Amendment of French restructuring and insolvency laws: a new balance between stakeholders

The reform resulting from Order no. 2021-1193 dated September 15, 2021 is applicable to proceedings initiated as of October 1, 2021

French insolvency law is undergoing a far-reaching reform, 7 years after the last major reform that came from Order No. 2014-326 of March 12, 2014. This reform is the result of Order No. 2021-1193 amending Book VI of the French Commercial Code, adopted by the Council of Ministers on Wednesday, September 15, 2021 (the Order).

The use of an order taken by the government had been authorized by the French parliament as part of Law No. 2019-486 of May 22, 2019 (Articles 60 and 196) for the purpose of:

• transposing into French law the European directive (EU) No 2019/1023 of June 20, 2021 (the Restructuring Directive) which aims at harmonizing the laws of the different Member States on preventive restructuring and insolvency, to reduce the length of proceedings, to promote the use of preventive proceedings and to improve the position of creditors, particularly security holders; and
• simplifying, clarifying and modernizing the rules relating to security interests and security-holding creditors in Book VI of the French Code de Commerce.

The government has made the choice, for consistency purposes, to deal with these two topics in a single Order.

While the reform does not entirely disrupt the existing structure of Book VI of the French Commercial Code, significant changes, inspired in particular by foreign laws¹, have profoundly modified the balance of restructuring and insolvency laws:

• the combination of conciliation and accelerated safeguard proceedings is established as the reference preventive framework within the meaning of the Restructuring Directive, through the reinforcement of the effects of conciliation proceedings - by the introduction of a principle of stay of individual proceedings (not collective and not automatic) - and the facilitation of the adoption of restructuring plans in spite of the opposition of dissenting parties;
• the introduction of affected parties classes makes it possible to call upon creditors and equity holders to express their views on the proposed plan and to apply a cross-class cram down mechanism in the event of rejection (without the agreement of the debtor in judicial reorganization), thus facilitating the adoption of restructuring plans, subject to respect of the protections accorded to affected parties (in particular the absolute priority rule and the criterion of the best interests of creditors); 
• the ability of the court to impose a debt term-out on dissenting creditors (i.e., uniform payment periods of up to ten years, the amortization profile of which has been modified for the benefit of creditors) is (i) abolished in safeguard proceedings as soon as classes of creditors have been constituted (i.e., above certain thresholds to be determined, but which we know will be assessed at Group level), and (ii) limited in judicial reorganization proceedings to situations where the plan has been rejected if classes of creditors have been constituted; and
• the safeguard and reorganization privilege is enshrined in positive law for the benefit of creditors who contribute in new money.

The provisions of the Order shall apply to new proceedings opened from October 1st, 2021, and not to ongoing proceedings on the date of its entry into force. However, once the Order comes into force, and in the case of a subsequent amendment of a plan approved in the context of proceedings opened before May 22, 2020, the provisions concerning the safeguard and reorganization privilege shall apply by way of exception and under certain conditions.

A number of questions remain however unanswered until the decree on the Order is published (including appeal or valuation methods admitted by the judge in the event of such appeal against the plan adopted).

Without prejudice to the date of its entry into force, the Order will still have to be ratified by the French parliament, and a draft law will thus have to be tabled by the government by January 16, 2022. 
Finally, it should be noted that, in parallel with this reform of restructuring and insolvency laws, the government has reformed the substantive law applicable to security interests (Order No. 2021-1192 of September 15, 2021 reforming the law of security interests).

The main changes brought about by the Order are presented hereafter.

