Mr Thomas Gagossian
Partner, BBLM Avocats

Thomas Gagossian advises a diverse range of clients in crisis situations. He has strong expertise in both amicable and collective proceedings, whether for national or international clients, as well as in debt restructuring.

Thomas also handles litigation and procedural aspects related to insolvency proceedings.

He notably assists debtors, buyers, investors in the context of tender offers, as well as procedural bodies.

He also regularly works alongside administrators and court-appointed receivers (mandataires judiciaires) in preventive, safeguard, reorganization and liquidation proceedings.

In addition, he acts on behalf of managers in actions for liability or sanctions.

Thomas Gagossian has advised on the following transactions: Bourbon, Hopps Group, Minelli, San Marina, Altéo, Jaccar, Alinéa.

Thomas Gagossian is a member of the IFPPC and a former secretaire de la Conférence.

REFORMS AND CHALLENGES OF FRENCH INSOLVENCY LAW: FROM PREVENTION TO RESTRUCTURING

A presentation of the legal framework for companies in difficulty

In France, despite falling inflation and an easing of interest rates during 2024, business insolvencies are on the rise compared with previous years.

Over the years, in order to overcome the difficulties encountered by certain French companies, the legislator has developed the law governing companies in difficulty, with the main aim of strengthening and improving the prevention and handling of company difficulties.

These provisions are essentially codified in Book VI of the French Commercial Code, entitled “Company difficulties”.

In order to increase a company’s chances of being rescued, the legislator has provided for the amicable handling of company difficulties, enabling action to be taken upstream of these difficulties and thus avoiding the company having to resort to a purely judicial phase of dealing with them.

In 2024, the number of prevention procedures was up 10.2% on the previous year.1Observatoire des Données Économiques du CNAJMJ – Indicators – Collective and preventive proceedings

These so-called amicable procedures are becoming increasingly popular with managers as they do not impose any binding measures on creditors, unless the Court grants the debtor company a period of grace at its request.2C. Com. law, L.611-7, paragraph 5 This enables the company manager to prevent future difficulties, whether of an economic, financial, employment or legal nature, or to deal with difficulties that already exist but do not at this stage need to be dealt with in collective proceedings. Anticipation and responsiveness on the part of the company director is one of the keys to the success of an amicable procedure.

There are two out-of-court procedures, namely the mandat ad hoc and the conciliation procedure3C. Com. law, L.611-1 to L.611-17, both of which are subject to an obligation of confidentiality which, in addition to avoiding disclosure of the potential difficulties facing the company, creates an environment conducive to calm negotiations between the debtor and the creditors involved in the procedure.

Respecting the confidentiality of amicable procedures is therefore essential to the success of such procedures.

On the other hand, the judicial treatment of a company’s difficulties results in the opening of so-called collective proceedings.

These include the safeguard procedure, the receivership procedure and the compulsory liquidation procedure4C. L.620-1 et seq., L.631-1 et seq. and L.640-1 et seq..

The opening of such proceedings (i) suspends or prohibits any legal action seeking payment or sanctioning the non-payment of a sum of money5C. Com, L.622-21, L.631-14, L.641-3 and (ii) entails, with certain exceptions, a prohibition on the payment of claims prior to the date of the judgment opening the proceedings, requiring creditors to declare their claims as liabilities6C. Com, L.622-24, L.631-14, L.641-3, R.622-21, R.631-27, R.641-25.

Unlike safeguard proceedings, receivership and liquidation proceedings can only be initiated against a debtor if the latter can prove that it is in a state of suspension of payments, defined as the company being unable to meet its current liabilities with its available assets.

In France, the number of business failures has substantially increased between 2020 and 2024, with a 110% rise in the number of collective procedures (67,830 collective procedures in 2024 compared with 32,212 collective procedures in 2020)7Altares – Study of Business Insolvencies and Safeguarding in France – Quarter 4 & Assessment 2024, impacting every type of business sector such as construction, commerce, industry, services, transport, catering, agriculture, etc.

This trend reflects a significant deterioration in the financial situation of companies as they emerge from the pandemic crisis and manage the ensuing economic challenges.

In fact, some companies that would normally have faced difficulties earlier were able to benefit from the exceptional aid measures put in place by the French government during the health crisis, which enabled them to postpone their insolvency.

However, with the phasing out of this aid and the introduction of obligations to repay State-guaranteed loans, these companies have had to cope with a worsening of their already fragile financial situation, leading inevitably to their failure.

The concept of classes of affected parties: the cornerstone of the financial restructuring of companies in difficulty

One of the innovations in French insolvency law in recent years has been the transposition of the European Restructuring and Insolvency Directive of 26 June 2019 by the Order of 15 September 2021 and its implementing Decree of 23 September 2021.

