Procédure de sauvegarde financière accélérée (SFA) and procédure de
sauvegarde accélérée (SA)
Universiteit van Amsterdam
Masterscriptie Master privaatrecht: Commerciële Rechtspraktijk
Student: Guillaume Creijghton
Student nummer: 5933161
Begeleider: dhr. dr. drs. R.J. de Weijs
Table of contents
1 INTRODUCTION
4
2 WHY IS THERE A NEED FOR A RESTRUCTURING PROCEDURE CONCENTRATED ON
THE SHAREHOLDERS AND FINANCIAL CREDITORS (NOT AFFECTING TRADE
CREDITORS)?
5
2.1
T
HE NEED FOR RESTRUCTURING PROCEDURES IN GENERAL5
2.1.1
S
URPLUS VALUE OF GOING CONCERN6
2.1.2
C
OUNTERING HOLD OUT6
2.2
T
HE NEED FOR RESTRUCTURING PROCEDURES FOR LEVERAGED COMPANIES(LBO
S)
INPARTICULAR
6
2.2.1
T
HE BASIC STRUCTURE OF THELBO
7
2.2.2
S
HAREHOLDERS8
2.2.3
F
INANCIAL CREDITORS9
2.2.4
N
ON-
ADJUSTING CREDITORS10
2.2.5
D
IFFERENCE LIQUIDATION AND RESTRUCTURING11
2.2.6
D
EBT FOR EQUITY SWAPS11
3 RESTRUCTURING UNDER CHAPTER 11
12
3.1.1
C
ONFIRMATION ANDC
RAM DOWN:
12
3.1.2
A
BSOLUTE PRIORITY RULE AND BEST INTEREST TEST13
4 RESTRUCTURING PROCEDURES IN FRANCE
16
4.1
A
VAILABLE PROCEDURES INF
RANCE16
4.2
T
HE NOTION OF CESSATION OF PAYMENTS17
4.3
T
HE‘
PROCÉDURE DE SAUVEGARDE’
17
4.3.1
G
ENERAL17
4.3.2
T
HE COMMENCEMENT OF THE SAFEGUARD PROCEDURE18
4.3.3
T
HE SUBJECT MATTER OF THE SAUVEGARDE PLAN;
19
4.3.4
W
HO CAN PROPOSE A PLAN?
19
4.3.5
E
FFECTS OF THE OPENING:
M
ORATORIUM20
4.3.6
C
REDITOR COMMITTEES20
4.3.7
M
AJORITY REQUIREMENTS20
4.3.8
C
RAM DOWN21
4.4
S
AUVEGARDE FINANCIÈRE ACCÉLÉRÉ AND SAUVEGARDE ACCÉLÉRÉE21
4.4.1
T
HE SAUVEGARDE FINANCIÈRE ACCÉLÉRÉE(
SINCE2011):
21
4.4.2
S
AUVEGARDE ACCÉLÉRÉE(
SINCE2014)
21
4.4.3
T
HE OPENING CONDITIONS22
4.4.4
W
HO MAY FILE A PLAN24
4.4.5
C
OLLECTIVE DISCIPLINE:
THE PÉRIODE D’
OBSERVATION AND THE FILING AND ALLOWANCE OFCLAIMS
24
4.4.6
C
ONTENT OF ASA
ORSFA
RESTRUCTURING PLAN:
NO‘
PLAN IMPOSÉ’
26
4.4.7
D
IVISION OF CREDITORS AND SHAREHOLDERS INTO CLASSES,
VOTING ENTITLEMENTS ANDMAJORITIES
27
4.4.8
P
OSITION OF SHAREHOLDERS:
D
EBT FOR EQUITY SWAP POSSIBLE AGAINST THE WILL OF5 CRITICAL ANALYSIS OF THE SA AND SFA
32
5.1.1
T
HE RESTRUCTURING OF VIABLELBO
S IN FINANCIAL DIFFICULTIES.
32
5.1.2
B
ALANCING DEBTOR-
CREDITOR AND CREDITOR-
CREDITOR INTERESTS32
6 CONCLUSION
37
About $86 billion of LBO debt is due to mature between 2012 and 2016 in France, 15% percent of Europe’s total LBO wall of debt of $550.1Restructuring attempts of big LBO companies, who incurred high amounts of debt at the
peak of the pre-financial crisis LBO boom, but as a result of the financial crisis, are not able to meet their obligations, regularly hit the economy sections of the French newspapers. For example, on the 1st of August 2014, the Paris Commercial Court approved an unanimous amicable agreement between the French retailer Vivarte and 116 lenders to reduce its €2.8 billion of LBO debt to €800 million. Its debt will be converted into equity and quasi-equity instruments, which quasi-equity will be acquired by private quasi-equity investors taking a majority stake in the company.2 In 2013, LBO lenders of the water company SAUR agreed a debt write down of €900 million from a
total debt of €1.8 billion, in return for a 45% equity stake in the company.3
A restructuring requires creditors to accept a haircut on their claims and, sometimes, shareholders to accept their stake to be diluted. Small minorities of claimholders, who are not willing to participate in the restructuring, often block amicable out-of-court restructuring deals that require unanimous consent. This ‘hold out’ behavior exposes debtors to lengthy and costly court proceedings that are detrimental to the operations of the company and enlarge the risk of the company going into insolvent liquidation. Therefore, in 2011, the French legislator introduced a fast-track version of the sauvegarde, a restructuring procedure modeled after the United States’ Chapter 11, aimed at overruling dissenting creditors for the approval of a pre-negotiated amicable restructuring plan agreed between and affecting only financial creditors; the sauvegarde financière accélérée. On the 1st of July 2014, a more general version of the fast-track sauvegarde that includes the main suppliers of the debtor, the
sauvegarde accélérée, came into force.
The need for restructuring procedures that enable the effective and fast deleveraging of companies through plans approved by and affecting certain creditors only, without affecting the operational part of the company, has also been stressed by the European Commission in its ‘Recommendation of 12 March 2014 on a new approach to business failure and insolvency’.4 A Dutch proposal for a preventive out-of-court procedure aimed at the
restructuring of liabilities, modeled after Chapter 11 and the English Scheme of Arrangement, has been published for consultation on 14th of August 2014.5
In this paper I first address the question why restructuring procedures should particularly target the shareholders and financial creditors of an overleveraged company, by focusing on the Leveraged Buyout (‘LBO’). I focus particularly on the (insolvency) risks of the structure, the interests involved of the different stakeholders and their incentives to participate in a restructuring. I argue that leveraged finance externalizes risk onto non-adjusting
1 According to a 2012 report by Linklaters: Off piste. Negotiating Europe’s LBO debt mountain, available at
www.linklaters.com/wallofdebt.
2 Le groupe d’habillement Vivarte passe aux mains de ses créanciers, www.lexpansion.lexpress.fr (31 july 2014). 3 Michael Stothard,France’s Saur secures debt restructuring deal, Financial Times (www.ft.com), July 2, 2013.
4 See recital 12 and recommendation at §20 in particular; Commission Recommendation of 12.03.2014 on a new approach to business
failure and insolvency,C(2014) 1500 final.
