Early stages

As predicted in our restructuring primer earlier this year, the court-supervised Conciliation process maintains its dominance under the new law. New early warning tools are added with the president of the commercial court able to summon a company director to a detection prevention meeting to obtain an accurate picture of the debtor’s economic and financial position. This could be prompted by information provided by the company’s statutory auditors. The Mandat ad hoc court appointee will continue to assist in negotiations between the company and its creditors, with the debtor able to seek up to 24-months (suspension of payments, approved on a case-by-case basis. 

If there is sufficient support to proceed with an agreed deal, a debtor can use Sauvegarde accleree – to implement a restructuring plan to ensure the continuity of the business with broad support of its creditors. The previous dual proceedings (accelerated and accelerated financial) are now replaced by a single procedure but can be limited to financial creditors only. Unlike Sauvegarde proceedings which can last up to a year, these last just two months, with the ability to extend by a further two months. 

Class actions

One of the biggest changes for both types of Sauvegarde is the composition of creditor classes. 

In the past financial creditors could be lumped together for voting purposes. They were often split into credit institutions, main suppliers, and bondholders, rather than arranged based on their legal rights. 

Under the new law creditor committees are replaced by ‘classes of affected parties’ which could be groups of creditors under the plan and even include the equity – if their interests are to be modified.  The court appointed administrator has the ability to constitute the classes of creditors based on certain criteria, such as economic interest and compliance with intercreditor and subordination agreements – meaning that secured, unsecured and equity (if affected) will vote in separate classes. 

Each class must approve a plan by a two-thirds majority. 

Similar to the UK, confirmation of the restructuring plan in France will require a test, similar to the relevant alternative whereby dissenting voters must be no worse off under the plan, compared to other options such as a liquidation, or a going concern sale. But unlike the UK, the absolute priority rule – a cornerstone of US Chapter 11, also applies, requiring claims of a dissenting class of creditors to be paid in full before any class of creditors junior to them may receive or retain any property in the satisfaction of their claims. 

The court does have some wriggle room however, for strategic suppliers for example if it is necessary to meet the plans objectives and doesn’t excessively affect the rights or interests of impaired parties, notes law firm Wilkie Farr in a client note. 

In line with the EU directive and in common with the UK Restructuring plan, there is a cross-class cramdown mechanism within the new French rules. The plan can be imposed on one or more dissenting classes if the plan is approved by a majority of the classes (one must be a class senior to unsecured creditors) or by at least one class which is ‘in the money.’ This will open up the court to dealing with valuation issues to determine where the value breaks. 

But disappointingly, employee claims and pensions cannot be compromised by a plan. Unlike the US Chapter 11 process where employee settlements are an integral part of the reorganisation, this must be addressed outside of the restructuring plan, noted one local lawyer. Employee claims can only fall away in an insolvency sale, whereby employee contracts can be left behind. 

The cramdown can apply to equity holders if they are deemed to be out of the money. This is a significant improvement than under the old regime where changes needed two-thirds approval at a general shareholders meeting. But if shareholders are marginally in the money based on a going concern basis, as opposed to a liquidation (which would happen if there is no agreement) this would still provide an indirect veto right notes Freshfields in a client note. A restructuring plan, however, cannot transfer all or part of the rights of a dissenting shareholder class, and while their equity can be diluted, the preferential subscription rights must be protected, note Wilkie Farr,

Safer Sauvegarde

The cramdown is also limited to larger companies – but the threshold applied is relatively low, applying to those with more than 250 employees and €20m turnover, or no employee limit if €40m or more of turnover. 

But, unlike before, these thresholds would apply to HoldCo’s, as they are now assessed on a consolidated basis with other group companies. This restricts a repeat of events at Groupe Rallye and Comexposium, with the borrowers using the lower thresholds to avoid the set-up of creditor committees. Both imposed a 10-year term out on their dissenting creditors. For more on Comexposium lenders’ legal battle for information and background, click here.

The Sauvegarde process itself has been tightened up, with the observation period reduced to 12-months, from a maximum of 18-months (12 plus six), this removes some of the criticisms that this has been used by debtors as a delaying tactic. It remains, however, a debtor-led process and under the new regime it is less easy for creditors to submit their own plans, noted the first lawyer. This places more emphasis on creditors using the Conciliation and Mandat process to secure a consensual deal. Alternatively, a riskier route for creditors is to wait for the process to flip into redressement and submit a plan at this stage.

On a more positive note, it is easier and there is more opportunity for creditors to challenge a plan, noted the first lawyer. Previously, the bar was very high, either a creditor had to explain why they should be treated differently to other creditors or prove that the company had fraudulently misled the court. 

Under the new law, challenges can be made either immediately after the classes vote or at the confirmation hearing. Voting rights, the composition of classes and determining the affected parties can be challenged, as can the substance of the plan, and whether it is in their best interests. Some of this will come down to valuation, and similar to the UK, until there is precedent case law, it is difficult to tell how this will be treated by the courts, noted a second lawyer. 

According to a legal note from Weil, there is a 10-day period (after distribution methods are notified) to challenge via an application to the supervisory judge; and 10-days (after its notification) to appeal the adoption of the plan.

Super priority

The temporary protections to funding provided to companies during the Covid-19 pandemic have been extended and are included in the new law. New money has super-priority, both in Sauvegarde and Reorganisation. The protections extend to money provided during the observation period, as part of the plan for its implementation, or as part of the subsequent modification to the plan, notes Wilkie Farr. 

This is similar to DIP financing in the US and should provide a lot of control to who funds the process, noted the first lawyer. 

The treatment of state-aid guarantees will be ‘tricky’ said the first lawyer. These loans are not due until May 2022 and unlike in Germany do not have super senior status. However, French insolvency can be politicised, and it will be interesting to see how these claims are treated in a high-profile case. 

Overall, most of the recommendations from restructuring practitioners have found their way into the new law and should be welcomed by investors, who should be familiar with the concepts, which are very similar to those seen under Chapter 11 and the UK Restructuring Plan. 

However, it remains to be seen how this is adopted in practice, and how the courts and their officials interpret the new rules. With the French

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