A recent modification to French insolvency law will allow debtors to enter an “accelerated financial safeguard procedure” under which the debtor may force dissenting minority financial creditors to accept a pre-insolvency restructuring that has been approved by a majority of the debtor’s financial creditors.
Before recent modifications to the law, a French debtor was required to secure the unanimous pre-insolvency consent of all creditors whose claims would be restructured under a proposed plan. In order to impose a restructuring on dissenting creditors, the debtor was forced to enter an “ordinary” safeguard procedure (procédure de sauvegarde) involving all of its creditors, including trade creditors.
On October 11, 2010, the French Parliament adopted the “New Safeguard Bill” (sauvegarde financière accélérée), which provides for a new “accelerated financial safeguard procedure.” The new procedure allows a debtor to reach a voluntary restructuring agreement with its primary financial creditors and to force minority financial creditors to accept this agreement without opening the process to unaffected trade creditors.
Scope of Application
The New Safeguard Bill’s provisions will be available beginning March 1, 2011 to a debtor that is not insolvent but that faces financial difficulties that it is unable to solve. In addition, the debtor must be engaged in a confidential pre-insolvency conciliation procedure with its creditors. The debtor must then bring evidence that it has drawn up a “pre-pack restructuring” agreement that will ensure the continuation of its business and that is likely to gain the support of the holders of at least two-thirds of the amount of the financial debt that will be affected by the restructuring.
Because only holders of affected financial debt will be permitted to vote on the restructuring agreement, unaffected creditors will not vote on the plan and therefore lose the power to block implementation of negotiated restructuring plans.
The court before which the conciliation procedure is brought will retain territorial jurisdiction over the subsequent accelerated financial safeguard procedure. The conciliator, appointed by the judicial administrator, will report to the court on the proposed outcome of the conciliation procedure and the likelihood that the financial creditors will adopt the plan. The court will rule on the initiation of safeguard proceedings and, if it permits the use of the accelerated process, will appoint a creditors’ representative (mandataire judiciaire) with whom the creditors will file their claims. The procedure for filing claims will remain identical to the procedure applicable in an ordinary safeguard procedure.
Treatment of Financial Claims
The debtor will draw up a list of claims owed to participating creditors as of the commencement of the accelerated financial safeguard proceedings. The debtor will have this list certified by the statutory auditor or, alternatively, by a certified public accountant. After the debtor has filed this list of debts with the relevant commercial court, the mandataire judiciaire will inform each participating creditor of the nature of that creditor’s claims on the debtor’s list.
The restructuring plan must take into account any subordination agreements between the creditors in existence before the proceedings began. A new provision also requires that committees’ agreements take account of inter-creditor and subordination agreements entered into before the initiation of the safeguard procedure. Under the old law turnover provisions binding the creditors, but not the debtor, remained enforceable. The New Safeguard Bill ensures that pre-initiation agreements continue to control.
After the financial creditors (and, if applicable, the bondholders) have adopted the restructuring plan, the court has one month from the date of its opening judgment to validate the agreement. Even if the court exercises its option to extend its decision period for a maximum of one additional month, court approval will come much more quickly than in the ordinary safeguard procedure, which allows six to 12 months for court approval. The court will validate the agreement only if it can ensure that all of the creditors’ interests are sufficiently protected. If the restructuring plan modifies the share capital, the court will verify that an extraordinary meeting of the shareholders or members (and, if applicable, a special meeting of shareholders and/or a general meeting of security holders) was convened to secure permission for those modifications.
Once the court is satisfied that appropriate notice has been given to all parties, it will validate the payment deadlines and discounts accepted by the affected creditors and will approve the agreements for conversion into shares. Claims that are not modified under the plan may retain whatever deadlines were negotiated before the initiation of the safeguard proceedings, even if those deadlines exceed the term of the restructuring plan.
The New Safeguard Bill gives unprecedented flexibility to companies whose debts are strictly financial in nature, allowing these debtors to resolve their liquidity challenges rapidly and without being constrained by a minority creditors objecting in a conciliation procedure.
The accelerated financial safeguard procedure is particularly well suited to companies engaged in a leveraged buyout, as such companies often encounter difficulties in their acquisition debt but nevertheless remain creditworthy and viable. The procedures of the New Safeguard Bill allow these, and other companies with financial challenges that can be worked out with creditors through negotiation, to quickly restructure their debts while remaining operational.
- French insolvency law differentiates between “financial creditors,” which are primarily credit institutions and bondholders, and “trade creditors,” which are primarily suppliers. [Back to reference]