Reform of French Bankruptcy Law - Fried Frank

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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. Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 2 A Delaware Limited Liability Partnership
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. 6 French Commercial Code, Art. L. 622-28. 7 French Commercial Code, Art. L. 626-1 and 626-3. 8 French Commercial Code, Art. L. 626-4. 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. Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 3 A Delaware Limited Liability Partnership
Page 1: Memorandum T o O u r F r i e n d s
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 and 12: Simplified liquidation will proceed
Page 13 and 14: 8. Conclusion The Act provides Fran

Reform of French Bankruptcy Law - Fried Frank

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