Insolvency and directors' duties in France: overview
Q&A guide to insolvency and directors' duties in France.
The Q&A global guide provides an overview of insolvency from the perspective of companies that are operating within a domestic and/or international group of companies, and considers the various complexities that this can introduce into insolvency procedures. It also has a significant concentration on duties, liabilities, insurance, litigation, and subsequent restrictions imposed on directors of an insolvent company.
To compare answers across multiple jurisdictions, visit the Insolvency and Directors’ Duties Country Q&A tool.
This Q&A is part of the Insolvency and Directors’ Duties Global Guide. For a full list of contents, please visit www.practicallaw.com/internationalinsolvency-guide.
Corporate insolvency proceedings
Liquidation proceedings (liquidation judiciaire). Liquidation proceedings (liquidation judiciaire) are the only proceedings available to achieve liquidation of a company's assets. Liquidation proceedings are opened when the rescue of the insolvent company appears to be obviously impossible (either at the time of the filing, or after an attempted rehabilitation). In liquidation proceedings, the objective is to sell the debtor's business, as a whole or by line(s) of business, or to sell its assets, asset by asset, in order to satisfy the creditors' claims in their order of priority.
Liquidation proceedings can also be opened after a sale plan of the debtor's assets is ordered by the court in the context of rehabilitation proceedings (see Question 2).
The French Insolvency Code provides for two types of out-of-court proceedings: ad hoc proceedings and conciliation proceedings. It also provides for two types of court-monitored proceedings to restructure a company's operations and debt: safeguard proceedings (available to solvent debtors only) and rehabilitation proceedings (available to insolvent debtors).
The French insolvency test is a pure cash flow test (in contrast to a balance sheet test). A company is deemed insolvent (en état de cessation des paiements) when it is unable to meet its current debts out of its current assets (those in the form of cash or those that can be quickly turned into cash), taking into account undrawn committed facilities and other credit reserves and moratoriums/standstills accepted by creditors.
Ad hoc proceedings (mandat ad hoc). These are flexible and confidential proceedings in which the president of the court appoints an agent to carry out appropriate tasks. In practice, the proceedings are used to organise an informal negotiation between a company and its major creditors. Ad hoc proceedings are available to solvent debtors only (although there have been precedents where lower courts considered that ad hoc proceedings could exceptionally be opened for insolvent companies for a short period of time). If an agreement is reached between a company and its creditors, the agent's duties end. If there is no solution to the company's financial difficulties and it later becomes insolvent, the only option is to initiate conciliation or insolvency proceedings.
Conciliation proceedings (procédure de conciliation). These are flexible, voluntary and, to some extent, confidential proceedings aimed at facilitating negotiations and reaching a workout agreement (protocole de conciliation) between a company and its creditors under the supervision of a court-appointed agent (conciliateur). Conciliation is available to solvent or insolvent debtors (provided they have been insolvent for less than 45 days before the petition is filed). A workout agreement sets out any new financing extended by creditors or shareholders, and any consents by creditors to grant waivers, reschedule and/or cancel existing debts. The main difference between ad hoc proceedings and conciliation proceedings is that:
Creditors in conciliation benefit from certain protection against the risk of future clawback.
New money injected in the framework of a court-approved workout agreement benefits from a statutory super-senior status should the debtor subsequently file for insolvency.
Safeguard proceedings (procédure de sauvegarde). Somewhat inspired by US Chapter 11, safeguard proceedings enable solvent debtors to restructure under court protection, so that they benefit from an automatic stay. Safeguard proceedings are available to companies that, though still solvent, face difficulties that they cannot overcome. The safeguard plan can involve:
A debt restructuring.
A re-capitalisation of the company.
A debt-for-equity swap.
The sale of asset(s) or a partial sale of the business.
However, it cannot include a proposal to sell the business as a whole. Since the recent reform of French insolvency law, two expedited pre-packaged safeguard proceedings are now available to enable debtors, for which conciliation proved unsuccessful to reach creditors' consent, to be restructured in a very short timeframe with the consent of a two-third majority within creditor classes.
Rehabilitation proceedings (procédure de redressement judiciaire). Rehabilitation proceedings are used as a remedy for the treatment of insolvent but still operating debtors when the continuation of the business seems possible. In contrast to safeguard proceedings, which can be opened at the discretion of the management at a preventive stage (provided the company is still solvent), filing for rehabilitation must be done no later than 45 days following the date on which the company becomes insolvent, unless conciliation proceedings are ongoing (the French insolvency test being a cash flow test, see above, Question 1). A rehabilitation plan (plan de redressement) may provide for a debt restructuring and/or a recapitalisation of the company and/or a debt-for-equity-swap and/or sales of assets or of autonomous lines of business. The sale of the business, as a whole or by portions, can be ordered if the court finds that the company cannot continue to operate, even with an annual reduced/rescheduled debt-service under a rehabilitation plan. If a sale is unavoidable, the sale plan is implemented within the legal framework of rehabilitation proceedings but following the rules applicable to liquidation proceedings.
Only conciliation (out-of-court) proceedings, rehabilitation proceedings and liquidation proceedings are "insolvency" proceedings under French law in the sense that they are available to insolvent debtors.
