Restructuring and insolvency in France: New regime and other hot topics Saam Golshani and Alexis Hojabr 20 January 2015
Agenda 1. What you need to know 2. Overview of the current regime 3. Specifics rules applicable to listed companies 4. French banking monopoly rules and debt trading 2
1. What you need to know The last significant changes to the current regime result from the orders dated 12 March 2014 and 26 September 2014 applicable to proceedings opened as from 1 July 2014 A rather debtor friendly system Emphasis on saving business as a going concern and preserving employment no significant duties towards creditors Different types of proceedings aimed at saving businesses before or on the verge of insolvency: out of court proceedings: mandat ad hoc and conciliation in court proceedings: safeguard (sauvegarde), fast-track safeguard (sauvegarde accélérée), fast-track financial safeguard, (sauvegarde financière accélérée) judicial reorganisation (redressement judiciaire) Stay of payments/moratorium and stay of enforcement during the court-controlled proceedings (save for some rare exceptions) No stay of payments and stay of enforcement during the court-assisted proceedings, but possibility for French courts to order a rescheduling of debt of up to 2 years 3
1. What you need to know Attempt to remedy any stay of enforcement: double LuxCo structures Sponsors 100% Share pledge Luxco 2 100% Share pledge Luxco 1 French Bidco 100% Managers Facilities Agreement Allows lenders to enforce the pledge over the shares of LuxCo 1 (even if French Bidco and/or the Luxcos are subject to a hostile safeguard) 4
2. Overview: Mandat ad hoc Objectives: to resolve identified issues, handle shareholders conflicts, conduct negotiation with certain key creditors, providing a wide range of assistance and support on specific issues Confidential Request by the debtor (solvent) Appointement by the court of a «Mandataire ad hoc» to assist the management of the company No automatic stay* of payments enforcement acceleration (as of 1st July 2014) No legal duration time, extendable without limit Out of court agreement with creditors (no cram down) Conversion into conciliation to benefit from the advantages of the «homologation» * Except for a rescheduling of debt for a maximum of 2 years ordered by the Court under art.1244-1 of the French Code civil if creditors attempt to enforce their rights while a mandat ad hoc is pending 5
2. Overview: Mandat ad hoc Trigger: Any company can file a petition for a Mandat ad hoc if facing legal, financial or economic difficulties, whether existing or foreseeable, provided the company is not insolvent (or, if so, has not been insolvent for more than 45 days) The President of the Tribunal de commerce appoints a Mandataire ad hoc setting out: an overview of the financial, economic and social situation; the debtor's financing requirements; and the solutions to resolve the difficulties The appointment needs to be transmitted to the auditors of the company confidentiality? New principle: any contractual term harming the debtor s rights or increasing its obligations as a result of a mandat ad hoc is deemed null and void: no default clause May be useful in the context of main insolvency proceedings located outside of France: Mandat ad hoc is not listed on Schedule A of the EC Regulation on Insolvency Proceedings 6
2. Overview: Conciliation Objectives: to reach an agreement with the main creditors in order to improve the company s financial situation Confidential No acknowledgement Conciliation Agreement Acknowledgement of the agreement (confidential, binding on the parties) Request by the debtor (solvent or insolvent for less than 45 days) No automatic stay* of payments enforcement acceleration (since 1st July 2014) 5 months max Homologation of the agreement (publicity, legal privilege of New-Money) Fast Track Safeguard (as of 1st July 2014) or Fast-Track Financial safeguard No conciliation agreement Debtor is solvent Safeguard or Fast-Track financial safeguard Debtor is insolvent Reorganisation or liquidation proceedings * Save for a rescheduling of debt for a maximum of 2 years which may be ordered by the Court under art.1244-1 of the French Code civil 7
2. Overview: Conciliation Trigger: Any company can file a petition for the appointment of a conciliator if facing legal, financial or economic difficulties, whether existing or foreseeable, provided that the company is not insolvent for more than 45 days Process: Similar to the appointment of the Mandataire ad hoc The President of the Tribunal de commerce may appoint an expert in order to draw up a report on the economic, financial, social and assets situation of the company Mission: Facilitate the negotiations between the company and its relevant creditors in order to treat the difficulties The conciliator may be appointed in order to organise the transfer of all or part of the assets of the company to be implemented in a subsequent safeguard, reorganisation or liquidation proceedings The conciliator may also be appointed as agent of the execution of the conciliation agreement Fees of the creditors advisors can be charged to the company up to a maximum of 75% only New principle: Any contractual term harming the debtor s rights or increasing its obligations as a result of the conciliation is deemed null and void - no default clause 8
