Key points
- Safeguard proceedings (sauvegarde) are preventive: they are aimed at companies facing difficulties they cannot overcome, without being in cessation of payments, and the director keeps control of management.
- Judicial reorganisation (redressement judiciaire) applies in cessation of payments, in order to continue the business, maintain jobs and settle liabilities.
- Judicial liquidation (liquidation judiciaire), opened where reorganisation is clearly impossible, ends the business or realises the assets to pay creditors, and marks the end of the company.
- Employees’ claims enjoy special protection in a liquidation.
- Out-of-court solutions such as conciliation and the mandat ad hoc make it possible to avoid court-based insolvency proceedings.
- Prevention measures, such as regular audits and rigorous management, help detect financial difficulties early.
Companies can sometimes face financial difficulties that threaten their survival. In these situations, insolvency proceedings (procédures collectives) play a crucial role in trying to save the company or, at least, protect creditors’ rights. This guide looks at the different types of insolvency proceedings available and their details.
Further reading: anticipating safeguard proceedings (in French).
Safeguard proceedings (sauvegarde)
Judicial safeguard proceedings are designed for companies that can show difficulties they are unable to overcome, without being in cessation of payments (Article L. 620-1 of the French Commercial Code (Code de commerce) (in French)). Their purpose is to facilitate the reorganisation of the company so that it can continue its business, maintain jobs and settle its liabilities.
This procedure is preventive and takes place before the financial situation worsens. The director continues to run the company; where a court-appointed administrator (administrateur judiciaire) is designated, the administrator supervises or assists the director, without replacing them. The procedure also helps prevent a cessation of payments.
The advantages of safeguard proceedings
- Freeze on prior debts (prohibition on paying them, stay of enforcement actions)
- Business continues under supervision
- Negotiation with creditors
A company can thus restructure its finances without immediate pressure from creditors, which makes a faster return to normal easier.
Judicial reorganisation (redressement judiciaire)
When a company is already in cessation of payments, that is, it can no longer meet its due liabilities with its available assets, it must apply for the opening of judicial reorganisation within 45 days, unless it has requested conciliation within that period. The main purpose of this procedure is to allow the company’s business to continue, jobs to be maintained and liabilities to be settled.
The court appoints a supervising judge (juge-commissaire), who ensures that the procedure runs swiftly and that the interests involved are protected, and a mandataire judiciaire (creditors’ representative), who represents the creditors. A court-appointed administrator may also be appointed to assist the director or to run the company; this appointment is mandatory above thresholds set by decree. A reorganisation plan may then be adopted to ensure the company’s long-term survival.
The stages of judicial reorganisation
- Opening of the proceedings and appointment of the court officers
- Observation period to assess the economic situation
- Preparation of a reorganisation plan, or judicial liquidation if reorganisation is impossible
Certain signs can point to a possible cessation of payments, such as repeated late payments or insufficient cash. Anticipating often allows better control of the situation.
Judicial liquidation (liquidation judiciaire)
If the company is unable to recover or if the reorganisation fails, judicial liquidation becomes inevitable. This procedure is intended to end the business or to realise the company’s assets, by selling its property as a whole or separately, in order to pay the creditors (Article L. 640-1 of the Commercial Code (in French)).
A liquidator (liquidateur judiciaire) is appointed to carry out this operation: the debtor is divested of the management of its assets. Unlike the other procedures aimed at the company’s survival, liquidation will mark its end.
The consequences of judicial liquidation
The permanent closure of the company has not only financial but also social consequences. Employees’ claims nevertheless enjoy special protection, in particular the super-priority (superprivilège) for pay covering the last 60 days and the wage guarantee provided for by the French Labour Code (Code du travail).
Before any decision to liquidate, all possible options for dealing with the difficulties must be explored, such as judicial safeguard proceedings and judicial reorganisation.
Out-of-court procedures
Outside the strict court-based frameworks, out-of-court solutions to business difficulties exist to avoid court-based insolvency proceedings. Among them, conciliation and the mandat ad hoc make it possible to find tailored solutions in complete confidentiality.
Conciliation
Open to companies experiencing a legal, economic or financial difficulty, actual or foreseeable, and which have not been in cessation of payments for more than 45 days, conciliation allows negotiation with creditors under the auspices of a conciliator. The procedure is confidential, which avoids the publicity of insolvency proceedings.
Mandat ad hoc
When tensions arise with financial or commercial partners, the mandataire ad hoc (court-appointed mediator), appointed by the president of the court, assists the company in negotiating agreements. The president freely determines the mediator’s task and the procedure remains confidential, which makes this solution flexible.
Preventing difficulties
Anticipation is often the key. Several tools exist to detect and deal with signs of financial distress early. These legal tools typically target the prevention of difficulties.
Regular audits, rigorous management and support from specialists such as chartered accountants or consultants can help identify problems early. Proactive action maximises the chances of success of corrective measures.
The advantages of prevention
- Early identification of risks
- Rapid implementation of corrective measures
- Reduced financial and social impact
Staying vigilant and taking action quickly significantly improves the prospects of recovery before the difficulties become insurmountable.
In this article, we have explored different aspects of insolvency proceedings and the mechanisms available to companies in difficulty. Whether safeguard proceedings, judicial reorganisation, judicial liquidation or an out-of-court settlement, each route offers specific opportunities to bounce back or limit the damage. Planning ahead, understanding and choosing wisely among these options is essential for a calmer future. The keys lie in vigilance and appropriate professional assistance.
