SPECIAL ISSUE PREVENTIVE RESTRUCTURING 3. The French transposition of the EU Directive on Preventive Restructuring 2019: revamping the law while preserving the status quo

1. Overview of the French Insolvency Law Regime^[1]

This article contains an analysis of the most recent reforms in French insolvency law, following the passing of the Ordinance of September 2021^[2] which has transposed the Directive on Restructuring and Insolvency (PRD 2019).^[3] The article is structured as follows. First, the French preventive restructuring regime is described, against the background of the PRD 2019 (section 2). Second, an analysis of the main features introduced into French insolvency law by the Ordinance of September 2021 is provided. In particular, section 3 discusses the adoption of the conciliation and accelerated safeguard proceedings as the main French reference preventive framework, the conditions for the adoption of the restructuring plan and the substitution of creditors’ committees for classes of creditors, as well as the introduction of a cross-class cram-down mechanism into French law. Finally, section 4 complements the discussion by examining the changes in the mechanisms in place for the detection and prevention of business difficulties, as well as the additional distinctions between the safeguard and rehabilitation proceedings which have been introduced by the Ordinance of September 2021.

1.1 A brief historical perspective

French insolvency law has a long and ancient history, dating back from Roman law. Before the introduction of the Commercial Code in 1807, insolvency law was mostly coercive and punitive, with procedures consisting of arresting and imprisoning the defaulting debtor. In 1880, the liquidation procedure was introduced, which ran alongside the coercive bankruptcy procedure. It was available to honest bankrupts who could save their businesses through debt forgiveness from their creditors.

It took until the 1950s^[4] and 1960s^[5] for insolvency law as we know it today to develop. In particular, the Laws of 20 July 1955 and 13 July 1967 considerably transformed the corporate insolvency landscape, notably by introducing the first rescue procedure known as rehabilitation proceedings (redressement judiciaire). At that stage, therefore, a ‘twin-track’ system was established, whereby a company could either be liquidated or rescued. The first pre-insolvency process was subsequently introduced in 1984.^[6]

The year 2000 marked the promulgation of the new Commercial Code, which consolidated insolvency laws. Since then, the French legislator and government have been prolific at reforming and modernising the insolvency regime at regular intervals, with substantial reforms taking place every few years. This continuous reform activity has been partly caused by regular economic crises, which have led to an increase in the number of insolvency cases, and partly due to consideration that previous reforms had fallen short of success. Most reforms have been rooted in the idea that corporate difficulties should be dealt with upstream, in order to preserve the value of the assets of the company and facilitate a successful restructuring.

1.2. The current French insolvency regime

In 2005, the safeguard procedure (procédure de sauvegarde) was instituted, introducing a debtor in possession process into French insolvency law. It was designed to encourage upstream rescue, since companies can avail of it before becoming officially insolvent. In the wake of the global economic and financial crisis from the late 2000s, variations of the safeguard procedure were created: the expedited financial safeguard (sauvegarde financière accélérée) in 2010^[7] and the accelerated safeguard (sauvegarde accélérée) in 2014,^[8] which drew on the practice of pre-packs.

French insolvency law was once again reformed in 2014, with the aim of promoting preventive measures; strengthening the efficiency of pre-insolvency proceedings, and increasing the rights of creditors in insolvency proceedings.^[9] In 2016, the Law on the Modernisation of 21^st Century Justice again focused on the promotion of the rescue culture, the enhancement of confidentiality during proceedings, the ring-fencing of new monies during restructuring, and the improvement of transparency and impartiality.^[10]

Finally, in 2019, the French legislator passed the so-called ‘Pacte Law’ (Plan d’Action pour la Croissance et la Transformation des Entreprises).^[11] The law had two main objectives: (i) business growth and job creation; and (ii) the redefinition of the place of the company in society with a view to better involving employees in the life of the company.^[12] In order to achieve these aims, the Pacte Law tasked the French Government with transposing the provisions of the EU Directive on Preventive Restructuring by means of an Ordinance. The latter came out in September 2021.^[13]

Thanks to these regular reforms and the long-standing corporate rescue culture of France, French insolvency law is now equipped with a comprehensive body of procedures, all governed by Title VI of the Commercial Code (Code de Commerce). The current corporate insolvency law system is comprised of the following procedures:

1. Ad hoc mandate (mandat ad hoc);^[14]
2. Conciliation (conciliation);^[15]
3. Safeguard (sauvegarde);^[16]
4. Accelerated safeguard (sauvegarde accélérée);^[17]
5. Judicial rehabilitation (redressement judiciaire);^[18] and
6. Liquidation^[19]

2. The PRD 2019 and the French Preventive Restructuring Regime

The preventive focus of the Directive on Preventive Restructuring 2019 (PRD 2019) is clearly articulated in its early recitals. For example, the PRD aims to ensure that:

‘viable enterprises […] that are in financial difficulties have access to effective national preventive restructuring frameworks which enable them to continue operating’ (Recital 1); and

‘debtors [are able] to restructure effectively at an early stage and to avoid insolvency’ (Recital 2).

While the Directive is the result of the codification of over 420 inputs  on existing European practices received during the trilogy process, the influence of French law is rather noticeable. This is not surprising consider that the prevention of business failure and the possibility for debtors to restructure at an early stage is not new for France, a jurisdiction which has long been known for its ‘restructuring-biased’ insolvency law regime,^[20] given its history for promoting the rescue of businesses at an early stage, especially with a view to preserving employment.^[21]

2.1. Out-of-court, Amicable, Preventive Proceedings

The ad hoc mandate is an out-of-court procedure opened by the President of the competent court at the request of the debtor who is experiencing legal, economic or financial difficulties but who is not yet insolvent. An ad hoc representative is appointed to assist with the negotiations between the debtor and their principal creditors,^[22] though the debtor remains in full possession of its assets and management of its company.

Principal creditors are invited to consider debt rescheduling and/or cancellation and/or the injection of new money into the business with a view to ensure the sustainability of the business, the pursuit of its economic activity and the preservation of employment.^[23] Major shareholders can be invited to negotiate and potentially re-capitalise the company.

A debt restructuring agreement cannot be imposed on dissenting creditors or creditors who have not participated in the negotiations, as the process is consensual, contractual and no cram-down is possible. There is no stay on enforcement proceedings and the procedure is fully confidential.

