The current unprecedented public health crisis has led the government to imposing exceptional social distancing and self-isolation measures. These measures result in an unprecedented downturn in the economic activity.
Despite the speeches and announcements, it is evident from the publication of the orders and implementation decrees that the economic measures for the benefit of companies are extremely limited and shall not be sufficient to eradicate the countless difficulties. Nonetheless, the President declared on the 12th of March that “no company shall be required to face the risk of insolvency”.
The government decided to take action by inviting company directors to anticipate their difficulties. The rules relating to the processing of company difficulties were relaxed given the current public health and economic crisis.
The order no. 2020-341 dated March 27, 2020, was published concerning the adaptation of the rules relating to the difficulties for companies and agricultural holdings for the public health crisis and modifying certain provisions of the French Code of Criminal Procedure. The provisions of this order shall enter into force “immediately” according to Article 24 of the public health law dated March 23, 2020. The public health crisis began on March 24, 2020 (date of enactment of the law) for an initial period of two months, according to Article 4 of this law. (for an analysis of this order see the Article posted on our website “Covid-19: the government tries to immunize companies in difficulty“.
The order adapts the rules for the opening of procedures to assist companies in financial or legal difficulty and we will focus on this aspect to present the different legal mechanisms available for companies during this public health and economic crisis.
RECAP OF THE PREVENTIVE MEASURES TO ASSIST COMPANIES IN DIFFICULTY
The law enables companies which are encountering economic, legal or financial difficulties, without being in a situation of insolvency, to anticipate these difficulties as a protective measure outside of any insolvency proceedings.
1 – The confidential procedures
Two preventive measures are made available to companies:
- The ad hocmandate
- the conciliation
They share the same objective: enable a confidential and amicable negotiation with the company’s creditors for the payment of its debts. To do so, the debtor is assisted by an
ad hoc representative or conciliator, both appointed by the President of the Commercial Court.
The benefits of these procedures are as follows:
- the company director shall remain the leader of the company,
- they are confidential,
- they enable the difficulties to be managed out of courtand with the assistance of a court representative experienced in negotiations,
- they may be requested as from the occurrence of the difficultiesor even by anticipation,
- The ad’hoc mandate may duly precede the conciliation procedure.
The prerequisite to benefit from these procedures is that the company must not be into default of payment (available assets lower than the outstanding liabilities).
2 – The judicial safeguard procedure
The judicial safeguard procedure is opened by a person carrying out a commercial, retail, agricultural or independent professional activity, and any private law legal entity which, without being in default of payment, justifies unsurmountable difficulties.
The objective is to facilitate the reorganization of the company in order to enable the continuation of the economic activity, employment and payment of the liabilities.
Inapplicable if the company is in default of payment, the safeguard procedure may give rise to the establishment of a safeguard procedure to enable the company’s receivership.
The benefits of this procedure are as follows:
- The director shall remain the leader of the company,
- The previous debts are frozenenabling the reorganization of the company, the reconstitution of its cash flow and the renegotiation of its debts.
To request the opening of a safeguard procedure, the company must not already have been subject to a previous safeguard procedure, receivership or compulsory liquidation.
The government has relaxed the rules to promote the recourse to these preventive procedures which enable an agreement to be reached in the majority of cases and prevent the opening of insolvency proceedings.
THE RELAXATION OF RULES INTRODUCED BY THE ORDER DATED MARCH 27, 2020 WHICH PROMOTES THE RECOURSE TO THESE PROCEDURES
The order dated 27th of March simplified the opening of procedures for these measures in several aspects, including:
- the company director is not obliged to appear before the President of the commercial Court, who may interview the claimant by any other means of electronic or telephone communication,
- “the insolvency proceedings shall be appreciated in consideration of the debtor’s situation on March 12, 2020”, date corresponding to the date of occurrence of the crisis.
Accordingly, the companies may request preventive measures even if they are in default of payment after the 12th of March and during the period corresponding to the public health crisis, increased by three months.
It must be evidenced that the company was not already in default of payment on the 12th of March.
When facing genuine difficulties resulting from the public health crisis, it is in the director’s interest to use preventive measures to anticipate the end of the crisis and the redress measures to be setup by starting the negotiations early with its partners and creditors, with the assistance of an ad hoc representative or conciliator, or in the context of a safeguard procedure, which shall enable it to freeze its previous debts and enable a restructuring.
AND IF THE DIFFICULTIES ARE TOO SIGNIFICANT?
If the difficulties are too significant or if the company was already undergoing insolvency proceedings on the 12th of March or if it is necessary to place the company under the Court’s control to ensure its continuity, traditional collective procedures must be envisaged.
1 – Receivership
Receivership provides for a reorganization of the legal, financial and social situation of any private law legal entity or any individual carrying out an independent professional activity (retail, family business, agricultural industry or independent professions) which are into default of payment, i.e., the impossibility to meet the outstanding liabilities with its available assets.
The objective of this procedure is to enable the continuation of the company’s activity, the continuation of employment and payment of liabilities.
Upon the outcome of the procedure, the receivership may give rise to either of the following:
- a restructuring plan
- an asset disposal plan.
In the absence of such solutions, the Court shall order the compulsory liquidation.
The order dated March 27, 2020 enables these procedures to be opened by the creditors awaiting payment from their debtors.
2 – Compulsory court liquidation
This procedure is applicable to any debtor, retailer, family business, or person carrying out an independent professional activity and any private law legal entity undergoing insolvency proceedings and for which receivership is evidently impossible as there is no possibility of continuation of the activity.
It may be pronounced immediately upon request by the company director or after the opening of a receivership.
The objective of the compulsory liquidation is to close the company’s activity, to evaluate the debtor’s assets and liabilities by a global or separate assignment of its rights and assets: a liquidator shall be appointed to sell the assets, collect the receivables and pay the debts.
The Court’s promotion of preventive measures and the government’s intention to provide support for companies should encourage directors, CEO and owner of business to anticipate such situation and benefit from the protection of commercial courts to face the economic crisis.
We remain at your disposal to discuss these possibilities and to assist you with any difficulties.