Compliance of French law with European law

The combination of "conciliation and accelerated safeguard proceedings" as a preventive framework of reference

• Accelerated safeguard proceedings are reformed to comply with the requirements of the Restructuring Directive. Accelerated safeguard was chosen to become the reference preventive restructuring framework within the meaning of the Restructuring Directive. The report to the President on the Order states that these proceedings were however already largely in conformity with European law, so that the changes made to the latter are limited in number (though not in importance).
• This choice of the French legislator preserves the time tested "conciliation and accelerated safeguard proceedings" combination, in accordance with what is permitted in Article 4.5 of the Restructuring Directive.²  Accelerated safeguard proceedings can only be opened at the request of the debtor at the end of a compulsory prior conciliation phase and subject to the debtor having drawn up a draft plan designed to ensure the company's survival and likely to receive sufficiently broad support to make its adoption likely within a short period of time. In this way, the Order enshrines accelerated safeguard proceedings as a means of deploying a negotiated solution in conciliation proceedings, despite the opposition of certain creditors.

The binding nature of the enhanced conciliation proceedings

• In line with the objectives set by the Restructuring Directive, already partly introduced by Order No 2020-596 of May 20, 2020 on the measures taken in response to the COVID-19 health crisis, the Order enshrines in a lasting way the temporary suspension on a case-by-case basis of the right of a creditor to require payment of a debt. This suspension is not automatic or collective (i.e., it can only occur on assignment of an individual creditor, i.e., in the context of a contradictory procedure).
• The Order thus affirms the possibility granted by the judge to rescheduling on a case-by-case basis:

(a)  claims due for a maximum period of 2 years when the creditor (i) has noticed (mis en demeure) or sued the debtor, or (ii) has not accepted within the time limit set by the conciliator the request made by the latter to suspend the due date of his claim (standstill)³; and

(b)  claims not due during the entire duration of the conciliation proceedings (for a maximum of 5 months), in the case of a creditor who has not accepted to suspend the due date of his claim (standstill).

• The legal security of the conciliation agreement is also reinforced by upholding the effectiveness of contractual provisions providing for the consequences of the nullity and resolution of the said conciliation agreement. This provision addressees to the call of practitioners and some legal scholars to reverse the case law according to which the opening of safeguard, reorganization or judicial liquidation proceedings rendered null and void the provisions of a non-fully performed conciliation agreement, thus annihilating new security interests granted to creditors in exchange for the efforts consented by them within the framework of the said agreement.

The recast accelerated safeguard proceedings 

• Access to the accelerated safeguard proceedings is extended. As a follow-up to COVID-19 measures the debtor thresholds upon which is conditioned the opening of accelerated safeguard proceedings are now removed. As a result, the only condition that remains is for the debtor company's accounts to have been certified by an auditor (Commissaire aux comptes) or drawn up by an accountant (expert comptable). Access to the accelerated safeguard proceedings remains possible for a debtor in a state of cessation of payments (i.e., cash-flow insolvent), provided that this situation does not exist for more than 45 days prior to the date of the request to open the preliminary conciliation proceedings.

• Collective consultation of creditors (as opposed to individual consultation), which made up the specificity of the former accelerated safeguard proceedings in order to allow forced application to dissenting creditors of the plan negotiated in conciliation, is maintained. Nevertheless, the creditor committees are replaced by the affected parties classes, a major innovation of the reform (described below) and resulting from the Restructuring Directive. This mechanism of affected parties classes now enables the use of a cross-class cram-down, which enhances the relevance of accelerated safeguard proceedings.
• The maximum duration of accelerated safeguard proceedings is extended from 3 to 4 months maximum (including a 2-month optional extension), with the safeguard plan to be approved within this time limit.
• To the extent that the scope of accelerated safeguard proceedings with regard to third parties is now determined by reference to affected parties, and no longer by the nature of the creditors claim, accelerated financial safeguard proceedings - which produced effects only in respect of credit institutions and bondholders – does not longer exist. However, the ability to limit the effects of the new accelerated safeguard proceedings to financial creditors alone is preserved, provided that the nature of the debt makes it plausible for the latter to adopt a plan and the debtor has requested it.
   

Modification of the rules for the adoption of plans

Subject to certain exceptions set out below, these new rules are common to ordinary safeguard proceedings, accelerated safeguard proceedings and judicial reorganization proceedings.

