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Global Restructuring Review

The Art of the Pre-Pack - Edition 2: France

Historically, the French restructuring system has always been perceived as a debtor-friendly system. In recent years, however, changes to the French legislation have favoured creditors' interests and the courts have favoured a number of lender-led restructures, enabling lenders to take control of the debtor from its existing shareholders.

In line with these improvements, the temporary framework implemented in the context of the covid-19 health crisis introduced further creditor-friendly measures. For instance, Ordinance No. 2020-596 of 20 May 2020 has introduced a new safeguard and reorganisation privilege, inspired by the existing conciliation privilege, benefiting creditors who have made a new cash contribution to the debtor in the context of the observation period, with the authorisation of the supervisory judge (juge-commissaire), or for the implementation of the safeguard or reorganisation plan adopted or amended by the court. In the case of subsequent insolvency proceedings, claims benefiting from such privilege shall be paid in priority (with certain exception) and shall not suffer debt write-offs or rescheduling that have not been accepted by the creditors. This privilege has been permanently implemented through the 2021 Ordinance.

Most importantly, the French restructuring and insolvency regime has recently been amended, notably to transpose into French law Directive No. 2019/1023 of the European Parliament and the Council of 20 June 2019 on preventive restructuring frameworks by (1) Ordinance No. 2021-1193, dated 15 September 2021, effective as of 1 October 2021, in respect only (with limited exceptions) of preventive and insolvency proceedings opened as of such date (the 2021 Ordinance), and (2) Decree No. 2021-1218, dated 23 September 2021, for the implementation of the 2021 Ordinance (the Decree).

The objectives of the European Union Directive No. 2019/1023 are to ensure that (1) viable companies and entrepreneurs that are in financial difficulties have access to effective national preventive restructuring frameworks that enable them to continue operating; (2) honest insolvent or over-indebted entrepreneurs (i.e., individuals) can benefit from a full discharge of debt after a reasonable period of time, thereby affording them a second chance; and (3) the effectiveness of procedures concerning restructuring, insolvency and discharge of debt is improved, in particular with a view to shortening their length. It also aims to achieve a higher degree of harmonisation in the field of restructuring, insolvency, discharge of debt and disqualifications by establishing substantive minimum standards for preventive restructuring procedures as well as for procedures leading to a discharge of debt for entrepreneurs. This is to promote a culture that encourages early preventive restructuring to address financial difficulties at an early stage, when it appears likely that insolvency can be prevented and the viability of the business can be ensured.

By way of illustration, under the former French system, the dissenting minority creditors could be crammed down only in pre-packaged financial safeguard proceedings, but there was no cram-down mechanism to overcome the veto right of shareholders, even if they were completely out of the money. The 2021 Ordinance enshrined the faculty for the court to adopt a safeguard plan even when certain classes of creditors have opposed it through a cross-class cram-down, subject to the absolute priority rule. These new rules for adopting the plan are aimed at aligning the political power of creditors with their economic situation, by limiting the harmful power of creditors who are out of the money. This new regime aims at rebalancing the interests involved, without betraying the objective of safeguarding the company.

Further, (1) a stay of individual enforcement actions by creditors against debtors has been introduced; (2) a material leeway has been granted to the insolvency practitioner to allocate the affected parties in distinct classes (as a minimum, creditors of secured and unsecured claims shall be treated in separate classes) based on a sufficient commonality; and (3) creditors' claims may be restructured in a restructuring plan adopted at a 2:3 majority in value of claims (or rights) by either a regular cram down (if approved by all classes), or cross-class cram down, if approved by a majority of the classes (with at least one class senior to unsecured creditors) or a class other than shareholders that is 'in the money'.

French legislation has created bridges between court-assisted consensual proceedings and insolvency proceedings, with the idea that restructuring solutions could be negotiated during the amicable phase and implemented in the context of subsequent insolvency proceedings. After providing a brief overview of the restructuring tools provided for in French law, this chapter will focus on the available prepackaging tools concerning both the implementation of traditional restructuring plans – through debt restructuring – and the sale of business.

 

Brief overview of key restructuring tools

Under French law, there are two categories of proceedings: consensual or out-of-court proceedings, and insolvency or court-administered proceedings. The first category includes mandat ad hoc and conciliation proceedings. The second category includes safeguard, accelerated safeguard, and reorganisation and liquidation proceedings, although the debtor under safeguard proceedings is not cash-flow insolvent (état de cessation des paiements).

