. Among them, the new conciliation procedure (formerly known as amicable settlement) aims to anticipate the difficulties that may arise, in agreement with the creditors. This procedure will be carried out under the auspices of a conciliator.
The conciliation procedure contains a new feature that is intended to encourage creditors to adopt a negotiated plan. Pursuant to the new Article L611-11 of the Commercial Code, if an order of conciliation is approved by means of formal judgment, creditors making new money (or goods or services) available to the debtor in connection with the order will rank in priority to other creditors.
First, creditors will benefit from the new priority of payment only if the order of conciliation has been homologated. Homologation is a formal approval of the negotiated agreement by the court, whereby the plan becomes public and may be challenged. The protection afforded to new credit is likely to lead creditors to push for homologation of agreements in most cases.
Second, homologated agreements shall expressly specify the grant of new credit. In other words, the agreement shall provide for the allocation of the amounts. In addition, pursuant to Article L611-11, the credits shall be made before the commencement of the conciliation procedure.
Only the injection of new money is concerned. As a consequence, support or credit granted by banks will benefit from the new priority of payment. In addition, current account advances carried out by shareholders will benefit from the new security. In contrast, the law excludes from its scope shareholders providing new equity. However, uncertainties remain with regard to bonds issued by a company and subscribed by shareholders, as well as bonds giving access to the share capital.
The injection of new money shall be granted in order to ensure the continuation or durability of the distressed company's business.
In addition, the new statute excludes from its scope the support or credit granted before the commencement of the conciliation procedure. As a consequence, funds provided within a refinancing transaction will benefit neither from the new priority of payment nor from respite for payment.
The new priority of payment is a preferential rank accorded to creditors. Therefore, the priority of payment subsists even in case of subsequent receivership or liquidation, whatever the outcome. Moreover, as the new preferential rank will be exercised over both movables and immovables of the debtors, Article 2105 of the Civil Code must be applied. Article 2105 provides as follows:
"Where, in the absence of movables, creditors having a prior charge as defined in the preceding article [creditors entitled to prior charges over real estates] wish to be paid out of the proceeds of an immovable and compete with other creditors having prior charges over the immovable, these creditors have priority and may enforce their rights in the order indicated in the said article."
Therefore, creditors benefiting from the new priority of payment will be paid only out of the debtor's movables. If the movables are insufficient, creditors will be paid out of the debtor's immovables.
Pursuant to Article L611-11, creditors that provide new money (or good or services) to ensure the continuation of the business of the distressed company (other than shareholders providing new equity) will benefit from priority of payment over all pre-petition and post-petition claims (other than post-petition employment claims and procedural costs), even in case of subsequent receivership or liquidation.
Creditors will benefit from the new priority of payment only if the order of conciliation has been homologated. Consequently, they must disclose the amount of the funds provided. In other words, the drawback of the homologation of restructuring agreements by means of formal judgment is that confidentiality is lost.
For further information on this topic please contact Jean-François Adelle and Renée Kaddouch at JeantetAssociés by telephone (+33 1 45 05 80 08) or by fax (+33 1 47 04 20 41) or by email (firstname.lastname@example.org or email@example.com).
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