Conciliation proceedings can only be initiated at the debtor's request (that is, the legal representative in the case of a company). The debtor can suggest, in its petition, the name of a court-appointed agent, but the court does not have to follow this suggestion.
The board of directors does not need to approve the petition unless the company's articles of association state otherwise. Conciliation is available to solvent or insolvent debtors, provided they have been insolvent for less than 45 days at the date when the petition is filed.
Rehabilitation and liquidation proceedings must be initiated at the request of the debtor (through its legal representative in the case of a company) within 45 days following insolvency (unless a petition for conciliation was filed in the meantime). The board of directors does not need to approve a decision to file for insolvency, unless the company's articles state otherwise. However, the company's legal representatives usually seek the board's approval as a precautionary measure. Before filing a petition, management must inform and consult with the employees' representatives. However, these representatives do not need to approve the filing.
Both rehabilitation proceedings and liquidation proceedings can also be initiated:
At the request of any creditor, whether secured or unsecured (regardless of the amount of its claims).
At the request of the Public Prosecutor.
Insolvency of corporate groups
Under French law, a corporation is deemed to be an autonomous and independent entity (principe de l' autonomie des personnes morales) and the company's assets should under normal circumstances not be affected by insolvency proceedings commenced against other companies within the same group. This is true of course provided group companies were incorporated as limited liability corporations such as Société Anonyme (SA) or Société par Actions Simplifiée (SAS).
As a consequence, where insolvency proceedings must be commenced for several group companies (for example, if they become insolvent at the same time), there are no statutory or regulatory provisions which call for a joint procedure.
However, the court can, under certain narrowly defined circumstances, find that there is ground for a consolidation of estates (confusion des patrimoines) so that the debts of two or more companies can be paid from a larger consolidated pool of assets (see Question 10).
Under Article R.600-1 of the French Commercial Code, the court which has territorial jurisdiction to hear insolvency matters with respect to companies incorporated in France is the court where the company's head office is located.
When the head office is located abroad but the centre of main interests (COMI) is in France, proceedings must be commenced before the French court having jurisdiction where that COMI is located.
In addition, specialised Commercial Courts were recently created to enhance the efficient treatment of insolvency proceedings opened against large companies. These courts have jurisdiction to open conciliation, safeguard, rehabilitation and liquidation proceedings when the debtor is either of the following:
A company employing at least 250 employees and having a net turnover of at least EUR20 million.
A company having a net turnover of at least EUR40 million.
A company owning or controlling other companies with an aggregate number of at least 250 employees, with an aggregate net turnover of at least EUR20 million.
A company owning or controlling other companies with a consolidated net turnover of at least EUR40 million.
The Commercial Courts will also have jurisdiction to oversee insolvency proceedings that are commenced under Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) or, for insolvency proceedings opened after 26 June 2017, under Regulation (EU) 2015/848 on insolvency proceedings (recast) (Recast Insolvency Regulation), or proceedings that stem from the fact the debtor's COMI is located within the specialised Commercial Court's area of jurisdiction.
If necessary, the Court of Appeals can decide to transfer an insolvency case to another Commercial Court (or to a specialised Commercial Court) within the remit of the same Court of Appeals. Similarly, the French Supreme Court can refer the case to another court within the remit of another Court of Appeals (Article L.662-2, French Commercial Code). This transfer decision can be requested by the debtor, by the creditor that initiated involuntary insolvency proceedings (if any), by the Public Prosecutor or by the President of the Commercial Court.
A transfer of proceedings is essentially aimed at co-ordinating procedures commenced against several entities belonging to the same corporate family. Its purpose is also to protect the interests of the family of companies taken as a group, wherever the head offices of group members may be located.
Among the criteria used to centralise various insolvency proceedings commenced against group companies, the following factors are taken into account:
The existence of complementary business activities, overlapping boards or management teams the members of which are decision makers in both (or more) group entities.
The existence of intercompany claims and/or the existence of joint administrative, marketing, accounting, sourcing division, IP and technical teams.
Under the principle that each corporation is deemed to be an autonomous and independent entity (principe d' autonomie des personnes morales), each company within a group must commence separate insolvency proceedings. Accordingly, there is no general principle where members of a corporate family should have to be subject to the same type of insolvency proceedings (rehabilitation, liquidation, and so on). When they do, the court, of its own motion or at the debtor's or the Public Prosecutor's request, usually appoints the same court agents (administrator, creditors' representative, liquidator, and so on) and co-ordinating agents can, in certain circumstances, be appointed to ensure transparency and efficiency (see Question 5).
Where a consolidation of estates is ordered (see Question 10), the various insolvency proceedings are merged into one single procedure, and the effective date of the joint procedure (which is used, for example, for voidance purposes) becomes the opening date of the proceedings for the first company that filed. A single judgment will be rendered encompassing the various companies included in the perimeter of the consolidation.
Unless the court orders a consolidation of proceedings, members of a group of companies are subject to separate insolvency proceedings. Accordingly, an administrator (or, as the case may be, a liquidator) is appointed in each proceeding to monitor, assist or, if necessary, replace the management and administer the company's assets.
In addition, at least two administrators and creditors' representatives (or as the case may be liquidators) must be appointed by the court, if the net revenues of one of the companies mentioned in the last two points below reach at least a threshold of EUR20 million and the insolvent debtor either:
Owns at least three secondary establishments located in the jurisdiction of another Commercial Court than the one the insolvent debtor is registered in.
