Restrictions on security enforcement

As a consequence, creditors are de facto restricted from claiming under guarantees or enforcing their security during this period since, under French law, any enforcement of security requires (i) actual payment default of the debtor, and (ii) a formal notice (mise en demeure) served on the debtor. The effect of the new legislation is that creditors are prohibited from serving formal notice to debtors, and thus are restricted from enforcing their security until 24 July 2020. In practical terms and depending on the assets, security enforcement would be difficult to effect before 24 July 2020.

Insolvency Ordinance – company directors’ duty to file for insolvency

1. Company directors would not be required to request the opening of insolvency proceedings during the Moratorium Period, if the relevant company would not be considered to be in cessation of payments⁴ or to have financial difficulties that they are not likely to overcome⁵  due to the freeze of acceleration provisions during the Moratorium Period.

2. Specifically, the Insolvency Ordinance provides that the state of cessation of payments will be assessed based on the circumstances of the relevant debtor from 12 March 2020 until the expiry of a period of three months after the end of the health emergency period, namely, 24 August 2020  (the Insolvency Moratorium Period). Effectively, company directors will not be personally liable for a breach of their duty to file for insolvency if the financial condition of the relevant company has deteriorated commencing from 12 March 2020.

3. In addition, French law applicable to the backdating of the date of cessation of payments (i.e. the beginning of the période suspecte), as well as the possibility of invalidating preferences (nullités des periods suspectes), remain applicable but will be adjusted to take into account a later date (if any) of the occurrence of a cessation of payments.

4. For all ongoing proceedings, the Insolvency Ordinance extends the time limits for insolvency proceedings:

   i. Conciliation proceedings: the duration (four months, extendable by one month) is automatically extended to three months after the end of the health emergency period  (i.e. until 24 August 2020).

   ii. Safeguard/reorganisation plans: the plans adopted by the French Tribunal may be extended by the Président du Tribunal to the end of the health emergency period plus three months at the request of the commissaire à l’exécution du plan, or by up to a year at the request of the public prosecutor (ministère public).

5. The Insolvency Ordinance also introduces softer formalities, adapting the functioning of French courts during the period starting from 12 March 2020 and expiring one month after the end of the state of public health emergency. Other measures include a faster procedure for the wage guarantee scheme applicable to the debtors, and more flexible rules applicable before the bankruptcy courts.

According to the French Government, the measures in the Insolvency Ordinance aim to enable businesses to benefit from ‘pre-insolvency’ preventive proceedings, such as conciliation and safeguard (sauvegarde), during the Insolvency Moratorium Period, even if their situation deteriorated after 12 March 12 2020.

The French Government also published measures applicable to companies to enable them to cope with the emergency situation (e.g. companies are allowed to hold general meetings without the presence of shareholders, the mandatory period to approve financial statements have been extended by three months, etc.).

1. Namely, from 12 March 2020 to and including one month after the end of the health emergency period. The French State declared a two-month health emergency period ending on 24 May 2020, therefore, the moratorium is currently scheduled to last from 12 March 2020 to 24 June 2020.
2. Article 4 of the Moratorium Ordinance provides that acceleration or termination provisions contained in existing credit agreements, liquidated damages clauses and penalties for late performance (astreintes) that would otherwise have taken effect in respect of any breach of an obligation of the debtor are deemed suspended until the end of the Moratorium Period.
3. There is some divergence in the interpretation of Article 4, al 2 of the legislation, as to whether this applies up to 24 June 2020 or up to 24 July 2020 (it is expressed to apply until one month after ‘the period in Article 1’ of the Moratorium Ordinance, namely, 24 July 2020).
4. Cash flow test to open a redressement judiciaire.
5. Test to open a sauvegarde.

Client Alert 2020-195