5 Draft law ‘Voorstel van Wet, Wet Continuïteit Ondernemingen ii’ and Explanatory Memorandum ‘Memorie van Toelichting, Wet
Continuïteit Ondernemingen ii’ are available at: http://www.rijksoverheid.nl/documenten-en-publicaties/kamerstukken/2014/08/14/wetsvoorstel-wet-continuiteit-ondernemingen-ii.html and
http://www.rijksoverheid.nl/documenten-en-publicaties/kamerstukken/2014/08/14/memorie-van-toelichting-wet-continuiteit-ondernemingen-ii.html.
creditors. Shareholders and financial creditors, who benefit from the leverage, and anticipate its risks through their remuneration, carry this risk in insolvency and therefore should give in without affecting non-adjusting to prevent insolvency. A restructuring procedure should therefore 1) enable a restructuring without affecting non-adjusting creditors, 2) reflect the priority ranking between equity (like) claimholders and creditors, and 3) reflect the subordination agreements among themselves.
Since Chapter 11 has been the main source of inspiration for the sauvegarde, I treat the main features of Chapter 11’s restructuring as a benchmark against which to compare the sauvegarde financière accélérée (SFA) and recently introduced sauvegarde accélérée (SA), which procedures are elaborated more extensively.
Chapter 11 owes it fame in particular to the classification of different claimholders in separate classes and the possibility to “cram down” (classes of) dissenting claimholders, if the restructuring plan or procedure reflects the priority ranking between the claimholders (absolute priority rule) and if they are not worse of than in a distribution scenario (best interest test). Therefore, under Chapter 11, huge debt write-downs by converting of debt into equity can more easily be forced on dissenting shareholders, who normally have to approve modifications in capital structure.
Closer scrutiny of the French SFA and SA reveals that these procedures, although moving in the right direction, have some flaws concerning precisely the way of claimholders classification, the way in which the restructuring plan or procedure reflects the priority ranking between the claimholders and the possibility to force a conversion of debt into equity on non-approving shareholders.
2 Why is there a need for a restructuring procedure concentrated
on the shareholders and financial creditors (not affecting trade
creditors)?
2.1 The need for restructuring procedures in general
The reason why we have insolvency procedures in our legal systems is basically to preserve value what companies have been generated thanks to corporate law. Corporate law facilitates the creation of value by enabling the company to incur liabilities to finance its operations with the prospect that these operations, through the allocation of control, goods and human capital, will create surplus value for its shareholders. Limited liability makes that the liabilities incurred by the company are assumed through its own assets, not by that of its shareholders, which enables the shareholders to use their assets to create surplus value elsewhere. The company can somehow be assimilated to its capital, which consists of assets and liabilities.6
6 Reygrobellet, Arnaud, Essai sur le concept juridique d’endettement des entreprises à propos et au-delà d’une recherché du CREDA,
Revue trimestrielle de droit commercial et de droit économique, 2001, p. 301.
2.1.1 Surplus value of going concern
When a company does not meet its liabilities, creditors can collect their debt on the company’s assets. When a company becomes insolvent, meaning that it has not enough assets to meet all its liabilities and ceases to pay its creditors, it’s likely that creditors take a race to the debtor’s assets to cover their own claim, with the result that the overall value that the assets represent, through their allocation in the corporate entity, is destroyed, and that some creditors get nothing. A collective and orderly liquidation procedure is likely to destroy less value than a piecemeal liquidation. Also, since the operations of the company generate value, the continuation of these operations (going concern) is also likely to produce more value for the creditors, than liquidation.7 The justification of the procedure
lies in the surplus value of going concern over liquidation value for the creditors and does not require the preservation of the corporate entity, which would indeed be dissolved in a liquidation scenario. Since insolvency itself involves costs for the company and for its creditors (referred to as the costs of financial distress), they have a common interest to anticipate the situation that the company ceases to pay its bills and enters insolvency. This becomes especially true if the financial difficulties that the company encounters are a result of the financial structure of the company and the viability of its operations is not the main problem. If the operations of the company are not viable, the surplus value of going concern argument does not apply.8
2.1.2 Countering hold out
A pre-insolvency restructuring procedure is meant to restore the unbalance between assets and liabilities by reducing liabilities, which asks from creditors a dilution of their claims, again, justified by the fact that they get a higher return on their investment than in a liquidation scenario. But here, instead of a race to the debtor’s assets, referred to as an incentive created by a common pool problem, there is an incentive for creditors not to give in on their rights and to benefit from the restructuring efforts of others, which can be seen as an anti-commons agency problem.9 By holding out they try to create value for themselves at the expense of others, what is referred to as
“nuisance value”.10 Restructuring procedures deal with that problem by forcing creditors into negotiations and let
them vote on a plan providing for reducing liabilities, with the consequence that a majority of creditors can overrule dissenting minorities, referred to as “cram down”.
2.2 The need for restructuring procedures for leveraged companies (LBOs) in
particular
When the imminent insolvency is the result of a severely overleveraged financial structure of the company, there are grounds to ask a more extensive contribution to the restructuring of the company from the shareholders and
7 Jackson, Thomas, The Logic and Limits of Bankruptcy Law, Cambridge: Harvard University Press 1986,p. 14.
8 Viable simply means that the company’s assets (incuding human capital) are more worth together than sold separately, thereby
susceptible to create surplus value (to be profitable) by generating (future) cash flows; see Vermeille, François, Le “feuilleton Technicolor”: et si rien n’était vraiment réglé ?: JCP E n40, 2012, 1582 supra note 11.
9See: de Weijs, Roelf Jakob,Harmonisation of European Insolvency Law and the Need to Tackle Two Common Problems: Common
Pool & Anticommons (October 19, 2011). Amsterdam Law School Research Paper No. 2011-44; Centre for the Study of European Contract Law Working Paper Series No. 2011-16. Available at SSRN: http://ssrn.com/abstract=1950100
10 Waisman, S, Mallon, Christopher, The Law and Practice of Restructuring in the UK and US, 2011, § 11.3.5.
those creditors who deliberately financed the leveraged structure, and to provide normal trade creditors with a better treatment.11 Shareholders can contribute by investing new capital or by increasing capital through other
means, such as by cooperating to a conversion of debt into equity. The justification for a subordinated treatment of shareholders and financial creditors is that by overleveraging the company, they externalize risk and costs onto non-adjusting creditors, risks and costs that they should bear themselves. Legal systems should provide in a restructuring mechanism in which only their rights can be impaired without impairing the rights of other creditors.
2.2.1 The basic structure of the LBO
The leveraged buyout can be defined as the acquisition of a company in which the purchase is leveraged through loan financing rather than being paid for entirely with equity funding.12 For that purpose the buyers set up an
acquisitions holding. The purchase price paid by the holding to the old shareholders for their shares in the purchased company, the target, is financed for the biggest part with bank loans (secured by the assets of the target), the remainder is financed with high yield debt, mezzanine debt and private equity.13 The idea behind the
transaction is that the acquisition debt is serviced by the cash flows from the operations of the target. The strategy is to make the operations as profitable as possible (e.g. by cutbacks on long term investments) to pay off the acquisition debt and to enrich the new shareholders with the surplus value. The operational company is to be sold with profit within 3 to 5 years through an IPO, to a strategic buyer or to another LBO fund.14 In France however, the
prohibition on financial assistance prevents that the target directly incurs the acquisition debt and it should thus be incurred by the holding.15 This prohibition can be bypassed through the use of a debt-push-down mechanism
consisting of passing on the acquisition debt to the target by granting the target intragroup loans, which is however not entirely without risk either.16 The effect for the target is the same; it gets severely indebted.
