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French Insolvency Law - a brief overview

This note is not intended to be exhaustive, but simply sets out a number of points which might be of comparative interest to those more used to the somewhat different philosophy and provisions of many Common Law systems.

Insolvency Law is referred to by multiple different expressions in French such as the 'dpt du bilan', 'droit des procdures collectives', 'droit des mesures de sauvegarde de l'entreprise', 'droit du redressement de l'entreprise' or even as the 'droit des faillites'.

However, care should be taken not to use the word 'banqueroute' in French when referring to a company's insolvency.

Notwithstanding its similarity (and ultimate origin) the French word 'banqueroute' is decidedly not the translation of 'bankruptcy' in common law usage; but instead refers to the specific and serious French criminal offence of knowingly fraudulent management whilst an entity is insolvent.

In essence, the definition of a company insolvency, known in French as the 'tat de cessation de paiements', is that the undertaking is unable to meet its (currently) due debts with its (immediately) available assets.

Different from many common law systems; rather than the principal creditor, such as a bank, taking the lead in such matters, the insolvency procedures in France are essentially judicial, in other words there is a systematic intervention by the French Commercial Courts.

In the majority of cases, it is the company's officers who file for insolvency protection with the local Commercial Court and they are required to do so within 45 days of becoming aware that the company is in an 'tat de cessation de paiements' i.e. is unable to meet its due debts.

This process requires the company's principal officer (Grant, Prsident etc) to file a number of documents such as the accounts and balance sheet, as well as the list of employees, with the Commercial Court; hence the commonly used French expression 'dpt du bilan' or more properly the ' dclaration de cessation des paiements'

The principal sanction of failing to file for insolvency protection is that the company's officers could be held to be personally liable for the company's debts.

Other methods of triggering the statutory insolvency protection measures include a writ aimed at putting the company into Court administration or liquidation being served upon the debtor company by a creditor, or instead the matter being brought directly before the Court by the Public Prosecutor (often at the behest of the employees) and finally the Court becoming aware of the difficulty of the company and deciding itself to take the requisite steps.

Furthermore a new provision known as the 'Loi de sauvegarde des entreprises' or 'Law for the safeguard of businesses' came into force in 2006. It allows the principal officer of a company to make a formal declaration to the Commercial Court that it is in difficulties i.e. before the entity is actually in an 'tat de cessation de paiements' or in an objectively insolvent situation.

This new provision is ostensibly aimed at finding a solution to the difficulties, insofar as possible, before any more serious step is taken. It includes the possibility of formal consultation and conciliation with the undertaking's principal creditors as well as the blocking of the possibility of the creditors serving a writ on the debtor entity with a view to it being put into Court administration or liquidation.

That said, in the event that the Court is nevertheless seized of the situation where the debtor entity is manifestly in an insolvent position, in essence there are two basic decisions which may be handed down by the Court seized by such an insolvency petition either :

  • to place the company in " Redressement Judiciaire " (cf. administration/receivership) with a view to bringing it back into a solvent position (the company is then administered either directly, or alongside the existing management, by a third party insolvency practitioner appointed by the Courts), or
  • to place the insolvent company in " Liquidation Judiciaire ", ( the assets of the company are then immediately realised by a Court appointed Liquidator and the creditors are paid off according to their ranking and the funds available).

The creditors are ranked, for example, as to whether they secured or otherwise as well as whether they are claiming title to goods delivered but not paid etc.

However, it is very important to note that French law is highly protective of the employee and that the interests of the salaried employees would generally tend to prevail over those of all the other creditors. The creditors must in any event make a formal declaration to the insolvency practitioner of the amount due to them within a two month period of the Court being seized. The question of the possible liabilities of Directors and Shareholders should not be underestimated e.g. in the event of knowingly trading whilst insolvent.

For more specific information on French insolvency law, please click here