Conciliation is also an out-of-court procedure opened at the request of the debtor. The debtor must face legal, economic or financial difficulties but cannot have been insolvent for more than 45 days.^[24] A conciliator is appointed by the court for a duration of four months with a view to reaching an agreement between the debtor and their main creditors.^[25] The objective is to put an end to the debtor’s difficulties and/or prepare a plan for the sale of the business.^[26]

Conciliation proceedings are confidential in nature as long as the agreement reached by the debtor and their creditors is not sanctioned by the court (homologation). A debt restructuring agreement cannot be imposed on dissenting creditors or creditors who have not participated in the negotiations, as similarly to ad hoc mandate proceedings, the process is consensual, contractual and no cram-down is possible (unless accelerated safeguard proceedings are subsequently opened). The debtor remains in control of its assets and the management of the company’s activities, and there is no automatic stay on enforcement actions. However, the judge may issue a debt deferral for up to two years against certain creditors at the request of the debtor. The debtor may also, in case of refusal of the creditor of a waiver request submitted by the conciliator, ask for the suspension of payments in respect of that creditor’s outstanding claims during conciliation proceedings.^[27] Parties to a conciliation agreement sanctioned or approved by the court are barred from initiating legal proceedings against the debtor.^[28]

The main difference between the ad hoc mandate and the conciliation procedures, therefore, is that a conciliation agreement is ratified by the court at the request of the debtor. The court can either approve the agreement (constatation), which means that the confidentiality of the procedure is preserved, or it can sanction the agreement (homologation), which involves publicising the judgment.^[29] In the latter case, the adverse effect of publicity is mitigated by the fact that the sanctioning confers more legal advantages than a mere approval in the event of subsequent insolvency proceedings being opened.

In particular, if the conciliation proceedings are later converted into restructuring proceedings, new money providers will benefit from a protection for new financing (privilège de conciliation).^[30] This benefit is granted to investors who have provided new money, goods or services during conciliation proceedings with a view to ensure the continuation of the business and aims to secure the repayment of this new debt in the event of subsequent restructuring proceedings. A claim benefitting from a new money privilege may be given a different treatment from old money in any subsequent court-supervised procedure. The new investors will enjoy a priority of payment over all pre-commencement and post-commencement claims (subject to some exceptions, especially with respect to employment claims and procedural costs). Claims benefitting from this new money privilege are not to be rescheduled or written off under a safeguard or rehabilitation plan without their holders’ consent, not even through a (cross-class) cram-down process.

2.2. Court-assisted Preventive Proceedings

The safeguard procedure was introduced by the law of 2005 and subsequently reformed in 2008, 2014 and 2016. Modelled on Chapter 11 of the United States (US) Bankruptcy Code, the procedure was originally introduced as an insolvency procedure where the debtor was required to show that it was facing ‘difficulties that it was not able to overcome’ and which would lead to a payment failure situation (cessation des paiements). The Ordinance of 2008 relaxed this criterion, making the safeguard available to a debtor who is encountering difficulties which it is not in a position to overcome, while not yet in a payment failure situation. It thus transformed the safeguard procedure into a hybrid mechanism, which can also serve as a preventive restructuring process.

Compared to the ad hoc and conciliation procedures, the safeguard exhibits characteristics closer to formal insolvency proceedings. It is a court-supervised procedure, aimed at alleviating a debtor’s financial difficulties. It is opened at the sole request of the debtor and is only available to solvent companies experiencing difficulties that they cannot overcome.

An administrator (administrateur judiciaire) is appointed by the court who supervises and/or assists the debtor or its management, the latter remaining in control of the company and its assets.^[31] The court also appoints one or more creditors’ representative(s) (mandataires judiciaires) to represent creditors’ interests and assess proof of claims, as well as a supervising judge (juge commissaire) who supervises the procedure.^[32]

Following the opening judgment, an observation period starts (période d'observation), which lasts for six months, renewable once for a further six months.^[33] The observation period imposes an automatic stay on all actions against the debtor who is also prevented from repaying pre-petition claims.^[34] The debtor and the administrator prepare a safeguard plan during the observation period. The content of the plan is flexible and can include the rescheduling of debts, write-offs, debt-for-equity swaps, etc. It is voted on by creditors who may be grouped within classes. If the debtor fails to comply with the terms of the plan or becomes insolvent, the court may convert the safeguard procedure into rehabilitation proceedings (redressement judiciaire) if rescue remains possible, or liquidation proceedings if rescue is manifestly impossible.

In the immediate wake of the global financial crisis of the mid-2000s, developments in legal practice prompted further reforms in France. Debtors wishing to benefit from an arrangement similar in structure to a pre-pack^[35] were negotiating an agreement before formally entering into safeguard proceedings. The agreement negotiated would then be adopted in the form of a safeguard plan.^[36] To codify existing practices, the accelerated financial safeguard was introduced in 2010 as a ‘pre-pack’ variant of the safeguard.^[37] In 2014, following the prolonged devastating effects of the crisis on the French economy, the second variant of the safeguard – the accelerated safeguard – was created.^[38] While the accelerated safeguard offers a means for the debtor to enter into negotiations with all his creditors, the accelerated financial safeguard only affected financial creditors. Following the transposition of the PRD into French law, the two accelerated safeguard proceedings have been merged into the accelerated safeguard.

The accelerated safeguard is therefore a court-supervised procedure which can be opened at the sole request of a debtor who is not insolvent, or has not been insolvent for more than 45 days prior to the request to open the conciliation procedure that preceded the accelerated safeguard proceedings.

The debtor remains in control of its assets and management of the company and the proceedings come with a stay on creditor enforcement actions which is limited to four months from the date of the opening judgment.

