Key points
- From the opening judgment, actions by prior creditors are stayed and payment of prior debts is prohibited.
- This freeze gives the company time to prepare a reorganisation plan and keeps its assets together.
- To recover part of what they are owed, creditors must file their claims with the mandataire judiciaire (creditors’ representative), generally within two months of publication in the BODACC (French official bulletin of civil and commercial notices).
- The proof of claim states the amount due on the date of the opening judgment, any security interest and the supporting documents.
- A creditor who does not file within the time limit is excluded from distributions and dividends, unless relief from the time bar is sought within six months.
- After filing, the creditor is consulted on the payment terms and debt write-offs in the plan, or votes within a class, and may ask to be appointed as a creditor controller.
Insolvency proceedings (procédures collectives) are legal mechanisms whose purpose is to deal with companies’ financial difficulties while protecting their creditors. However, when a company is in judicial reorganisation (redressement judiciaire) or judicial liquidation (liquidation judiciaire), creditors must navigate a complex and often restrictive legal environment. This article provides a detailed overview of the various effects these proceedings can have on creditors.
The stay of proceedings: what does it involve?
From the judgment opening insolvency proceedings, legal actions by prior creditors seeking payment of a sum of money or termination of a contract for non-payment are interrupted or prohibited, as are enforcement proceedings (Article L. 622-21 of the French Commercial Code (Code de commerce) (in French)). This is known as the stay of proceedings (gel des poursuites). For creditors, this rule means they can no longer bring new actions to recover their claims for the duration of the proceedings.
The stay of proceedings comes with a prohibition on paying prior debts. Creditors must therefore wait until the court decides the company’s fate. In principle, they receive no payment during the observation period, which can weigh heavily on their cash flow.
Why the stay of proceedings matters for the company in difficulty
While this prohibition temporarily restricts creditors’ actions, it aims to give the company time to prepare an effective reorganisation plan. It also keeps the company’s assets together, which increases the chances of a favourable outcome for all parties concerned.
Stay of proceedings: what remedies do creditors have?
Even under a stay of proceedings, creditors can take certain steps to protect their interests. For example, they can file a proof of claim with the mandataire judiciaire. This step formalises their rights as creditors in the ongoing insolvency proceedings.
How to file a claim in French insolvency proceedings
To have any hope of recovering part of what they are owed, creditors must file their claims. This formality, known as the proof of claim (déclaration de créance), must be completed within a time limit strictly set by law. In general, this time limit is two months from publication of the opening judgment in the BODACC.
What does a proof of claim contain? It states the amount of the claim due on the date of the opening judgment, the sums falling due in future and their due dates, and the nature of any security interest and the assets it covers; the supporting documents are attached and listed in a schedule. If the time limit is not met, the creditor risks being excluded from distributions and dividends.
Risks of missing the filing deadline
Failing to meet the deadline for filing a claim can have disastrous consequences for creditors. The defaulting creditor is not admitted to distributions and dividends, unless it obtains relief from the time bar (relevé de forclusion) from the supervising judge (juge-commissaire), which must be requested within six months.
What rights do creditors have after filing a claim?
Once the claim has been filed, the creditor has several rights: it is consulted on the payment terms and debt write-offs proposed in the plan, with its silence for 30 days counting as acceptance, or, if it belongs to a class of affected parties, it votes on the draft plan. It may also ask the supervising judge to be appointed as a creditor controller (contrôleur). These prerogatives ensure a degree of transparency and underline the importance of creditors in dealing with the company’s difficulties.
Judicial reorganisation: what are the prospects?
Judicial reorganisation is a crucial phase in which the company tries to restructure its business to get out of cessation of payments. During this period, creditors face various uncertainties and must be patient.
There is nevertheless a substantial chance for creditors to recover part of their money, particularly if the reorganisation plan succeeds. The draft plan is prepared by the court-appointed administrator (administrateur judiciaire) with the debtor’s assistance, and then submitted to the creditors.
Taking part in the reorganisation plan
Creditors can make suggestions to improve the reorganisation plan. Although their influence varies with the type of claim and their importance in the company’s business, their role is not negligible.
Impact on preferential creditors
Some claims benefit from a preferential right that gives them priority over others. These preferential creditors often see their claims partly satisfied, even where the business continues. They are therefore at an advantage over ordinary creditors.
Judicial liquidation: the end of hope?
Where reorganisation does not appear viable, the court orders judicial liquidation. In principle, this decision ends the company’s business, although a temporary continuation may be authorised, and leads to the sale of its assets to pay the creditors.
The prospects of repayment then become very limited. However, some creditors, mainly those holding specific security interests (mortgages, pledges), find a glimmer of hope here, as they rank preferentially in the distribution of the proceeds of the assets.
Order of distribution of the proceeds
The funds recovered from the sale of the company’s assets are distributed in a precise order of priority, set by Article L. 643-8 of the Commercial Code (in French). In outline:
- Wages protected by the super-priority (superprivilège): pay for the last 60 days
- Post-opening legal costs and preferential claims arising from the conciliation or the proceedings
- Creditors holding security over real property, then the Treasury’s preferential claim and pledges (nantissements)
- Unsecured creditors (créanciers chirographaires, with no specific security), in proportion to their amount
Possible exceptions
Some assets fall outside this distribution. For example, the seller of goods delivered under a retention of title clause may reclaim them if they can still be found in kind, within three months of publication of the opening judgment.
Safeguard proceedings: proactive prevention
Safeguard proceedings (sauvegarde) are another form of insolvency proceedings, whose purpose is to prevent cessation of payments. Creditors experience effects similar to those in judicial reorganisation, with a few notable differences.
They make it possible to deal with difficulties before cessation of payments. They lead to a safeguard plan adopted by the court: creditors are consulted on the payment terms and debt write-offs or, where classes of affected parties are formed, each class decides by a two-thirds majority of the votes cast.
Benefits for creditors
Taking part in this process has advantages: negotiation takes place before cessation of payments, which can improve the prospects of repayment and preserve business relations with the company in difficulty.
Drawbacks and limitations
Constraints nevertheless remain. For example, the possible dilution of claims or the restriction of any individual court action for recovery during the proceedings sometimes proves a handicap.
Court-based recovery: creditors’ last resort
During the proceedings, enforcement proceedings brought by prior creditors, such as seizures, are stayed or prohibited. After a liquidation is closed for insufficient assets, creditors do not, save for exceptions, recover the right to bring individual actions. Individual recovery routes therefore remain very limited in the context of insolvency proceedings.
Given the major obstacles encountered at these stages, advice from an insolvency lawyer helps the creditor assert its rights and limit its losses. Every situation is different.
For assistance: insolvency lawyer in Paris.
