Reform of French Bankruptcy Law - Fried Frank

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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 10 French Commercial Code, Art. L. 622-7. 11 French Commercial Code, Art. L. 622-7. 12 French Commercial Code, Arts. L. 622-17. 13 French Commercial Code, Art. L. 611-11. 14 French Commercial Code, Art. L. 622-28. 15 French Commercial Code, Art. L. 622-13. 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. Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 4 A Delaware Limited Liability Partnership
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. Fried, Frank, Harris, Shriver & Jacobson LLP Client Memorandum November 17, 2005 5 A Delaware Limited Liability Partnership
Page 1 and 2: Memorandum T o O u r F r i e n d s
Page 3: The draft reform bill submitted to
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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