Accelerated safeguard proceedings are not a standalone procedure. Rather, a company must:

1. have opened conciliation proceedings;
2. have negotiated a restructuring plan with the creditors later involved in the accelerated version of the safeguard; and
3. be able to demonstrate to the court that the plan will receive the support of the creditors involved.^[39]

The objective is for the debtor to reach an agreement with its creditors in a speedy fashion. The attractiveness of the accelerated safeguard procedure is that they combine confidentiality and contractual flexibility during the conciliation phase with:

1. the protection of new financing brought forward during the conciliation phase;^[40] and
2. the possibility for the court to bind dissenting creditors via a cross-class cram-down in the accelerated safeguard phase of the procedure.^[41]

2.3. Improving French Preventive Restructuring Law

Regrettably, French insolvency law has traditionally been known for being too favourable to debtors and ‘unreasonably averse to creditors.’^[42] While regular reforms over the years reinforced the prerogatives of creditors in insolvency procedures,^[43] French insolvency law has continued to rank relatively low regarding the ‘strength of its insolvency framework’ in international and comparative studies,^[44] because of the limited role of creditors in restructuring proceedings,^[45] especially compared to the protection of other stakeholders’ interests.^[46]

Therefore, while the transposition of the Directive was not expected to deeply upset the rather sophisticated existing French preventive restructuring system, it has nonetheless provided a unique occasion for France to reform its preventive restructuring landscape, notably by rebalancing the protection afforded to different stakeholders’ interests.^[47]

The transposition of the PRD 2019 into French law has followed a two-step process. First, on 11 April 2019, the so-called ‘Pacte Law’ relating to the growth and transformation of companies was passed.^[48] The Law had three main stated objectives:

1. to grow businesses and to create jobs;
2. to redefine the place of the company in society and to better involve employees in the life of the company; and
3. to transpose the PRD 2019.^[49]

Second, the Pacte Law tasked the French government with achieving these listed objectives by adopting an executive ordinance within two years. On 15 September 2021, the government adopted Ordinance No. 2021-1193,^[50] which made few, yet substantial changes to Book VI of the French Commercial Code dealing with insolvency and restructuring procedures. Indeed, while the premise of the PRD 2019 mirrors that of the French regime, the conditions for drawing up and adopting the restructuring plan under the Directive are inspired by Anglo-American law, notably by Chapter 11 of the US Bankruptcy Code, as well as the British scheme of arrangement.

Consequently, key changes introduced into French insolvency law by the transposition of the PRD 2019 have included:

1. the endorsement of the reference preventive framework, e. conciliation followed by accelerated safeguard proceedings;
2. the shift from committees to classes of creditors; and
3. the introduction of a cross-class cram-down mechanism.

3. An Analysis of the Main Features introduced into French Insolvency Law by the Reform

While the reform brought about by the Ordinance of September 2021 did not introduce any new (preventive) restructuring procedure into Book VI of the French Commercial Code, significant changes have nonetheless been introduced, which apply to proceedings opened from 1 October 2021.

3.1 The French Reference Preventive Framework: Conciliation and Accelerated Safeguard Proceedings

The French government has transposed the Directive de minimis, by retaining existing preventive restructuring procedures. In particular, the combination of the conciliation and accelerated safeguard proceedings was preserved and endorsed as the reference preventive framework within the meaning of the Directive, through the reinforcement of the effects of conciliation proceedings and the facilitation of the adoption of restructuring plans in case of opposition by dissenting creditors.

3.1.1. Step 1: Conciliation Proceedings

French insolvency law, through its ad hoc mandate and conciliation, has been a forerunner with respect to preventive restructuring frameworks, as they have proven to be rather effective tools over the years. The conciliation procedure has thus only been slightly altered by the Ordinance of September 2021. Therefore, the transposition of the Directive has resulted in a marginal strengthening of conciliation proceedings only, mostly through the modification of the procedure allowing the debtor to obtain a stay on enforcement actions and grace periods.

Conciliation proceedings are voluntary, flexible and to some extent, confidential, proceedings which aim to facilitate the negotiation of a restructuring agreement (accord de conciliation) between a company and its creditors under the supervision of a court-appointed conciliator (conciliateur). It is available to debtors that:

1. encounter legal, economic or financial difficulties, actual or anticipated; or
2. are not insolvent, or have been insolvent (i.e. in a payment failure situation (cessation des paiements)) for less than 45 days.

Articles L611-4 and L611-5 specify that a ‘debtor’ includes any natural and legal person who carries out a commercial or artisanal activity. These will include limited companies, closed corporations, partnerships, limited liability companies or individuals conducting a commercial or trade activity. Debtors carrying out an agricultural activity are excluded from the scope of the procedure.^[51]

The opening of conciliation proceedings follows a judicial decision by the President of the competent court (i.e. the commercial or judicial court (tribunal judiciaire)) located where the debtor has its registered office.^[52] A conciliator (conciliateur) is appointed, who oversees the procedure and makes any proposal relevant for the preservation of the business, its activity and employment. The conciliation procedure cannot exceed a duration of four months, which may be extended by the court for a maximum of one month.^[53]

The conciliation is a debtor in possession regime. The conciliator does not assume any management responsibility and there are no restrictions on trade activities. While the opening of conciliation proceedings does not trigger any automatic stay, Article L611-7 of the Commercial Code allows the debtor to petition the judge to suspend enforcement actions under certain conditions.

Until the implementation of the Directive, the debtor could only petition for a stay against creditors attempting to enforce their due and payable claims while conciliation proceedings were ongoing. In such circumstances, the judge could grant grace periods (délai de grâce) for up to two years, in accordance with Article 1343-5 of the Civil Code. This was considered rather ‘excessive, allowing for a substantial transfer of wealth benefitting the shareholders and carrying very costly effects for credit institutions since their debt [would] become[…] almost automatically non-performing.’^[54] Although such long stays were seldom granted by the court in practice, their mere prospect had an impact on the negotiations during the conciliation procedure, and were therefore heavily criticised for being a ‘formidable threat to the benefit of the debtor.’^[55]

The Ordinance of 15 September 2021 has since amended Article L611-7, enshrining a measure initially adopted in the context of the COVID-19 pandemic under the Ordinance of 20 May 2020.^[56] Under the new rules, the debtor can petition the judge who opened the conciliation procedure to:

1. stay enforcement actions and reschedule claims, that are due and payable, for a maximum of two years with respect to creditors attempting to enforce their claims or that have not granted a consensual standstill requested by the conciliator during the negotiations (but without any need for prior enforcement attempts by the creditor in the latter case); and
2. reschedule claims, that are not yet due and payable, for the duration of the ongoing conciliation procedure (e. for a maximum of five months) in relation to creditors who have not granted a standstill requested by the conciliatory during the negotiations.

