French Insolvency Law Reform

French Insolvency Law Reform

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Editor's Note: Major reforms to French bankruptcy law suggest that France has adopted an "earlier treatment" approach to ailing corporate debtors. The EU Regulation on Insolvency Proceedings continues to inspire a race to the courthouse to open "main" proceedings and jurisdictional results that would not have been possible before the Regulation came into force in May 2002. The U.K.'s highest court has clarified certain features of the floating charge, a very flexible form of security that first saw the light of day 150 years ago. Also see a related article in the October 2005 issue, "French Overhaul Bankruptcy Regime," by Michael Haravon.

In 2003, nearly 90 percent of the insolvency proceedings in France resulted in liquidation. As a result, the French government has overhauled French insolvency law with a view to:

  • promoting voluntary arrangements between the debtor and its creditors,
  • anticipating the debtor's financial difficulties by allowing it to commence insolvency proceedings before the traditional insolvency test is met (the traditional insolvency test is known as cessation des paiements and is basically a simple cash-flow test),
  • simplifying proceedings, and
  • reducing the length of the insolvency proceedings (in 2003, the average length of French insolvency proceedings was approximately four years).
The legislation was approved in July 2005 and will come into force on Jan.. 1 2006, at which time a debtor will have the following options, which in certain cases will depend on whether it is cash-flow insolvent or not:
  • If it is not yet insolvent according to the French insolvency test, the debtor may file a petition for the appointment of a receiver (mandataire ad hoc). The role of the receiver will be determined by the judge in the light of the debtor's difficulties. The process will be confidential.
  • If it is not yet insolvent, the debtor may commence 'safeguard proceedings' (procédure de sauvegarde). Two creditors' committees (one for trade creditors and one for credit institutions) will be set up for large companies and should be consulted on the safeguard plan drafted by the debtor's management during the observation period that may last up to a maximum of 12 months (other than in exceptional cases where the period may be extended at the attorney-general's request).
  • The debtor may file a petition for the commencement of conciliation proceedings (formerly a voluntary arrangement), which will result in the appointment of a conciliator in charge of supervising and facilitating a rescheduling agreement. Any creditors that financially support the debtor's attempt to recover by providing new money following the commencement of conciliation proceedings will be privileged in the event of subsequent insolvency or liquidation proceedings. The conciliation proceedings will be available to debtors experiencing financial difficulties or debtors that have been insolvent for no longer than 45 days.

    Although the Austrian Supreme Court did not elaborate in its ruling on the COMI issue, this ruling can nevertheless be regarded as an indication that Austrian courts would accept the opening of main insolvency proceedings by a non-Austrian (EU) court...

  • If it is insolvent, the debtor may commence either reorganization or liquidation proceedings, depending on the likelihood of the company's recovery. It is expected that liquidation proceedings for small companies2 that do not own real estate will be completed within one year of the judgment commencing the proceedings.

The French insolvency law reforms also amend some of the criminal sanctions applicable to directors and reduce the risk of a creditor becoming liable for wrongful support.

Austria: EC Regulation on Insolvency Proceedings—Opening Main Proceedings

Pursuant to Article 3(1) of the EC Regulation on Insolvency Proceedings3 (the Regulation), the courts of the member state where a debtor has its centre of main interests (COMI) shall have jurisdiction to open main proceedings with respect to that debtor. There can only be one COMI and one set of main proceedings for any company to which the Regulation applies.

Recently, the Austrian Supreme Court held4 that the opening of main proceedings by a non-Austrian (EU) court in another member state that may not have been competent within the meaning of Article 3(1) of the Regulation (and that did not even give sufficient reasons for the opening of main insolvency proceedings in its relevant decision) nevertheless had to be accepted and complied with by Austrian courts. Although the Austrian Supreme Court did not elaborate in its ruling on the COMI issue, this ruling can nevertheless be regarded as an indication that Austrian courts would accept the opening of main insolvency proceedings by a non-Austrian (EU) court, even if such court were not competent in the particular case.

Background

On Nov. 26, 2003, a bank filed an application with the Austrian court to open insolvency proceedings over the assets of a debtor. On Jan. 28, 2004, the Austrian court opened the insolvency proceedings. The day after the proceedings were opened, the court received a written pleading from the debtor stating that insolvency proceedings were already open in the United Kingdom, that the debtor did not possess any assets in Austria and that the debtor's centre of main interests was not in Austria. Therefore, the debtor argued that the opening of another set of main insolvency proceedings was not permitted pursuant to Article 3(2).

The Judgment

The U.K. High Court had claimed jurisdiction to open main proceedings in respect of the debtor pursuant to Article 3(1) on the grounds that the debtor's COMI was in the United Kingdom. Pursuant to Article 16, the opening of collective insolvency proceedings in one member state has to be recognized by all other member states from the time it becomes effective. As a general rule, applying the principle of mutual trust, the international jurisdiction of the court that opens insolvency proceedings shall not be examined. The opinion of the court of another member state on whether the court in the first member state has correctly claimed jurisdiction is not relevant. What is relevant is whether the court in the first member state has claimed jurisdiction pursuant to Article 3(1).