This has led to the codification of legislative provisions8C. L.626-29 et seq and regulatory provisions9C. R.626-52 et seq introducing into French insolvency law the concept of “classes of affected parties” for companies of a certain size, a concept already established in foreign legislation such as in the United States, England and Germany.

The French Commercial Code defines the classes of affected parties as creditors whose rights are directly affected by the draft plan, thus implying that the plan must modify the contractual provisions agreed between the parties, as well as holders of capital whose shareholding in the debtor, articles of association or rights are modified by the draft plan10C. Com. law, L.626-30, I.

The creation of classes of affected parties is compulsory as soon as a company subject to receivership or compulsory liquidation proceedings reaches the following thresholds: 250 employees and €20m net sales or €40m net sales regardless of the number of employee11C. Com. law, L.626-29 and R.626-52.

If these thresholds are not reached, classes of affected parties may only be formed at the request of the debtor company or the insolvency receiver and by decision of the official receiver of the Commercial Court that opened the collective proceedings.

On the other hand, the classes of affected parties necessarily apply, regardless of the aforementioned thresholds, in the context of an accelerated safeguard procedure, the purpose of which is to submit to the Court the main principles of a restructuring agreement that would not have been fully successful in the conciliation procedure.

The role of the constitution of classes of affected parties enables creditors qualified as such to express themselves collectively with regard to the adoption of the safeguard or reorganisation plan. This mechanism thus contributes to the implementation of a plan that is not only viable for the restructuring of the company, but also, in principle, accepted by a larger number of stakeholders, thus reinforcing the legitimacy and effectiveness of the restructuring process.

It is the role of the insolvency receiver to divide all the creditors of the debtor company into classes of affected parties on the basis of the community of economic interest that they share, more precisely on the basis of the chances that they have of being paid outside the plan, which is determined on the basis of the status of the claim as defined before the judgment opening the proceedings12C. Com. law, L.626-30, III.

The legislator requires at least three classes of affected parties to be constituted: a class of preferential creditors and holders of security interests, a class of unsecured creditors and a class of holders of capital whenever their shareholding, articles of association or rights are modified by the draft plan.

The insolvency receiver is then free to form as many classes as there are communities of economic interest, bearing in mind that the more limited the number of classes of affected parties, the greater the chances of obtaining unanimous agreement in favour of the draft plan.

Although it has considerable latitude in the composition of the classes of affected parties, this latitude is limited insofar as the criteria for allocating creditors within the different classes must be objective, explicit and verifiable.

However, each of the parties affected has the possibility of contesting the allocation of classes before the juge-commissaire, but this must be done within the strict time limits laid down by the French legislation in force in order to ensure that the procedure proceeds rapidly, which is essential to its effectiveness and success13C. Com. law, L.626-30, V and R.626-58-1.

After the debtor and the receiver have sent the draft plan to all the classes, the Court can only rule on the draft plan after each class has voted by a two-thirds majority of the votes held by the members who have cast a vote, it being specified that for the purposes of calculating the votes, only the amount of the claim is taken into account, with the exception of affected parties who are beneficiaries of a security trust, for whom only the amount of the claim not accompanied by such a security is taken into accoun14C. Com. law, L.626-30, V and L.626-30-2.

However, in the event of opposition from one or more classes, and provided that the plan has been approved by a class of “in-the-money” affected parties other than the equity holders, the French legislator has provided for the possibility of the Court adopting a restructuring plan by means of the “cross-class cram down” mechanism, the implementation of which can only be initiated by the debtor in safeguard proceedings, unlike in receivership proceedings, where the debtor, the insolvency receiver or a class of affected parties can make the request.

In order to guarantee effective protection for affected minority dissenting parties on whom the plan may be imposed, the legislator requires compliance with two major rules, which are based on well-known concepts from the Anglo-Saxon system of restructuring companies in difficulty.

Firstly, where all the classes have voted in favour of the proposed plan but there are dissenting parties within one or more classes, or where the plan has not received a favourable vote from all the classes and there are dissenting classes, the Court must carry out the “best interest of creditors’ test”15C. Com. law, L.626-31.

The Court must therefore ensure that creditors do not receive less in dividends under the plan than they would have been entitled to under a sale or liquidation plan.

Secondly, if the draft plan is adopted by a majority of classes, or even by a single class known as “in the money” (i.e. which, even in a liquidation scenario, would still have a chance of recovering their claim), it must be applied, unless there are exceptions, the “absolute priority rule” guaranteeing that creditors of a higher-ranking class (the senior classes) will be paid in full (both in capital and in interest at the contractually agreed rate) before those of a lower-ranking class (the junior classes).