Owns or controls at least two companies against which safeguard, rehabilitation or liquidation proceedings have commenced.
Is owned or controlled by a company against which safeguard, rehabilitation or liquidation proceedings have commenced and that owns or controls another company against which safeguard, rehabilitation or liquidation proceedings have commenced.
The second administrator, creditors' representative or the liquidator must be the same for all the companies mentioned above in the second and third points listed above.
However, if these conditions are not met, the same administrator and creditors' representative/liquidator can be appointed by the court for the various group companies that have filed concomitantly for the sake of efficiency.
Moreover, since the 2014 reform of French insolvency law, the French Insolvency Code now expressly provides that a "common" administrator and a "common" creditors' representative can be appointed to supervise and co-ordinate the various insolvency proceedings opened by different courts for group companies (that is, for companies controlled by the same holding company or controlling the same subsidiary or subsidiaries).
No specific notice is required to be given to creditors or other interested parties, so they have no opportunity to object or be heard on the decision to appoint a co-ordinating administrator.
Up to five supervising creditors (créanciers contrôleurs) can be appointed by the court from among the creditors to assist the creditors' representative or, as the case may be, the liquidator. They benefit from information rights and can participate to the hearings approving the restructuring plan. In certain circumstances, the supervising creditors can also summon the creditors' representative or the liquidator to bring an action or commence proceedings on their own initiative if they do not do so after such summoning.
There are provisions allowing different administrators to co-ordinate with each other so that the efficiency of the process can be maximised (see Question 5).
As a general rule, no statutory or regulatory provisions prohibit the joint representation by legal advisers or accounting or auditing firms of several companies within a corporate family. However, to avoid any conflict of interests, it may be recommended under certain circumstances that each insolvent company be represented by its own legal counsel.
In rehabilitation or liquidation proceedings, certain transactions, payments and transfers can be challenged by the administrator, the creditors' representative (who usually becomes the liquidator if rehabilitation is ultimately converted into liquidation), the liquidator or the Public Prosecutor if they were entered into by the debtor and any third party (including its affiliates) during the "hardening period" (période suspecte).
The hardening period (where there is one) runs from the date on which the company is deemed to be insolvent and can be backdated by the court up to 18 months before the judgment opening the rehabilitation or liquidation. However, if the debtor and all or some of its creditors entered into a conciliation workout agreement prior to the opening of insolvency proceedings, and if the court formally approved that agreement in a judgment, the insolvency date cannot be backdated to a date prior to that of the judgment approving the conciliation workout agreement (with the limited exception of fraud).
The French Commercial Code provides for a limited list of transactions that are either automatically avoided by the court, assuming that the court is petitioned by the court-appointed agents (administrator or liquidator) or the Public Prosecutor, or that may be avoided by the court (see below).
Unlike for automatic avoidance/claw-back, the requirements for optional avoidance/claw-back are assessed by the court at its own discretion, which means that the court is not required to base its assessment on damage suffered by the debtor (even if, in practice, it is always difficult to justify an avoidance action if there is no damage suffered).
The following transactions are subject to automatic avoidance/claw-back:
Transactions without effective consideration for the debtor:
any transfer of movable or immovable assets without consideration (for example, donations);
any contract under which the debtor's obligations substantially exceed those of the other party.
Voluntary unusual payments:
any payments, in any form, made on account of debts that have not fallen due on the payment date;
any payments on account of debts that have fallen due made by any means other than cash settlement, negotiable instrument, wire transfer, Dailly law assignment of receivables (that is, a form of assignment of receivables), or any other methods of payment commonly used in business transactions.
Suspicious guarantee: any mortgage or pledge (both conventional and judicial) over the company's assets on account of pre-existing debts.
Judicial deposit and consignment (protective measures):
any deposits or consignments of money made under Article 2350 of the French Civil Code (governing pledges over certain tangible assets) in the absence of a final judgment, with the specification that such consignment will be valid if completed in compliance with a court decision that became final before the date of insolvency;
any protective measures, unless the security is registered or the attachment has occurred before the date of insolvency.
Transactions relating to stock options: any granting, exercise or reselling of stock options made under Article L.225-177 et seq of the French Commercial Code.
Transfers into a trust estate guaranteeing pre-existing debts:
any transfers of movables or assignment of rights into a trust estate, unless that transfer or assignment occurred as a guarantee of a debt concomitantly undertaken;
any amendment to a fiduciary agreement (similar to a trust) affecting the rights and movables already assigned or transferred to a trust estate as a guarantee of debts undertaken prior to that amendment;
any declaration of non-seizability from the debtor under Article L.526-1 of the French Commercial Code.
When the debtor is a sole proprietorship with limited liability: any allocation, or change in the allocation, of a movable, subject to the payment of revenues which resulted in an impoverishment of the bankrupt estate subject to the benefit of another estate.
The following transactions are subject to optional avoidance/claw-back:
Any transfers of movable or immovable assets without consideration if completed within six months prior to the date of insolvency as backdated by the court (that is, 18 months plus six months, equalling 24 months in total).