2.2.1.1 Benefits
The overall structure has various beneficial effects resulting from leverage. Most important, the financial leverage increases the return on investment of equity when the costs of borrowing are low. If the shareholder borrows at a fixed rate to make an investment whose rate of return exceeds the borrowing costs, this results in higher earning per invested equity, and thus increases earnings per share.17 A relevant factor is that interest on debt is generally
11 de Weijs, Roelf Jakob, Harmonisation of European Insolvency Law and the Need to Tackle Two Common Problems: Common Pool &
Anticommons (October 19, 2011).
12 Ablum, Tom, Leveraged Buyouts: The Ever Changing Landscape. LePaul Law Review.
13 Eckbo, B. Espen and Thorburn, Karin S., Corporate Restructuring (May 8, 2013). Available on the internet at SSRN:
http://ssrn.com/abstract=2272970.
14 Eckbo, B. Espen and Thorburn, Karin S., Corporate Restructuring: Breakups and LBOs. HANDBOOK OF CORPORATE FINANCE:
EMPIRICAL CORPORATE FINANCE, Vol. 2, Chapter 16, pp. 431-496, B. E. Eckbo, ed., Elsevier/North-Holland Handbook of Finance Series, 2008; Tuck School of Business Working Paper No. 2008-49. Available at SSRN: http://ssrn.com/abstract=1133153
15Article 225-116 Code de Commerce (hereafter C. Com.).
16 Vermeille, Sophie and Bardasi, Saliha, L'interet de l'analyse economique du droit dans le traitement du surendettement des societes
sous LBO, Droit & Croissance / Rules for Growth available at http://droitetcroissance.fr/wp-content/uploads/2014/03/DroitCroissance-LBO.pdfSee about the risks of cash pooling and management fees contracts: Bertrel, Marina, L'activation de la holding de reprise dans un LBO, RTDF 4 – 2011.
17See for a worked example: de Weijs, Roelf Jakob, A Basic Introduction to Balance Sheet and Solvency Analyses (February 20, 2014).
Centre for the Study of European Contract Law Working Paper Series No. 02; Amsterdam Law School Research Paper No. 2014-14. Available at SSRN: http://ssrn.com/abstract=2398922 or http://dx.doi.org/10.2139/ssrn.2398922.
tax deductible, whereas dividends on shares are not.18 The stake in capital can also be inflated through the use of
holding structure(s), since taking control of a company requires only acquiring half the shares, thereby reducing the cost of investment by half.19 Another benefit of the LBO structure is that the interests of the managers of the
target are aligned with those of the shareholders by granting them an equity stake, thus they benefit personally if they do what shareholder tell them to do, for example by increasing the leverage ratio. Shareholder/manager agency costs are thus low. Also, the high level of debt would increase monitoring from the lenders of the acquisitions debt, which monitoring would have a disciplining effect on the management, known as the ‘control function of debt’.20
2.2.1.2 Risks
Leverage increases risk for creditors, since the increase of the leverage ratio implies a decrease of the solvency ratio. As dividends on shares are not a fixed income but are variable on economic circumstances, big losses can be made when return on investment drops below the costs of borrowing. For example, if interests increase, the costs of borrowing can be much higher than expected.21 The structure entails a higher risk of insolvency, and
when times are bad, it entails high financial distress costs that reduce the value of the company. In the event of insolvency, the unsecured creditors’ returning rate is heavily diluted due to the high amount of (secured) debt that has been invested instead of equity. Unsecured creditors involuntarily subsidize leveraged buyouts since the seller’s equity interest, which is subordinated to the creditors’ claims, is replaced with secured debt.22
Shareholders lose no more than the small amount of equity they invested. Leveraged finance thus externalizes the risk of insolvency and the costs of financial distress onto creditors. As a result of a LBO, claims of pre-LBO creditors are less worth on secondary loan markets23.
When an already overleveraged company enters the “vicinity of insolvency”, shareholders have no incentives to raise new capital, even if this would be beneficial for the value of the company. When there is an imminent risk of insolvency, any capital investment would involve a transfer of value to creditors in the case of a subsequent insolvency, since shareholders, as residual claimants, get nothing in an insolvency scenario.24 A company with a
leveraged financial structure is thus likely to have a bigger shareholder/creditor agency problem.25
2.2.2 Shareholders
Equity shareholders have a variable claim on the company, what they get is conditional on the profitability of the company. In exchange for the risk that they lose their investment they can exert influence on the enterprise
18MacNeil, Ian G., An Introduction to the Law on Financial Investment, Oxford; Hart (2012), p. 249. 19Cozian, Maurice, Viandier, Alain, Deboissy, Florence, Droit des Sociétés, Paris: LexisNexis (2013), 1525.
20Jensen, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers, American Economic Review, 76 (2), May, 323-9 21Cf. Market Disruption Clauses
22 Ginsberg, John Holland and Burgess, Mary and Czerwonka, Daniel Richard and Caldwell, Zachary Richard, Befuddlement Betwixt
Two Fulcrums: Calibrating the Scales of Justice to Ascertain Fraudulent Transfers in Leveraged Buyouts (January 1, 2010). American Bankruptcy Institute Law Review, Spring 2011. Available at SSRN: http://ssrn.com/abstract=1598922.
23 Kraakman, et al., The Anatomy of Corporate Law: A comparative and Functional Approach, Oxford Second Edition, p. 117. 24 Idem. This is known as the debt overhang problem, see Meyers, Stewart C., Determinants of Corporate Borrowing, 5 Journal of
Financial Economics, 147 (1977).
25See more extensively on the shareholder/creditor agency problem, Rock, B., Adapting to the New Shareholder-Centric Reality (2013), Faculty Scholarship. Paper 457. A vailable at : http://scholarship.law.upenn.edu/faculty_scholarship/457.
through their vote in the shareholders’ assembly. There may be an internal ranking between shareholders with regard to rights to equity or voting rights. On dissolution of the company, when its assets are sold, they get what is left after all creditors are paid. They are so-called “residual claimants”. They’re always better off if the company can be continued or be sold than to let it go into liquidation. They benefit from a leveraged structure, and in bad times, they have rather an incentive to increase that leverage ratio, by the issuance of more debt, hoping that it cures the financial difficulties, than to decrease it by raising capital. Creditors absorb raised capital in a subsequent insolvency, and welcoming new capital would dilute the shareholders’ stake if the company continues after a restructuring. Indeed, when shareholders are already “out of the money”, they have an incentive to take even more risk.26
The possibilities for shareholders to extract value from the company through dividends however are not endless. There are restrictions on dividend distributions, their transactions could be subject to fraudulent conveyance law and they could even face liability actions (corporate veil piercing).27 Whereas these risks present
themselves mainly if the company is already insolvent, as a result of the efforts of a bankruptcy trustee representing creditors to enhance the value of their claims, they may form an incentive for shareholders to prevent going into insolvency and to collaborate with the restructuring.
2.2.3 Financial creditors
Financial creditors who finance a LBO are sophisticated and repeat players; they are familiar with leveraged finance and know what their rights are in case of insolvency. Extending debt is their core business.