While the debtor’s bargaining position seems to be reinforced following the reform, it should be noted that some French courts have rejected petitions, where it appeared that the requested suspension or rescheduling would be used as a way to force creditors to negotiate, rather than as a way to stay enforcement actions.^[57]

A stay is also effected, yet this time automatically, as per Article L611-10-1, while the conciliation agreement is being carried out, provided that the agreement is sanctioned (homologation) by the court. The sanctioning of the conciliation agreement by the court suspends any legal action against the debtor and prohibits any individual enforcement action against the debtor’s estate with respect to claims covered within the agreement.^[58]

The reforms introduced by the 2021 Ordinance have improved the effectiveness of the conciliation phase of the conciliation agreement by broadening the participating creditors. The conciliator is tasked with promoting the conclusion of a restructuring agreement between the debtor and its main creditors (and, where applicable, his main co-contractors).^[59] As a result, it is up to the debtor and conciliator to determine which creditors should be included in the negotiations. However, bearing in mind that, if conciliation proceedings are subsequently followed by accelerated safeguard proceedings, the decision as to which creditors to involve during the conciliation phase is therefore an important one.

At the end of the negotiation process, the conciliation agreement is approved by the court. The court can either approve the agreement (constatation), or sanctioned (homologation). If the agreement is merely approved, it is neither subject to publication nor to appeal. However, at the request of the debtor, the court can sanction the agreement if the following conditions are met:

1. the debtor is not in a payment failure situation or the agreement concluded puts an end to it;
2. the terms of the agreement are such as to ensure the sustainability of the company’s activity; and
3. the agreement does not impact the interests of non-negotiating and non-signatory creditors.^[60]

Approval of the agreement puts an end to the conciliation procedure, as well as the automatic stay.

3.1.2 Step 2: Accelerated Safeguard Proceedings

The Ordinance of September 2021, transposing the PRD 2019, made the accelerated safeguard procedure the core framework of preventive restructuring within the meaning of the Directive. It meets the European legislator’s expectations of ensuring a vote on a restructuring plan in a short timeframe, thanks to the compulsory passage through conciliation first. With a maximum duration of four months (two months which can be extended by another two months at the request of the debtor or the administrator), accelerated safeguard proceedings are now available to all companies, regardless of their size, which was not the case before October 2021. The objective of the accelerated safeguard procedure is, therefore, to preserve the company’s value within the framework of a so-called pre-pack, where a restructuring plan can be adopted by affected creditors.^[61]

Importantly, the accelerated safeguard is not a standalone procedure. Rather, accelerated safeguard proceedings are opened at the request of a debtor who can demonstrate that:

1. they are engaged in conciliation procedure;
2. a conciliation agreement has been drawn up, aimed at ensuring the sustainability and rescue of the company; and
3. the agreement must be likely to receive support from the affected parties within two months of the opening judgment.^[62]

Subject to some variations, found in Chapter VIII of Book VI of the Commercial Code, the accelerated safeguard is subject to the rules applicable to the traditional safeguard.^[63] The first substantial condition for opening accelerated safeguard proceedings is that the debtor must be engaged in conciliation proceedings.^[64] The fact that the debtor is in a payment failure situation does not preclude the opening of accelerated safeguard; the same criterion is used as that of the conciliation, i.e. the debtor must not have been in a payment failure situation for more than 45 days.^[65] The decision to open accelerated safeguard proceedings is taken by the court on the basis of the report prepared by the conciliator, expressing their own opinion on the likelihood of the restructuring plan being adopted by the creditors concerned.^[66]

The plan is therefore prepared during conciliation proceedings and it must be likely to receive the approval of affected parties against which the procedure will take effect. The attractiveness of the two-stage approach of the conciliation and accelerated safeguard preventive restructuring framework is that it combines confidentiality and contractual flexibility during the conciliation phase with the possibility for the court to bind dissenting creditors in the safeguard phase of the procedure through a cross-class cram-down process.^[67] It also protects new financing brought forward during the conciliation process (privilège de la conciliation), if the conciliation agreement has been sanctioned (homologation) by the court. Investors will enjoy a priority of payment over all pre- and post-commencement claims in the event of subsequent court-administered proceedings. Such claims benefitting from this new money privilege cannot be rescheduled or written-off by a safeguard or rehabilitation plan (plan de sauvegarde/plan de redressement judiciaire), without their holders’ consent, not even through cram-down or cross-class cram-down.

Overall, the voting conditions and adoption of the plan by the classes of affected parties are defined within the framework of the traditional safeguard, which remains the flagship of Book VI of the Commercial Code. The specificities of the accelerated safeguard, therefore, lie in the compulsory constitution of classes of affected parties and the imposition of a short deadline, since the plan must be adopted within two months of the opening judgment, otherwise the procedure is closed, without possible conversion.^[68]

3.2. Adoption of the Plan and the Introduction of Classes of Creditors

Article 9(6) of the PRD 2019 gave the Member States some leeway in setting up the creditors’ voting majority: ‘Member States shall lay down the majorities required for the adoption of a restructuring plan. Those majorities shall not be higher than 75% of the amount of claims or interests in each class or, where applicable, of the number of affected parties in each class.’  French insolvency law complied with Article 9(6) of the PRD 2019, since Article L626-30-2 of the Commercial Code already required that two-thirds in value of each class of creditors must approve the plan.

Article 9(2) of the PRD 2019 also provides that ‘all affected parties have a right to vote on the adoption of a restructuring plan’, while parties not affected by the plan should not vote on it. Before transposing the Directive, French law already aligned with this first element of Article 9 PRD 2019 as only creditors affected by the plan could vote on it.^[69] The Commercial Code also explicitly excluded some creditors from voting on the plan:

1. those not affected by the restructuring plan;
2. those who benefit from a trust agreement (bénéficiaires d'une fiducie); and^[70]
3. social and taxes authorities, invited to take part in the negotiations and able to agree to debt cancellations or rescheduling without being members of any committees.^[71]

The formation of classes of creditors as per Article 9(4) PRD 2019 was one of the main sticking points of the 2021 reforms, since the French Commercial Code did not provide for actual classes of creditors, but rather grouped creditors within committees. While the EU legislator expected Member States to ensure that ‘affected parties are treated in separate classes, which reflect sufficient commonality of interest [and as] a minimum, creditors of secured and unsecured claims should be treated in separate classes’,^[72] the Commercial Code grouped creditors within committees depending on their institutional nature, as opposed to the nature of their claims.