  • Mandat ad hoc proceedings are confidential out-of-court proceedings, pursuant to which the commercial court appoints a restructuring practitioner to assist a solvent debtor in its negotiation with its stakeholders under the aegis of the court.
  • Conciliation proceedings are confidential out-of-court proceedings, pursuant to which the commercial court appoints a restructuring practitioner to assist a debtor that is solvent or has been insolvent for no more than 45 days in its negotiation with its creditors under the aegis of the court.
  • Accelerated financial safeguard proceedings have been merged into the accelerated safeguard proceedings (whose scope may be limited to financial creditors and that have a short duration of two months, renewable once) as of 1 October 2021 by the 2021 Ordinance.
  • Reorganisation and liquidation proceedings must be commenced if the debtor is cash-flow insolvent according to the French insolvency test, defined by the debtor's inability to pay its debts as they fall due with its immediately available assets, taking into account available credit lines and moratoria. If the debtor is not facing cash-flow insolvency, it has the option to request consensual proceedings or safeguard proceedings. However, the distressed debtor (through its legal representatives) is required to file a petition for reorganisation of liquidation proceedings within 45 days from the date of insolvency, unless it has requested the court to appoint a conciliator. If the debtor fails to file to do so in the time frame, managers (de jure and de facto) are exposed to civil liability. Reorganisation and liquidation proceedings can also be initiated by the court if it is brought to its attention that a company registered in its jurisdiction has become insolvent; at the request of the public prosecutor; or at the request of any creditor.

 

Consensual out-of-court proceedings

Consensual restructuring

As a matter of principle, market practice favours preventive and consensual proceedings over insolvency proceedings. Preventive proceedings in France are furthermore promoted by the recent 2021 Ordinance. The mandat ad hoc and conciliation are preventive and confidential proceedings for resolving difficulties carried out under the aegis of a court-appointed officer under the supervision of the president of the court. These consensual proceedings may be opened with a view to reaching a consensual restructuring.

The duties of the mandataire ad hoc or the conciliator are determined by the order of the president of the court commencing the proceedings. Such mandataire ad hoc or conciliators are usually appointed to facilitate negotiations with creditors, but they cannot force the creditors into accepting any proposal: the restructuring agreement between the company and its creditors will consequently be negotiated on a purely consensual and voluntary basis.

Mandat ad hoc does not trigger an automatic stay of payment and enforcement actions. Creditors are therefore not barred from taking legal actions against the debtor to recover their claims but those that have accepted to take part in such proceedings usually also agree to abstain from such actions while they are ongoing.

The 2021 Ordinance introduced a major change at the level of the conciliation: on a case-by-case basis, the court can: (1) stay enforcement actions and reschedule due claims for a maximum of two years with respect to creditors that have attempted to enforce their claims or that have not granted a standstill requested by the conciliator (but without any need for prior enforcement attempts), and (2) reschedule claims that are not due and payable for the duration of proceedings (i.e., a maximum of five months) for creditors that have not granted a standstill requested by the conciliator.

In principle, banks and credit funds tend to advocate a supportive approach to their debtors to the extent that a debtor provides a proper independent business review (IBR) to its creditors and that its shareholders are ready to support, if need be, their subsidiaries. Otherwise, banks and credit funds may be tempted to sell their claims to distressed debt investors that may take a more aggressive approach towards the debtor and its shareholders. It is, however, important to note that there are a limited number of cases where banks or credit funds have triggered a default and, therefore, an insolvency of their debtors.

These amicable proceedings do not provide for a cram-down system and the agreement of every creditor is required. As explained below, if a dissenting creditor refuses to enter an agreement with the debtor in the context of a consensual proceeding, safeguard or reorganisation proceedings could be opened whereby the cram-down system and even the cross-class cram-down is applied.

Conciliation proceedings can last for four months, which can be extended by another month in exceptional circumstances. However, mandat ad hoc are not limited in time. In practice, debtors often combine the use of mandat ad hoc and conciliation proceedings. A mandat ad hoc is usually commenced first, as it is not subject to any time constraint.

If the debtor is able to reach an agreement with its creditors, applying to the court to convert the mandat ad hoc into conciliation proceedings permits the arrangement to be either acknowledged (constaté) by the president of the court or approved (homologué) by the court.

Where investors would be willing to provide new money, goods or services to ensure the continuation of the business, it will be necessary to convert the mandat ad hoc into a conciliation proceeding. As new money providers, these investors will benefit from the 'new money' privilege granting them a priority ranking in liquidation and a shield from term out or cram down in subsequent proceedings – provided that these new money financings are approved by the court.