2.2.3.1 Loan covenants
Financial creditors rely on loan covenants to monitor the debtor and to anticipate its financial difficulties. They survey the financial position of the debtor by obliging him to communicate leverage ratios, equity ratios and cash flow ratios (reporting covenants). Financial documentation contains prohibitions on dividend distributions if certain ratios are not met, and negative (pledge) covenants prohibit or restrict the debtor to incur more debt (or to grant more security) in order to prevent a dilution of the creditor’s claim (or its security interests covering that claim). The breach of certain covenants may be a reason under the contract for earlier repayment.28
Covenants would have a positive effect on the restructuring of a company, as they would force the management to restructure the liabilities. They would thus realign the interests of creditors (not only financial ones) and shareholders, to avoid the costs of financial distress.29 When covenants are breached, the situation forces
26 See, de Weijs, Roelf Jakob, Nieuwe regels omtrent aandeelhoudersleningen: tussen afdwingbaarheid en onrechtmatigheid in
(Regulating Shareholder Loans) (January 20, 2014). Centre for the Study of European Contract Law Working Paper Series No. 2014-01; Amsterdam Law School Research Paper No. 2014-03, § 4.4. Available at SSRN: http://ssrn.com/abstract=2381969, see also, Rock, B., Adapting to the New Shareholder-Centric Reality (2013), Faculty Scholarship. Paper 457, p. 1937, A vailable at :
http://scholarship.law.upenn.edu/faculty_scholarship/457.
27In France there is the “confusion de patrimoines” and “l’action en responsabilité pour insuffisance d’actif”.
28 Vermeille, S. Bourgueil, R. Bezert, A. L’affaire Belvédère ou les effets contre-productifs du droit français des entreprises en difficulté –
Plaidoyer pour une réforme ambitieuse, RTDF n°3, 2013.
29 Vermeille, Sophie and Bardasi, Saliha, L'interet de l'analyse economique du droit dans le traitement du surendettement des societes
sous LBO, Droit & Croissance / Rules for Growth available at http://droitetcroissance.fr/wp-content/uploads/2014/03/DroitCroissance-LBO.pdf
debtor and creditors into negotiations.30 Primarily, the interest of the financial creditors is to exert control on the
debtor (through the use of covenants) in such a way that the debtor does the necessary to service its debt and to prevent its insolvency. Second, if insolvency is inevitable, financial creditors have a common interest to give in on their rights according to the priority ranking they anticipated on, to facilitate the continuation of the company through a restructuring.
2.2.3.2 Priority ranking
One of the core principles of insolvency law is the pari passu principle, which prescribes that all creditors are collectively bound by the insolvency regime to prevent the destruction of firm value. Some creditors, such as secured creditors in some jurisdictions, are an exception to this rule, since they may have the right to cover their claims on the assets of the debtor as if there were no insolvency. Another principle prescribes the pro rata distribution of the proceeds of the dissolved or sold company, meaning that each claimant should be paid according to the amount of their claims. Exceptions to pro rata distribution are priorities following from law or out of inter-creditor subordination agreements, having as a result that creditors (seniors) get paid before other creditors (juniors) get anything. A claim is subordinated when its payment is conditional on the full or partial payment of claims with a higher ranking.
Claims that have a priority ranking prescribed by law or are subordinated by law, mostly have this rank for policy reasons. Contractually agreed subordination of a claim and consequently, the higher risk to get nothing in the event of insolvency, is economically justified by the higher remuneration the creditors get in compensation for that risk. Financial creditors anticipate this subordinated ranking for example by diversifying their investments.31
The LBO debt is often financed by senior secured bank debt, secured by the assets of the target company, or by the shareholdings of the holding in the target.32 Subordinated to bank debt is high yield debt and mezzanine
debt, which is often issued through bonds and which consists of different tranches of seniority; e.g. super subordinated bonds or debt entitlements convertible into equity.
2.2.4 Non-adjusting creditors
Some creditors cannot adjust the claims they have on a debtor to its specific circumstances and thus cannot protect themselves against its risky leveraged profile. They have to rely on creditor protection given by law. We can think of employees, trade creditors, the tax authorities, pre-payers (consumers), and tort creditors. The costs of monitoring or bargaining are too high for them, or they can simply not choose their debtor (e.g. public creditors and tort creditors). Creditor protection given by law consists mainly of capital rules, rules on dividend distributions, and through providing in individual or collective debt collection. When insolvency is imminent, capital rules and rules on distributions do not effectively protect these creditors. A reason to not force them to give in on their rights in a restructuring is because the enterprise is considered viable. If we consider insolvency as a last resort for companies whose operations are unviable, we need a collective procedure to coordinate between all creditors without discriminating between creditors. However, when liabilities are coming predominantly from financial
30 Vermeille, François, Le „feuilleton Technicolor“ : et si rien n’était vraiment réglé ?: JCP E n40, 2012, 1582.
31Mokal, Contractarianism, contractualism, and the law of corporate insolvency, Singapore Journal of Legal Studies (2007). 32In large LBOs, debt is often syndicated and secured by the shares in the target, facilitating the takeover if the debtor defaults.
creditors due to the acquisition debt, and the debtor’s assets, which should serve as the creditors’ common gauge, are entirely pledged to secure that debt (which can be seen as a unconsented subordination of the ex ante LBO creditors), there should be a restructuring procedure that leaves non-adjusting creditors unimpaired.33
2.2.5 Difference liquidation and restructuring
Shareholders know beforehand that they lose their stake in the company upon liquidation, when the proceeds of the assets are distributed to all claimholders according to their priority ranking. Financial creditors, who can adjust the terms of their loans, accept ab initio to absorb losses before other creditors according to their ranking upon liquidation or in conditions they contractually agreed on. Since in liquidation after insolvency there are not enough assets to pay out all the claimholders, most subordinated claimholders get nothing. A restructuring procedure does not involve the dismantling of the debtor, the allocated assets are kept together and secured creditors may be bound by an automatic stay upon opening of the procedure preventing them to exercise their rights. The justification to let the company survive is that creditors get a smaller haircut on their claim than in insolvent liquidation. The question however is how to treat claimholders whose claims at the moment of opening of the procedure do not represent any economic value. Should they have a vote at all on the approval of a restructuring plan? And may a plan provide in a dismemberment of those claimholders? In other words, the question is if the priority ranking in a liquidation scenario should determine the making and the content of a restructuring plan.
A restructuring procedure should account for both the legal and contractual ranking between shareholders and between creditors, as for the economic value of the claims involved. This can be done at two stages, at the stage of determining whether a claimholder can vote and at determining whether a claimholder can be crammed down.
At voting stage one can subject eligibility to vote to the question whether the claimholder is affected by the plan. Claims that do not represent any value can be considered not to be impaired. Claimholders with different ranking can be put in separated classes and subordination can be reflected in weighted voting. Before going into the French sauvegarde, a closer look is given to the United States’ Chapter 11 of the Bankruptcy Code on which the French sauvegarde has been modeled, and how Chapter 11 deals with these issues.34
2.2.6 Debt for equity swaps
Since failure of a LBO is necessarily the result of an unhealthy balance between debt and equity an appropriate measure to cure that unbalance is by converting debt into equity. Through the use of a debt for equity swap a distressed company’s balance sheet can significantly be deleveraged. Becoming a shareholder of a company is actually a scenario on which lot of LBO lenders anticipate, especially subordinated creditors.35 In complex financial
33 See on how secured debt transfers value from unvoluntary creditors to financial creditors: Vermeille, Sophie and Bézert, Adrien,
Breaking the Deadlock through Law & Economics: How Can We Reconcile the Effectiveness of the French Law of Security Interests with French Insolvency Law? (May 19, 2014). Available at SSRN: http://ssrn.com/abstract=2438697
34 Montéran et Mieulle, De la pratique du plan de sauvegarde pré-négocié à la procédure de sauvegarde financière accélérée, Journ.
sociétés, nov 2010, 36.