Until the Ordinance of September 2021 transposing the PRD 2019, Article L626-30-2 provided that creditors be grouped within the three following committees:

1. credit institutions;
2. main suppliers; and
3. bondholders

The French position had been heavily criticised by commentators^[73] over the years for its lack of homogeneity of interests, with senior, junior, privileged and unsecured creditors being grouped in the same committees^[74] and for not meeting international standards when complex financing schemes involving different layers of debt were involved.[75]

In the period leading to the transposition of the PRD 2019, debates around class formation were numerous. Some authors proposed that the formation of these classes be done ahead of the opening of accelerated safeguard proceedings, during the conciliation phase.^[76] However, conciliation proceedings are contractual in nature and do not normally abide by the voting mechanism envisioned by the Directive. Others suggested that classes could be divided into sub-categories based on a commonality of interest, as is the case in Chapter 11 of the US Bankruptcy Code and in German insolvency law.^[77] The possibility for the government to introduce a specific class for new money providers during conciliation proceedings or a one-person class comprising of one creditor only was also mentioned,^[78] as well as a classes grouping all shareholders who could vote on the safeguard plan but could also be cram-downed with a view to deter them to ‘unreasonably prevent or create obstacles to the adoption […] of a restructuring plan.’^[79]

First, in introducing classes of creditors, the Commercial Code has also introduced a difference between safeguard and accelerated safeguard proceedings. In the latter, the formation of classes is compulsory for all debtors.^[80] For safeguard proceedings, the new class system is not mandatory, except for companies which meet the following thresholds:

1. they employ over 250 employees and have a turnover greater than EUR 20 million; or
2. they have a turnover of over EUR 40 million.^[81]

This threshold is higher than those applying to the former creditors’ committees and, therefore, it is anticipated that their formation will remain relatively marginal in number. The thresholds reflect delicate political choices between equal access to restructuring tools and greater or lesser complexity of the procedures depending on the size of the debtor.^[82] At the request of the debtor, the supervising judge (juge-commissaire) may nonetheless constitute classes of affected parties for debtors that fall below the threshold. The decision is a measure of judicial administration and is not subject to appeal.^[83]

Second, considerable leeway is left to the insolvency practitioner (administrateur judiciaire) who will group creditors within classes representative of a sufficient commonality of economic interests (communauté d’intérêt économique suffisante). This will therefore vary depending on the typology of the company’s liabilities and its activity. At the very least, however:

1. creditors whose claims are secured by security interests in rem and other creditors (such as unsecured ones) shall belong to different classes;
2. the class formation shall comply with subordination agreements entered into before the commencement of proceedings;
3. equity holders shall make up one or more classes; and
4. in relation to creditors secured by a trust (fiducie) granted by the debtor, only the amount of their claims not secured by such security is considered.^[84]

Public creditors such as tax and social creditors benefit from a preferred status, while claims resulting from employment contracts, as well as pension rights acquired under an occupational pension scheme and maintenance claims are considered not to be affected by the plan.^[85]

The administrator notifies each affected party of their grouping and class.^[86] In the event of disagreement concerning the affected parties, the methods of distribution into classes and the calculation of the votes, each affected party, the debtor, the public prosecutor, creditors’ representatives or the administrator may petition the supervising judge.^[87]

The composition of classes, presence of equity holder classes and the supervised flexibility left to the administrator in their composition should allow for the emergence of greater options and solutions while better protecting secured creditors’ rights. The introduction of classes, coupled with the cross-class cram-down mechanism, thus contributes to reinforcing France’s attractiveness, particularly for foreign investors.

3.3. The Introduction of a Cross-class Cram-down Mechanism into French Law

With the introduction of the possibility to cross-class cram-down dissenting creditors during safeguard or accelerated safeguard proceedings came the introduction of protections ensuring that all parties are treated fairly, especially creditors.

First, the debtor’s consent is compulsory for the court to cross-class cram-down creditors.^[88] Second, France has adopted the absolute priority rule, which means that creditors of a class that voted against the plan must be fully repaid when a lower-ranking class is entitled to be paid or retains an interest. However, the court may make exceptions to this requirement (e.g. in the case of strategic suppliers, tort claimants or equity holders), if such exceptions are deemed necessary to achieve the plan’s objectives and if the plan does not excessively affect the rights or interests of impaired parties.^[89] Third, in order to adopt a restructuring plan despite the negative vote of one or several classes of creditors, and therefore effect a cross-class cram-down, the court must verify that one of the following two criteria is met:

1. a majority of the classes of impaired parties voted in favour of the plan, provided that at least one of those classes is a secured creditors’ class or is senior to the ordinary unsecured creditors’ class;^[90] or
2. at least one of the classes of affected parties has voted favourably, i.e. a class other than an equity holders’ class or any other class which is ‘in the money’ (i.e. which, after determining the value of the debtor as a going concern, could reasonably be expected not to be entitled to any payment or retain any interest while applying the normal distribution order as would be the case in liquidation proceedings or a sale plan (plan de cession).^[91]

Finally, the court must ensure that when affected parties have voted against the draft plan, none of these affected parties is in a less favourable situation because of the plan, than that which they would be in in a liquidation or sale of the company.^[92]

When one or more classes of equity holders have been constituted and have not approved the plan, a cross-class cram-down may only be implemented if:

1. the debtor exceeds a certain threshold (e. 150 employees or more or a turnover of EUR 20 million or over);
2. the equity holders of one or several dissenting classes are not ‘in the money’;
3. if the plan provides for a capital increased subscribed by cash contribution or by of set-off against receivables, the shares issued are offered in priority to the shareholders, pro rata their existing shareholding; and
4. the plan does not provide for the transfer of all or part of the rights of dissenting class(es) of equity holders.^[93]

4. Other Features adopted within the French Insolvency and Restructuring Regime

Besides the conciliation/accelerated safeguard reference preventive framework, the Ordinance of 15 September 2021 has also amended the other two restructuring procedures, the safeguard and the rehabilitation processes, as well as upstream early warning tools (procédure d'alerte).