Pre-pack solutions: possible first step to accelerated safeguard or for the sale of business

There are several interactions between consensual proceedings and the insolvency process. Court-assisted consensual proceedings are never mandatory under French law and remain the option of the debtor, who will, when possible, likely opt for these procedures as they present numerous advantages (e.g., preventing financial difficulties at an early stage, confidentiality and considerable flexibility with creditors). Over the past 15 years, France has introduced a new range of restructuring tools at the crossroad of amicable proceedings and insolvency proceedings, contributing to the development of pre-packaged solutions. The out-of-court consensual proceedings are now emerging as a privileged place to negotiate restructuring solutions, which will be implemented in subsequent court-administered proceedings.

Certain insolvency proceedings cannot be implemented without a consensual proceeding beforehand. Accelerated safeguard proceedings cannot be implemented without a consensual proceeding beforehand. Indeed, accelerated safeguard proceedings are only available to a debtor that is subject to an ongoing conciliation proceeding, has elaborated a draft plan to ensure its viability, and has not been insolvent for more than 45 days. Pre-pack sales enable a debtor to prepare a restructuring plan during an out-of-court proceeding while negotiating with its main creditors, with the plan being implemented at a later stage during an in-court proceeding.

 

Insolvency proceedings

The safeguard proceedings

Safeguard proceedings are public proceedings commenced at the request of a debtor experiencing financial difficulties that it cannot overcome on its own, provided it is not insolvent, aimed at facilitating the reorganisation of a company at an early stage, thereby ensuring the continuation of the business, the protection of employment and the payment of creditors.

In that respect, the debtor will prepare, with the assistance of the judicial administrator, a draft safeguard plan to be negotiated with its creditors. During this proceeding, the debtor benefits from the suspension of payments and automatic stay, which prevents creditors from suing the debtor for payment and enforcing the securities.

In insolvency proceedings, and notably in safeguard or accelerated safeguard proceedings, creditors (and, if applicable, equity holders) must be consulted on the manner in which the debtor's liabilities will be settled under the safeguard plan (debt write-offs, payment terms or debt-for-equity-swaps) prior to the plan being approved by the court. The rules governing consultation will vary depending on the size of the business. Mandatory class-based consultation applies to companies that, on the date of the petition for commencement of the proceedings, exceed either of the following thresholds (1) 250 employees and €20 million in net turnover, or (2) €40 million in net turnover (at either the company level or together with subsidiaries controlled by the debtor), or upon the debtor's request and with the authorisation of the supervisory judge if they do not meet such thresholds.

Only the affected parties are entitled to vote on the draft plan, namely creditors whose rights are directly impaired by the proposed plan; and equity holders (including shareholders and holders of securities giving future rights to the share capital) if their equity interests, the debtor's articles of association or by-laws, or their rights are modified by the proposed plan.

The court-appointed administrator is responsible for drawing up the classes and informing each affected party that it is a member of a class. The court-appointed administrator must, on the basis of objective verifiable criteria, allocate the affected parties in classes representing a sufficient commonality of economic interest (communauté d'intérêt économique suffisante) in compliance with the following conditions:

  • creditors whose claims are secured by security interests in rem (sûretés réelles), in respect of their claim so secured, and other creditors shall belong to different classes;
  • the class formation shall comply with subordination agreements entered into before commencement of the proceedings that shall have been brought to the attention of the court-appointed administrator within 10 days from his or her notification to each affected party of its membership in a class;
  • equity holders are to be separated in one or several classes of their own; and
  • claims arising from employment contracts (including the French wage guarantee scheme (AGS) claims), pension rights and maintenance claims cannot be affected by the plan and in respect of creditors secured by a security trust (fiducie) granted by the debtor, only the amount of their claims that are not secured by such security trust is taken into account.

The formation of the classes can be challenged by the dissenting affected parties; appeals need to be filed immediately after the notification of formation of the classes.

Each class of affected parties votes on the restructuring plan with a 2:3 majority of the amount of the claims (or rights).

If applicable, the class or classes of equity holders vote under the rules governing votes at shareholders' or equity holders' general meetings.

