Reform of French Bankruptcy Law - Fried Frank

Memorandum 

T o O u r F r i e n d s a n d C l i e n t s 

Reform of French Bankruptcy Law – Adoption of the 

Business Safeguard Act 

After more than two years of parliamentary debates and 

numerous amendments, the Business Safeguard Act (La loi de 

sauvegarde des enterprises, the “Act”), was enacted on July 26, 

2005. 1 It will enter into force on January 1, 2006. 

Prior to adoption of the Act, French law provided for four alternative 

bankruptcy procedures: (i) ad hoc mediation (“mandataire ad hoc”), a 

process by which a court-appointed mediator assists in non-binding 

negotiations between a debtor and its creditors; (ii) voluntary 

settlement or friendly composition (“réglement amiable”), a judicially 

supervised negotiation procedure in which the court may grant a stay 

against creditors; (iii) judicial reorganization (“redressement 

judiciaire”), leading to a court-administrated restructuring of the 

debtor company; and (iv) judicial liquidation (“liquidation judiciaire”), 

for cases in which the court finds that continued operations are not 

feasible. This system was widely criticized as overly rigid and timeconsuming. 

Nine out of ten bankruptcies in France resulted in the 

liquidation of the debtor. 

The Act significantly modifies the voluntary settlement procedure, 

and creates a new “safeguard” procedure, inspired by the US 

bankruptcy system’s Chapter 11 process, to facilitate workouts 

1 Law No. 2005-845 of July 26, 2005. For a discussion of the original bill submitted to the 

French parliament in January 2004, please see our memo, “Reform of French Bankruptcy 

Law,” dated March 29, 2004, at www.friedfrank.com. 

www.friedfrank.com/publications 

Copyright©2005Fried Frank Harris Shriver & Jacobson LLP November 17, 2005

early in the bankruptcy process and avoid liquidation where possible. The Act also streamlines the sale of 

companies in liquidation, and institutes a simplified liquidation procedure for small debtors. 2 Together, 

these provisions amount to a significant reform of the French bankruptcy system. 

1. Ad Hoc Mediation 

Ad hoc mediation is a common procedure, in which the president of the Commercial Court names a 

mediator, upon application of the debtor, to resolve specified re-financing issues. This procedure is flexible 

and informal, and has been only lightly modified by the Act. 

The ad hoc mediation procedure is not available to a debtor that has ceased payments. Traditionally, in 

light of the drastic consequences of more formal bankruptcy procedures, it has been used to prepare for a 

voluntary composition with creditors (known as a “réglement amiable”) or to stave off bankruptcy. 

While the mediator is appointed by the court, in practice the debtor often recommends a professional who 

is already familiar with the debtor’s financial situation. The mediator’s mandate is determined by the court 

and is intended to facilitate an agreement between the debtor and its creditors. The entire procedure is 

confidential. 

2. The Conciliation Procedure 

Under the Act, the voluntary settlement procedure has been modified and renamed “conciliation.” This 

procedure will be available to any company that faces legal, economic or financial difficulties, currently or 

in the foreseeable future, or that has ceased payments for no longer than 45 days. Conciliation is intended 

to permit the debtor and its creditors to arrive at a mutually acceptable compromise on a contractual basis. 

Conciliation is intended to be a brief, four-month process, renewable for one month, supervised by the 

Commercial Court of the debtor’s jurisdiction. The president of the Commercial Court will appoint a 

mediator who will negotiate agreements with creditors and who will have broad authority to propose plans 

for restructuring the business and retaining employees. The debtor company may recommend potential 

mediators for the court’s approval, as well as appeal the court’s choice of a mediator. 3 

An agreement between the debtor and its creditors reached in the context of a conciliation procedure must 

be approved by the court, which will then become binding on all parties to the agreement. 

2 Unlike the current bankruptcy system, this is applicable to both corporations and professionals in private practice. 

3 French Commercial Code, Art. L. 611-6. The procedures for appealing a mediator’s appointment will be set out in a future implementing decree. 

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The draft reform bill submitted to the French parliament in 2004 provided that the ratification of a 

conciliation agreement by the court would be made public. This position evoked fierce opposition on the 

grounds that publicity of a court’s ratification order could alarm a business’s suppliers and clients. Under 

the Act, the ratification order will be published only at the request of the debtor, and only if creditors not 

parties to the agreement are not prejudiced by the conciliation agreement. 

