French Insolvency Proceedings. The 2014 Reforms

Transcription

1 French Insolvency Proceedings The 2014 Reforms 1 Legal framework: from debtor friendly to creditor friendly? Pre-insolvency procedures (Ad Hoc mandates and Conciliation) Formal insolvency procedures and safeguard Conclusion... 5

2 Page 2 1 Legal framework: from debtor friendly to creditor friendly? (b) (c) On 12 March 2014, the European Commission enacted proposals which set out a new approach to failing companies and insolvency procedures. The Commission's proposal extends the scope of Council Regulation No 1346/ 2000 on insolvency proceedings to preinsolvency / preventative procedures in order to maximise the debtor's total value to creditors, employees and shareholders. On the same day, the French government enacted new domestic legislation which came into force in July 2014 (and which was subsequently amended and supplemented in March 2015). Key features of the French reforms include: Encouraging consensual pre-insolvency procedures (Conciliation and Ad Hoc Mandate) and pre-pack arrangements; New stay on enforcement actions and introduction of new money privileges in consensual pre-insolvency proceedings; Facilitating debt for equity swaps; New majority rules in creditors' committees and enhanced role for creditors in the formulation of recovery plans; New duties for shareholders with regard to recapitalisation of the debtor. (d) (e) (f) The reforms outlined above are within the ambit of what has occurred in Germany, Spain and Italy since France is now falling into line with these practices given the growing recognition that the European economy needs common insolvency features given the cross border nature of most investments. Moreover, the reforms seemingly create a new balance between creditors' and the debtor's interests and it is hoped that the reforms will foster a distressed M&A market in France as soon as there are major targets to be found. Moreover given this evolution in practices, it is anticipated that creditors may no longer need to resort to artificial (and often fragile) schemes to circumvent the French system, by, for example, artificially manipulating the debtor s centre of main interest (COMI) in order to bring the process within the ambit of more creditor friendly jurisdictions. Moving forward, it is hoped that creditors will therefore feel more comfortable investing in France knowing that should matters take a turn for the worse, stakeholders can rely on procedures which strike a better balance between debtor and creditor. Below we set out the principal aspects of the reforms in the context of pre-insolvency, formal

3 Page 3 insolvency and safeguard procedures, including 'pre-pack' arrangements. 2 Pre-insolvency procedures (Ad Hoc mandates and Conciliation) (b) A robust and modernised restructuring framework should enable a debtor to address its financial difficulties while avoiding insolvency and it should be possible to avert anything that historically adversely affected consensual negotiations and a potential restructuring of the business. The hurdles which aim to be overcome include: Contractual provisions in documents which trigger events detrimental to the debtor on the sole ground that Ad Hoc Mandate or Conciliation proceedings are open will be deemed null and void; The courts can now impose a stay on enforcement actions of up to two years with respect to all creditors, including public creditors. Note that the stay can be imposed even if a creditor has accelerated it debt or other legal action has been commenced prior to the opening of conciliation. And in cases where there is a guarantee, the guarantor can also obtain the benefit of stay in the same manner as the principal debtor; Capitalisation of interest on claims will no longer be allowed during the preinsolvency procedure; Priority for creditors lending or refinancing during the conciliation ('new money lien') has been reinforced, and this now takes effect prior to formal Court approval of the outcome of the conciliation. Note that if there is any subsequent safeguard or insolvency proceeding, those claims cannot be rescheduled without creditors' consent; Upon the debtor's request, and after considering the entreaties of any participating creditors, the conciliator may be entrusted with a partial or entire sale of company's business and /or restructuring of its share capital. (c) 12BSuch a "pre-pack" procedure has long been a central tool for restructurings in jurisdictions such as England and Australia and is now being applied to some major French corporate restructurings. The tool preserves goodwill and retains value because it sits outside formal insolvency procedures and relies on creditor consent. It also promotes an ethos of "business as usual" during the consensual negotiations (thereby avoiding the stigma of insolvency), preserves brand integrity and prevents attrition of key customers and