35Henrot, Financement LBO et Entreprises en difficulté
,
Revue de Droit bancaire et financier n° 3, Mai 2008, dossier 20.structures, such as LBOs, tranches of debt are held by sophisticated financial actors like hedge funds who buy claims on the debtor on the secondary market in view of becoming a creditor at fulcrum level.36
3 Restructuring under Chapter 11
The procedure referred to as the ‘prepack’ is a restructuring procedure written down in Chapter 11 of the U.S. Bankruptcy Code and is therefore referred to as a bankruptcy procedure, but the insolvency of the company is no pre-requisite for entering a Chapter 11 procedure. Prepack refers to the plan containing either a reorganization or a sale of viable parts of the business having been pre-negotiated in a informal setting before being subject to a formal procedure.37 Usually the debtor takes the initiative for a plan and stays in control of the company which
element is referred to as ‘debtor in possession’. The debtor has 120 days exclusivity to file a plan and 180 days to get the plan accepted.38 Filing a plan under Chapter 11 triggers the entry into force of an automatic stay on
individual enforcement actions.39 The automatic stay suspends the debtor’s payment obligations to creditors40; it
prevents creditors from enforcing ipso facto clauses.41
Before being communicated among claimholders the plan is subject to court approval. The plan should contain a classification of claims (and creditors) and should mention which claims or interests are impaired42.
Claimholders vote in separate committees classified according to the similarity of the claims or interests involved.43 Per class, at least two-thirds in amount of claims and more than one-half in number should vote in favor
of the plan.44 One can only vote if one’s right is impaired under the plan.45 After voting the plan is submitted to the
court for final approval.46
3.1.1 Confirmation and Cram down:
The conditions on which a court can confirm a plan, thereby permitting that dissenting creditors within classes, and dissenting classes as such, can be overruled, or ‘crammed down’, are set in 11 U.S.C. §1129.
The court confirms the plan voted on if the conditions of §1129 are met. The most important conditions are: - That the plan has been made in good faith;47
- That at least one class whose rights is impaired and who is not an insider accepted the plan48
36Kamensky, FURTHERING THE GOALS OF CHAPTER11: CONSIDERING THE POSITIVE ROLE OF HEDGE FUNDS IN THE
REORGANIZATION PROCESS, 22 Am. Bankr. Inst. L. Rev. 235 (Winter 2014).
37 Besse, Antonin, Morelli, Nicolas, Le prepackaged plan à la française pour une saine utilisation de la procedure de sauvegarde, La
semaine Juridique – Entreprise et affaires, 18 juin 2009. Jol, J., Gedwongen medewerking aan de debt for equity swap, een (on)mogelijkheid? Supra note 37, available at www.legalhoudini.nl.
38 11 U.S.C. §1121 (b) and (d). 39 11 U.S.C. §362 40 11 U.S.C. §362 (a). 41 11 U.S.C. § 365 (e) 1. 42 11 U.S.C. § 1123 (a). 43 11 U.S.C. §1122 (a). 44 11 U.S.C. §1126 (c). 4511 U.S.C. §1126 (f). 46 11 U.S.C. §1128. 47 11 U.S.C. §1129 (a)(3).
- That the plan is feasible;49
- That the plan does not “discriminate unfairly” and is “fair and equitable” with respect to dissenting classes whose rights are impaired or who didn’t vote on the plan (they are considered to dissent) and thus are “crammed down;50
- That claimholders that voted against the plan receive not less than the amount they would receive if the debtor were liquidated (best interest test);51
- That with respect to an impaired class of unsecured creditors the holder of any interest that is junior to the claims of such class will not receive any distributions under the plan; thus junior creditors get nothing as long as senior creditors are not paid in full, but senior creditors cannot get more than 100% of their claim if dissenting junior classes get nothing (absolute priority rule).52
The best interest test and absolute priority rule impose on the restructuring, the ranking of priorities that would apply in an insolvency scenario. In contrast to the e.g. the English scheme of arrangement, the value of the reorganized debtor under Chapter 11 is determined on a going concern and not on a liquidation basis.53 The cram
down procedure however does not preclude the wipe out of shareholders or most junior claimholders, in contrast to the scheme of arrangement a whole class may be crammed down. This means that a debt for equity conversion can be obtained without the shareholders’ approval. Chapter 11 foresees explicitly in a debt for equity swap as the subject matter of a plan.54 This feature of Chapter 11 has led to the development of a distressed debt investors
market. Distressed debt investors acquire debt on a so-called fulcrum security level meaning that their stake will be ‘in the money’ and try to acquire sufficient control to direct the company towards Chapter 11 proceedings enabling them to cram down the classes that are ‘out of the money’.55
3.1.2 Absolute priority rule and best interest test
Two guidelines for assessing a plans’ fairness for court confirmation are particularly relevant for the restructuring of LBOs, and other leveraged structures; the absolute priority rule and best interest test. Both principles prevent the creation of nuisance value, or put differently, prevent that claimholders get a preferential treatment that they do not deserve to the detriment of others. They originate from the time of ‘equity receiverships’ some 100 years ago, in reaction to a practice in which reorganizing railroad companies could get rid of their creditors while keeping the shareholders on board.56 The absolute priority rule and best interest test are embodiments of the general requisite
48 11 U.S.C. §1129 (a) (10). 49 11 U.S.C. §1129 (a)(11). 50 11 U.S.C. §1129 (b)(1). 51 11 U.S.C. §1129 (a)(7). 52 11 U.S.C. §1129 (b)(2)(b)(ii). 53
Segal, Nick, Schemes of arrangement and junior creditors - does the US approach to valuations provide the answer? (Insolvency Intelligence (2007)).
54 11 U.S.C. §1123 (a)(5)(J).
55 Vermeille, S., Peut-on prêter pour posséder (« loan to own ») en droit français ? La Semaine Juridique Entreprise et Affaires no 28, 9
Juillet 2009, 1709.