There is a significant new advantage offered under the Act in the case of a published conciliation order: 

credit extended to a debtor during the conciliation procedure will benefit from a higher priority than claims 

arising prior to the commencement of the conciliation procedure. Security granted under such 

arrangements will not be open to challenge as fraudulent conveyances. 4 The protection afforded to such 

new credit will likely lead creditors to push for publication of the conciliation order in most cases. 

The commencement of a conciliation procedure will not automatically stay creditors’ claims. However, in 

an action for payment against the debtor, any court may grant the debtor a deferral or extension of 

payments and suspend enforcement actions brought by creditors. 5 In addition, court approval of a 

conciliation agreement will suspend any ongoing legal actions against the debtor brought by creditors who 

are parties to the agreement. 

3. The Safeguard Procedure 

The Act introduces a completely new procedure, referred to as the “safeguard” (“sauvegarde”) procedure, 

intended to facilitate the restructuring of a debtor company before its financial difficulties become 

irremediable. Similar to a US bankruptcy case, the commencement of a safeguard procedure will result in 

an automatic stay against creditors in favor of the debtor and guarantors or joint obligors of the debtor. 6 

The safeguard procedure is intended to lead to a continuation plan and cannot entail the sale of the debtor 

company as a whole. The plan may provide for the modification of the debtor’s capital structure, an 

adjustment of its liabilities, the division of the debtor corporation into autonomous entities, asset sales, and 

sales of corporate divisions. 7 The court may also make adoption of the plan conditional on a change in the 

debtor’s management or directors. 8 The duration of a safeguard procedure is six months, with the 

possibility of one six-month extension. 9 

4 French Commercial Code, Art. L. 631-8. 

5 French Civil Code, Arts. 1244-1 and 1244-2. 


7 French Commercial Code, Art. L. 626-1 and 626-3. 


9 Additional extensions may be possible, but the procedures for requesting and granting them have not yet been established, and will require an implementing decree. 

French Commercial Code, Art. L. 621-3. 



During the safeguard procedure, payments by the debtor of any debts existing prior to the opening of the 

procedure are prohibited, except for those payments necessary for the business’s ordinary activities, and 

“for the requirements of the procedure.” 10 The bankruptcy judge can also authorize payments for prior 

debts in order to discharge a lien on property needed for the continued operation of the business. 11 

Debts arising after the commencement of the safeguard procedure will be given priority over debts 

incurred prior to the commencement of the safeguard procedure if they relate to expenses necessary for 

the business’s ordinary activities or are “for the requirements of the procedure.” 12 This priority appears 

substantially more restrictive on its face than the new money priority in a conciliation procedure, which 

provides for a priority for all “new treasury provided to the debtor in order to enable the continuation of its 

activities and its survival.” 13 

The commencement of a safeguard procedure suspends the accumulation of interest and penalties, except 

for interest on loans with a term of one year or more. 14 Thus, longer-term bank debt and bonds may 

continue to accumulate interest, though payment of that interest will be prohibited until the end of the 

safeguard procedure. 

Similar to a US Chapter 11 case, the administrator in a safeguard action or a judicial liquidation has the 

sole authority to reject or continue commercial contracts, including unexpired leases, entered into prior to 

the commencement of the safeguard action. 15 Contracts are not automatically terminated by the 

commencement of the safeguard procedure and may not be terminated by the non-debtor party on the 

basis of the opening of a safeguard procedure or for failure by the debtor to perform the contract prior to 

the commencement of the safeguard procedure. 16 If the administrator rejects a contract, the other party 

may file a claim for damages. 17 

Unlike in the US, in a safeguard procedure the rules authorizing rejection of prior contracts do not extend 

to employment agreements, which remain subject to the normal French labor law regime. During the 



12 French Commercial Code, Arts. L. 622-17. 




16 Pursuant to Art. 431-7-2 of the French Monetary and Financial Code, some types of contracts are exempted from this rule, such as certain financial guarantees 

governed by Art. 431-7-1 of the French Monetary and Financial Code. 

17 French Commercial Code, Arts. L. 622-13 and 622-14. 



parliamentary debate on the Act, a provision was proposed that would have allowed expedited layoffs 

during a safeguard procedure. This aroused strong objections and, as a result, was not included in the Act. 

