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French Insolvency Proceedings – la révolution a commencé

Creditors can propose restructuring plans in safeguard and reorganisation proceedings

The new law allows any creditor who is a member of any formal creditors’ committee to present its own restructuring plan to the administrator, regardless of whether the debtor has already proposed its own plan. There are two formal creditors’ committees for large companies: the credit institutions committee (in which bondholders are not able to participate) and the committee of main suppliers of goods and services.

This provides additional leverage to creditors who were previously only able to make suggestions to the debtor and the administrator but not present a formal plan. It should be noted however that bondholders are not permitted to be members of creditors’ committees and as such would not be authorised to present their own restructuring plan but retain a consent right for approval of any plan (see below).

French insolvency law does not distinguish between different classes of creditors. As a result, secured creditors,  unsecured and subordinated creditors are treated equally within each committee. Any plan submitted by the creditors will be subject to the existing voting and approval requirements applicable to plans presented by the debtor.

By way of reminder, the approval of any restructuring plan requires:

(i) the approval of each formal creditors’ committee (2/3 in value of those creditors present and voting at each creditors’ committee); and

(ii) the approval of the general assembly of bondholders of the restructuring plan adopted by the creditors' committees (2/3 in value of those bondholders present and voting at the assembly).

In addition, the new law requires the approval of the shareholders at a general meeting and consultation of the debtor’s work council in relation to plans proposed by creditors which provide for a modification of the share capital of the debtor.

Creation of a new "Accelerated Safeguard" proceeding

A new proceeding called "accelerated safeguard" proceeding (Sauvegarde Accélérée) is created.

Please click here for common features and main differences between the existing  "accelerated financial  safeguard" (Sauvegarde Financière Accélérée) and the new "accelerated safeguard" proceeding (Sauvegarde Accélérée).

Decrees expected to be issued in June 2014 will set the thresholds to be met by companies, in terms of revenue and number of employees, in order to be able to fall within the scope for the new "accelerated  safeguard" proceeding (Sauvegarde Accélérée).

These thresholds for the new "accelerated safeguard" proceeding are expected to be lower than those relating to the existing "safeguard" proceeding (Sauvegarde)  and the existing  "accelerated  financial safeguard" proceeding (Sauvegarde Financière Accélérée) and this will allow more companies to benefit from this new insolvency proceeding.

Contractual law and fees cap

Any contractual provisions which, as a result solely of the opening (or a request for the opening) of a mandat ad hoc proceeding or a conciliation proceeding, would either (i) restrict the debtor's rights or increase the debtor's obligations (this appears to be similar to, but may be broader than, the prohibition on ipso facto provisions under the US Bankruptcy Code) or (ii) result in the debtor paying for the creditors’ advisers' fees in excess of thresholds to be set by the government, would be deemed to be null and void.

Please note that a similar provision already exists under French law for the existing  "safeguard" proceeding (Sauvegarde),   the existing "accelerated financial safeguard" proceeding (Sauvegarde Financière Accélérée) and "reorganisation" proceeding (Redressement Judiciaire). It provides that an automatic acceleration of a debt as result of the opening of a "safeguard" proceeding, " accelerated financial  safeguard" proceeding or "reorganisation" proceeding is deemed to be null and void. However, the new law is much broader than the existing provisions as it is not limited to the automatic acceleration. This could have potentially far reaching consequences but it is difficult to assess how these provisions will be interpreted by the courts.

Debt to equity swaps without shareholder consent

This was the most awaited and controversial of the proposed amendments but was delayed at the last minute and is expected to become law in July this year.

The proposed amendment, which is not yet in force, would grant the court powers to facilitate the adoption of a creditor restructuring plan that provides for a modification of the debtor’s share capital or a sale of the controlling shareholder’s shares.

The proposed modification would grant the court discretion, in certain circumstances, to appoint a representative to call a meeting to approve the debt for equity swap and/or the sale of the shares and to step into the shoes of shareholders to vote and approve the plan even if the controlling shareholders do not support the plan.

Controlling shareholders would therefore be forced to give up or sell their shares.