56 Baird, Jackson, Bargaining after the Fall and the Contours of the Absolute Priority Rule, 55 University of Chicago Law Review 738
(1988). Hicks, Foxes Guarding the Henhouse: The Modern Best Interests of Creditors Test in Chapter 11 Reorganizations, Nevada Law
Journal: Vol. 5: Iss. 3, Article 10 (2005). A vailable at: http://scholars.law.unlv.edu/nlj/vol5/iss3/10
established in case law for approval of reorganization plans prescribing that these plans should be “fair and equitable” to all creditors.57
3.1.2.1 The Absolute Priority Rule (APR).
Chapter 11’s absolute priority rule is incorporated in article 1129(b)(2)(B)(ii) and reads as follows:
b) (2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements: (B) With respect to a class of unsecured claims—(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.58
The absolute priority rule implies that senior claimholders must be paid in full, or consent to be paid partially, before a class of junior claimholders receives anything.59 Since shareholders are the most junior class, they
wouldn’t get any stake in the reorganized company unless creditors claims are met in full.60 The APR is based on
the idea that the company’s faith should be in the hands of those to whom the company is the most valuable. If the assets of the firm taken together are worth more than when sold piecemeal, the company is eligible to survive. When the company can survive, but its assets are not enough to pay out all the claimholders, the claimholders who would receive something upon a hypothetical sale of the company, the most senior creditors, should be first in line to get their claim paid out. When the stakeholders decide not to sell the company but to continue and they want to preserve their stake, they should make an investment as if they sell the company to themselves. This investment has to be made to cure the unhealthy capital structure that endangers the continuation of the company. For claimholders who are ‘in the money’, accepting a haircut on their claim makes this investment. Claimholders who are ‘out of the money’ should bargain to maintain a stake in the company; a real investment should be made, for example by providing additional capital (‘new money’). Bankruptcy law, through the APR, seeks to prevent that junior claimholders, who in a distribution scenario would receive something only after a senior claimholders gets paid, negotiate nuisance value, by making the adoption of a reorganization plan conditional on the mutual ranking between juniors and seniors. The APR only seeks to prevent that senior claimholders are bound to a plan in which their ranking above junior creditors is not respected. It gives senior creditors bargaining power to let participate junior creditors in the restructuring.61
If we apply the APR to shareholders, who are most subordinated and in a liquidation scenario would be wiped out, the only reason that they may still be shareholders of the company after the reorganization, is that the shareholdings are not part of the company’s estate. According to Madaus, who stresses the difference between liquidation and reorganization, there is no need to involve or wipe out equity in a reorganization plan, even if equity
57Most notable is Northern Pacific Railway Co. v Boyd, 228 U.S. 482 (1913). 58 11 U.S.C. §1129(b)(2)(B)(ii).
59 Baird, Jackson, Bargaining after the Fall and the Contours of the Absolute Priority Rule, 55 University of Chicago Law Review 738
(1988).
60McCormack, Apples and Oranges? Corporate Rescue and Functional Convergence in the US and UK, Int. Insolv. Rev.,Vol.18:p.
109-134 (2009), p. 122.
economically speaking is under the water, because shareholders maintain control prerogatives attached to their shares after reorganization.62 Creditors would sufficiently be protected with the best interests test. In my opinion,
the APR however, does not seek to dismember the shareholders of a company. It seeks to prevent the transfer of value from senior claimholders to less senior claimholders. The best interest test does not prevent this transfer of value. Even if the creditors receive more in reorganization than in liquidation, their rights are impaired. Leaving shareholders unaffected thus transfers value from creditors to shareholders. It goes against the principle of the APR if the restructuring of a LBO, in need of a restructuring because the cash flows are not sufficient to service its debt, does not affect the rights of shareholders. Shareholders can cash out in full, at the time of the acquisition, while the creditors get paid, if they get paid at all, months after the acquisition when the company finally enters insolvency.63 Therefore, special attention should be brought to the ranking of subordinated claimholders during
restructuring. It should be possible to involve shareholders’ rights in a restructuring plan without their consent. The APR should be applied between senior and junior secured creditors, between secured creditors and unsecured creditors, between unsecured creditors and bondholders, between different kind of bondholders, between bondholders and shareholders etc.
3.1.2.2 The best interest of creditors test
Chapter 11’s ‘best interest test’ is laid down in article 11 U.S.C. §1129 (a)(7) and reads as follows:
(a) The court shall confirm a plan only if all of the following requirements are met: (7) With respect to each impaired class of claims or interests— (A) each holder of a claim or interest of such class— (i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date; or (...)
To comply with the best interest test, individual creditors whose claims are impaired should at least get under the plan what they would have got if the company had been liquidated.64 They cannot be forced to get less than upon
liquidation. The best interests test seeks to balance the protection of dissenting creditors against the need to approve a nonconsensual organization plan.65 A thorny issue of the concept is valuation of the claims as if the
company would be liquidated, in which distribution is made according to the priority ranking of claims.66 Congress
has indicated that courts, in determination of the hypothetical distribution in liquidation, will have to consider the various subordination provisions.67 Under Chapter 11, the assessment of the fairness and reasonableness of a
cram down of a dissenting class may contain the enforcement of subordination agreements pursuant to 11 U.S.C. § 510 (a), and the application of ‘equitable subordination’ pursuant to 11 U.S.C. § 510 (c). ‘Equitable subordination’
62 Madaus, Reconsidering the Shareholder’s Role in Corporate Reorganisations under Insolvency Law, Int. Insolv. Rev., Vol. 22: 106–
117 (2013).
63 Femino,Ex Ante Review of Leveraged Buyouts, Yale Law Journal: Vol.123: Iss. 6 (April 2014). Available online at :
http://www.yalelawjournal.org/note/ex-ante-review-of-leveraged-buyouts#_ftnref55
64Hicks, Foxes Guarding the Henhouse: The Modern Best Interests of Creditors Test in Chapter 11 Reorganizations, Nevada Law Journal: Vol. 5: Iss. 3, Article 10 (2005). A vailable at: http://scholars.law.unlv.edu/nlj/vol5/iss3/10 .
65Hicks, op. cit.
66The distribution ranking upon liquidation is set out in 11 U.S.C. §726. 67Hicks, op cit., supra note 153.
reflects the APR since it seeks to protect unaffiliated creditors by subordinating the claims of equity holders that behaved unfairly or wrongly towards the corporation and its outside creditors.68
The European Commission in its recommendation, included the best interest test under the conditions under which a restructuring plan can be confirmed by a court: “the restructuring does not reduce the rights of dissenting creditors below what they would reasonably be expected to receive in the absence of the restructuring, if the debtor’s business was liquidated or sold as a going concern, as the case may be”.69
4 Restructuring procedures in France
4.1 Available procedures in France
French insolvency law is in Book VI of the Commercial Code (C. Com) and has numerous procedures that can be divided into preventive measures meant to prevent insolvency, and collective procedures meant to redress or liquidate insolvent companies. The following procedures are worth mentioning before focusing on the restructuring procedure aimed at financial creditors.
Preventive measures:
- Mandat ad hoc (L. 611-3 C. Com): Voluntary (on request of the debtor) and confidential court
appointment of a “mandataire ad hoc” who will investigate the financial state of the company.
- Conciliation (L. 611-4 C. Com): Voluntary out-of-court amicable procedure (on request of the debtor)
under mediation of a court appointed “conciliateur” with the purpose to reach an agreement between the debtor and its principal creditors to overcome legal, financial or economic difficulties. Access is denied if the company has been in cessation of payments for more than 45 days. The agreement requires unanimous consent and gets court approval if the company is not in cessation of payments, if it ensures the continuity of the company and if it does not impair the interests of non-signing creditors.70
- Sauvegarde (L. 620-1 C. Com): The debtor can request the commencement of the sauvegarde
procedure if he is in financial difficulties that he cannot overcome but is not in cessation of payments. The procedure should enable the reorganization of the enterprise in order to continue its economic activities, to preserve jobs and to discharge the enterprise of debts. After an observation period the court adopts a plan proposed by the debtor after approval by (committees of) creditors.71
68 See http://www.law.cornell.edu/wex/equitable_subordination.
69 Recommendation at §22 (c), Commission Recommendation of 12.03.2014 on a new approach to business failure and
insolvency,C(2014) 1500 final.