In a safeguard procedure, judicial reorganization, or judicial liquidation, employee wage claims have an 

absolute priority over all other claims, followed, in order of priority, by administrative expenses, the 

privilege for any new money extended in a previous conciliation procedure, and certain claims arising after 

commencement of the safeguard procedure, as discussed above. 18 By contrast, in the US, wage claims 

earned within 180 days of the earlier of either the date the bankruptcy petition is filed or the date of 

cessation of the debtor’s business are given a fourth-level priority over other unsecured claims only up to 

an amount of $10,000 per employee, and are subordinated in priority to administrative expenses of the 

bankruptcy procedure, as well as certain other unsecured creditors’ claims arising after the bankruptcy 

filing. 19 

Scope of the safeguard procedure 

The safeguard procedure will be available for debtors meeting the following criteria: 

- The company must be facing serious difficulties. The term “difficulties” is not defined in the Act, 

but will likely be interpreted broadly to include economic, legal, financial or labor-related 

difficulties. 

- The company finds it impossible to surmount those difficulties, because of inadequate financing. 

- The company has not yet suspended payments, but will inevitably do so as a result of its 

difficulties. 20 The Act does not specify a timeframe for evaluating the imminence of a suspension 

of payments, but the probability of insolvency must be demonstrable; i.e., the court may require 

proof that when existing debts come due, the company will not be able to pay. 

So long as the company has not yet ceased payments, the company’s managers can choose between the 

conciliation and safeguard procedures. This decision will turn on a number of factors: the conciliation 

procedure is rapid and can be kept confidential, but does not result in a stay against creditors, while the 

safeguard procedure can take longer and is public, but includes an automatic stay against creditors. 

18 French Commercial Code, Arts. L. 611-11, 622-17 and 641-13. 

19 US Bankruptcy Code, §§ 507(a)(1), (2) and (3) and 502(f). 

20 If, after the opening of the safeguard procedure, it is determined that the debtor had already ceased payments, the court will transform the procedure into a 

judicial reorganization and appoint a receiver, as discussed below. 



Organization of the safeguard procedure 

The safeguard procedure is supervised by the Commercial Court. The debtor will normally retain 

management control of the company under the supervision of a court-appointed administrator and the 

bankruptcy judge (juge-commissaire). 21 However, the debtor’s management authority is subject to several 

restrictions. The court may delegate certain management functions to the administrator, but may not place 

the administrator in full control of the debtor company. 22 The court will appoint a creditors’ representative 

(mandataire judiciaire), a professional bankruptcy specialist who acts in the name and in the interest of the 

creditors. 23 The administrator, the public prosecutor, and the creditors’ representative may petition the 

court for a change in the administrator’s mandate at any time. 24 

In addition, the bankruptcy judge may also appoint up to five creditors as inspectors (contrôleurs) to assist 

the creditors’ representative and the judge. The inspectors will be authorized to review all documents 

provided to the administrator and the creditors’ representatives. 25 The Act strengthens the powers of the 

inspectors by allowing them to bring an action against the debtor, including claims for fraudulent 

conveyance, in the collective interest of the creditors as a whole. 26 Inspectors may not purchase the 

business or acquire the debtor’s assets in liquidation. 

For larger companies, creditors will be represented by two committees, one for financial institutions 

(établissements de crédit) and another for trade creditors. 27 Individual trade creditors will automatically be 

included in the committee if their claims make up more than 5% of the total trade debts. The committees 

must be convened by the administrator within 30 days of the commencement of the safeguard 

procedure. 28 It is unclear whether the type of financial institutions eligible to sit on the creditors’ committee 

will include only credit establishments licensed as such in France. 

21 French Commercial Code, Arts. L. 622-1, L. 621-4, and L. 622-20 of the French Commercial Code. If the company falls below certain thresholds in terms of 

turnover and number of employees, the appointment of an administrator is not mandatory. These thresholds will be determined by an implementing decree, which 

has not yet been published. 

22 French Commercial Code, Arts. L. 622-1 and 631-12. 

23 The public prosecutor may object to an individual’s appointment if that person has already served as special mediator (mandataire ad hoc) or conciliator for the 

same company. 

24 French Commercial Code, Art. L. 622-1-IV. 


26 French Commercial Code, Art. L. 622-20. This provision differs from the previous law, under which inspectors could only bring actions to protect their own 

interests. Philippe Roussel-Galle, “Les contrôleurs, gardiens de l'intérêt collectif” [Inspectors: Guardians of the collective interest], Gazette du Palais, September 9/10, 

2005, no. 252. 