Once the draft plan has been adopted by each of the classes, it will be submitted to the commercial court, which shall essentially verify that the following conditions are met:

  • the classes have been duly formed in accordance with the rules mentioned above;
  • affected parties, sharing a sufficient commonality of interest within the same class, are treated equally and in proportion to their claim or right;
  • the plan has been duly notified to all the affected parties;
  • if there are dissenting affected parties, the plan meets the ‘best interests of creditors' test (i.e., no dissenting creditor to be worse off under the plan than in the case of (1) liquidation proceedings, (2) a disposal of a debtor's business within liquidation or reorganisation proceedings, or (3) the next-best-­alternative scenario);
  • where applicable, any new financing is necessary to implement the plan and does not excessively impair the interests of the affected parties; and
  • the interests of all affected parties are sufficiently protected.

The court may refuse to adopt the plan if it does not offer a reasonable prospect of avoiding the debtor's insolvency or of ensuring the viability of the business. The judgment adopting the plan renders the plan enforceable against all (erga omnes) (including the affected parties who did not vote or voted against the adoption of the plan).

 

The reorganisation proceedings

Rreorganisation proceedings are commenced upon the request of an insolvent debtor, a creditor or the public prosecutor. Under this proceeding, the administrator appointed by the court will assist the debtor to make all or some of the management decisions or may be empowered by the court to take over the management of the company.

The administrator will propose the reorganisation of the company by assisting the debtor to elaborate a reorganisation plan, it being specified that rules governing the adoption of the safeguard plan are applicable. If the elaboration of a reorganisation is not possible, the administrator will organise the sale of the business through an open bid process. Either the reorganisation plan or the sale plan will be sanctioned by the court.

 

The liquidation proceeding

Liquidation proceedings may be initiated by an insolvent debtor, a creditor or the public prosecutor if the company's recovery is manifestly unfeasible. A liquidator is appointed vested with the power to represent the debtor and perform the liquidation operations that mainly consist in the liquidation of the assets.

In that respect, there are two possible outcomes of such liquidation scenario: a sale plan as in the reorganisation proceeding or sale of individual assets.

 

Can a restructuring be implemented on a pre-packaged basis?

As indicated above, the French legislation has created bridges between court-assisted consensual proceedings and insolvency proceedings, with the idea that restructuring solutions could be negotiated during the amicable phase and implemented in the context of subsequent insolvency proceedings. These evolutions concern both the implementation of traditional restructuring plans – through debt restructuring – and the sale of business.

While mandat ad hoc and conciliation proceedings have the advantage of being confidential, their positive outcome requires that debtor's creditors called up to participate in the negotiations agree to make the efforts that are necessary to ensure the continuation of business. Neither the court-appointed administrator nor the debtor have the power to impose those efforts to dissenting creditors in the context of amicable proceedings.

To overcome the opposition of dissenting creditors preventing the adoption of a restructuring agreement negotiated in the context of the amicable proceedings, the practitioners were using safeguard and reorganisation proceedings to benefit from the cram-down system and force the adoption of the restructuring plan.

Thus, the French legislation has enshrined the practice of pre-packaged plan: the Order dated 12 March 2014 introduced a major innovation in French law, with the possibility to prepare the sale of business in the context of an amicable proceeding, which will be implemented in the context of a subsequent insolvency proceeding. The main interests in using the pre-pack sale framework lie in – as in the pre-packaged safeguard plan – the confidentiality attached to the court-assisted amicable proceedings during the preparation phase and the reduction of duration of the subsequent court-administered proceedings.

Moreover, since the entry into force of the 2021 Ordinance, French law has implemented a cross-class cram-down mechanism, whereby the court is enabled to adopt safeguard or accelerated safeguard plans notwithstanding the negative vote of one or several classes, subject to a number of general conditions:

  • the plan complies with the conditions for adoption of the plan by the court:
    • the classes have been duly formed in accordance with the rules;
    • affected parties, sharing a sufficient commonality of interest within the same class, are treated equally and in proportion to their claim or right;
    • the plan has been duly notified to all the affected parties;
    • if there are dissenting affected parties, the plan meets the ‘best interests of creditors' test (i.e., no dissenting party is worse off as a result of the plan than it would be if the order of priority of payments in a judicial liquidation were applied (whether in the event of a piecemeal sale or a court-ordered disposal plan (plan de cession)) or in the event of a better alternative solution if the plan was not approved);
    • where applicable, any new financing is necessary to implement the plan and does not excessively impair the interests of the affected parties; and
    • the interests of all affected parties are sufficiently protected;
  • approval of the plan by a majority of classes (necessarily including a class of secured claims or a class having a higher rank than the class of unsecured creditors) or by a class ‘in the money' other than capital holders;
  • compliance with the absolute priority rule (the claims of dissenting classes shall be discharged ‘in full' by ‘same or equivalent means' where a junior class is to receive any payment or to keep any interest under the plan (with possible exceptions where necessary for the needs of the plan and provided such exceptions do not unfairly prejudice some affected parties)); and
  • compliance with the rule according to which the plan shall not permit a class to receive or retain more than the total amount of its receivables or interests.

