Reorganization, insolvency and
distressed M&A in France
July 2009
Reid Feldman
Kramer Levin Naftalis & Frankel LLP
47, avenue Hoche
75008 Paris, France
telephone: + (33) 1 44 09 46 00
fax: + (33) 1 44 09 46 01
rfeldman@kramerlevin.com
Topics covered
Legislative context and recent reforms
Reorganization/ insolvency process
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
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Goals and principles
Available procedures
Comparative table
Selected issues for distressed M&A lenders and
investors
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

Risks of liability
Debt-trading issues
Key scenarios
Note: This outline is for informational purposes only and does not constitute legal
advice or create an attorney-client relationship. Legal advice should be sought in
assessing the impact of any of the matters mentioned herein.
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Legislative context and recent reforms
Prior law (dating from 1985) was considered unsatisfactory because
not favorable enough to reorganizations

Of over 51,000 insolvency proceedings in 2005, 88% resulted in
straight liquidations.
Significant reform was adopted in 2005 (Law n° 2005-845 of July 26,
2005)


maintained the goals and principles of prior law
created two new insolvency procedures:
 conciliation (based on former règlement amiable procedure)
 safeguard (sauvegarde) procedure, inspired by US Chapter 11
Further reform adopted in late 2008/early 2009 included
measures to encourage use of the safeguard procedure
(Ordinance n° 2008-1345 of December 18, 2008, and Decree n° 2009-160 of February
12, 2009)
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Reorganization/insolvency process
Goals and principles
Goals



1st priority: continue the business
2nd priority: maintain employment
3rd priority: settle liabilities to creditors
Principles

Control over the process



Right to information



exercised by court-appointed officials and supervising judge
(and debtors, in safeguard proceeding)
not exercised by creditors
In theory creditors and the public have some right to
information
In practice the process is often not transparent
Standards for decision are subjective
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Reorganization/insolvency process
Available procedures

Ad-hoc mediation (mandat ad hoc)

Conciliation (conciliation)

Safeguard (sauvegarde)

Judicial reorganization (redressement judiciaire)

Judicial liquidation (liquidation judiciaire)
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Reorganization/insolvency process
Comparative table - 1
Ad-hoc
mediation
Purpose
Criteria re
solvency
(measured by
the cash-flow
test)
Automatic
stay and
status of
ongoing
contracts
Conciliation
Safeguard
Judicial
Reorganization
Informal
agreement with
creditors or
preparation of
voluntary
composition
“Facilitate
agreement with
principal creditors,
and possibly
contractual
counterparties,
which resolves the
company’s
difficulties”
“reorganization of the business to permit continuation
of economic activity, maintenance of employment and
settlement of liabilities” (L620-1)*
Not insolvent
current or expected
“legal, economic or
financial difficulty”
and either solvent
or insolvent for 45
days
Debtor not insolvent but
experiencing “difficulties which
it is not able to overcome”
(L620-1)
No automatic stay.
General debt extension provisions can
be used permitting a court to delay
payment of specific debts for up to two
years
Judicial Liquidation
“Bring an end to the business or
liquidate the debtor’s assets by
sale of assets as a whole or
separately” (L640-1)
Possible outcomes include plan of continuation of
business; adjustment of liabilities, division of business,
sale of some units and (in reorganization only) possible
sale of entire business
Insolvent (management required to file 45 days after
the debtor becomes insolvent)
Automatic stay of enforcement actions against the debtor..
Payment of pre-petition debts prohibited except via set-off of related debts; security interests
cannot be enforced
No interest accrues on debts except loans or deferred-payment contracts with duration  1
year. (In safeguard proceeding only, guarantors benefit from automatic stay.)
Ongoing contracts can be terminated.
*Provisions relating to reorganization and insolvency are codified in the Commercial Code; references herein in the
form L____ or R____ are to articles in the Commercial Code.
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Reorganization/insolvency process
Comparative table - 2
Ad-hoc
mediation
Time-frame
Appointments
made by the
court
None
specified;
ends upon
request of
debtor
Mediator
(mandataire
ad hoc) – can
be proposed
by debtor –
empowered to
talk with
creditors and
management
Conciliation
Safeguard
Judicial
Reorganization
Four months with
possible extension
for one month (or, if
a plan is proposed,
until a court decision
thereon) . Debtor
can end proceeding
at any time, mediator
can request end of
proceeding if his
proposals are
rejected by debtor.
Six months with possible extension of six months plus
possible additional six-month extension at request of public
prosecutor
Mediator
(conciliateur) – name
can be proposed by
debtor
•
•
•
•
Judicial Liquidation
Claims must be filed within two months (four months for foreign creditors) of publication of
commencement of proceedings.
Expert
•
•
•
•
Experts (optional) for specific missions
Supervising judge (juge-commissaire)
Employees’ representative
Bankruptcy administrator (administrateur judiciaire),
optional unless turnover  3M€ or employees  20; in
safeguard procedure, name can be proposed by the
debtor and management remains in office
Creditors’ representative (mandataire judiciaire, a
bankruptcy professional)
Up to five inspectors (chosen among creditors – but
inspectors cannot purchase the debtors’ assets)
Two creditors’ committees (optional unless employees
 150 or turnover  20M€): (1) creditors who are EEA
financial institutions and others (including purchasers of
debt) and (2) creditors who are suppliers of goods or
services (including all with >3% of debtor’s liabilities)
If there are bondholders, they are consulted via
bondholders’ assemblies
• Supervising judge (jugecommissaire)
• Liquidator.
• Employees’ representative
• Up to five inspectors (chosen
among creditors – but inspectors
cannot purchase the debtors’
assets)
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Reorganization/insolvency process
Comparative table - 3
Ad-hoc
mediation
Agreement
or plan
Any
arrangement
reached is
implemented
by contract
Conciliation
Agreement can be
acknowledged by
court and made
directly
enforceable, and
protects to
guarantors.
If agreement is
approved by court
(homologué) and
rendered public,
new credits
granted thereby
have priority, in
case of later
insolvency
proceedings, over
debts incurred
prior to
commencement of
the conciliation
proceedings
Safeguard
Judicial
Reorganization
• To be approved by committees within six months of
commencement of the proceedings; in safeguard
proceeding plan is proposed by the debtor with
participation of the administrator and in judicial
reorganization proceeding by the administrator with
the participation of the debtor.
• Approval by each committee requires an affirmative
vote of holders of 2/3 of debts whose holders vote.
• Maximum duration generally 10 years unless
longer duration approved by both committees.
• Any substantial modification in the plan requires reapproval by the committees.
• Can include conversion of debt to equity
• First payment must be within one year
• Small claims up to 300€ or 0.5% of liabilities (total
limited to 5% of liabilities) not reduced.
• Court can impose a plan.
• Safeguard proceeding can be converted into
judicial reorganization
.
Judicial Liquidation
Can involve sale of business
unit(s), including intangible
assets.
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Reorganization/insolvency process
Comparative table - 4
Ad-hoc
mediation
Dismissals
of
employees
Voidable
preferences
(i.e.
clawback)
Conciliation
Normal rules apply
In case of later
insolvency
proceedings, the
insolvency date
cannot be set prior
the date of
approval of a
composition
agreement
(important for
determination of
voidable
preferences).
Safeguard
Judicial
Reorganization
Judicial Liquidation
Collective dismissals may be carried out under accelerated
procedures if “urgent, unavoidable and indispensable”
(L.631-17, L.631-19, L.641-4, L.641-10, L.642-5).
Certain transactions entered into after insolvency date
including: sales where debtor’s obligations are
disproportionate in the context; payments for debts not
due; payments by unusual means for debts which are due;
mortgages or pledges to guarantee prior debts; and
payments or performance to parties aware of insolvency.
Insolvency date can be set up to 18 months prior to
commencement of proceedings.
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Issues for distressed M&A investors and lenders
Risks of liability
Managers whether de jure (such as board members or general manager) or de
facto (such as shareholders exercising effective control) can be held liable for
shortfall in assets caused in whole or in part by management error (C. Com.
art. L.651-2).
Lenders, suppliers and other creditors can become liable for artificial support
of debtor in cases of fraud or clear interference (immixtion caractérisée) in the
management of the debtor or if security interests taken in connection with the
credit are disproportionate (C. Com. Art. L.650-1).
Credit institutions can cancel an indefinite-term credit facility only with prior
notice (60 days unless longer period agreed in writing) except if the borrower
acts in a “gravement répréhensible” manner or its situation is
“irrémédiablement compromise” (C. Mon. & Fin. arts. L.313-12 & D.313-14-1).
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Issues for distressed M&A investors and lenders
Debt-trading issues