27 French Commercial Code, Art. L. 622-30 et seq. The threshold for having creditors’ committees will be determined by a forthcoming implementing decree, but 

legislative history indicates that companies with more than 250 employees and € 50 million in turnover will require creditors’ committees. At the request of the 

administrator or the debtor, creditors’ committees may be convened in cases where the debtor company does not reach this threshold. 

28 French Commercial Code, Art. L. 626-30. A forthcoming decree should specify the procedures for convening and holding meetings of the creditors’ committees. 



If the debtor has issued bonds, the Act provides that the creditors’ representative must contact the 

bondholders’ representatives so that an assembly of bondholders can be convened. 29 There is a serious 

ambiguity in the Act concerning whether a financial institution, even if a licensed French credit 

establishment, that holds only bonds would have a seat on the creditors’ committee as does an ordinary 

bank lender, or whether it can exercise its rights exclusively through the bondholders’ assembly. 

Debt restructuring in the context of a safeguard procedure 

If the company is large enough to have creditor committees, the debtor must present the committees with 

a proposed workout plan within two months of the date they are convened. 30 The debtor and the 

administrator negotiate with the two committees. The committees will have 30 days to respond to the 

debtor’s proposal. Approval of the plan requires, for each committee, a double majority of 50% of the 

committee members, representing 2/3 of the total debts held by members of such committee. 31 

If both creditors’ committees approve the plan, the court must independently review the plan to verify that 

it appropriately protects the interests of all creditors. 32 The bankruptcy judge can then approve the plan, 

and impose it on dissenting members of the committee. If the creditors’ committees oppose the plan, or 

fail to respond within 30 days, the negotiation process will recommence on an individual basis, without the 

intervention of the creditors’ committees, and can continue until the end of the six-month deadline. 33 

If the company has issued bonds, the bondholders assembly will have the opportunity to review and vote 

on the adoption of any plan submitted to the creditors’ committees. 34 The Act does not specify whether the 

bondholders’ refusal to approve a plan would entail the failure of the plan, or whether their vote is purely 

consultative. 35 

Creditors who are not members of either of the creditors’ committees and are not bondholders will 

negotiate individually with the bankruptcy administrator. 36 They may accept or reject the plan proposed by 

the administrator. If they accept the plan, the judge can confirm the new arrangement. If they reject it, the 

29 Bondholders assemblies are governed by separate, non-bankruptcy provisions in the French Commercial Code, which set forth the rules for convening an 

assembly and voting. The Act does not specify whether these general provisions will be subject to any modifications in the safeguard context. 

30 The deadline of two months may be extended up to four months total, by court order. 


32 French Commercial Code, Art. L. 626-31. The wording of this provision is ambiguous, and could be read to mean that the judge must verify the protection of all of 

the company’s creditors, or only all of the creditors on the creditors’ committees. The Act does provide elsewhere that any creditor, including creditors not 

represented on a creditors’ committee, may appeal the judge’s approval of a safeguard plan. French Commercial Code, Art. L. 661-3. 



35 An implementing decree is expected to resolve this ambiguity, as well as questions concerning the makeup of the creditors’ committees. 

36 French Commercial Code, Art. L. 626-33. Individual negotiation will also be used for all creditors if the creditors’ committees reject the proposed safeguard plan. 



ankruptcy judge has the authority to impose “uniform” payment extensions of up to ten years. 37 The Act 

contains no interpretation of the term “uniform.” In the case of a fully-fledged judicial reorganization, 

courts in the past have imposed the same repayment terms on all non-consenting creditors, and the same 

standard may be applicable in the case of a safeguard procedure. 

Under the US Bankruptcy Code, a Chapter 11 plan that provides classes of creditors or equity holders with 

less than the full amount of their claims can be confirmed over the dissenting vote of such classes 

(commonly referred to as a “cramdown”) provided that certain conditions are met. 38 By contrast, the 

safeguard procedure allows the judge to grant delays in payment, but not to reduce the principal amount of 

a debt without either the consent of the committee on which the creditor sits or the creditor’s individual 

consent if it is not a member of a committee. 39 Similarly, there is no provision in the safeguard procedure 

for the non-consensual transfer of equity interests from shareholders to creditors. A true “cramdown” 

against dissenting classes of creditors, as in the US system, is not possible. 

