Restructuring and insolvency in France: New regime and other...

New regime and other hot topics

Saam Golshani and Alexis Hojabr

20 January 2015

Restructuring and insolvency in France:

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

Agenda

2

The last significant changes to the current regime result from the orders dated 12 March 2014 and 26 September 2014applicable 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 financialsafeguard, (sauvegarde financière accélérée) judicial reorganisation (redressement judiciaire)

• Stay of payments/moratorium and stay of enforcement during the court-controlled proceedings (save for some rareexceptions)

• No stay of payments and stay of enforcement during the court-assisted proceedings, but possibility for French courts toorder a rescheduling of debt of up to 2 years


3

• Attempt to remedy any stay of enforcement: double LuxCo structures

• Allows lenders to enforce the pledge over the shares of LuxCo 1 (even if French Bidco and/or the Luxcos are subject to ahostile safeguard)


4

Sponsors

Managers

Facilities Agreement

Luxco 2

Luxco 1

FrenchBidco

100%

100%

100%

Share pledge

Share pledge

2. Overview: Mandat ad hoc

Request bythe debtor(solvent)

Appointement by the courtof a « Mandataire ad hoc »to assist the managementof the company

Out of court agreementwith creditors (no cram down)

Conversion into conciliation tobenefit from the advantages ofthe « homologation »

No legal duration time, extendable without limit

Confidential

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

No automatic stay* of• payments• enforcement• acceleration (as of1st July 2014)

* 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 creditorsattempt to enforce their rights while a mandat ad hoc is pending

5

• Trigger: Any company can file a petition for a Mandat ad hoc if facing legal, financial or economic difficulties, whetherexisting 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 onSchedule A of the EC Regulation on Insolvency Proceedings

2. Overview: Mandat ad hoc

6

Debtor is insolvent

2. Overview: Conciliation

Objectives: to reach an agreement with the main creditors in order to improve the company’s financial situation

Request bythe debtor(solvent or

insolvent forless than 45

days)

ConciliationAgreement

No conciliationagreement

5 months max

Safeguard or Fast-Track financialsafeguard

Reorganisation or liquidationproceedings

No acknowledgement

Acknowledgement of the agreement(confidential, binding on the parties)

Homologation of the agreement(publicity, legal privilege of New-Money)

Confidential

Fast Track Safeguard (as of 1st July2014) or Fast-Track Financialsafeguard

Debtor is solvent

No automatic stay* of• payments• enforcement• acceleration (since1st July 2014)

7* 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

• Trigger: Any company can file a petition for the appointment of a conciliator if facing legal, financial or economicdifficulties, 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 beimplemented 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 theconciliation is deemed null and void - no default clause


8

• 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 theprivilege of “New-Money” in a case of subsequent Safeguard or Judicial Reorganisation or Liquidation when theyprovided 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 thesuspension of payment (period during which decisions of the company can be cancelled by the court). Agreementand securities granted until such date entered into before the homologation judgment can not be rescinded and anypotential 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 suchagreement, 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

Mandat ad hoc Conciliation

• Debtor must be solvent

• No legal time limit for negotiations

• Any agreement reached is contractual

• 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)

2. Overview: Mandat ad hoc vs Conciliation

10

2. Overview: Safeguard

Request bythe (solvent)debtor

Safeguard Plan

Reorganisation

6-monthsobservation

period

Objectives: to ease the reorganisation of the company which is not insolvent in order to allow the continuation of itsbusiness, the protection of employment and the payment of its indebteness

Legal stay of• payments• enforcement• acceleration

6 monthsextension ofobservation

period

6 monthsexceptionalextension

Debtor remains solvent

Liquidation

Debtor is insolvent

11


Planpreparedby thedebtor(or, from1st July2014, bythecreditors)

Successful vote andexecution of theSafeguard Plan(max 10 years)

Non execution of theSafeguard plan

Filing forInsolvency

MainsSuppliers

CreditInstitutions

Bondholders(if any)

Vote : 66.66%by value ofcreditorswho attend andvote in eachcommittee

Approval of the Safeguard plan for eligible companies (>Eur 20M annual turnover/ >150 employees)or upon request of the debtor for smaller companies

Cram downof dissentingcreditors

Exit fromInsolvency

Shareholders

2/3 majority

If debtequity swap

12

• 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 monthsfor creditors located out of France). Automatic relief of foreclosure of creditors missing on the list provided by thedebtor


13

• 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 judicialadministrator 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 requestof the debtor, and from 1st 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)


Mainsuppliers

Bondholders(if any)

Vote : 66.66%by value ofcreditorswho attendand vote in eachcommittee

Objectives: to Implement a plan that is supported by the majority of the creditors