Where one or more classes of equity holders have been constituted and have not approved the plan, the plan can also be imposed on such dissenting equity holders if:

  • threshold criteria are met (see above);
  • there is no economic interest left: it is reasonable to assume that the shareholders will be ‘out of the money' in the event of a liquidation or disposal plan;
  • the preferential subscription rights of the shareholders are respected; and
  • the plan does not provide for the transfer of all or part of the rights of the dissenting class or classes of equity holders.

Reorganisation proceedings broadly take place in a manner that is similar to safeguard proceedings, subject to certain specificities. The main differences are as follows:

  • if the debtor does not meet the required thresholds, the authorisation to form classes of affected parties may also be requested from the supervisory judge by the judicial administrator on its own, without the debtor's approval (in addition to being requested by the debtor);
  • any affected party may submit a draft plan to the vote of the classes;
  • if the plan has not been approved by all classes of affected parties, the court can decide to apply the cross-class cram-down mechanism at the request of any affected party (in addition to the debtor or the administrator with the debtor's consent); and
  • if plan approval through the class-based consultation procedure (whether by regular approval by the classes of affected parties or by a cross-class cram-down) fails, the approval of the plan may occur through the individual consultation rules.

 

Pre-packaged plan

The premises of the French pre-packaged plan: Autodis case

Even before the introduction of specially designed pre-pack proceedings, the practitioners found a way to use existing proceedings – with the combination of the conciliation and safeguard proceedings – to carry out a pre-packaged plan. The restructuring of the Autodistribution group, which took place in 2009, was its first illustration.

In this case, the LBO documentation provided that significant restructuring steps were subject to the unanimous consent of Autodis's lenders, which made it difficult for Autodis to implement a restructuring agreement in the context of the amicable proceeding. As a unanimous vote was impossible to reach, given the plurality of creditors, the only solution was to try to obtain the agreement of the two-thirds majority of the members of (former) creditors' committees in the context of a safeguard proceeding.

In this context, a safeguard proceeding was opened while the terms and conditions of the financial restructuring were decided by the debtor and its main creditors before the commencement order, pursuant to a memorandum of understanding concluded under the aegis of a mandataire ad hoc. In contrast to the defensive safeguards – which traditionally aim for the automatic stay – the main attraction of the safeguard in this case was the possibility to use the cram-down system provided for in safeguard to impose the adoption of the plan to the dissenting creditors.

Insofar as the restructuring plan had been prepared before the opening of the proceeding, the implementation of the plan took no longer than six weeks, with a vote in committee organised less than a month after the commencement order and a judgment approving the plan 15 days later. The swiftness of the process mitigated the value-destroying effect traditionally induced by a safeguard proceeding.

Despite the lack of dedicated proceedings at the time, the wide range of tools offered by French law had permitted to implement a pre-packaged plan and brought to light its numerous advantages.

Introduction of specially designed pre-pack proceedings: accelerated safeguard proceedings

Following this case, the French legislation had enshrined the practice by introducing two new proceedings: the accelerated financial safeguard proceedings (Law dated 22 October 2010) and accelerated safeguard proceedings (Order dated 26 September 2014). However, as mentioned above, the fast track accelerated safeguard proceedings have been merged into accelerated safeguard proceedings (whose scope may be limited to financial creditors) as of 1 October 2021 by the 2021 Ordinance.

Conditions

A debtor that is engaged in conciliation proceedings may request the commencement of accelerated safeguard proceedings enabling it to implement a restructuring plan in an expedited fashion through a class-based consultation.

As described above, these proceedings are only available to a debtor whose financial statements have been certified by an auditor or drawn-up by a chartered certified accountant that (1) is subject to an ongoing conciliation proceeding; (2) has elaborated a draft safeguard plan ensuring the continuation of its business as a going concern likely to be supported by enough parties that will be impaired by such plan to render its adoption plausible within an initial two-month period which may be extended up to four months upon request from the debtor and the court-appointed administrator; and (3) has not been insolvent for more than 45 days when it initially applied for commencement of conciliation proceedings.

