Implemented by an order dated 12 March 2014, French pre-pack proceedings were created either to impose the execution of a turnaround plan drafted before any insolvency proceedings can be opened or to prepare for the sale of a company in difficulty. The proceedings are segmented into two phases: an amicable confidential phase followed by a judicial and public phase. Despite their efficiency, such pre-pack plans are not numerous in France due to the success rate of amicable restructurings. The new rules contained within Title IV of the draft Directive dated 7 December 2022 published by the European Commission should not disrupt the French legal landscape on this topic.
1. The pre-pack plan: breaking free from consensualism
The implementation of the pre-pack plan is preceded by an amicable phase (mandat ad hoc or conciliation, two French amicable procedures) during which a turnaround plan (e.g. debt waive-off or standstill, new contribution of money in debt or capital, etc.) is prepared. In fact, the French system encourages addressing financial difficulties at an early stage. French amicable proceedings are governed by consensualism and some stakeholders may refuse to agree to execute the draft agreement. Thus, if the debtor is confident that its plan will be adopted (particularly regarding principles set out in the Directive (EU) 2019/1023 of the European Parliament and of the Council dated 20 June 2019 and transposed into French law by an order dated 15 September 2021), it can request the Commercial Court to open French insolvency proceedings and have the plan previously negotiated adopted by the same Court in order to overcome the refusals of the dissenting signatories. Indeed, the rules allowing the adoption of the plan within a French insolvency proceeding do not require the unanimous agreement of the affected parties.
There is a special French procedure for this purpose (sauvegarde accélérée), which carries the precondition that an agreement must have been reached with creditors whereby the agreement can be adopted within the context of the French insolvency proceedings pursuant to the voting rules applicable to classes of affected parties.
The new concepts introduced into French law by the transposition of Directive n°2019/1023 allow practitioners to be ingenious in anticipating, during the out-of-court phase, a segmentation of creditors into different classes of affected parties, according to a scheme that would secure the adoption of the plan by a Commercial Court if the majority rules are applicable. Such maneuvers are often detrimental to creditors who are least protected by the best-interest-of-creditors test.
2. The “pre-pack cession”: fast and efficient
Similar to the pre-pack plan, the sale of a business as a going concern can be anticipated and prepared within a secure amicable framework before being implemented within the framework of a French insolvency proceeding.
In this particular context, the insolvency practitioner appointed by the President of the Commercial Court to monitor the out-of-court proceedings prepares the conditions of the assignment with one or more identified bidders, usually with the assistance of an investment bank or M&A advisor. The bidders carry out their due diligence quickly and provide the monitor with their offer to take over the company's assets and activities, which complies with the rules applicable in the framework of a French insolvency proceedings.
The advantage lies in the confidentiality associated with the search for buyers. At this stage, the debtor is not in public insolvency proceedings, which makes it possible to preserve the value of its assets and avoid the deleterious effects of the opening of insolvency proceedings.
The offer must meet all the criteria listed in the law (e.g. it must be valid, list the cherry-picked assets, the jobs taken over). There is genuine preparation for a judicial sale.
So, in general terms, French law has already incorporated many of the new features proposed by the draft Directive dated 7 December 2022 (i.e. segmentation into two phases, appointment of an insolvency practitioner, assignment of the assets/activities, etc.). Specific points will still need to be clarified from a French law perspective. Examples include the need to demonstrate that the search for a buyer during the amicable phase was transparent, which is already a point of contention in France, even though the procedure is confidential, or whether the status of the buyer is "closely related to the debtor" since French law restricts the rights of specific parties close to the debtor to acquire its activity.
For more information on pre-pack procedures in France, contact your CMS client partner or these CMS experts: Guillaume Boute and Leo Gironde
This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.