Any transactions with consideration completed during the hardening period (18 months maximum before the insolvency judgment), but on the condition that the other party had knowledge of that insolvency situation.
Any (voluntary) payments on account of debts made during the hardening period, but on the condition that the beneficiary of the payment had knowledge of that insolvency situation.
Any third-party notification for attachment or seizure of property initiated by the tax authorities (avis à tiers détenteur) and any attachment of receivables (saisie-attribution) can also be avoided if delivered or initiated by a creditor during the hardening period while they had knowledge of the debtor's insolvency situation.
The other party's knowledge of the debtor's insolvency situation results in the former being denied specific protection, and the payment of due and payable debts, even made with a usual method of payment, can be avoided. Proof of such knowledge can be given by any means, and such knowledge can be presumed when the contracting parties, or those having received payment, had already entered into business relations or belong to the same group of companies.
Claims held by affiliates of a corporation having filed for insolvency proceedings are subject to the same provisions as those governing any other creditor's claims.
General rules governing proof of claim, validity and enforceability of claims are also applicable to claims held by a member of a corporate family against other companies within the group.
The judgment opening insolvency proceedings automatically stays all enforcement proceedings, subject to very few limited exceptions for claims secured by a certain type of collateral. The stay applies to all creditors, including members of the same corporate family.
Within two months following publication in the Official Gazette of the judgment opening the insolvency proceedings (or four months for foreign creditors), all creditors (including affiliates of the insolvent company) other than employees will file a proof of claim or risk being time barred. Transactions entered into with affiliates during the hardening period may also be subject to avoidance provisions (see Question 8).
There is no statutory subordination of intra-group debts under French law. Unless otherwise agreed between the debtor, the senior creditors and the junior creditors, loans extended to a French company by one of its affiliates are treated pari passu with other debts of that company.
The general view is that intra-group or shareholder loans carry the same weight as senior and secured loans when it comes to approving a safeguard or rehabilitation plan. Indeed, where creditors' classes are organised to vote on the restructuring plan (which is mandatory for companies of a certain size), any entity (and not only banks) having entered into a loan transaction with the company should, under the current law, be part of the bank class (for example, creditors holding debt originally lent by a bank or creditors who have lent money to the debtor by way of a term loan).
Article L.621-2 of the French Commercial Code provides that a consolidation of proceedings can be ordered by the court so that debts of different companies can be paid from a larger consolidated pool of assets if either of the following conditions is met:
Intermingling of the estates (confusion de patrimoines). This is the case when the commingling of the assets and liabilities, bank accounts or cash flows of two non-fictitious entities is such that, in terms of business management and accounting, it is impossible to separate one company's activities from the other.
The company is found to be a "fictitious corporate entity". This is where there is a pure corporate veil created on purpose to try to isolate the company's assets from the other group companies' assets, without an independent management running a real business enterprise.
The insolvency of the company(ies) targeted by the consolidation is not a condition precedent to joint proceedings. Provided one of the above tests is met, insolvency proceedings opened against one insolvent company can be extended to other solvent companies. Consolidation can be ordered by the court at the request of the debtor, the court appointed administrator or the Public Prosecutor.
Consolidation is not automatic and the court must be convinced by the petitioning party that the conditions are met (that is, a fiction or an intermingling of estates).
Intermingling of estates
When assets and liabilities of two (or more) different companies are so closely intermingled that from an accounting or commercial point of view it is impossible to distinguish the assets and liabilities of one company from the assets and liabilities of the other(s) or when the insolvent debtor has repeatedly entered into abnormal transactions (that is, transactions where the debtor does not receive sufficient consideration), there are grounds for joint proceedings.
The existence of such a commingling of assets usually results from a finding by the court that one of the two following factors (theoretically alternative, but most of the time used cumulatively by the courts) is met:
There is an intermingling of accounts.
There are abnormal finance streams.
A company is deemed fictitious where it has no real existence because it is acting as a mere front for another entity or individual.
Theoretically, fiction can be found where one of the essential elements of the contract to form a company (see Article 1832, French Civil Code), in particular the actual intent to share profits and losses, is missing. However, most of the time it is brought about by fraud.
The applicable tests are diverse in case law, and generally include:
Having the same directors on the two boards.
Having the same shareholders.
Maintaining, without any real benefit/compensation/consideration exchanged, financial links, such as cash-pooling arrangements or any type of transaction which was clearly not entered into at arm's-length conditions.
The French Commercial Code (Article L.621-2) provides that the court that has opened the initial proceedings will have jurisdiction to order a consolidation.
The action can be initiated at the request of the administrator, the creditors' representative, the liquidator or the Public Prosecutor and, since the 2014 reform of French insolvency law, the insolvent debtor itself can also initiate consolidation proceedings.
Where consolidation of proceedings is ordered by the court, the creditors of all consolidated companies will file proof of claim and are subject to the same joint procedure.
As a result, the combined list of creditors provides for a unique ranking of all creditors, and this combined list is used in order to determine which claims will be satisfied under their respective priority.
The ranking of claims among creditors in safeguard and rehabilitation proceedings is governed by the following basic principles (in order of priority):
Certain employees' pre-petition claims benefiting from a statutory superprivilege (that is, wages in arrears for the last 60 days prior to the opening judgment, or which were paid as advances by the AGS (Assurance Garantie des Salaires, the wage insurance system run by the employers' association), excluding severance payments).