The regime applicable to standard safeguard proceedings is broadly applicable to accelerated safeguard proceedings. However, certain provisions relating to ongoing contracts and the provisions relating to the recovery of assets by their owners do not apply in accelerated safeguard proceedings.

Negotiations in the context of a conciliation proceeding

Before the opening of the accelerated safeguard proceedings, the debtor must conduct negotiations with its creditors in the context of a conciliation proceeding. It is only if the restructuring agreement negotiated with its creditors cannot be implemented owing to dissenting creditors that the opening of accelerated safeguard proceedings will be contemplated.

The simple threat to file for accelerated safeguard proceedings is sometimes sufficient to obtain all creditors' agreements on the plan. These accelerated safeguard techniques are indeed rarely used because their existence and the threat for the debtor to implement them are often sufficient to overcome blocking situations, creditors knowing that they will not be able to avoid company support measures imposed on them by the law of the majority.

In classic safeguard, the court can no longer force a term-out plan upon creditors if the classes reject the proposed plan: there is no fall back option for the debtor in case of rejection of the plan. This important change introduced by the 2021 Ordinance could considerably lessen the attractiveness of the safeguard for the debtor. In parallel, the reduction of the duration of the safeguard (12 instead of 18 months) will probably encourage debtors to open this preliminary phase of negotiation, notably to prepare the restructuring proposal and classes of affected parties.

Opening of subsequent safeguard proceedings

The fast-track financial safeguard proceedings no longer exist but the scope of the accelerated safeguard proceedings may be limited to financial creditors only, if the nature of their indebtedness is such that a plan could be adopted by such creditors alone.

Insofar as the safeguard plan has been prepared beforehand, the duration of the accelerated safeguard proceedings has been significantly reduced and is limited to two plus two months.

In this limited amount of time, the draft safeguard plan must be submitted to the classes of affected parties and sanctioned by the court, being specified that the constitution of classes is mandatory in the accelerated safeguard proceedings notwithstanding the thresholds (see above).

The safeguard plan must be approved by each class by a 2:3 majority. It is only once the majority is obtained in each class that the court can approve the plan through a regular cram-down. Accordingly, the dissenting part of the creditors in each class is ‘crammed down'. Even more entire classes may be crammed down through the cross-class cram-down mechanism (see above).

As described above it should be noted that the court has to verify that the following conditions are met:

  • the classes have been duly formed in accordance with the rules;
  • affected parties, sharing a sufficient commonality of interest within the same class, are treated equally and in proportion to their claim or right;
  • the plan has been duly notified to all the affected parties;
  • the plan meets the ‘best interest of creditors' test with respect to dissenting creditors;
  • where applicable, any new financing is necessary to implement the plan and does not excessively impair the interests of the affected parties; and
  • the interests of all affected parties are sufficiently protected. The plan shall also have to offer a reasonable prospect of avoiding the debtor's insolvency or of ensuring the viability of the business.

 

Advantages of the pre-packaged plan

First of all, the pre-pack scheme strengthens the efficiency of consensual proceedings by making it possible to force the adoption of the restructuring plan pre-negotiated with the majority of creditors in the context of subsequent safeguard proceedings.

Although the search for a consensual restructuring solution is often preferred by the debtor and its stakeholders, it cannot always be implemented in the context of a mandat ad hoc or a conciliation. In most LBO cases, the implementation of a restructuring agreement requires the unanimous agreement of the main creditors, which can be difficult to obtain. The diversity of lenders and the opposing interests that may exist between them make it difficult to reach an amicable agreement.

The use of the safeguard proceedings – whereby the cram-down and cross-class cram-down systems are applied – allows the debtor and the main creditors supporting the restructuring plan to force its adoption.

As explained above, these techniques are rarely used because the mere possibility of implementing them is a deterrent and, therefore, contributes to the success of court-assisted consensual proceedings. The mere assumption that accelerated safeguard proceedings could be implemented is sometimes enough to rally the few dissenting creditors to the agreement, as they do not wish to assume publicly the failure of the consensual proceedings.

In addition, insofar as the restructuring plan is negotiated in the context of consensual and confidential proceedings, the duration of the subsequent safeguard proceedings will be limited to the time required to vote and adopt the plan. Given the limited duration of the safeguard proceedings, the value-destroying effect and the loss of confidence of the debtor's customers and suppliers will be significantly reduced.