70L. 611-8 (II) C. Com.
71 L. 620-1 C. Com. ‘financial difficulties that he cannot overcome’ is a translation of “difficultés qu’il n’est pas en mesure de surmonter”.
Collective insolvency procedures
- Redressement judiciaire (L. 631-1 C. Com): This procedure has the same objective as the
sauvegarde procedure (continue economic activities of the enterprise, to preserve jobs and to discharge the enterprise of debts) but has an important distinction as to the opening criteria: the company is in cessation of payments.
- Liquidation judiciaire (L. 640-1 C. Com): This procedure is meant to make an end to the activities of
the enterprise or to realize its assets by selling its assets as a whole or separately.
4.2 The notion of cessation of payments
The notion ‘cessation de paiements’ or cessation of payments was meant to delimit the application of preventive measures to that of procedures treating enterprises in financial difficulties. This delimitation has faded away with the introduction of the sauvegarde procedure, which is a procedure that treats financial difficulties but applies when the enterprise is not yet in cessation of payments.
The status of cessation of payments is legally defined as the enterprise being unable to meet its current liabilities with its available assets.72 Current liabilities means all due debts which are uncontested but not
necessarily claimed. The situation is independent of the enterprise having a negative result, having occurred new debts, having an unbalanced financial structure (negative equity, insufficient cash flow). Available assets are cash and cash equivalents (immediately realizable securities) but also what is realizable in a very near future or as a result of newly extended credit (without aggravating the financial difficulties). The appreciation whether an enterprise is in cessation of payments cannot be completed on the basis of a simple balance sheet test since the balance sheet lacks information about the maturity of the liabilities and is not up to date.73
4.3 The ‘procédure de sauvegarde’
4.3.1 General
The procédure de sauvegarde is inspired on Chapter 11. Since its introduction in 2006 it has encountered numerous reforms.74 The French legislator introduced in 2010 the Sauvegarde Financière Accélérée (SFA).75 This
procedure can be seen as an in-between of the conciliation and sauvegarde procedure and concerns only the financial creditors, not other creditors such as suppliers. In 2014 a genus of the SFA was introduced, the Sauvegarde Accélérée (SA) which is not limited to financial creditors.76 The SA and the SFA proceedings are
accelerated safeguard procedures because they build upon a pre-negotiated conciliation plan between some creditors. The accelerated sauvegarde proceeding is used to “cram down” the dissenting minorities. The duration
72L. 631-1 C. Com.
73See for financial statement requirements articles L. 232-1, L. 232-2 C. Com.
74 ‘Loi n° 2005-845 du 26 juillet 2005 de sauvegarde des entreprises’ came into force on 1 January 2006.
75‘Loi n° 2010-1249 du 22 octobre 2010 de régulation bancaire et financière’. The SFA came into force on 1 March 2011.
76‘Ordonnance n° 2014-326 du 12 mars 2014 portant réforme de la prévention des difficultés des entreprises et des procédures
collectivescame’, the SA came into force on 1 July 2014.
of the procedures is shortened; such as the time which is given to the creditor committees to give their approval and the time between the opening of the procedure and court approval of the plan. Total duration of the procedure until court approval is 3 months for the SA (628-8 C. Com) and 1 month for the FSA, which duration can be prolonged with one month or more (628-10 C. Com).
The procedure de sauvegarde is a debtor-in-possesion procedure. The opening of a sauvegarde procedure can involve the appointment of an administrateur judiciaire who assists the management and whose appointment is only mandatory for larger companies.77 It always involves the appointment of a mandataire judiciaire, who acts
in the collective interest of the creditors78 and the appointment of a juge-commissiare who ensures the rapidity of
the procedure and that all interests present are duly protected.79
4.3.2 The commencement of the safeguard procedure
As mentioned above, the trigger event is that the debtor must have financial difficulties that he cannot overcome. The additional requirement that these financial difficulties should have “the nature as to lead to a cessation of payments“ has been abrogated to improve accessibility of the procedure at an earlier stage of financial difficulties.80 The notion of having “financial difficulties that cannot be overcome” is not legally defined but
court practice demonstrates liberal use of the criterion, putting emphasis on the less stigmatizing anticipation of difficulties instead of requiring proof of the company heading towards cessation of payments.81
The Cœur Défense case: Eligibility of a holding company
In the seminal case Cœur Défense a creditor filed third party opposition against the opening of the sauvegarde procedure of an owner of a property situated in the Paris business district of La Défense, Heart of la Défense SAS, and its holding company, Dame Luxembourg. Due to the opening of sauvegarde proceedings, the creditor, who extended a loan to the holding company for the acquisition of the property, would not be able to enforce its security interests in the shares of its subsidiary. With respect to the eligibility of a holding company to the sauvegarde, the court held that although the sauvegarde procedure is aimed at the continuation of economic activities, the opening of the procedure is not conditional on difficulties pertaining to economic activities. If the financial difficulties are established (in casu the repayment of the loan would have led to a cessation of payments), the circumstance that the application for a sauvegarde procedure may be motivated to escape financial obligations or to keep in control as shareholders, do not preclude its application82. This ruling has as a consequence that holdings devoid of any operational activities, e.g. the borrower in a LBO, except fraud, can take recourse to the sauvegarde procedure.83
77 L. 622-1 C. Com. 78 L. 622-20 C. Com.
79L. 621-9 C. Com: “Le juge-commissaire est chargé de veiller au déroulement rapide de la procédure et à la protection des intérêts en
présence.“
80 Ordonnance n° 2008-1345 du 18 décembre 2008 portant réforme du droit des entreprises en difficulté. 81Annual report of the Cour de Cassation 2011 p. 364 and further, see www.courdecassation.fr/publications.
82 Com., 8 mars 2011 confirmed by Second Court of Appeal 19th January 2012; see also Lucas, François-Xavier, L’éligibilité des holdings à la sauvegarde, Bulletin Joly Sociétés, 01 avril 2011 n° 4, p. 28.
83 Dammann, Podeur, Affaire Cœur Défense / exemple d'instrumentalisation de la procédure de sauvegarde, Receuil Dalloz 1 mars
2010, Lucas, Éditorial – L’éligibilité des holdings à la sauvegarde, Bull. Jol. Soc, 01 avril 2011 n° 4, p. 281.