2. Overview: Conciliation Effects of the approval (homologation) by the Court: New-Money Privilege: new financing granted to the company (other than via a capital increase) benefit from the privilege of New-Money in a case of subsequent Safeguard or Judicial Reorganisation or Liquidation when they provided at any moment of the conciliation proceeding Claw back period (nullités de la période suspecte): period from the opening of the proceeding to the date of the suspension of payment (period during which decisions of the company can be cancelled by the court). Agreement and securities granted until such date entered into before the homologation judgment can not be rescinded and any potential default of the company on its debt is waived by the effect of the law Loss of confidentiality: Information of the workers committee (comité d entreprise) homologation judgment is filed with the registry of the commercial court and published If during the execution of the agreement, a creditor request the payment for a debt which is not covered by such agreement, the judge may, upon the debtor request, apply the articles 1244-1 to 1244-3 of the French Code civil The court may pronounce the resolution of the agreement if its terms are not respected by the parties 9
2. Overview: Mandat ad hoc vs Conciliation Mandat ad hoc Debtor must be solvent No legal time limit for negotiations Any agreement reached is contractual Conciliation Debtor may be insolvent but for less than 45 days Limited to maximum 5 months Agreement can be acknowledged or homologated by the Court (legal privilege of New-Money creditors) Informal, amicable proceedings Confidential No legal stay of payments and enforcement Management remains in place No rescheduling/waiver of debt may be imposed to the creditors without their consent (save for a rescheduling of debt for up to years which may be ordered by the Court under art.1244-1 of the French Code civil) 10
2. Overview: Safeguard Objectives: to ease the reorganisation of the company which is not insolvent in order to allow the continuation of its business, the protection of employment and the payment of its indebteness Legal stay of payments enforcement acceleration Debtor remains solvent Safeguard Plan Request by the (solvent) debtor 6-months observation period 6 months extension of observation period 6 months exceptional extension Reorganisation Debtor is insolvent Liquidation 11
2. Overview: Safeguard Approval of the Safeguard plan for eligible companies (>Eur 20M annual turnover/ >150 employees) or upon request of the debtor for smaller companies Plan prepared by the debtor (or, from 1 st July 2014, by the creditors) Mains Suppliers Credit Institutions Bondholders (if any) Vote : 66.66% by value of creditors who attend and vote in each committee Cram down of dissenting creditors Successful vote and execution of the Safeguard Plan (max 10 years) Non execution of the Safeguard plan Exit from Insolvency Filing for Insolvency 2/3 majority If debt equity swap Shareholders 12
2. Overview: Safeguard Trigger: Financial distressed situation that the company can not overcome The court appoints: A supervisor judge (juge-commissaire) in charge of supervising the proceedings One or two judicial agents (mandataires judiciaires) The Judicial administrator (administrateur judiciaire) Employees representatives 1 or 5 supervising creditors among the mains creditors upon their request Effects on the creditors: Freeze of the payment of debts incurred prior to the safeguard opening date; automatic stay of enforcement Interest of loans < 1 year cease to accrue Obligation to file for proof of claim within 2 months from the date of the publication of the judgement (or 4 months for creditors located out of France). Automatic relief of foreclosure of creditors missing on the list provided by the debtor 13
2. Overview: Safeguard Consequence on shareholders: can be obliged to pay the remaining part of the share capital not fully paid up Content of the safeguard plan: Assessment of the assets of the company and its liabilities relating to employment Analysis by the judicial administrator of acquisition offers from third parties Propositions by the judicial administrator: new investors, dismissal of directors, sale of the director's shares, Settlement of debt proposed by the company (both reschedule and reduction), then negotiated with the judicial administrator and the creditors Approval of the plan: The safeguard plan is adopted if both committees accept it. Once adopted, the plan may be approved by the court If the safeguard plan is not adopted the proceedings may be converted in a reorganisation proceedings at the request of the debtor, and from 1 st July 2014 the judicial administrator, the judicial agent and the Public Prosecutor Enforcement of the plan against third parties 14
2. Overview: Fast-Track Safeguard (New proceedings) Objectives: to Implement a plan that is supported by the majority of the creditors Prior Conciliation proceedings Opening of proceedings upon request by the (solvent) debtor Legal stay of payments enforcement acceleration observation period (3 months max) Plan prepared by the debtor (or, from 1 st July 2014, by the creditors) Credit Institutions Main suppliers Bondholders (if any) Vote : 66.66% by value of creditors who attend and vote in each committee Cram down of dissenting creditors If debt equity swap 2/3 majority Shareholders 15
