Newsletter Restructuring - Do creditors have the odds in their favour?

By Nicolas Morelli, Celine Nezet

04-2019

1. It is hard to get rid of this preconceived idea that unlike other systems, the French insolvency system (excessively) favours debtors at the expense of their creditors.

Some recent decisions make it possible to question this idea.

These decisions deal with the conditions required for the approval of a safeguard plan and are warnings to debtors that might be tempted to force their plan through.

Safeguard proceedings end with the court-approval of a restructuring plan when there are serious chances of rescuing the business (French Commercial Code, Art. L.626-1).

The restructuring plan is prepared by the debtor company, with the assistance of a court-appointed administrator (French Commercial Code, Art. L.626-2). The plan must determine the prospects for recovery based on business opportunities, the current state of the market and available financing resources. It must also set out the terms for settling the company’s debts and any guarantee or commitment that the debtor may provide or make to ensure the performance of the plan.

Provisions of the restructuring plan dealing with the settlement of liabilities should be based on liabilities declared by the company’s creditors and not the company’s subjective assessment of its indebtedness.

2. The Paris Court of Appeal recently reaffirmed this principle in very clear terms: “Pursuant to Article L.626-21 of the French Commercial Code, including a debt in the plan does not prejudge its final acknowledgement in the company’s liabilities. Amounts to be allocated to creditors in relation to challenged claims are paid only from their definitive acknowledgement in the company’s liabilities. However, a safeguard plan must provide for the settlement of all declared claims, including those that are challenged, and regardless of whether they are due and payable” (Paris Court of Appeal, 12 April 2018, No.17/11357).

Some safeguard plans implemented in high-profile restructurings were recently rejected in appeal for not satisfying this essential requirement. Such decisions are rare and therefore worth highlighting.

The first case related to the safeguard proceedings of the companies FIBT, GBT and Dolol, mainly known for their shareholders, French businessman and former politician Bernard Tapie and his wife (Paris Court of Appeal, 12 April 2018, No.17/11357; Paris Court of Appeal, 4 May 2018, No.17/11353).

The Public Prosecutor lodged an appeal against the judgments that had approved the safeguard plans of the three companies that hold the shares of the French newspaper La Provence and a prestigious real estate property.

The Paris Court of Appeal was required to review “the relevance of the plan proposed [by the companies] to ensure their safeguard while repaying their creditors”.

The Court noted that although the companies challenged a significant portion of the claims declared by creditors, “a safeguard plan is not intended to solely stay payment of the claims during its term; it must set out the conditions of the progressive settlement of the liabilities within the statutory time limit. The restructuring plan must satisfy the test of serious probability of execution. It is therefore necessary to determine on a case-by-case basis whether the plan submitted to the Court is reasonably likely to be executed from its first due date to fall within a one year period, it being noted that it is not financed by any sale of assets”.

On the basis of the information provided to the Court, the Paris Court of Appeal concluded that “the prospects of execution of the plan” were not serious. It therefore reversed the judgments of the Paris Commercial Court and rejected the safeguard plans presented by the companies of the Tapie spouses.

3. In another case that received about the same media attention as the Tapie restructuring, two creditors of the company Sequana successfully challenged the company’s safeguard plan in the Versailles Court of Appeal (Versailles Court of Appeal, 18 September 2018, n°17/08963).

After ruling that BAT and BTI had standing to challenge the safeguard plans, the court stated that: “the safeguard plan must provide for the settlement of all declared claims, even if they are challenged, regardless of whether they are due and payable and the chances of success of the challenge raised by the debtor company”.

The restructuring plan approved by the Nanterre Commercial Court provided for the settlement of claims acknowledged in the safeguard proceedings (as opposed to all declared claims) over a ten-year period. The Versailles judges concluded that this plan did not meet “the legal requirements that a safeguard plan must provide for the settlement of all declared claims”. The court of appeal therefore reversed the judgment of the lower court and rejected Sequana’s safeguard plan.

Once neglected, this requirement that the restructuring plan must be credible and based on all declared claims will undoubtedly satisfy financial creditors.