Public creditors (such as the tax administration) are authorized to grant remission of debts for taxes, 

interest due for late payments, or tax penalties, “on similar terms to those accepted by private creditors in 

the same situation under normal market conditions.” 40 Direct taxes, such as corporate income tax, may be 

deferred in their entirety. Indirect taxes, such as VAT, may be deferred only as to interest, penalties, or 

other fines. 41 Commercial debts forgiven under a safeguard plan will be considered business losses for 

purposes of the creditor’s income tax. 42 

4. Judicial Reorganization 

Both judicial reorganization (“redressement judiciaire”) and the safeguard procedure are intended to allow 

a company a grace period for restructuring while continuing operations. The safeguard procedure is 

applicable prior to a debtor’s ceasing payments; judicial reorganization is applicable after that point. 43 

37 French Commercial Code, Art. L. 626-18. This extension may exceed ten years if the parties’ original contract, entered into prior to the safeguard procedure, 

provided for a repayment period of longer than ten years. 

38 See § 1129(b) of the US Bankruptcy Code. 


40 French Commercial Code, Art. L. 626-6. This rather opaque requirement likely derives from EU case-law relating to state aid. ECJ, April 29, 1999, case no. C- 

342-96, Spain v. European Commission, ECJ Rec. I-2459. 

41 French Commercial Code, Art. L. 626-6. The Act does not specify how these provisions are to be implemented, and a forthcoming decree should provide further 

details. The assistant director of the French social security administration, URSSAF, has indicated that the commencement of a safeguard plan will not be considered 

as imposing a moratorium on social security contributions by the debtor company. “Les Zones d’ombre de la réforme des faillites” [Areas of uncertainty in the 

bankruptcy reform], La Tribune, September 16, 2005. 

42 French General Tax Code, Art. 39.8°. 

43 The legislature seems to have intended to make the safeguard procedure more attractive to management than judicial reorganization, by allowing individual 

guarantors of a debtor to be granted deferments and debt forgiveness only in the context of a safeguard plan and not as part of a judicial reorganization. As 

managers are frequently guarantors of their company, these provisions seem to be intended to encourage management to move toward a safeguard procedure 

earlier in their company’s decline. In addition, managers may not sell their shares in the debtor company during a judicial reorganization. French Commercial Code, 

Art. L. 631-12. 



Judicial reorganization can be initiated either at the request of the debtor within 45 days of a suspension of 

payments or by the court on its own motion in the case of a failure of a conciliation procedure. 

The Act provides that after the commencement of a judicial reorganization procedure, the court may either 

transfer management control of the debtor directly to a court appointed receiver, or leave control with the 

current management but require that the debtor be “assisted” by a receiver. Nevertheless, in practice, the 

commencement of a judicial reorganization usually results in the replacement by the court of incumbent 

management. 

Judicial reorganization is intended to allow the debtor to write down its debts and continue operations. In 

principle, the court appointed administrator negotiates directly with individual creditors to put in place a 

plan for the restructuring of the business. The Act provides that creditors’ committees will be established 

pursuant to the same rules as for a safeguard procedure. 44 The Act does not specify whether bondholders 

will have a statutory right of consultation; nor does the Act specify the consequences of a rejection of the 

proposed plan by a creditors’ committee. 

The court may order the sale of the debtor company’s assets, in whole or in part. 45 A sale of all assets, or 

the sale of the business as a whole, may only be ordered if the court determines that there is no possibility 

for the current management to successfully reorganize the business as it exists. The sale will be conducted 

pursuant to the rules applicable in a judicial liquidation procedure. 

Third parties may submit purchase proposals during the reorganization procedure, and those proposals 

will be considered by the court alongside the debtor’s own restructuring plan. If the court considers that 

the debtor is incapable of reorganization by itself, the judge may transform the reorganization process into 

a judicial liquidation and order the sale of the debtor company. A potential purchaser may request to be 

appointed administrator of the company during the reorganization process. 