Post-petition court expenses validly incurred after the opening judgment in connection with the proceedings (that is, essentially court costs, fees of the administrator, the creditors' representative and their attorneys, and so on).
Lenders' pre-petition claims that extended new credit facilities as part of a workout agreement in conciliation proceedings. This is the statutory privilege covering new money extended within the procedural framework of a conciliation procedure approved by the court at the end of the conciliation process, should this process be followed by safeguard, rehabilitation or liquidation proceedings (privilège de conciliation).
Post-petition claims which benefit from a statutory privilege (Article L.622-17, French Commercial Code) provided that they either:
arise for the purpose of funding the observation period;
represent consideration owed to a lender, or to a provider of goods or services, in a business transaction directly connected to the company's activities continued during the observation period.
These post-petition claims must be paid when they fall due.
Pre-petition secured claims or pre-petition claims benefiting from a statutory privilege, other than the privilège de conciliation (for example, pre-petition tax claims).
Claims of post-petition creditors not qualifying for the Article L.622-17 statutory privilege rank pari passu with all unsecured and unprivileged pre-petition claims.
Shareholders do not receive any repayment of their capital investment, unless a surplus remains after all the creditors have been paid in full (which is extremely rare).
The above ranking also applies in liquidation, subject to one exception: pre-petition claims secured by a charge over immovable property (for example, a mortgage) rank above the privileged post-petition claims set out above.
Except where consolidation is ordered by the court, French law does not provide for one single insolvency procedure with respect to group companies. As a consequence, any secured creditor (as well as other creditors) must file a proof of claim against each company within the group against which it holds a direct claim or a guarantee claim.
Since the law of 12 March 2012, enacted within the context of the Petroplus case and the financial difficulties faced by Petroplus's holding company, it is now possible, where the consolidation of estates is ordered, to have protective measures ordered by the President of the court to freeze the assets of the legal entity to which insolvency proceedings (safeguard, rehabilitation or liquidation proceedings) are extended, and therefore avoid asset misappropriation. These protective measures can be ordered at the request of the administrator, creditors' representative, Public Prosecutor or on the court's own initiative. This law applies to insolvency proceedings pending on 13 March 2012 or opened after.
Insolvency proceedings for international corporate groups
Subject to the developments below (see Question 16), the same rules will apply. Separate insolvency proceedings will be commenced against each filing company having its head office or the centre of its main interests (COMI) in France. The grounds for a consolidation of estates will remain unchanged (that is, intermingling of estates or a fiction). Inter-company claims will be subject to the rules applicable to any other creditors' claims (except that non-French creditors have a further two-month extension to file a proof of claim) and avoidance provisions governing payments/transactions entered into during the hardening period will also apply.
The Insolvency Regulation (to be replaced by the Recast Insolvency Regulation) provides for the recognition of insolvency proceedings commenced in any European member state.
The courts of a member state where the debtor's centre of main interests (COMI) is located have jurisdiction to open insolvency proceedings (Article 3(1), Insolvency Regulation). The place of the head office of a legal entity is presumed to be the centre of its main interests in the absence of proof to the contrary. Secondary proceedings can be opened subsequently in another member state.
For non-European foreign corporations, French courts can assert jurisdiction to open insolvency proceedings if the main centre of the company's interests is located in France.
In the context of cross-border insolvencies, two approaches coexist:
Unity-universality theory (théorie de l' unité-universalité).
Plurality-territoriality theory (théorie de la pluralité-territorialité).
Under the unity-universality theory, a debtor can only be subject to one single insolvency proceeding which extends to and has effects in any jurisdictions where the debtor owns assets. Conversely, the plurality-territoriality theory makes a debtor subject to as many insolvency proceedings as there are jurisdictions where the debtor owns assets, each of these proceedings having only territorial and local effects limited to each jurisdiction in which insolvency proceedings are opened.
Over the years, the French courts have developed an approach which leans much more towards the application of the universality theory and have considered that, subject to international treaties or EU legislation (as well as recognition by foreign jurisdictions), the opening of insolvency proceedings in France will have effect anywhere the debtor owns assets (in France or abroad).
This sort of long-arm jurisdiction rule can be subject to some exceptions for assets located in European member states, where secondary proceedings under the Insolvency Regulation may be opened.
If insolvency judgments are ordered in a European member state or a jurisdiction that is a party to a bilateral convention with France (although there are very few of these), those judgments are recognised and enforceable in France.
Where there is no applicable convention (which is usually the case outside the European Union), foreign judgments rendered outside of the European Union can only be enforced in France if they have been subject to an inter-partes procedure known as exequatur (which is a limited review process initiated by a writ of summons only aimed at verifying, for example, the proper jurisdiction of the foreign court, compliance with international public policy basic principles (adversary debate, non-violation of due process, right to counsel essentially) and absence of fraud). Once that review procedure is complete, the order rendered by the foreign court is enforceable in France and the "exequatured" foreign judgment can prevent creditors from taking enforcement actions over assets located in France owned by the corporation subject to foreign insolvency proceedings. Such exequatur process usually takes a couple of months, and can be subject to appeal which could lengthen the process.