2. Overview: Fast-Track Safeguard Trigger: Financial distressed situation that the company can not overcome Conditions: The company has to justify the opening of an ongoing conciliation proceedings The company may not be insolvent for more than 45 days prior to the opening of the conciliation proceeding Accounts certified by an external auditor or a chartered accountant Eligibility: Thresholds: 20 employees at the time of the opening, or 3m of turnover, or 1,5m of balance sheet Or company justifying of consolidated accounts The Tribunal de commerce appoints: Judicial administrator (administrateur judiciaire): the conciliator is either appointed as judicial administrator or judicial agent Judicial agent (mandataire judiciaire) represents the interest of the creditors Improvement of the creditors rights: A better situation for the creditors who participated in the conciliation ( pre-pack ) Enforceable of the adopted plan to all creditors (except employees) and not only financial creditors whose claims exist prior to the opening of the proceeding No extension of payments could be imposed by the Court (L.628-8 of the French Code de Commerce) 16
2. Overview: Fast-Track Financial Safeguard Fast-Track Financial Safeguard proceedings and approval of the plan Prior conciliation proceedings Opening of proceedings upon request of the debtor Legal stay of payments enforcement acceleration observation period (1 month) extented observation period (1 month) Plan prepared by the debtor (or, from 1 st July 2014, by the creditors) Credit Institutions Bondholders (if any) Vote : 66.66% by value of creditors who attend and vote in each committee Cram down of dissenting creditors If debt equity swap 2/3 majority Shareholders 17
2. Overview: Fast-Track Financial Safeguard Background: Implemented in 2010, this proceeding was not a success (only 6 opened) Trigger: Financial distressed situation that the company can not overcome itself The indebtedness of the company is mainly composed of financial claims (from Credit institution or Bondholders) Eligibility: Thresholds: 25 m of balance sheet; or 10 m of balance sheet if the debtor controls a company having more than 150 employees or 20 m of turnover, or 25 m of balance sheet Conditions and treatment of creditors similar to the Fast-Track Safeguard Effects limited to financial creditors or bondholders 18
2. Overview of Safeguard proceedings Safeguard Fast-Track Safeguard Fast-Track Financial Safeguard Prior conciliation mandatory No Yes Yes Companies which can initiate proceedings All companies Accounts certified + one of these thresholds : 20 employees, or 3M of turnover, or 1,5M of balance sheet Or consolidated accounts Accounts certified + one of these thresholds : 20 employees, or 3M of turnover, or 1,5M of balance sheet Or consolidated accounts Creditors concerned Financial and trade creditors Financial and trade creditors Financial creditors only Time limit 18 months max 3 months 2 months 19
2. Overview: Reorganisation Objectives: continuation of the company s business The reorganisation may result from the conversion of safeguard Request by the (insolvent) debtor or by the creditors 6 months observation period Legal stay of payments enforcement acceleration 6 months extension of observation period 6 months exceptional extension Sale Plan Continuation Plan Liquidation If debt equity swap Credit Institutions Main suppliers Bondholders (if any) 2/3 majority Shareholders Vote : 66.66% by value of creditors who attend and vote in each committee Cram down of dissenting creditors 20
2. Overview: Reorganisation Trigger: The company must be insolvent (i.e. not be able to pay its due debt with its available cash). The company has to file a petition following 45 days after insolvency occurs, unless a pre-insolvency proceedings was opened Initiative: The company The creditors The Court has to inform the Public Prosecutor of the situation of the debtor. Following such information, the Public Prosecutor may request the opening of the proceedings by the Court The Tribunal de commerce appoints: A supervisor judge (juge-commissaire) in charge of supervising the proceedings One or two judicial agents (mandataires judiciaires). Judicial administrator (administrateur judiciaire) Employees representatives 1 or 5 supervising creditors designated among the main creditors upon their request The plan is enforceable against all creditors whose claim incurred prior to the opening of the proceeding Same effects and consequences on the creditors as those applicable in a safeguard proceedings 21
2. Overview: Reorganisation Creditor s rights: Post-insolvency creditors to benefit from a better ranking in the payment waterfall Possibility for the creditors to propose alternative plans New consequences on the shareholders: Shareholders to pay the remaining part of the share capital not fully paid up Shareholders meeting to vote a capital increase if the company s equity falls below half of the legal share capital New investor having subscribed to a capital increase not subject to prior approval by the existing shareholders 22
2. Overview: Liquidation Objectives: end the activities of the company and/or its assets and repay the creditors to the extent possible Mandatory for debtor within 45 days after insolvency, unless a conciliation or reorganisation is opened The liquidation may result from the conversion of safeguard or reorganisation proceedings Partial sale Request - by the (insolvent) debtor; or - by the creditors Possible temporary continuation of the business (up to 6 months) Total sale 23
2. Overview: Liquidation Initiative: The company Creditors The Court has to inform the Public Prosecutor of the situation of the debtor. Following such information, the Public Prosecutor may request the opening of the proceedings by the Court Appointement of a liquidator, a supervisor judge (juge-commissaire) The Liquidator takes over the management of the company Transfer of business (part or whole) or assets: its aim is to maintain activities that can be operated autonomously, maintain part or whole of employment and reduce indebtedness Partial payment of debt allowed for the judicial administrator when the receivables are not contested and following request by the supervisor judge 24