4.1. Mechanisms for Detecting and Preventing Business Difficulties

Recital 22 of the PRD 2019 states that:

‘early warning tools should […] be put in place to incentivise debtors that start to experience financial difficulties to take early action. Early warning tools which take the form of alert mechanisms that indicate when the debtor has not made certain types of payments could be triggered by, for example, non-payment of taxes or social security contributions. Such tools could be developed either by Member States or by private entities, provided that the objective is met.’

Internal early warning tools already existed in France (procédure d'alerte),^[94] intended to promote a dialogue within the management of the company before the difficulties encountered become overwhelming. The triggering initiatives belongs to the auditor, the social and economic committee or the shareholders. The alert process is divided into several steps. First, the entity that has triggered the alert requests the company’s management to explain the economic and financial situation in which the company is. Secondly, if the manager fails to respond or if the continuity of the operation remains compromised, a special report is drafted and a copy sent to the president of the court. Other external  warning mechanisms now also exist, notably triggered by the President of the relevant court (commercial or judicial court) or from approved risk management agencies (groupements de prévention agréés).

Article L611-2 of the Commercial Code states that the President of the relevant court may summon the directors of the debtor company, when it is revealed, from any act, document or procedure that they are experiencing difficulties which are likely to jeopardise the continuity and sustainability of the business. The objective of this provision is to make managers aware of, and react to, the difficulties which their company is experiencing, in order to prevent insolvency. Originally available only to the President of the commercial court, this preventive mechanism has since been extended to the judicial court as well (tribunal judiciaire).

This detection mechanism is relatively straightforward. The President of the relevant court summons the company’s directors for an interview to discuss the implementation of necessary measures with a view to avoid insolvency. Before the Ordinance of September 2021 transposing the PRD 2019, managers were merely summoned to attend this meeting but were not sanctioned in case of absence. Article L611-2 of the Commercial Code has therefore been amended to provided that the President of the court may obtain any information likely to give them some accurate representation of the economic and financial situation of the debtor, from the auditors, members of the social and economic committee, public administrations, social security and welfare organisations, as well as the financial risks and payment incidents services (services chargés de la centralisation des risques bancaires et des incidents de paiement).

In relation to detection by approved risk management agencies, Article L611-1 of the French Commercial Code states that, when the agency identifies signs of difficulty, it informs the manager of the debtor and can suggest the intervention of an expert. The detection criterion (‘signs of difficulty’) is therefore broad and there is no legal precision as to what it entails. In practice, these risk management agencies tend to look at accounting and financial documents communicated by the debtor, as well as any other information brought to their attention such as the loss of contracts or conflicts between equity-holders.

4.2 The ‘Post-Money’ Privilege

The ordinances implemented in response to the COVID-19 pandemic, in some way inspired by the PRD 2019, a ‘post-money’ privilege which did not exist until then and which has been embedded in the Ordinance of September 2021. This privilege benefits to claims arising from a cash contribution to the debtor:

1. during the observation period, authorised by the supervisor judge; and/or
2. for the implementation of the safeguard (or rehabilitation) plan adopted by the court; or
3. for a modification of the plan, adopted by the court.^[95]

Just as in the case of claims benefitting from the new money privilege (privilège de conciliation, discussed in section 2.1 above), claims guaranteed by the ‘post-money’ privilege (privilege de post money) cannot be subject to write-off or postponements, which are not agreed by their holders in the event of subsequent restructuring proceedings. During restructuring proceedings, therefore, these claims can only be overridden by certain specific claims, such as the super-priority granted to wages, legal fees, new money privileged claims and post-petition claims of the National Wage Guarantee Fund (Association pour la Garantie des Salaires (AGS)).

4.3. Additional Distinctions between Safeguard and Rehabilitation Proceedings

While rehabilitation proceedings follow the rules of the safeguard procedure with some departures, the main difference between the safeguard and rehabilitation procedures lies in the nature and severity of the difficulties encountered. For rehabilitation proceedings to be opened, the company needs to be in a payment failure situation, which amounts to difficulties which are more severe than the possible momentary cash flow problem under safeguard.

Similar to the safeguard, when the debtor is insolvent and rescue does not seem unlikely, the management of the distressed company can request the opening of rehabilitation proceedings no later than 45 days from the date on which it becomes insolvent, provided that conciliation proceedings are not pending.^[96] Any unpaid creditor or the public prosecutor may also request the court to open rehabilitation proceedings against the debtor.^[97] Similar to the safeguard, the objectives of rehabilitation proceedings are to allow the company to keep trading, preserve employment and pay off the company’s liabilities. It gives rise to a plan sanctioned by a court at the end of an observation period and, where appropriate, to the constitution of classes of affected parties.^[98]

As a result, although the safeguard proceedings are available to solvent debtors and rehabilitation proceedings to insolvent ones, the similarities of these two regimes meant that very comparable restructuring tools were applied to companies in very different situations (solvent or insolvent). The Ordinance of September 2021 has slightly modified these proceedings, as the government opted to use the accelerated safeguard as the main vessel for the transposition of the PRD. However, since safeguard proceedings are in practice often used defensively to protect a company facing financial difficulties, or as a threat in upstream negotiations, the French government has chosen to introduce additional distinctions between the safeguard and rehabilitation procedures:

1. the maximum duration of safeguard proceedings has been lowered to 12 months, whereas rehabilitation proceedings can last for up to 18 months;^[99]
2. while the safeguard rules also apply to creditors’ voting and classes, differences have now been introduced of the rehabilitation procedure:
   1. if the debtor does not meet the required thresholds, the authorisation to form classes of affected parties may be requested by the administrator, without the debtor’s approval;^[100]
   2. any affected party may submit a draft restructuring plan to the vote of the classes;^[101]
   3. if the plan has not been approved by all classes of affected parties, the court can decide to apply the cross-class cram-down mechanism at the request of the debtor or any affected party (in safeguard proceedings, cross-class cram-down can be implemented by the court with the approval of the debtor only);^[102] and
   4. if the approval of the plan through the class-based consultation procedure (whether by regular approval by the classes of affected parties or by a cross-class cram-down) is not achieved, the approval may occur through individual consultation of the creditors.^[103]

iii. finally, where the plan is not approved by the requisite classes, including through a cross-class cram-down, the court’s power to reschedule the debtor’s liabilities by up to ten years (also known as ‘term-out’) is no longer available in safeguard proceedings^[104] but remains available in rehabilitation proceedings. This is however subject to a minimum instalment of 10% after the fifth years, thereby providing debtors with stronger leverage in restructuring discussions.^[105]

5. Conclusion

For years, France has been internationally known for its pro-debtor nature and the rather low involvement of creditors in preventive restructuring proceedings. The Ordinance of September 2021 transposing the PRD 2019 has made significant changes to French restructuring and insolvency law, making France more attractive to financial investors. While the attractiveness of preventive measures for debtors has been strengthened, in particular conciliation proceedings with the improvement of the grace period mechanism and accelerated safeguard proceedings with the introduction of the constitution of classes and cross-class cram-down mechanism, increased the protection that is now offered to secured creditors.

