Reform of French Bankruptcy Law - Fried Frank

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”).
51 French Commercial Code, Art. L. 650-1.
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.
53 French Commercial Code, Art. L. 650-1.
54 Reinhard Damman, "Soutien abusif : la responsabilité des banques" [Abusive assistance: the liability of the banks], Les Echos, September 19, 2005.
Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 11
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