Inspired by legislation in force in the United States and the United Kingdom in particular, the concept of classes of affected parties favours a financial perspective of the restructuring, highlighting the idea that, faced with the plan, creditors are no longer equal. If a senior class agrees to waive or extend its term without any compensation, a junior class of creditors cannot receive a payment, just as holders of equity cannot keep their profit-sharing.

In addition, equity holders may see their position in the debtor company’s capital deteriorate if an investor enters the capital in the form of a share buyback at a discounted price or a capital increase through the subscription of a cash contribution with a strong dilutive effect.

However, it should be noted that, in this case, shareholders retain their preferential subscription rights in proportion to the portion of the capital represented by their shares16C. Com. law, L.626-32, making it more difficult to squeeze out shareholders, with the risk of jeopardising a takeover solution by an investor not wishing to retain the existing shareholder base.

One solution for depriving shareholders of their pre-emptive rights would be a capital increase through a contribution in kind, as would be the case for a creditor who contributes his debt with a view to converting it into equity: this is the “debt-to-equity swap” mechanism.

It therefore follows that, through this reform, the legislator’s objective is to give precedence to the financial logic of restructuring a company in difficulty over capital owners who do not wish to participate in the effort to recapitalise the company.

In addition to the above, holders of capital have a number of protection mechanisms under French law.

To name but a few, holders of shares in SMEs (whose thresholds must not be exceeded, as set out in Article R.626- 63 of the French Commercial Code) are excluded from the possibility of forced inter-class application of the draft plan. of the French Commercial Code)17C. Com., L.626-32 and R.626-63: “1° 250 employees and net sales of 20 million euros; or 2° net sales of 40 million euros”. are excluded from a possible inter-class forced application of the draft plan and a plan can only be imposed on them by the Court if it is legitimate to assume that, on the basis of a valuation of the debtor’s assets in operation, the holders of capital would have been out of the money, i.e. they would not have been entitled to any payment or to retain any profit in the context of a liquidation scenario18C. Com. law, L.626-32, I, 5°..

If the plan is not adopted, the consequences are not the same depending on whether the debtor company is subject to safeguard proceedings or receivership proceedings.

In such a case, the Court may, only in the context of a receivership, revert to the ordinary law applicable to these proceedings by imposing an alternative plan based on the traditional and individual consultation of creditors, leading ipso facto to the application of restrictive deadlines.

On the other hand, in the case of an accelerated safeguard procedure or a conventional safeguard procedure, failure to adopt the plan will result, in the case of the former, in the termination of the procedure and, in the case of the latter, either in the termination of the procedure or in the conversion of the procedure into a receivership or judicial liquidation, depending on the case.

In any event, this reform has introduced a more financial approach to corporate restructuring, but the architecture of French law has still been preserved.

A restructuring plan can be drawn up during the conciliation procedure and imposed on minority creditors as part of an accelerated safeguard procedure (or as part of a safeguard or reorganisation procedure under ordinary law).

The “prépack cession”: a legal tool needed to preserve the value of the company

Following on from this reform resulting from the transposition of a European directive, it is now the turn of the French legislator to inspire the European legislator by introducing a new procedure into European law: the pre-pack disposal, which is the subject of a draft directive19Draft European directive, 7 December 2022, no. 20220408, which has not yet been adopted by the European institutions.

Under French law, the purpose of this procedure is to initiate, within the framework of a preventive procedure (an ad hoc mandate but more often a conciliation), negotiations aimed at the total or partial disposal of the assets of a company in difficulty, which will be implemented within the framework of a subsequent collective procedure during which the timetable will be relatively more restricted than a collective procedure under ordinary law20C. Com. law, L.611-7 and L.642-2.

If the sale has been negotiated beforehand during the preventive procedure, and depending on the quality of the transferee’s takeover plan, the court may decide to organise a more limited invitation to tender, which is not legally permitted in conventional receivership or liquidation proceedings.

Moreover, as the takeover of the company was negotiated beforehand, its implementation within the framework of collective proceedings is intended to be effective and rapid, while preserving the value of the company in difficulty, thanks to the confidentiality of the preventive procedure.

In this way, seeking a sale as part of an amicable procedure makes it possible to obtain a better sale price, enabling the transferee to acquire the entity, which in most cases is free of most of its liabilities.

Conclusion

French insolvency law has evolved to offer varied and flexible solutions, both amicable and judicial, to meet the economic and financial challenges faced by companies in difficulty. Mechanisms such as the classes of affected parties and the pre-pack sale procedure make it possible to ensure faster and more consistent restructuring of companies in difficulty.