France has not yet adopted the Guidelines Applicable to Court-To-Court Communications in Cross-Border Cases as adopted and promulgated by The American Law Institute and The International Insolvency Institute.
Within the European Union, the Insolvency Regulation on insolvency proceedings imposes a general obligation on each administrator/liquidator to exchange information if this information could be of importance for another proceeding, particularly insofar as it concerns the progress of lodging and verifying claims and all measures aimed at terminating the proceedings.
Moreover, the Insolvency Regulation has been recently amended in order to, among other things, reinforce the obligation imposed on court agents appointed in different member states to co-operate and co-ordinate their actions.
The Recast Insolvency Regulation (applicable to proceedings opened after 26 June 2017) especially provides that:
Insolvency practitioners appointed in, and courts having jurisdiction over, proceedings opened for group companies in different member states will co-operate and communicate, subject to conflicts of interest or confidentiality issues. In particular, insolvency practitioners will:
as soon as possible communicate to each other any information which may be relevant to the other proceedings, provided appropriate arrangements are made to protect confidential information;
explore the possibility of restructuring the debtor and, where such a possibility exists, co-ordinate the elaboration and implementation of a restructuring plan; and
co-ordinate the administration of the realisation or use of the debtor's assets and affairs.
A single insolvency practitioner may be appointed over several group companies, subject to local qualification and licensing issues.
A new concept of "group co-ordination proceedings" has been introduced. Any court agent appointed in one member state can request the court to open group co-ordination proceedings, in which case the court may:
appoint a co-ordinator in charge, among other things, of proposing a group co-ordination plan;
decide on the outline of the co-ordination; and
decide on the estimation of costs and the share to be paid by the group members.
In order to ensure transparent and effective management, French law tends to limit overlapping boards. Under Article L.225-21 of the French Commercial Code, no individual can concurrently hold more than five director terms in corporations having their head offices located in France.
However, these provisions are subject to certain exemptions for corporations which are part of the same group. The above limitation does not apply to director terms or supervisory board terms of "controlling" or "controlled" companies. Under French law, company A is deemed to be controlled by company C when one of the following tests is met:
A majority of A's voting rights are, directly or indirectly, held by C.
A majority of A's managers, directors or, as the case may be, members of the supervisory board are appointed by C for two successive fiscal years. C is presumed to be responsible for an appointment if, during the relevant fiscal year, both of the following apply:
C directly or indirectly held more than 40% of A's voting rights; and
no other shareholder directly or indirectly held a greater portion.
C exerts a dominant influence over A by virtue of specific provisions of A's bye-laws or by virtue of one or specific contracts agreed between A and C (for example, patent and/or trade mark licensing, supply contracts, joint research and development).
Director terms in "sister" companies (subject to a limitation of five terms in those sisters companies) whose shares are not listed on a regulated stock market and are held by one single company are accounted for as one director term, for the purposes of calculating the maximum of five director terms.
"De facto" or "shadow" directorship is not defined by any French statutory or regulatory provisions. However, French courts have repeatedly held that a "de facto" or "shadow" director is any individual or corporate entity who/which, in practice, repeatedly exerts influence over the company and/or makes management decisions, irrespective of whether or not that person or entity is a shareholder.
"De facto" directors/managers can be subject to liability actions (see Question 23).
The duties remain the same but the exposure of officers or directors to liability actions is generally viewed as being less important post-filing, since all payments must be co-signed by the administrator and management, and any asset disposal (other than ordinary day-to-day transactions) must be approved by the bankruptcy judge.
The management decision, which is most often controversial and generally taken before any filing is made, is the decision to suspend or reduce cash pooling arrangements, existing intragroup financings, or centralised purchases.
The test for the officers/directors of the subsidiary(ies) taking a credit risk vis-à-vis an affiliate is to be found in the common law of corporate interests' protection (that is, it is the same protection, if any, that a third party would ask for).
Failure to take reasonable steps to minimise losses to creditors
Under French law, directors and officers do not owe any specific duties to creditors to minimise their loss.
Creditors are third parties with respect to the company. Therefore, directors' and officers' liability towards them cannot be incurred, except in the case of wrongdoing which is severable from their functions.
Misappropriation of corporate assets
The French Commercial Code (Article L.241-3 4) and the French Monetary and Financial Code (Article L.231-11, 3) make it an offence to knowingly and fraudulently use the company's assets and credits for one's own benefit, or to the benefit of another legal entity in which one holds a direct or indirect position (see below, Preffering payment to one creditor, for specific provisions on misappropriation of assets in an insolvency context).
Undervaluation of corporate assets in a preference
Disposing of an asset during the hardening period can potentially be a voidable transaction (see Question 8 for the applicable conditions) irrespective of the value/price, but undervaluation of the asset disposed of increases the risk of the transaction being avoided.
Failure to inform creditors of insolvency
There is no liability for failure to inform creditors of insolvency, but failure to file for insolvency within 45 days of becoming aware of the insolvency situation is a cause for liability (see Question 25).
Preferring payment to one creditor
Any payment made during the hardening period of a debt prior to maturity is subject to automatic avoidance (see Question 8).
