Insolvency proceedings in France

Introduction

Insolvency proceedings can be a dangerous game fosr creditors in France. Once your debtor has filed for insolvency under French laws, your possibilities, as creditor, are severely limited and your ability to pursue legal actions essentially paralyzed.

These insolvency procedures allow for a company to manage its liabilities all the while benefiting from a state-mandated protection from the commercial courts (“gel du passif”). For creditors, this creates a bubble around your debtors’ assets, leaving you without many feasible options for filing legal proceedings.

Once insolvency proceedings have been opened, creditors must declare any disputed claims to the judicial administrator within a strict 30-day window. If this time frame in not respected you may find yourself unable to recover your debts. To avoid this, we advise you strongly to file for an interim injunction order and have the court declare a freezing order (“saisie consevatoire”) over your debtor’s assets. This is a popular method of debt collection in France as it can be done rather simply in the event of a creditor’s reasonable doubt on their debtor’s solvability. The process is efficient and can be executed by your collection lawyer.

For more information on debt collection laws in France see Novlaw’s Practical guide on Debt Collection in France

Insolvency proceedings in France

Insolvency proceedings are particularly relevant to the French legal environment. There have been a variety of reforms in recent years in a general effort to preserve the fabric of the French economy. The high rate of SME companies in France has brought about an increase in insolvency and unpaid dues throughout the country. The reforms regulating insolvency proceedings in France have been steered towards allowing struggling companies to bounce back, maintain employment and in the best-case scenario repay their unpaid dues. Keeping these SMEs alive means maintaining their suppliers, customers, service providers and employees afloat as well. Debt collection laws and agencies are here to balance out between the plight of unpaid bills and the necessary restructuring of struggling companies.

French insolvency laws have established different procedures for creditors and debtors alike.
At Novlaw we recommend you spend the time to properly identify the different procedures you may want to take before your debtor files for insolvency.

The question becomes, when and how can your debtor file for insolvency? When is it appropriate for you, as a creditor, to freeze your debtor’s assets?

Novlaw is here to explain to you the different proceedings available in France and how to make sure you properly safeguard your debts.

1. Why your debtor may choose to file for insolvency?

Insolvency proceedings allow companies to manage their difficulties with the help of certain key judicial measures.

Once a company decides to file for insolvency under French law, it is protected financially by two key legal tools:

– The first instrument, A freeze on individual creditors and their proceedings: the company’s creditor are no longer able to initiate individual debt collection proceedings against their defaulting debtor. The company’s debt are managed collectively and is no longer the responsibility or right of a single individual creditor.
– The second, the company’s overall payment of debts is frozen during the entirety of the insolvency proceeding. Companies having filed for insolvency are not allowed to pay their creditors for debts predating the proceeding. This legally binding measure protects the struggling company as it grants sufficient time for the undertaking to reconstitute its cash flow and establish a sustainable plan to settle its unpaid dues.

The idea hiding behind these protective measures is to allow a balancing out of interests between struggling companies and their creditors. Both parties are essential to the functioning of the French economy, for which SMEs make up a notable percentage.

Under French law it is key to distinguish between insolvency proceedings (“procédures collectives”) seen above, and preventive meaures used as instruments of financial precaution before true financial difficulties arise.

Preventive measures or amicable restructuring methods such as the ad hoc mandate (“mandat ad hoc”) and conciliation (“procédure de conciliation”) exist in France with the intent of establishing legal tools that facilitate amicable settlement and can be requested solely by the debtor.

2. What are the different proceedings your debtor may file for?

There are three types of insolvency proceedings in France. Your debtor’s choice is made by determining which is most adapted to the degree of financial difficulty suffered by the struggling company.

The different insolvency proceedings and judicial restructuring proceedings in France

Judicial safeguard (“sauvegarde judiciaire”) This method can be extended up to 18 months with a renewable ‘observational period’ of 6 months (without exceeding 18 months). This procedure is meant to apply as a preventive measure, before the company reaches insolvency. Its aim is to facilitate internal restructuring and ensure the successful repayment of its debts and liabilities.

Judicial Re-organisation (“redressement judiciaire”) intervnes when the difficulties are proven and the company can no longer pay its debts. The objective is to create a recovery plan in order to consider the continuation of the activity and the safeguarding, the maintenance of the employment and the discharge of the liabilities. It has a maximum duration of 18 months (6 months renewable three times maximum).

Winding up procedure (“liquidation judiciaire”): this procedure intervenes in cases where the firm’s financial difficulties are too important to allow for a sustainable recovery plan and proper repayment of debts. In these cases, the firm’s activities are ceased and the employees are let go and the company’s assets are sold off by a liquidator in order to reimburse the creditors. This measure is taken in the more extreme cases and favours debt collection proceedings and creditor protection.

3. When can insolvency proceedings be initiated?

Each procedure has its own set of rules and responds to different degrees of financial difficulty. The conditions for filing for insolvency are often linked to the state of the firm’s finances and its ability to pay back debts and liabilities.

There are different stages of insolvency. Your debtor’s company may be in a state of suspending payments, where its ‘available assets’ are insufficient and unable to meet its liabilities (ex: unpaid dues).

This means the company is no longer in a position to pay back its debts and is legally in a state of insolvency. The date of insolvency can be determined in advance, using your company’s management indicators. The earlier this risk is detected, the easier it will be to avoid this difficulty.

The conditions for requesting Judicial safeguard:

The conditional requirements to fulfill before filing for judicial safeguard (the first insolvency proceeding available) are the following:

the request must be made by the company’s legal representative
the company must be facing overwhelming financial difficulties
the company may not be in a state of insolvency at the time of the request

Good to know: there exists a fast track to a safeguard procedure or (sauvegarde accélérée) which allows the struggling company to be in suspension of payment – as long as that period has not surpassed a maximum of 45 days.

The conditions for requesting Judicial re-organisation and liquidation proceedings:

the company must be in a state of suspension of its payments;
the request can be made either by a representative, public prosecutor or by affected creditors.

Good to know: Liquidation proceedings are only made possible in the occurrence that the company’s finances are inoperable and repayments of debts impossible to execute.

In the event of insolvency or nascent financial difficulty we recommend seeking assistance in before the situation worsens. However, if your company finds itself in a situation of suspension of its payment and insolvency begins to loom over your heads, Novlaw is here to assist you in your procedures.

If you are a creditor facing your debtor’s imminent insolvency, our debt collection attorneys are here to assist you in best recovering your unpaid dues.