Common rules to safeguard and judicial reorganization proceedings

• Thresholds: the choice was made to replace the concept of the creditor committees with that of the affected parties classes⁴. In accelerated safeguard proceedings, the constitution of classes is compulsory. With regard to the ordinary safeguard and judicial reorganization proceedings, however, a decree (not published to date) will define the thresholds applicable to the debtor from which the formation of classes would be compulsory. Debtors who do not meet these thresholds may ask the judge for the voluntary constitution of classes. Unlike the earlier law, constitution thresholds will now be assessed at group level (this rule being particularly relevant to holding companies).
• Constitution of classes of affected parties: these classes are formed under the responsibility of the judicial administrator, according to a sufficient commonality of economic interest (but without strictly defined criteria), on the basis of objective verifiable criteria (and, a minima, according to a distinction between classes of claims benefiting from security interest over debtor's estate, classes of unsecured claims and classes of equity holders if these are affected by the plan). The major novelty resulting from the text is that the equity holders are now called upon to vote on the plan as affected parties (if affected) alongside the other creditors.
• Regular adoption of the plan: the plan may provide for claims rescheduling, debt write offs and where the debtor is a joint-stock company (société par actions) (except for limited joint-stock companies (sociétés en commandite par actions)) for debt-to-capital conversions. Certain general criteria for approval of the plan are laid down, under which the plan must (i) reasonably avoid the cessation of payments by the debtor or guarantee the viability of the company, (ii) rely on equal treatment of creditors sharing sufficient common interests within a given class, (iii) meet the test of "best interest of creditors" with respect to dissenting creditors (including where their class approved the plan). Outside of these criteria verified by the judge, the plan will only be validly approved if each class has approved the safeguard or reorganization plan by a 2/3 majority in value of claims (among the members having cast a vote).
• Adoption of the plan through the cross-class cram-down mechanism: this mechanism allows for the adoption of a plan notwithstanding the negative vote of one or several class(es), subject to a number of general conditions

(a) compliance with the conditions laid down in Article L. 626-31 French C. com: voting by creditors in classes that represent a common economic interest, regular notification of the plan, respect of the principle of the best interest of creditors, and absence of unfair prejudice to the interests of affected parties due to the implementation of new financing

(b) approval of the Plan by a majority of classes (necessarily including a class of secured claims or a class having a higher rank than the class of unsecured creditors) or by a class "in the money" other than capital holders;

(c) compliance with the absolute priority rule (cf. below); and

(d) compliance with the rule according to which the plan shall not permit a class to receive or retain more than the total amount of its receivables or interests.

As allowed in Article 9 of the Restructuring Directive, the French government has opted for the integration of equity holders into one or several classes (if their interests are affected by the contemplated plan), at the option of the judicial administrator. This choice is not without impact on shareholders and in fact embodies a real paradigm shift in French restructuring and insolvency laws. It will make it possible to reduce the "passive" veto power of shareholders (the existing eviction mechanisms being subject to excessively restrictive implementation conditions and only being accessible in judicial reorganization). The implementation of the cross-class enforcement mechanism vis-à-vis equity holders will only be possible subject to compliance with certain additional conditions:

(a) threshold criteria: only in the case of debtors above certain thresholds, to be set by the decree to be published. The thresholds will be assessed at "group" level;

(b) no economic interest left: it is reasonable to assume that the shareholders will be "out of the money" in the event of a liquidation / disposal plan;

(c) respect of the preferential subscription rights of the shareholders; and

(d)  no forced disposal if the class(es) of equity holders refuse(s).

Consecration of two mechanisms protecting the interests of creditors:

• The criterion of the best interest test which comes into play in the case of the regular adoption of the plan as well as in the case of cross-class cram down: none of the affected parties is to be in a less favorable situation because of the plan than the one it would have been in if it were applied in either of:

(a) a business disposal plan (e.g., in reorganization plans) or disposal of debtor's assets (in liquidation), or 

(b) a better alternative if the plan is not validated.