Where the company is subject to insolvency proceedings (rehabilitation or liquidation), non-pecuniary/professional sanctions can be ordered under Article L.653-5 4 where a director or officer knowingly paid or caused the payment, after the date of insolvency, of a pre-petition creditor to defraud other creditors (see Question 25).
French insolvency laws also provide for additional criminal sanctions against "de jure" or "de facto" directors who carried out certain wrongful transactions in the framework of insolvency proceedings, such as paying a pre-petition creditor by preference.
Continuing to trade when insolvent
Continuing to trade fraudulently at a loss to further one's own interests, knowing that this will lead to the company's insolvency, constitutes a cause for faillite personnelle (see Question 25).
"Shadow" or "de facto" as well as "de jure" directors can be held personally liable to pay all or part of the company's net debts (that is, debts left unsatisfied after the liquidation proceeds have been distributed by the liquidator to creditors according to their rank). However, as previously indicated, no liability action can be initiated before the company is placed into liquidation, and the power to initiate that liability action essentially belongs to the liquidator.
Liability can arise where as a result of identified management errors (other than mere negligence), the proceeds yielded by the liquidation of the company's assets are insufficient to cover all admitted proofs of claim.
In this case, the liquidator must prove the following three elements:
Existence of management errors. Mismanagement can result either from a positive action, or from a failure to act or negligence (other than mere negligence, for example, operating a loss-making activity without taking the adequate measures to restructure the business, while increasing in the meantime the company's total liabilities), or from any violation of applicable law, in particular, mandatory legal provisions.
Insufficiency of assets.
Direct causal link between the management errors and the insufficiency of assets, which may in practice prove difficult to characterise (the failure of a company being always the result of several factors).
In an insolvency context, directors may also be exposed to non-pecuniary/professional sanctions (faillite personnelle) and/or to criminal sanctions known as "banqueroute" (certain wrongdoings can be the source of both faillite personnelle and banqueroute sanctions).
Causes for faillite personnelle include the following:
Using the company's assets as one's own.
Using the company to conduct and conceal business transactions for one's own benefit.
Using the company's assets or credit for one's own benefit, or to the benefit of another legal entity in which one holds a direct or indirect position.
Fraudulently continuing to trade at a loss (whether to further one's own interests or not), knowing that this would lead to the company's insolvency.
Fraudulently embezzling or concealing all or part of the company's assets, or fraudulently increasing the company's debts.
Carrying out commercial, craft and agricultural activities or acting as director of a legal entity in breach of a legal prohibition.
With intent to avoid or delay the opening of insolvency proceedings, obtaining credit significantly higher than commercial rates or selling assets below market value.
Undertaking, on behalf of a third party, without consideration, commitments deemed too important at the time they were undertaken in view of the company's situation.
Paying or causing the payment to a certain creditor, by defrauding other creditors, after the insolvency date and knowing that such a date had occurred.
Obstructing, by voluntarily refraining from co-operating with the administrator/liquidator, the smooth running of the proceedings.
Concealing accounting documents, failing to keep the accounts when required by applicable law or keeping fictitious accounts in an obvious incomplete or illegal manner.
Failing to file for insolvency within 45 days of the date on which director(s) knew, or ought to have known, of the company's insolvency.
Knowingly filing a frivolous claim on behalf of a creditor.
Causes for banqueroute include the following:
Avoiding or delaying insolvency proceedings through obtaining credit at significantly higher than commercial rates or selling assets below market value.
Embezzling or concealing all or part of the company's assets.
Fraudulently increasing the company's debts.
Keeping fictitious accounts or concealing the company's accounting or refraining from keeping the accounts while required by applicable law.
Keeping the accounts in an obvious incomplete and illegal manner.
In a solvency context, misappropriation of corporate assets is punishable by imprisonment for up to five years and a fine of up to EUR375,000. In an insolvency context, banqueroute is punishable by imprisonment for up to five years and a fine of up to EUR75,000. When banqueroute is committed by an officer or director of an investment services provider, imprisonment can be extended to up to seven years and the fine to up to EUR100,000.
Criminal liability is not a factor since the 2005 reform of insolvency laws provided that failure to file for insolvency within the statutory maximum period of 45 days (wrongful trading) is no longer criminally sanctioned, but constitutes one of the breaches leading to faillite personnelle (see Question 25). In fact, wrongful trading is now, when established and prosecuted (which is rare in practice), subject to non-pecuniary/professional sanctions only.
An officer or director whose decisions prove to be the source and origin of the company's failure can be exposed to civil liability actions based on the "insufficiency of assets" theory (see Question 25). Even though what triggers liability in this respect is a series of management errors having caused the insolvency filing, failure to file within the prescribed maximum period of 45 days will be an aggravating factor.
Civil liability can be covered by insurance taken out by the company covering the company itself and its officers and directors, and more generally employees, with only one limit with respect to each individual's liability, that being that the insured risk should not be the result of a willful/intentional negligence or breach. However, comprehensive officer and director insurance coverage, including adequate protection against having to indemnify an estate for "insufficiency of assets", is rare in practice in France.
French law does not provide for any action aimed at preventing officers or directors from resigning from their positions once the company becomes financially distressed.
In addition, former directors and officers remain liable for their conduct or management decisions in the same conditions as described above even if they have resigned.
