1.2.3. France

French insolvency law is in many ways the antithesis of the above two systems. Insolvency

proceedings are regulated by the Code de Commerce. " Whereas the Insolvency

Act 1986 and the German Insolvenzordnwi^ are decidedly geared towards creditor

interests, Article L. 620-1 Code de Commerce expressly provides that the procedure

aims at the survival of the undertaking, the maintenance of employment and payment

of creditor claims'. Article 1 lists the objectives in order of importance, 'rendering

creditor payment almost an afterthought'. 1

Unless the business has ceased all activity or reorganisation is manifestly impossible,

proceedings will commence with an observation period."1 The period of observation

is used to investigate the debtor's state of affairs and the possibilities of reorganisation.

The period ot observation may be set at six months, which may be extended for

another six and again for a final eight m o n t h s / 1 At the end of the period, it is up to

the court to decide whether the business is to be liquidated or can be reorganised

(redressement) either through continuation (continuation) in the hands of the debtor

or sale to a third party (cession):''

During the observation period all creditor action is stayed. This stay of proceedings

includes secured creditors as well.''' T h e stay remains in place not only in case the court

orders a reorganisation;'1 even in the case of liquidation, secured creditors remain

subject to a stay of proceedings. Only ifthe liquidator has not undertaken to liquidate

the assets within three months after the liquidation order do secured creditors regain

their right to execute against their c o l l a t e r a l / '

While the wide stay ol proceedings ensures the preservation of the estate, successful

reorganisation also requires a reduction of debt. The manner in which this is realised

depends on whether the reorganisation involves continuat ion or cession of the business.

Intersentia

From Struggle to Co-operation

In the former case, the necessary reduction of debt is attained through the deferral of

payment. The plan of reorganisation (plan dc redrcssetnent) will stipulate a uniform

period of deferment."" While the duration of a plan of reorganisation is limited to a

maximum o f t e n years, deferment may exceed that limit." As no interest accrues

during that time, all claims are de facto reduced."" The plan may offer creditors the

option of a shorter period of deferment, but creditors will have to accept a proportionate

reduction of the amount of their claim in return."" If property subject to a security

right is sold pursuant to the plan, the secured creditor will be paid out ot proceeds,

though certain employee claims take priority.""

Where the court orders the cession of the business, the proceeds of the sale will serve

as the fund from which distribution is made to the creditors." The sale may also affect

the rights of secured creditors. If the sale includes assets covered by a security right,

the court, for each of the encumbered assets, will fix a share of the total purchase price

to be allocated to the secured creditors. Payment of the purchase price will prohibit

the exercise of the security.' The court has discretion in fixing the amount to be paid

to secured creditors. In particular, it is not under any obligation to ensure that the

share equals the liquidation value of the collateral that would otherwise have been

available to the secured creditor. Exempted from this scheme are security rights in

(movable or immovable) assets, which were granted for credit, used to buy the

encumbered assets. These security rights 'survive' the cession and are transferred to

the buyer."

As far as distribution is concerned, the tact that under French law the (public) interests

of survival of the company and employment take precedence over creditor payment

means that the estate may be deployed in a manner that does not necessarily produce

the best result for the creditors. This is the case with both the court's decision on

whether to liquidate or to reorganise, and with the manner of reorganisation. Just as

with different offers to buy the estate as a going concern (cession), the court is not

bound to accept the highest offer. Rather, in deciding which offer to accept, the court

the Struggle over Jurisdiction

is to be guided first by which offer would best assure employment."4 This in itself

implies a redistribution of value from creditors to the general public interest.

Further redistribution takes place from secured to non-secured creditors. In case of

continuation the period of determent is applied uniformly to unsecured and secured

claims. Consequently, in distributing the loss these claims are treated as equal in rank.

Neither does the share of the purchase price allocated in the case oi cession guarantee

secured creditors full payment ahead of unsecured creditors. Moreover, specific claims,

for instance those of employees, are accorded a priority over secured claims. '