Although this situation is welcomed, the implementation of the new provisions in practice largely rests on insolvency practitioners, whose responsibility is now to make sense of the system of classes of creditors, which turns out to be rather technical. Since the legislator did not strictly regulate the grouping of affected parties into classes, the number and types of classes will therefore depend on the assessment of the administrator. The judge will also have to apprehend new concepts with caution, as they are significant and complex. Concepts such as ‘affected parties’, ‘best interest of creditors test’, ‘commonality of interests’, as well as the criteria for cross-class cram-down, are subtle and of variable geometry.

^[1] The article covers the law, case law and literature as of 31 May 2022.

^[2] Ordinance No. 2021-1193 of 15 September 2021.

^[3] Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on dischage of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132, O.J. L 172/18.

^[4] Decree-Law No. 55-583 of 20 July 1955.

^[5] Law No. 67-563 of 13 July 1967.

^[6] Law No. 84-148 of 1 March 1984.

^[7] Law No. 2010-1249 of 22 October 2010.

^[8] Ordinance No. 2014-326 of 12 March 2014.

^[9] Idem.

^[10] Law No. 2016-1547 of 18 November 2016.

^[11] Law No. 2019-486 of 22 May 2019.

^[12] See the Report of the French Council of Ministers of 18 June 2018, available at:

<https://www.gouvernement.fr/conseil-des-ministres/2018-06-18/croissance-et-transformation-des-entreprises>.

^[13] Ordinance No. 2021-1193 of 15 September 2021.

^[14] Governed by Articles L611-1 to L611-16, Commercial Code.

^[15] Ibid., Articles L611-1 to L611-16.

^[16] Ibid., Articles L620-1 to L627-4.

^[17] Ibid., Articles L628-1 to L628-8.

^[18] Ibid., Articles L631-1 to L632-4.

^[19] Ibid., Articles L640-1 to L645-12.

^[20] M. Adalet McGowan and D. Andrews, ‘Insolvency Regimes And Productivity Growth: A Framework For Analysis’ (2016) OECD Economic Department Working Papers No. 1309, p.18.

^[21] See R. Parry, ‘Introduction’, in K. Gromek Broc and R. Parry (eds), Corporate Rescue in Europe: An Overview of Recent Developments from Selected Countries in Europe (Kluwer, 2004), p.1.

^[22] Ibid., Article L611-7.

^[23] The court can sanction the agreement through homologation only if certain conditions are met, including that the provisions of the agreement aim to ensure the viability of the going concern of the company: Article L611-8, Commercial Code.

^[24] Article L611-4, Commercial Code.

^[25] Ibid., Article L611-6.

^[26] Ibid., Article L611-7.

^[27] Ibid., Article L611-10-1.

^[28] Ibid., Article L611-10-1.

^[29] Before the court sanctions an agreement, it must hear the debtor, the creditors who are parties to the agreement, the conciliator and some representatives of the company: Article L611-9, Commercial Code.

^[30] Articles L611-11, L626-20 and L626-30-2, Commercial Code.

^[31] Ibid., Article L622-1.

^[32] Ibid., Article L621-4.

^[33] Ibid., Article L621-3.

^[34] Ibid., Article L622-7.

^[35] F-X. Lucas, ‘Le plan de sauvegarde apprêté ou le prepackaged plan à la française’ CDE 2009, dossier.

28; A. Besse and Nicolas Morelli, ‘Le prepackaged plan à la française: pour une saine utilisation de la procédure de sauvegarde’ JCP E No. 25 (18 June 2009), p.1628.

^[36] Y. Le Gales, ‘Comment fonctionne la procédure de sauvegarde financière accélérée’ (Le Figaro, 11 January 2011).

^[37] Law No. 2010-1249 of 22 October 2010. See also P. Omar, ‘Preservation and Pre-Packs à la Française: The Evolution of French Insolvency Law after 2005’ (2011) 8 International Company and Commercial Law Review p.258; L-C. Henry, ‘La sauvegarde financière accélérée ou les leçons de la pratique’ LPA 2010, No. 232, p.4; T. Monteran and M. Mieulle, 'Le vade-mecum du plan de cession « prepack »’ BJE 2015, No. 3, p.164.

^[38] Ordinance No. 2014-326 of 12 March 2014.

^[39] Article L628-1, Commercial Code.

^[40] Ibid., Article L611-11.

^[41] Ibid., Articles L628-8 and L626-31, as amended by Article 37, Ordinance of 15 September 2021.

^[42] F. Pérochon, Entreprises en difficulté (LGDJ, 2014), p.205.

^[43] Law No. 2005-845 of 26 July 2005; Ordinance No. 2008-1345 of 18 December 2008; Ordinance No. 2014-326 of 12 March 2014; Law No. 2015-990 of 6 August 2015; Law No. 2016-1547 of 18 November 2016.

^[44] See, for example, World Bank, Doing Business Report, available at:

<https://www.doingbusiness.org/en/methodology/resolving-insolvency>, which states the recovery rate of creditors in a fictious case under consideration is estimated at 74.8%, while it is well above 85% in other European countries, such as Denmark, Finland, Ireland, the Netherlands, Norway, Slovenia and the United Kingdom. See also S. Davydenko and J. Franks, ‘Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK’ (2008) 63 Journal of Finance p.565.

^[45] A. Epaulard and C. Zapha, ‘Distressed firms: how effective are preventive procedures?’ France Stratégie - La Note D'Analyse no. 84 (February 2020), p.2, available at:

<https://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/fs-na-84-procedures-preventives-anglais.pdf>.

