Reform of French Bankruptcy Law - Fried Frank

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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. 55 French Commercial Code, Art. L. 652-1. Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 12 A Delaware Limited Liability Partnership
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 Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 13 A Delaware Limited Liability Partnership
Page 1 and 2: Memorandum T o O u r F r i e n d s
Page 3 and 4: The draft reform bill submitted to
Page 5 and 6: parliamentary debate on the Act, a
Page 7 and 8: If the debtor has issued bonds, the
Page 9 and 10: Judicial reorganization can be init
Page 11: Simplified liquidation will proceed

Reform of French Bankruptcy Law - Fried Frank

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