Initiation of lawsuits on the basis of insuffisance d' actif (when the company's assets are insufficient to cover its debts), is only possible in the case of liquidation proceedings and liquidators are traditionally, unless confronted with gross mismanagement, reluctant to launch long and costly court actions against officers and directors who are not necessarily solvent and/or properly insured.
Good faith in itself is not a defence. However, courts tend to assess damages more leniently when directors and officers acted in good faith.
Decisions/actions will not be considered faulty when directors or officers can prove that they requested that the necessary due diligence/audits be carried out, or where experts' opinion was sought.
Reliance on outside consultants or professionals
This is the same as the position for due diligence (see above, Due diligence).
Exercise of reasonable judgment with intent to preserve the "on going value" of the enterprise
This in itself is not a defence. This is only helpful to mitigate any sanctions.
There is no specific protection for officers and directors who continue operations with the objective of protecting value for the benefit of all creditors. The answer is the same if the result of such continuation is an increase of the company's debt, even though the officers and directors were acting in good faith.
The mere opening of insolvency proceedings does not trigger restrictions on officers or directors. Restrictions on officers or directors only apply in cases of faillite personnelle or banqueroute (see Question 25).
In the case of faillite personnelle, officers or directors can be either:
Prohibited from managing, administering or controlling, directly or indirectly, any business or any legal entity and holding a public office for a period of up to 15 years.
Forced to sell their equity holdings in the company.
In the case of banqueroute, officers or directors can also be prohibited from running:
A public office or professional activities in connection with which the breach was committed.
A commercial or industrial business, or from managing, administering or controlling any business, directly or indirectly, on his/her own behalf or on behalf of a third party.
There is no restriction preventing a director who becomes personally insolvent from continuing to act as an officer or director of his current company, or another company. In France, an individual cannot file for insolvency for court protection under insolvency laws for his/her personal debts. The only remedy for an individual becoming personally insolvent is to apply to a special commission known as "Over-indebtedness Commission" (Commission de Surendettement), unless such individual meets the conditions to open insolvency proceedings (for example, having a commercial, craft or liberal activity).
See above, Current company.
Description. Official website. The English translation is potentially out-of-date and for guidance only. In France, there are no official translations of legislation and case law.
Description. Official website and up-to-date. The English language version is binding.
Description. Official website and up-to-date.
Philippe Dubois, Partner
De Pardieu Brocas Maffei A.A.R.P.I.
Professional qualifications. Professor of Law. Paris Bar, 1994
Areas of practice. Debt-restructuring and insolvency proceedings (domestic and cross-border); advising banking and financial institutions as well as large French and foreign industrial groups in a wide range of economic sectors. His practice focuses on restructuring, litigation and arbitration in diverse areas such as shareholder disputes, indemnification agreements and liabilities.
- Camaïeu. Representing a group of senior lenders in connection with out-of-court debt restructuring proceedings.
- SNCM. Representing SNCM in the context of its rehabilitation proceedings and its court-ordered sale plan.
- Latécoère. Representing one of the major lenders in the framework of a court-approved restructuring agreement.
- Fram. Representing the senior lenders in the context of Fram's debt restructuring followed by its acquisition by LBO France through a pre-packed sale plan (pre-pack plan de cession) in rehabilitation proceedings.
- Groupe Partouche. Advised crossholder lenders of Financière Partouche and Groupe Partouche in connection with the safeguard proceedings.
- Ascométal. Advising a group of French and European investors in connection with their successful takeover bid for Ascométal group which was approved by the Commercial Court of Nanterre.
- Thomson-Technicolor. Advising Thomson-Technicolor on the restructuring of the group.
- Bata. Representing Bata in the context of its rehabilitation proceedings and its court-ordered sale plan (plan de cession).
- Alma Consulting Group. Representing the senior lenders in the context of the first debt-equity swap implemented through accelerated safeguard proceedings (procédure de sauvegarde accélérée).
Languages. French, English
Professional associations/memberships. ARE.
Joanna Gumpelson, Partner
De Pardieu Brocas Maffei A.A.R.P.I.
Professional qualifications. Paris Bar, 2002
Areas of practice. Debt-restructuring and insolvency proceedings, both domestic and cross-border; representing French and foreign investment funds, banks, bondholders and so on, as well as issuers, French or foreign, in particular in failing leveraged buyouts.
- Nextiraone: Representing one of the largest creditors in the context of the first French pre-packaged sale plan (prepack plan de cession) and debt restructuring at the level of the holding company.
- Joa. Representing the largest senior creditor having become the majority shareholder through a debt-equity-swap.
- Orco Property Group. Representing the bondholders' committee.
- Eurotunnel. Representing EIB, the second largest creditor.
- Brealu. Representing Diversified Machine Inc (subsidiary of The Carlyle Group) in the takeover of Brealu's business in the framework of rehabilitation proceedings.
- Belvédère. Representing the senior noteholders in the insolvency proceedings opened for Belvedere and its subsidiaries.
- Coeur Défense. Representing the "A" bondholders of the securitisation senior tranche in the safeguard proceedings opened for Hold and its parent company Dame Luxembourg.
- Mecachrome. Representing the bondholders of Mecachrome International Inc in the safeguard proceedings opened for the two French subsidiaries.
Languages. French, English
Professional associations/memberships. ARE - IBA.