Procedures for purchase of debt
 Documentation should deal with classic issues, such as: identification of assigned debt; price/payment; obligations
assumed; representations, warranties and covenants re supply of information and other matters; indemnification; etc.
 Assignment should be valid under the law applicable thereto and also comply with requirements of French law, i.e. be
notified by process server on the relevant debtors and guarantors (C. Civ. art. 1690) or be made by bordereau to a French
securitization vehicle (an FCC) or to a credit institution (cession Dailly) or by subrogation (quittance subrogative).

Due diligence
 Review of terms, conditions and validity of credit and security interests.
 Compliance with French legal and regulation requirements (taux effectif global, annual notice to guarantors, regulatory
issues, consumer protection rules, etc.)

Regulatory issues
 Purchase or sale in France of uncontested unmatured debts, if done “habitually”, is a credit operation subject to the
French banking monopoly, which can be carried out only by French or “passported” EEA credit establishments (C. Mon.
& Fin. arts L.311-1, L.313-1 & L.511-5).
 In case of violation, administrative and penal sanctions are possible, but contract should not thereby be voided.

Pay-off of disputed claims (retrait litigieux)
 Purchase of a claim which is being litigated can give the debtor the right to pay off the claim at the price paid by the
purchaser (retrait litigieux) (C. Civ. art. 1699).
 Exceptions include purchase in set-off of a preexisting debt in a greater amount owed to the purchaser; purchase of a
claim as part of a broader assignment dealing with other assets and rights as well (if the price paid for the contested
claim cannot be determined); and purchase of a claim against a debtor in liquidation, reorganization or safeguard
proceedings (see Cass. com. 12 October 2004 n° 03-11.615).
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Issues for distressed M&A investors and lenders
Key scenarios
Acquisitions of businesses out of reorganization or
liquidation procedures
Investments in companies in safeguard proceedings
Investments/acquisitions of companies not on the
verge of insolvency but with some prospects of
insolvency
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Questions?
Reid Feldman
Kramer Levin Naftalis & Frankel LLP
47, avenue Hoche
75008 Paris, France
telephone: + (33) 1 44 09 46 00
fax: + (33) 1 44 09 46 01
rfeldman@kramerlevin.com