Cram downofdissentingcreditors

Shareholders

2/3 majorityIf debtequity swap

Opening ofproceedingsupon requestby the(solvent)debtor

PriorConciliationproceedings


observationperiod

(3 months max)

CreditInstitutions

15

• 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 tothe opening of the proceeding

No extension of payments could be imposed by the Court (L.628-8 of the French Code de Commerce)

2. Overview: Fast-Track Safeguard

16

2. Overview: Fast-Track Financial Safeguard


CreditInstitutions

Bondholders(if any)

Vote : 66.66%by value ofcreditorswho attendand vote in eachcommittee

Fast-Track Financial Safeguard proceedings and approval of the plan

Cram downofdissentingcreditors

Shareholders

2/3 majorityIf debtequity swap

Opening ofproceedingsupon requestof the debtor

Priorconciliationproceedings


observationperiod

(1 month)

extentedobservationperiod

(1 month)

17

• 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, or25 m€ of balance sheet

• Conditions and treatment of creditors similar to the Fast-Track Safeguard

• Effects limited to financial creditors or bondholders

2. Overview: Fast-Track Financial Safeguard

18

Safeguard Fast-Track Safeguard Fast-Track FinancialSafeguard

Prior conciliation mandatory No Yes Yes

Companies which caninitiate proceedings

All companies Accounts certified + one ofthese thresholds : 20employees, or 3M€ ofturnover, or 1,5M€ ofbalance sheetOr consolidated accounts

Accounts certified + one ofthese thresholds : 20employees, or 3M€ ofturnover, or 1,5M€ ofbalance sheetOr consolidated accounts

Creditors concerned Financial and trade creditors Financial and trade creditors Financial creditors only

Time limit 18 months max 3 months 2 months

2. Overview of Safeguard proceedings

19

2. Overview: Reorganisation

Request bythe(insolvent)debtor or bythe creditors

Sale Plan

Continuation Plan6 months

observationperiod

Objectives: continuation of the company’s business


6 monthsextension

of observationperiod

6 monthsexceptionalextension

Liquidation

The reorganisation mayresult from the conversion ofsafeguard

CreditInstitutions

Mainsuppliers

Bondholders(if any)

Vote : 66.66%by value ofcreditorswho attendand vote ineachcommittee

Cramdownofdissentingcreditors

Shareholders

2/3 majority

If debtequity swap

20

21


• Trigger: The company must be insolvent (i.e. not be able to pay its due debt with its available cash). The company has tofile 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, thePublic 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

• 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

Request- by the

(insolvent)debtor; or- by thecreditors

Partial sale

Total sale

Possible temporary continuation of the business(up to 6 months)

The liquidation may result fromthe conversion of safeguard orreorganisation proceedings

23

Objectives: end the activities of the company and/or its assets and repay the creditors to the extent possible

Mandatory for debtor within 45 daysafter insolvency, unless a conciliationor reorganisation is opened

• Initiative:

The company

Creditors

The Court has to inform the Public Prosecutor of the situation of the debtor. Following such information, the PublicProsecutor 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 followingrequest by the supervisor judge

2. Overview: Liquidation

24

2. Overview: In a Nutshell

Solvent debtor

Safeguard Plan

Reorganisationproceedings

Liquidationproceedings

Insolvent debtor

Mandat ad hoc

Conciliation

Safeguard

out of court agreement

No Court acknowledgment

Acknowlegement of the agreement

Homologation of the agreement

Fast-track Safeguard or Fast-trackFinancial Safeguard

Observation period (up to 18 months)

Observation period (up to 18 months)

Possible temporary continuation ofthe business (up to 6 months)

Partial Sale

Total sale

ContinuationPlan

Sale Plan

Liquidationproceedings

25

• 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-yearof 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 listedcompany 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

3. Specifics rules applicable to listed companies

26

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 ofguarantees or likewise.

Credit transactions include (i) any type of loans and financial leases, and (ii) the purchasing of non-matured 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 andduly “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 donot 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, providedthat one of the contracting companies has effective controlling rights over the others

securities (such as bonds)

4. French Banking Monopoly

27

• 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 beexecuted 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 thebanking 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 sub-participation (“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 tothe 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, inreturn of a remuneration in the form of commissions, to disburse to the debtor the full, for loan to be used onceonly, or depending the debtors drawings, the equivalent funds to its percentage of participation taking intoaccount 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, ofa 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 acompany 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)

4. Debt trading – loan syndication

28

Restructuring and insolvency in France: New regime and other...

Documents

Transcript of Restructuring and insolvency in France: New regime and other...