• The absolute priority rule, which only plays out in the case of a cross-class cram down: a dissident class must be completely compensated in the same or equivalent means before a lower-ranking class can be entitled to a payment or retain an incentive under the plan. The court may, however, waive this rule under certain conditions.

The pivotal rules: the preservation of significant bargaining levers to safeguard against legal reorganization

• Cross-class cram-down mechanism: it is important to note that while the conditions laid down by the Order are common to safeguard proceedings (ordinary and accelerated) and judicial reorganization proceedings, a fundamental difference remains:
  • in safeguard, the interclass cramdown mechanism may only be implemented with the agreement of the debtor, it being specified that French law has opted, as was allowed by recital 53 of the Restructuring Directive, for a definition of the debtor encompassing legal representatives (and not controlling shareholder(s)). It cannot therefore be excluded that managers' responsibility may be sought if the debtor's management withholds its agreement on a cross-class cram-down in a manner that is abusive and contrary to the debtor company's corporate interest. 
  • in judicial reorganization, cross-class cram-down mechanism can be implemented with the agreement of the debtor or an affected party. This ability considerably reinforces the relevance of the cross-class cram-down mechanism.
• Alternative plans: In safeguard proceedings, only the debtor will, from now on, be entitled to propose a restructuring plan, unlike in judicial reorganization, which opens the possibility to affected parties proposing alternative restructuring plans. 
• Uniform debt rescheduling (or "imposed plans"):
  • in safeguard, because of the apparent absence of a return to the individual consultation provided for in the text in the event of rejection of the plan, uniform payment deadlines can only be imposed by the court if the classes are not constituted (that is because the company is not exceeding thresholds and did not request a voluntary application); and
  • in judicial reorganization, due to the return to the individual consultation provided for in the text, if the plan is not approved, uniform debt rescheduling could be imposed by the court in the presence of classes of affected parties.

In both proceedings, the minimum annual amortization in case of a debt term out imposed by the court is now 10% of the eligible claims concerned from the 6th year of the plan, compared with 5% before the reform (the annual instalments provided for in the plan between year 3 and year 6 remain at a minimum of 5% per year). This provision is intended to strengthen the rights of creditors, as the amortization profile provided to the dissenting creditors will now have to be more progressive over the duration of the plan.

Other coordination measures and implementation of some COVID-19 measures

Duration of the proceedings

In line with one of the objectives of the Restructuring Directive, the duration of safeguard proceedings has been shortened by 6 months in order to allow for a clearer partition between safeguard and reorganization proceedings. It should be noted, however, that there is no sanction for exceeding the time limit.

Safeguard and reorganization privilege

The Order provides for the creation of a new safeguard/reorganization privilege applicable to all new cash contributions (excluding contributions made prior to the opening of the relevant proceedings and the contributions made by shareholders as part of a capital increase), by any person (including shareholders of the debtor):

• during the observation period, for the interim financing granted to ensure continuity of the debtor's activity during the observation period. Such financing is subject to the approval of the supervisory judge (juge commissaire) who must ensure that the financing is necessary for the continuation of business during the observation period; and
• as part of the implementation of the safeguard or reorganization plan, for new financing granted for the implementation of the plan when it is approved (or when it is amended). This new financing must be mentioned in the plan (or the amended plan) submitted to the vote of the classes of creditors.

Like the conciliation "new money" privilege, claims benefiting from the safeguard/reorganization privilege cannot be rescheduled or reduced in subsequent proceedings (even through a cram-down). This protection is a key feature of the safeguard/reorganization privilege. 

The claims benefiting from the safeguard/reorganization privilege will be subject to preferential treatment in the context of a possible subsequent judicial liquidation.