4.3.3 The subject matter of the sauvegarde plan;
The court can sanction a plan only if there is a serious chance that the enterprise will be safeguarded.84 A plan is
made by the debtor together with the administrator and elaborates how the debtor will deal with its liabilities (rescheduling, debt relief, conversion of debt to equity or warrants85), if it will transfer some of its activities and how
it works out for employees.86 Upon opening of the proceedings claims are to be submitted to the mandataire
judiciaire following the procedure of “déclaration de créances”.87 The plan will be presented to the creditors who
submitted their claims, unless their claims are unimpaired by the plan.88 If the plan involves a modification of the
capital structure, the extraordinary shareholders’ assembly must vote upon the plan.89 The duration of execution of
the plan is fixed by the court and cannot be longer than 10 years.90 The court takes notice of creditors who agree
with the proposed rescheduling of their claims. Creditors whose claims come to maturity after duration of the plan are not affected. For creditors that do not agree and whose claims mature before or during the execution of the plan, the court can impose a rescheduling of their claims up to the duration of the plan. Creditors can thus see their claims being rescheduled over a 10 years period against the interest rate initially agreed on.91 They can
choose instead to have a shorter maturity but in consideration for a partial debt relief.92
4.3.4 Who can propose a plan?
In principle only the debtor can propose a plan, but if it concerns a large company with creditors committees, creditors of such committees can propose an alternative plan.93 This is a novelty, introduced by the Ordonnance
du 12 mars 2014, and is an important reinforcement of the position of creditors that otherwise only could choose between a plan proposed by the debtor or a so-called “imposed plan”, which provides in a rescheduling of loans to a maximum of 10 years with a fixed interest rate.
84L. 626-1 C. Com.
85 L. 626-5 C. Com: “Les propositions pour le règlement des dettes peuvent porter sur des délais, remises et conversions en titres
donnant ou pouvant donner accès au capital”.
86L. 626-2 C. Com 87L. 622-24 C. Com. 88L. 626-5 C. Com. 89L. 626-3 C. Com 90L. 626-12 C. Com. 91L. 626-18 C. Com. 92L. 626-19 C. Com.
93L. 626-30-2 C. Com (paragraph 1). Bondholders in the bondholders’ assembly do not enjoy the possibility to propose an alternative
plan.
4.3.5 Effects of the opening: Moratorium
An important feature is that the opening of the sauvegarde triggers the commencement of a moratorium, called the
période d’observation or observation period, which duration is 6 months.94 It ends when the court sanctions the
plan. It contains a stay on individual enforcement actions.95 Claims arising prior to the opening of the procedure
cannot be paid.96 The performance of ongoing contracts cannot be withheld and the creditor cannot terminate
ongoing contracts with the debtor.97 Clauses that makes undue debt immediately claimable upon the opening of a
sauvegarde procedure are deemed unwritten.98 So-called acceleration clauses such as contained in standard LMA
lending documentation are not enforceable.
4.3.6 Creditor committees
Article L. 626-29 C. Com limits the formation of creditors committees to larger companies, companies who have more than 150 employees and a minimum turnover of € 20 million.99 Only two creditors committees can be formed;
one existing of financial institutions (comité des établissements de crédit) and one existing of the main suppliers having at least 3% of the main suppliers claims (comité des principaux fournisseurs).100 If there are bondholders, a
third class can be formed consisting of bondholders (assemblée des obligataires).101 Bondholders deliberate on
the plan after approval of the plan by the creditor committees.
4.3.7 Majority requirements
Approval of a plan requires a majority of 2/3 in value per creditor committee and each committee voting in favor.102
The same majority requirement, 2/3 in value of voting bondholders, applies to the bondholders’ assembly, independent of contrary clauses and the law governing the issued bonds.103 Creditors, whose claims are not
impaired by the plan or are paid in full as soon as the plan has been sanctioned, cannot vote on the plan.104 This
provision has been introduced after the Thomson / Technicolor – case in which super subordinated bonds were covered only to the amount of future interest, but excluded from voting on the plan to the extent of the full amount of their claims since their claims would be paid only after all other claims in a liquidation scenario, and the plan was aimed at continuation.105
94L. 621-3 C. Com.
95 Article L622-21 suspends enforcement actions on claims that arose prior to the opening of the procédure de sauvegarde
(“suspension des poursuites”).
96
L. 622-7. (“l’interdiction de paiement des créances antérieures”)
97L. 622-13.
98L. 622-29 C. Com. (freezing of liabilities “gel du passif”) 99R. 626-52. C. Com. 100L. 626-30 C. Com. 101L. 626-32 C. Com. 102L. 626-30-2 C. Com (paragraph 4). 103L. 626-32 C. Com (paragraph 3). 104L. 626-30-2 C. Com (paragraph 5).
105 Dammann, Podeur - Affaire Thomson-Technicolor - le clap de fin, Bull. Joly Entrep. diff. 2012. 78.; Montéran et Mieulle, De la
pratique du plan de sauvegarde pré-négocié à la procédure de sauvegarde financière accélérée, Journ. sociétés, nov 2010, 36
4.3.8 Cram down
Per class the dissenting minority is crammed down. Unlike the Chapter 11 there is no cram down between classes, and the shareholders do not form a class. The ranking of priorities between classes is not an issue, as approval of the plan needs approval of each class. The ranking of priorities between creditors within the creditor committees and the bondholders’ assembly however is an issue which I will address hereunder.
4.4 Sauvegarde financière accéléré and sauvegarde accélérée
4.4.1 The sauvegarde financière accélérée (since 2011):
The sauvegarde financière accélérée has casually been inserted in a law on banking and financial regulation of 22 October 2010 by an amendment of senators Hyest and Marini.106 The purpose of the sauvegarde financière
accélérée (‘SFA’) is to ensure the operational activities of a company that faces financial difficulties during their
restructuring attempts, thereby preserving firm value and to prevent them from insolvency.107 Since the amicable
conciliation proceedings require unanimity of creditors adopting the restructuring plan, a debtor facing a recalcitrant minority that blocks the plan, would nevertheless have to take recourse to the (collective) sauvegarde procedure, which can lead to a credit crunch and disruptions in commercial relationships.108 Therefore, the French
legislator proposed a fast-track version of the sauvegarde procedure in which a pre-negotiated restructuring plan, which has the support of a majority of creditors, can be adopted by overruling the recalcitrant minority. In order to prevent the detrimental effects at operational level of the opening of a sauvegarde procedure the proposed fast-track procedure only concerns and impacts financial creditors. Building on a pre-negotiated conciliation plan and requiring only the convening and voting of the financial creditors’ committee, the sauvegarde procedure in this simplified form should be completed in only a few weeks.109 The SFA became applicable on conciliation
proceedings that started after 1st March 2011.110
4.4.2 Sauvegarde accélérée (since 2014)
As a part of a more extensive insolvency law reform the French legislator introduced on 12 March 2014 a genus of the SFA named the sauvegarde accélérée (‘SA’), which applies to conciliation proceedings that started after 1st
106 See, Loi n° 2010-1249 du 22 octobre 2010 de régulation bancaire et financière, art. 57 and 58, and the implementing decree Décret
n° 2011-236 du 3 mars 2011 pris pour l'application des articles 57 et 58 de la loi n° 2010-1249 du 22 octobre 2010 de régulation bancaire et financière. See for the amendment nr. 144 presented by senators Hyest and Marini on 24th of Septembre 2010: http://www.senat.fr/amendements/2009-2010/704/Amdt_144.html.
107 Explanatory Note (two pages) that was issued for consultation on 27 July 2010, available online at
http://www.textes.justice.gouv.fr/art_pix/Presentation_proced_collect_20100728.pdf. See also Bourbouloux et Couturier, La consécration de la sauvegarde financière de l’entreprise, Bull. Jol. ent. diff., 1 mars 2011 n° 1, p. 48.
108 Explanatory Note issued for consultation on 27 July 2010. 109 The Explanatory Note mentions 15 to 21 days.
110 Lienhard, A., Rép. com. Dalloz, Entreprises en difficulté (Sauvegarde financière accélérée), 6.