 

Illustrative cases

As indicated above, the very existence of pre-pack proceedings has made court-assisted consensual proceedings more effective. This explains why the use of these pre-pack proceedings may seem low.

Vallourec's restructuring (2021) may be the most significant illustration of such pre-packaged plan. In this case, Vallourec had secured – in the context of a mandat ad hoc – a lock-up agreement with its main creditors providing that they would support the contemplated restructuring plan. This restructuring plan was then implemented in the context of a subsequent safeguard proceeding after the vote of the former creditors' committees.

 

Pre-pack sale

Overview of the traditional sale plan

As a general principle, the sale of business is initiated by the judicial administrator in the context of reorganisation proceedings, if the adoption of a reorganisation plan is unlikely. It can also be implemented in the context of liquidation proceedings with maintenance of the activities and, to the extent it is not a complete sale of business, in the context of safeguard proceedings.

A sale plan provides for the transfer of assets, contracts and employment contracts of the debtor to a third-party purchaser. As the sale plan is an asset plan, the debts of the debtor are, therefore, not transferred to the purchaser of the distressed business. The sale plan process is construed as an open bidding process where there is no exclusivity to the benefit of one bidder.

At the end of the process, the court has to accept the offer that allows the most prolonged maintenance of employments attached to the assets assigned and the payment of the creditors, under the best conditions and that presents the best guarantees for its implementation.

While the sale plan has the merit to save employments, the interest of creditors tends to be sacrificed as the sale proceeds are most frequently far below the amount of debts of the debtor.

 

The new pre-pack sale legal framework

Preparation of the sale of business in the context of consensual proceedings

At the request of the debtor and after the creditors taking part in the proceedings have been consulted on the matter, mandat ad hoc and conciliation proceedings may also be used to organise the partial or total sale of the debtor, in particular through a ‘plan for the disposal of the business' (i.e., pre-pack disposal plan) that could be implemented in the context of subsequent safeguard, reorganisation or liquidation proceedings.

Article L. 611-7 of the Commercial Code provides that, at the debtor's request, the conciliator may be entrusted with a mission to organise the partial or the total sale of the business, which could be implemented, where appropriate, in the context of a subsequent safeguard, reorganisation or liquidation proceedings. Although not expressly provided for, this mission could also be entrusted to the mandataire ad hoc whose mission is more broadly described.

The law suggests that the mission to organise the sale of the business should be assigned to the conciliator in the course of the conciliation proceeding if an agreement could not be reached with the creditors. It provides that this mission can be assigned to the conciliator at the request of the debtor after having received opinion of the participating creditors, which suggests that the proceeding is already pending and that negotiations with creditors have already been initiated.

Since the implementation of the pre-pack mission may lead to a total or partial sale of the company, the employer must comply with the legal obligations to provide information and consult employees' representative institutions.

As part of his or her mission, the conciliator will initiate a bidding process for the acquisition of the business in the context of the conciliation proceeding. In contrast to the bidding process provided for in the context of the reorganisation proceeding, this bidding process will not have to be public. It is, however, essential that the conciliator actions, in particular with the companies acting in the relevant business, ensure sufficient publicity. Provided they comply with certain requirements, offers received in this context by the mandataire ad hoc or the conciliator may, after consultation of the public prosecutor, be considered by the court in the context of safeguard, judicial reorganisation or judicial liquidation proceedings.

The balance between the confidentiality that governs the amicable proceeding and the need to ensure sufficient publicity to maximise the chances of finding a purchaser is sometimes difficult to find. In most cases, the conciliator will use the same practices as those used for the sale of in bonis businesses. The potential buyers are approached by an investment bank, non-disclosure agreements are signed and a data room is set up.

The opening of a subsequent insolvency proceeding is not mandatory if the contemplated sale can be implemented within the framework of a share deal or an asset deal in which the creditors could be fully paid up. However, in practice, reorganisation or liquidation proceedings will systematically be opened to benefit from the advantageous framework of the sale in the context of these proceedings.

Implementation in the context of a subsequent insolvency proceeding

After the preparation of the sale in the context of the conciliation or mandat ad hoc proceedings, the debtor will usually request the opening of reorganisation or liquidation proceedings, as a total sale of business cannot be implemented in the context of safeguard proceedings. Although the opening of these proceedings is only justified by the implementation of the pre-negotiated sale, the debtor will have to be insolvent in accordance with the conditions for their opening.