2. Overview: In a Nutshell Mandat ad hoc out of court agreement Solvent debtor Conciliation No Court acknowledgment Acknowlegement of the agreement Homologation of the agreement Safeguard Fast-track Safeguard or Fast-track Financial Safeguard Observation period (up to 18 months) Safeguard Plan Insolvent debtor Reorganisation proceedings Observation period (up to 18 months) Continuation Plan Sale Plan Liquidation proceedings Liquidation proceedings Possible temporary continuation of the business (up to 6 months) Partial Sale Total sale 25
3. Specifics rules applicable to listed companies Background: listed companies are subject to specific information duties to the Market and to the shareholders Overview of the information duty: Periodic information: whatever the difficulties the company is facing, the shareholders must be informed of annual, half-year of quarterly situation of the company Permanent information: any event that could have any significant impact on the trading of the company Market/shareholders have to be informed of the opening of insolvency proceedings Confidentiality rules vs information duties The AMF could impose sanction to any lack in the information duty and investors could seek responsibility of the managers Possibility to delay the disclosure of the information ( mise sous embargo ) provided it does not harm to the interest of the listed company or does not mislead the public Pre-insolvency proceedings: The company should inform the AMF of any difficulty and in particular the opening of a pre-insolvency procedure The AMF recommends to communicate on the situation of the company (annual, half-year and quarterly information) Insolvency Proceedings: The judicial administrator monitors the information shared with the AMF The company must inform the shareholders of the situation Information on the sale or partial sale of the company Listing suspension: Listed companies may choose for a temporary suspension of listing provided such suspension is brief and limited 26
4. French Banking Monopoly French banking monopoly rules:» Banking transactions include: receiving funds on deposit refundable from the public (réception de fonds du public) credit transactions (opérations de crédit) the provision of banking means of payment (services bancaires de paiement)» Credit transactions A credit transaction is an act by which a person, for valuable consideration, places (or promises to place) funds at the disposal of another person or assumes a commitment in favor of the latter in the form of guarantees or likewise. Credit transactions include (i) any type of loans and financial leases, and (ii) the purchasing of nonmatured loans (e.g. receivables that are not yet due and payable)» French banking monopoly: It is forbidden to carry out banking transactions in France on a habitual basis, save for (i) credit institutions duly licensed in France, and (ii) EU/EEA entities duly licensed in their country of incorporation and duly passported under Directive 2006/48/EC Mandatory rules: The French banking monopoly rules are mandatory rules (lois de police) of territorial application, so that they do not apply to a transaction that takes place outside of the French territory Exceptions to the French banking monopoly: insurance and reinsurance companies governed by the French Code des assurances securitization vehicles intra-group treasury transactions with companies having direct or indirect share capital links between them, provided that one of the contracting companies has effective controlling rights over the others securities (such as bonds) 27
4. Debt trading loan syndication Syndication:» Purchase of non matured loans considered as a credit transaction» With a view to avoiding the application of the French banking monopoly, the purchasing of the non matured loans should be executed outside of France and the bank selling the loan should register it in books in a foreign branch» Rescheduling of the loan: the rescheduling of a loan may be viewed as a credit transaction, falling into the scope of the banking monopoly, even where granted by a foreign securitization vehicle Second re trading sub-participation:» The original lender remains the owner of its debt against the debtor. The debtor is not always informed of the subparticipation ( lender off record )» The sub-participant has only rights and duties towards the original lender» 2 different types: the unfunded sub-participation (sous-participation en risque seul): the facial lender ensures the cash flow to the company whether the sub participant demands a remuneration in the form of commissions the funded sub-participation (sous-participation en risque et trésorerie): the sub-participant commits, in return of a remuneration in the form of commissions, to disburse to the debtor the full, for loan to be used once only, or depending the debtors drawings, the equivalent funds to its percentage of participation taking into account the risk of non reimbursement» The banking monopoly does not apply between the original lender and borrower but covers the transfer, on a habitual basis, of a sub-participation to a non banking institution» How to avoid the banking monopoly constraints in order for a sub-participant to grant new financing (New-Money) to a company subject to conciliation? a bank should provide funds as New-Money and the non banking entity would become its sub-participant; debt capital market (i.e. bonds are not subject to the French banking monopoly) 28