Layoffs for economic reasons during a judicial reorganization are governed by special rules that allow 

accelerated dismissals. Layoffs may be ordered by the court on the request of the administrator, after 

consultation with the shop committee, if they are found to be urgent, inevitable and essential to the 

business’s survival. 46 






5. Judicial Liquidation 

Judicial liquidation would be applicable to any debtor (i) that has ceased payments, (ii) that the court 

deems unable to continue conducting business, and (iii) if the court determines that there are no serious 

possibilities of improving the firm’s prospects through restructuring. Debtors are required to file for 

liquidation within 45 days of ceasing payments if they do not request conciliation or judicial reorganization; 

the court may also open a liquidation procedure on its own motion following the failure of a conciliation 

procedure. 47 In judicial liquidation, the sole remedy is a sale of the company, either in whole or in part. 

If the debtors’ business can be sold as autonomous units, the liquidator will attempt to maintain those 

units as individual operations. An offeror for assets in judicial liquidation must provide the court with a 

detailed statement of the terms of its offer, the purchase price, and the conditions of its financing. The 

court is responsible for accepting or denying the offer. 

A court may impose a non-transferability obligation on the purchaser. Such a covenant would have a 

maximum duration of three years from the time the purchase was made, and could be enforced by any 

interested party or the public prosecutor. Special rules will apply to sales resulting from judicial 

reorganization, and will restrict the purchaser’s ability to grant certain leases or transfer certain property 

until the purchase price has been paid in full. 48 

Simplified Liquidation 

The Act institutes a simplified liquidation procedure to allow more rapid liquidation of small companies. 49 A 

simplified liquidation may be ordered on the recommendation of the liquidator, or by the court on its own 

motion, based on the information it possesses at the commencement of the liquidation procedure. 50 The 

court may transform a simplified liquidation back into a standard liquidation at any point. The simplified 

liquidation provisions of the Act will apply to bankruptcies ongoing as of January 1, 2006. 

If the Commercial Court approves a simplified liquidation, the liquidator has three months to dispose of the 

debtor’s assets by any means, including a non-auction sale, without further court approval. After three 

months, the remaining assets will be sold by public auction. After liquidating the assets and verifying 

creditors’ claims, the liquidator must file and publish a plan for the allocation of the liquidation proceeds. 

This plan may be contested by any interested party during a finite period, to be determined by a 

forthcoming implementing decree, after which the liquidator distributes the funds to creditors. 



49 Simplified liquidation will be available to debtors with no real property, and with employees and turnover less than a certain threshold over the six months 

preceding bankruptcy, such threshold to be fixed in a forthcoming decree. Commentators expect that the limit for employees will be set at around 300. 

50 French Commercial Code, Art. 641-2. 



Simplified liquidation will proceed much more rapidly than a standard judicial liquidation. The liquidator is 

required to present a final report to the Commercial Court within one year of the opening of the liquidation, 

and this deadline may be extended by the court for no more than three months. 

6. Liability of Banks 

Under French law, banks lending to troubled companies face a risk of being held liable for “abusive 

assistance” (soutien abusif). Prior to the Act, the standard for liability was fairly broad: a bank could be 

held liable if it lent money to a company that it knew to be in an irredeemable position and if its financial 

support ultimately contributed to the debtor’s bankruptcy. The Act limits abusive assistance liability to 

those cases where there is fraud on the part of the bank, clear interference in the management of the 

debtor company, or where the security taken by the bank is disproportionate to the credit extended. 51 

Thus, while the remaining risk of liability is not negligible, it is more restricted. 

Interference in the debtor company’s management has previously been interpreted by doctrine, and 

through the limited case law available, to include situations where a bank has lent money to a company in 

difficulty simply in order to profit from the interest payments, when the bank knows the company will be 

unable to recover. It remains to be seen if bankruptcy courts will interpret the Act’s new abusive assistance 

provisions in a similar way. 

The Act provides that disproportionate security can be set aside by the court. 52 The Act does not, however, 

define the term “disproportionate security,” which poses a problem of interpretation. If the term 

“disproportionate” is interpreted by the courts to mean that the security is simply of greater value than the 

credit, the timing of the valuation could be critical to the determination. In any case, it is common for banks 

to extend credit against a lien on the business as a whole, which in most cases would necessarily exceed 

the amount of credit extended. 53 Under the Act, disproportionate security may be set aside regardless of 

when the security was granted, and without a finding that the debtor has suspended payments. 54 

Previously, security could only be set aside if it were granted within 18 months prior to the commencement 

of a judicial reorganization or liquidation procedure (the “suspect period”). 