Even though it is not provided for in the law itself, the conciliator or mandataire ad hoc who conducted the bidding process beforehand is, in most cases, appointed as judicial administrator in the subsequent insolvency proceedings. This ensures a natural continuity between the preparation phase of the sale and its effective implementation.

At the opening of the proceedings, the court shall ensure that the actions conducted by the conciliator have ensured sufficient publicity for the preparation of the sale, in particular on the basis of the conciliator's report and having regard to the public prosecutor's opinion. If the actions conducted by the conciliator and the bids received in that respect prior to the opening of the insolvency proceedings are considered to be satisfactory by the court, it may decide not to open a public bidding process and set a date for the examination of the takeover bids.

As the pre-pack sale is implemented in the context of reorganisation or liquidation proceedings, the bids submitted to the administrator shall contain certain specific and mandatory provisions, such as:

  • business and proposals, a specific description of the assets, rights and contracts to be assigned to the purchaser;
  • the sale price of the business and terms and conditions of payment;
  • the date of completion of the sale;
  • the number of employment contracts to be transferred; and
  • the guarantees provided for the completion of the purchase.

As with any sale in the context of an insolvency proceeding, and to the extent that dismissals on economic grounds may have to be conducted following the sale, the employees' representative shall be informed and consulted on the bids submitted and on such potential dismissals.

At the end of the process, the court will have to accept the offer that allows the most prolonged maintenance of employments attached to the assets assigned and the payment of the creditors, under the best conditions and presenting the best guarantees for its implementation.

 

Advantages of the pre-pack framework

The main advantage of using the pre-pack sale framework lies in – as with the pre-packaged safeguard plan – the confidentiality attached to the court-assisted consensual proceedings during the preparation phase and the reduction of the duration of the subsequent insolvency proceedings.

As explained below, the opening insolvency proceedings has a negative impact on the value of the business and sometimes entails the loss of confidence of the debtor's customers and suppliers. The adverse effects of such proceedings do not allow for the best valuation of the debtor's assets and, in the worst case, can weaken the interest of potential purchasers.

The pre-pack scheme is of special interest in the sales of industrial businesses since the opening of insolvency proceedings generally leads to a significant increase in working capital requirements for such activities. The limited duration of the sale process allows the debtor to mitigate this risk and avoid a significant increase of its financing requirements.

The preparation of the sale in a confidential framework gives time to negotiate with potential buyers and thus contributes to the optimisation of the content of their respective offer. The interests of creditors will be improved, as the negative impact of insolvency proceedings on the value of the company's assets will be significantly reduced and the sale proceeds could, therefore, be optimised.

 

Illustrative cases

Since the introduction of the pre-pack sale in French law, some significant sales have been successfully implemented within this framework, such as FRAM, NextiraOne, Tati and William Saurin. In each of these cases, an investment bank had been mandated to ensure a serious and complete search for potential buyers.

Whenever the sale of a distressed company of a certain size is contemplated, the search for potential buyers will systematically be initiated before the opening of insolvency proceedings. Sometimes, it is the nature of the interests expressed by potential buyers that will lead the company to use the pre-pack sale framework, for example, when these potential buyers are not willing to take over the company's debt or do not want to conduct the social restructuring.

There have also been cases – such as Doux or Toys ‘R' Us France – where potential buyers have been identified and offers have been submitted in the conciliation proceeding, but a public bidding process has nevertheless been initiated in the context of the subsequent insolvency proceedings.

If a majority of significant debtors uses the court-assisted amicable proceedings to search for potential buyers of their businesses in a confidential framework, the ‘complete' pre-pack framework cannot always be implemented. When the bids submitted are not satisfactory or require further work, or when it appears necessary to open the process to new purchasers, it seems best to revert to the traditional sale process.

 

Conclusion

Over the past 10 years, France has introduced a new range of restructuring tools at the crossroad of consensual proceedings and insolvency proceedings, contributing to the development of pre-packaged solutions. Court-assisted amicable proceedings are now emerging as a privileged place to negotiate restructuring solutions, which will be implemented in subsequent insolvency proceedings.

Amicable proceedings offer a confidential and flexible framework allowing the conciliator or the mandataire ad hoc, the debtor, its shareholders and creditors to work on restructuring solutions without destabilising the business. The subsequent insolvency proceedings then allow the implementation of contemplated solutions, which include both the classic restructuring plan and sale plan.

 

This article was first published in Global Restructuring Review on March 4, 2022. For further information please visit Global Restructuring Review. Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.

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