Incorrectly assuming jurisdiction pursuant to the Regulation is not, prima facie, contrary to public policy. Recognition of main insolvency proceedings opened in another member state may only be refused pursuant to Article 26 if recognition or enforcement of a judgment would be clearly incompatible with public policy, and in particular incompatible with basic principles or constitutionally guaranteed rights and freedoms of the individual. If the court of another member state incorrectly claims jurisdiction or another EU law is breached, this will not be automatically contrary to public policy under Austrian law unless fundamental rules of the EU had been grossly disregarded.

The Austrian courts should only refuse to recognize insolvency proceedings opened in another member state in exceptional circumstances. It could be argued the exceptional circumstances existed because the U.K. High Court failed to give substantive reasons for its decision to open main insolvency proceedings. This is a fundamental requirement for a fair trial. However, even in these circumstances the refusal of recognition is not mandatory but optional. It could be seen from the application of the bank that the debtor had links to the United Kingdom and at least in part conducted business there. With respect to the requirements for opening insolvency proceedings, although there did not seem to be sufficient proof to counter the presumption that the debtor's COMI is in the place of its registered office as required by Article 3(1), no violation of public policy was apparent. It might have been different had there been no internationally recognized connection at all or had additional exceptional circumstances led to an unfair trial.

Once main insolvency proceedings have been opened in a member state, only secondary insolvency proceedings can be opened in another member state. These secondary proceedings are restricted to the assets of the debtor situated in that other member state. The existence of an "establishment" is a precondition to opening secondary insolvency proceedings. In this case, it was held that there was no establishment because although assets were situated within Austria, the debtor did not have an office, employees or conduct any noticeable activities there.

This case is another in a long line of cases that U.S. lawyers will need to understand in order to make appropriate use of the new chapter 15, which came into force on Oct. 17. Specialist advice on the European experience of the new concepts of COMI and "establishment" may in appropriate cases be well worthwhile.

U.K.: Recent Case Law on Security Interests

The House of Lords (the highest court in the United Kingdom) has recently given an important judgment clarifying certain aspects of the law on granting security.5

The question that was considered by the House of Lords in Spectrum was whether a charge over present and future book debts took effect as a fixed charge (which was how it had been drafted) or as a floating charge. The charge was drafted in a form that had been approved by the court of appeal little more than 25 years earlier. The charge prevented the charger from disposing of or charging the uncollected book debts, but allowed it to deal with its debtors and collect the debts. Proceeds of collection were to be paid into a designated account with the chargee bank, but the charger was allowed to draw freely on the account for its business purposes, provided that the overdraft limit was not exceeded. Natwest argued that the charge created a fixed charge, and the Crown creditors argued that the charge created a floating charge.

Whether a charge is a fixed or floating charge has implications for the priority of payments to the lender. Preferential creditors rank ahead of a floating chargeholder in respect of floating charge realisations, but not ahead of a fixed chargeholder in respect of fixed charge realisations.

The House of Lords held that the hallmark of a floating charge is that, until some further step by way of intervention is taken by the chargee, the charger company can use the assets in question for its normal business purposes and, in using them, remove them from the security. If this characteristic is present, the charge will be a floating charge and cannot be a fixed charge, whatever its other characteristics may be. In this case, Spectrum was able to draw on the account once the book debts had been collected, and so the charge was a floating charge.

Although the charge considered in Spectrum was not a fixed charge, the court held that it was conceptually possible to take an effective fixed charge over present and future book debts, although they gave little by way of practical guidance as to how effective fixed charges over book debts should be taken going forward. However, the House of Lords also made it clear that even if the charge had contained sufficient restrictions on how the money in the account could be used, if that was not how the account operated in practice then the charge would still be a floating charge.

This ruling put an end to the wait of approximately 550 corporate insolvencies that have been frozen because of the legal uncertainty arising from an earlier decision of the Privy Council in 20016 that came to the same conclusions as the House of Lords in Spectrum.


Footnotes

1 Contributing authors include Fabienne Goubault (Paris), Friedrich Jergitsch (Vienna) and Catherine Derrick (London). Return to article

2 A company is small if its number of employees and turnover does not exceed specified thresholds. Return to article

3 Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings. Return to article

4 OGH 17.3.2005, 8 Ob 135/04t. Return to article

5 National Westminster Bank v Spectrum Plus Limited [2005] 3 WLR 58. Return to article

6 Agnew v Commissioners of Inland Revenue [2001] 2 AC 710. Return to article

Journal Date: 
Tuesday, November 1, 2005