4 Page 4 employees. The reforms also give added powers to the conciliator in its search for a global solution for all creditors. Of course, as the process proceeds, it is critical to ensure that all parties are on the same page in terms of a swift and seamless handover of the business under the conciliator s supervision. (d) 13BIn relation to shareholders, although they cannot be compelled to embark on a pre-pack, to give up their shares and/or approve a disposal of a debtor as a going concern, the conciliators capacity to inform the court that there is a viable plan for the business may cause shareholders to hesitate in obstructing any viable and sustainable plan. And if the conciliation fails and a debtor goes into a formal insolvency procedure as a result of shareholders blocking a valid proposal, the court will likely consider that a viable offer was on the table but subsequently refused by shareholders. 3 1BFormal insolvency procedures and safeguard 14BIn safeguard and judicial insolvency the aim is still to save the business with a viable and sustainable solution. But the new regime enacts some rules that strengthen creditors' rights, increase a debtor's duties to its shareholders and enhances the prospect of distressed M&A sales for impaired debtors. By way of example: The initiation of a safeguard judgment allows a creditor's representative to demand shareholders pay their portion of unpaid capital. If there is a need for a restoration of shareholders equity in judicial recovery, the judicial administrator can request the appointment of a judicial representative who will convene a shareholders' meeting, and despite the existence of dissenting shareholders, may demand the restoration of shareholders' equity by existing shareholders or third parties. Members of a creditors' committee can propose an alternative restructuring or safeguard plan and each member of the creditors committee votes on the plans that are submitted to the court. Practically speaking, junior and mezzanine lenders are more likely to make use of this opportunity as opposed to more traditional financial institutions hampered by lending and internal restrictions. Of course junior and mezzanine lenders will also try to get the support of the secured creditors who will hope to get a better return. The approval of these safeguard plans is achieved by a majority of two-thirds in value of claims held by creditors present and voting and dissenting creditors are also bound by this mechanic. The court cannot impose a reduction in claims, but can nonetheless impose deferral of payments and rescheduling of debt for a maximum of 10 years.

5 Page 5 A new procedure, the 'accelerated safeguard', has been added to the pre-existing 'accelerated financial safeguard.' Similar to the accelerated financial safeguard except in scope, there is now no need for the debtor to be solvent to benefit from this safeguard as long as the insolvency has not been ongoing for more than 45 days. This effectively ensures that within a defined and theoretically short timeframe, an insolvent debtor can have a restructuring plan approved by the court and sufficiently supported by creditors. Moreover, whereas the conciliation process requires unanimous consent, an accelerated safeguard can be implemented with two-thirds creditor consent thereby ensuring that a minority of dissenting creditors cannot derail a viable plan. 4 2BConclusion (b) (c) 15BIn summary, although the French restructuring system is still to some degree one which favours a recovery plan presented by a debtor's shareholders, shareholders duties and creditors powers have been strengthened by the 2014 reforms which should go a long way to ensure the viability and sustainability of the recovery plan. 16BOf course, there is always scope for France to strengthen its rules even further in favor of creditors, but without a doubt there is now a legal environment favourable to distressed M&A activity in France (which complements the commercial reality that there are a number of orphan companies either in need of liquidity or ready for venture capital or distressed sale and larger companies whose capital structures makes them viable for pre-pack arrangements). 17BIt is therefore anticipated that the insolvency reforms in France should save some businesses that have, in the past, been suffocated by restructuring plans limited to rescheduling debts and which not only starve these businesses of capital but limit creditors' interests and leverage to a large degree.

6 Page 6 Confidentiality, Disclosure and Disclaimer Brown Rudnick accepts no responsibility, liability or duty of care to any party in respect of this document. No party may seek to rely on this document or any oral comments made in connection with it. This document has been provided for information purposes only, and does not constitute advice. Brown Rudnick views its approaches and insights as proprietary and therefore under no circumstances should this material be shared with any third party without the written consent of Brown Rudnick. This document is based on public information. By delivering this document, Brown Rudnick does not undertake any obligation to update any of the information or to correct any inaccuracies which may become apparent and Brown Rudnick assumes no responsibility for the independent verification of the information. No representation or warranty (express or implied) is made by Brown Rudnick as to the accuracy, suitability, adequacy, completeness or reasonableness of any information contained in this document and no responsibility or liability whatsoever is accepted by Brown Rudnick for the accuracy or sufficiency thereof or for errors, omissions or misstatements, relating thereto. This document does not contain legal, investment or regulatory advice. recommendation in relation to any investment, trading strategy or other action. It does not make any Brown Rudnick LLP