^[46] G. Plantin et al., French Council of Economic Analysis, ‘Les notes du conseil d'analyse économique’ No. 7 (June 2013), p.1, available at: <http://www.cae-eco.fr/IMG/pdf/cae-note007-en.pdf>; L. Spizzichino et al., ‘Les perspectives d'évolution du rôle des créanciers en droit des entreprises en difficulté’ (2019) RPC No. 3, p.1.

^[47] Recital 35, PRD 2019.

^[48] Law No. 2019-486 of 22 May 2019.

^[49] See the Report of the French Council of Ministers of 18 June 2018, available at:

<https://www.gouvernement.fr/conseil-des-ministres/2018-06-18/croissance-et-transformation-des-entreprises>.

^[50] Ordinance No. 2021-1193 of 15 September 2021, later supplemented by Decree No. 2021-1218 of 23 September 2021.

^[51] For the procedure applicable to agricultural tradespersons, see Articles L.351-1 to L.351-7, Rural and Fisheries Code.

^[52] Article L611-5, Commercial Code.

^[53] Ibid., Article L611-6.

^[54] V. Rotaru, ‘The Restructuring Directive: A Functional Law and Economics Analysis from a French Law Perspective’ (30 September 2019), para. 97, available at:

<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3461716>; A. Pietrancosta and S. Vermeille, ‘Le droit des procédures collectives à l'épreuve de l'analyse économique du droit. Perspectives d'avenir?” (2010) RTDF No. 1, p.15, available at: <https://droitetcroissance.fr/wp-content/uploads/2015/04/1.-Le-droit-des-proc%C3%A9dures-collectives-%C3%A0-l%C3%A9preuve-de-lanalyse-%C3%A9conomique-du-droit.pdf>.

^[55] Rotaru (above note 54), para. 98.

^[56] Ordinance No. 2020-596 of 20 May 2020.

^[57] Commercial Court, Nanterre, Order of 17 May 2021.

^[58] Article L611-10-1, Commercial Code.

^[59] Ibid., Article L611-7.

^[60] Ibid., Article L611-8.

^[61] The replacement of the concept of committees by classes of creditors, as discussed in section 3.2, led to the disappearance of the accelerated financial safeguard because the committee of credit institutions no longer exists. However, it is still possible to limit the effect of accelerated safeguard proceedings to financial creditors only (Article L628-1, Commercial Code).

^[62] Article L628-1, Commercial Code.

^[63] Governed by Articles L620-1 to L627-4, Commercial Code.

^[64] Ibid., Article L628-1.

^[65] Ibid., Article L628-1.

^[66] Ibid., Article L628-2.

^[67] Ibid., Articles L628-8 and L626-31.

^[68] Ibid., Article L628-8.

^[69] Ibid., former Article L626-30-32.

^[70] Ibid., former Article L626-30-32. See also former Article L626-32. A fiducie is defined by Article 2011, Civil Code as ‘the operation by which one or more persons transfer assets, rights or security interests, or a set of assets, rights or security interests, present or future, to one or more trustees who, holding them separate from their own assets, act for a specific purpose for the benefit or one or more beneficiaries.’

^[71] Ibid., Article L626-6.

^[72] See also, Recital 44, PRD 2019: ‘To ensure that rights which are substantially similar are treated equitably and that restructuring plans can be adopted without unfairly prejudicing the rights of affected parties, affected parties should be treated in separate classes […] “Class formation” means the grouping of affected parties for the purposes of adopting a plan in such a way as to reflect their rights and the seniority of their claims and interests. As a minimum, secured and unsecured creditors should always be treated in separate classes.’

^[73] See for example R. Dammann, ‘L'introduction des classes de créanciers dans l'optique d'une harmonisation franco-allemande des procédures d'insolvabilité’, in Mélanges en l'honneur du Professeur Claude Witz (LexisNexis, 2018), p.223; R. Dammann and M. Boché-Robinet, ‘Transposition du projet de directive sur l'harmonisation des procédures de restructuration préventive en Europe. Une chance à saisir pour la France’ (2017) Recueil Dalloz No. 22 (22 June 2017).

^[74] Rotaru (above note 54), paragraph 12: ‘current French law provides, contrary to any common sense, that any safeguard plan must be voted on by creditors organized in three separate bodies.’

^[75] Dammann and Boché-Robinet (above note 73).

^[76] Idem.

^[77] A. Droege Gagnier and A. Dorst, ‘France: quo vadis ? France is keen to reform its security and insolvency law (2018) 12 Insolvency and Restructuring International 24, p.25.

^[78] See R. Dammann and A. Alle, “Directive ‘Restructuration et Insolvabilité’: l'introduction des classes de créanciers en droit français” (2019) Recueil Dalloz pp.2047 et seq.

^[79] Article 12, PRD 2019.

^[80] Article L628-4, Commercial Code.

^[81] Ibid., Articles L626-29 and R626-52.

^[82] O. Buisine and V. Rousseau, ‘L’efficacité des procédures de restructuration, d’insolvabilité et de seconde chance’: commentaire du titre IV de la directive Restructurations préventives’, Rev. proc. coll. 2020, no. 2, study 10.

^[83] Articles L626-29 and R626-54, Commercial Code.

^[84] Ibid., Article L626-30.

^[85] Ibid., Article L626-30-IV.

^[86] Ibid., Article R626-55.

^[87] Ibid., Article R626-58-1.

^[88] Ibid., Article L626-32.

^[89] Ibid., Articles L626-32-I-3° and L626-32-II.

^[90] Ibid., Article L626-32-I-2°-a).

^[91] Ibid., Article L626-32-I-2°-b).

^[92] Ibid., Article L626-31.

^[93] Ibid., Article L626-32-I- 5°.

^[94] Governed by Articles L234-1 to L234-4, Commercial Code.

^[95] Ibid., Article L622-17.

^[96] Ibid., Article L631-4.

^[97] Ibid., Article L631-5.

^[98] Ibid., Article L631-1.

^[99] Ibid., Article L631-7 and Article L621-3 for the safeguard.

^[100] Ibid., Article L631-1.

^[101] Ibid., Article L631-19.

^[102] Ibid., Article L631-19.

^[103] Ibid., Article L631-19.

^[104] Ibid., former Articles L621-62 et seq.

^[105] Ibid., Article L626-18.

Keywords