Changes related to the articulation of restructuring and insolvency laws with security interests law

Main changes

The Order introduces important changes with respect to the treatment of security interests in public pre insolvency or insolvency proceedings:

(a) the prohibition, as a result of the opening judgment, of any increase of the scope of a contractual security interest or a contractual retention right, regardless of the method used, by addition, complement or transfer of assets or rights. This principle, which, according to the terms of the report to the President on the Order, is intended to facilitate business continuation, is, however, uncertain. Exceptions to this principle are provided for, in particular with respect to security assignments under Dailly law;

(b) the neutralization of the case law of the Cour de cassation relating to the treatment of the beneficiaries of a security guaranteeing the debt of a third party (sûreté pour compte de tiers) in the collective proceedings of the grantor. It was considered that, in the absence of a personal commitment by the grantor to satisfy the debt of the third party concerned, the beneficiary of a third party security was not a creditor of the grantor and was therefore not subject to the collective discipline, in particular with regard to the rule of the stay of individual proceedings. The beneficiary of a security interest granted by this debtor to secure the debt of another is now subject to this rule; and

(c) the treatment of natural person guarantors in reorganization is now aligned with the rules that prevail in safeguard. As a result, natural persons who are co-obligors or who have granted a personal guarantee or who have assigned or transferred an asset as security may now avail themselves of the provisions of the reorganization plan.

Coordination measures

Some other measures of relative importance should also be noted:

(a) in conciliation proceedings, the debtor's guarantor (whether a natural or legal person) may now benefit from the grace periods granted by the judge during the execution of the agreement ;

(b) the case law solution authorizing, during the 'hardening period', the substitution of security interests when the new security replaces an earlier security of an equivalent nature and basis is now enshrined in the French Commercial Code, putting an end to the legal uncertainties in this respect;

(c) the creation of a retention right (droit de retention) on the debtor's assets or rights for debts previously incurred becomes, in the same way as the creation of contractual security interests, a transaction which would fall within the scope of 'hardening periods (i.e., void by operation of law);

(d) during the 'observation period', the supervisory judge may henceforth authorize the creation of any contractual security interest. This provision replaces the existing restrictive list provided for in the French Commercial Code and thus marks an improvement in favor of creditors; and

(e) the procedures for lodging claims relating to security interests have been modified: the declaration must now relate to the basis of the security interest and not only to its nature. Failure to lodge a claim is sanctioned by the unenforceability of the security interest vis a vis the debtor and natural person guarantors, under certain conditions. In addition, the obligation to lodge a claim is now also imposed on the beneficiary of any contractual security created on the debtor's assets to guarantee the debt of a third party.

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_{1 In particular Chapter 11 in US law concerning the cross-class cram-down mechanism, the protection of the affected parties and the dissident classes, but also German law for the establishment of classes of creditors (according to the report to the President on the Order, in accordance with the Treaty on Franco-German Integration and Cooperation of January 22, 2019 (Aix-la-Chapelle) on the convergence of Franco-German business law.)
2 Article 4.5 of the Restructuring Directive allows the transposition of the preventive restructuring framework into "one or more proceedings", whose essential characteristics recalled by the report to the President relating to the Order are (i) the application of a principle of stay of individual enforcement, (ii) the organization, with a number of derogations, of creditors in class to allow them to vote on the proposed restructuring plan and the possibility for the court to adopt a plan despite the negative vote of one or more classes: (i.e., cross-class cram-down), as well as (iii) the reference made by the Restructuring Directive to the best interest of creditors test.
3 Amendment of Article L. 611-7 French C. com allowing the grace periods of Article 1343-5 of the French Civil Code
4 i.e., parties whose rights - receivables or interest - are likely to be modified by the restructuring plan and therefore only parties having the power to decide on the draft plan.
5 Deletion of the 6-month extension ability with the agreement of the Prosecutor (procureur).
6 With an approval of the Prosecutor for the last 6 months}.

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