52 The 10-year statute of limitations will still apply, at least in theory. This period runs, not from the date on which the abusive loan is made, but from the date on 

which the creditor knows of the harm the loan is causing to the company. CA Paris, ch. 15 B, January 13, 2005, RG no. 200247084. This is an almost impossibly 

difficult standard to apply. 


54 Reinhard Damman, "Soutien abusif : la responsabilité des banques" [Abusive assistance: the liability of the banks], Les Echos, September 19, 2005. 



7. Personal Liability of Managers 

The Act modifies the potential liability of managers of a bankrupt company. 

There are several grounds on which a manager can be held personally liable for a bankrupt company’s 

debts. A manager guilty of negligence resulting in the company’s bankruptcy may be held personally liable 

for all or part of the company’s debts (“comblement de passif”). This sanction, imposed at the initiative of 

the bankruptcy judge, is intended to penalize a manager who is found to have acted negligently or 

imprudently. However, no liability may be imposed during the execution of a reorganization plan, but rather 

only in the context of judicial liquidation or the cancellation of a reorganization. 

The previous system provided for the “extension” of a judicial reorganization procedure to include the 

managers of the debtor company. The extension of a judicial reorganization was intended to apply where 

managers had committed serious faults, such as misuse of corporate assets (“abus de biens sociaux”). In 

the case of an extension, as opposed to a comblement de passif, the company and manager were held 

jointly liable for the company’s debts, and creditors could recover against either. 

The extension procedure has been eliminated by the Act. Instead, bankruptcy judges may now transfer a 

debtor’s liabilities directly to one or more managers, without including those managers in the judicial 

reorganization procedure. 55 This form of liability will be imposed principally in cases in which a manager 

has misused or intermingled corporate assets for personal gain. 

The Act preserves another type of personal liability under current law, known as “personal default” (faillite 

personnelle). This penalty may be imposed by a bankruptcy judge for serious faults, such as 

embezzlement, fraudulent bookkeeping, or ruinous management practices that could have no other result 

than bankruptcy. A manager declared to be in personal default can be required to cover all debts of the 

bankrupt firm, including debts remaining after the close of the bankruptcy procedure, and may be required 

to sell his shares. In addition, the manager would be prohibited from managing a commercial enterprise for 

up to 15 years and may be barred from holding public office. 

The situations in which personal default can be imposed often also lead to criminal bankruptcy charges 

(banqueroute), which can be punished by up to five years imprisonment and a fine of up to 75,000. In 

addition, French law allows a bankruptcy judge to impose on the manager of a bankrupt company, for a set 

period, a general prohibition on engaging in management. 




8. Conclusion 

The Act provides France with a strong pre-insolvency reorganization process that compares favorably with 

its European neighbors. 

By providing a debtor-in-possession workout mechanism with an automatic stay against creditors, the Act 

strengthens the position of a debtor on the verge of insolvency. Yet to the extent that the Act may result in 

more restructurings and fewer liquidation sales, returns to creditors through the restructuring process may 

improve. In any case, the Act improves the position of new money advanced in the conciliation process and 

should reduce the risk of “abusive assistance” liability. 

Several questions remain. The text of the Act itself includes serious ambiguities, particularly regarding the 

rights of bondholders, secondary loan market investors, and subordinated lenders who are not licensed 

French credit establishments. These questions will need to be rectified by further legislation or by 

administrative decrees. In addition, it remains to be seen whether the safeguard procedure will provide 

debtors’ management with sufficient incentives to overcome their traditional reluctance to declare 

insolvency, and to move toward court protection at an earlier point. 

Paris 

Eric Cafritz 33.140.62.2200 

David Chijner 33.140.62.2200 

Patrick Jais 33.140.62.2200 

Laurent Assaya 33.140.62.2200 

New York 

Brad Eric Scheler 212.859.8019 

Jean E. Hanson 212.859.8198 

Gary Kaplan 212.859.8812 

Vivek Melwani 212.859.8208 

Alan N. Resnick 212.859.8529 

Bonnie Steingart 212.859.8004 

Kalman Ochs 212.859.8139 



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Fax: 33.140.62.22.29 

Frankfurt 

Rahmhofstrasse 2-4 

60313 Frankfurt am Main, Germany 

Tel: 49.69.133.868.0 

Fax: 49.69.133.868.90 

Website 

www.friedfrank.com 

A Delaware Limited Liability Partnership

Reform of French Bankruptcy Law - Fried Frank

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