Associated files

Obligation to file annual accounts

Filing annual accounts and their associated documents with the registry office of the Commercial court is compulsory for several categories of companies.

Read more

Judicial administration

The main reason for the legislation behind judicial administration proceedings is to allow a business in difficulty to continue its activity in the framework of legal processing, while at the same time allowing it to repay its debts and maintain its jobs.

Read more

Judicial liquidation

The judicial liquidation proceedings is intended to end a company's activity or to convert into cash the debtor's assets by means of a global or separate sale of his rights and goods.

Read more

Last published

File : Suspension of payments

Part 1

The notion of insolvency

Definition of insolvency

Law has defined the contrasting procedures for handling difficulties depending on whether a company is insolvent or not. This is why the definition of this situation is fundamental in providing the most appropriate solution to the company's situation.


Any company, whether a physical person or company, under insolvency, must declare this situation to the court within forty five days following occurrence, unless the company requests, during this period, initiation of conciliation proceedings.

Performance of this obligation has several effects.
It underlines the conditions for a company being declared as suffering financial difficulties, by way of a ruling "initiating proceedings", wither judicial liquidation or administration.
Above all, it aims at allowingclarification of the actual situation of the company and, where applicable, to take elementary measures to remedy the situation.
Declaring insolvency allows the court to set out the limits of a "suspect" period. During this period, any abnormal actions undertaken by the director (error in management) or often by third parties may be more easily identified. Consequently, the declaration of insolvency may lead to reconstituting the company assets, in whole or in part, notably thanks to annulment of all abnormal actions observed during said "suspect" period. The declaration may additionally lead the court to be obligated to dismiss the director, when committing such errors, and sometimes remove him from all economical duties.


Insolvency, a decisive criteria in the choice of handling company difficulties

Detection of insolvency by a company under difficulties is decisive in the handling of the procedure and therefore in the future of the company. This is why a company in difficulties must fully understand the legal definition of this event and its actual consequences.

Indeed, the lack of insolvency allows a company in difficulties to be able to initiate proceedings for protection, namely safeguarding proceedings, or conciliation proceedings or an ad hoc mandate:

  • Initiation of safeguarding proceedings are subject to the company demonstrating that it is unable to overcome these difficulties alone. These proceedings are intended to facilitate reorganisation of the company in order to allow for continued activities, protection of jobs and settlement of liabilities, under legal protection, thanks to performance of a safeguarding plan enforceable on third parties.
  • Use of an ad hocmandateis subject to demonstration by a company of the existence of economic difficulties, but without the situation of the company being conclusive. This strictly confidential procedure aims at seeking all possible amicable solutions allowing for difficulties to be resolved. The role of the representative appointed by the court is not defined by law and the court has a vast degree of flexibility to set this, subject to the proposals which may be made by the company. In practice, this type of intervention is more often than not illustrated by seeking an agreement with the main creditors of the company.
  • Initiation of conciliation is subject to demonstration by the company of "legal, economic or financial difficulties duly justified and likely". This confidential procedure, which may follow on from an ad hocmandate, allows for appointment of a conciliator whose fundamental role is negotiation. It is intended to conclude an amicable agreement restructuring company debts with its primary creditors and, where applicable, relations with other usual contracting partners (suppliers and clients), within a given timescale. This agreement may be approved by the court, which shall permit its publication.

On the contrary, insolvency leads to a fundamental obligation, within forty five days, for the company in difficulty to make a declaration for the purposes of initiating judicial liquidation, bankruptcy or conciliation proceedings.

  • Initiation of judicial liquidation proceedings are subject to demonstration by the company that the situation is not irremediably compromised. The purpose of this procedure is to allow, under legal supervision, continued operations of the company, settlement of liabilities (namely, in brief, payment of debts) and the settlement of creditors (in other words, reimbursement of debts) whilst protecting jobs.
  • Initiation of judicial liquidation proceedings are subject to demonstration by the company that the situation is not repairable. This purpose of this procedure is, still under legal control, to bring an end to company activities or to settle (conversion into money)of estate by way of overall transfer or separate transfer of its rights and assets.
  • Initiation ofconciliation, the only procedure for protection of difficulties remains accessible to an insolvent company, as long as this situation does not exceed forty five days.


Consult our subject-specific files on Insolvency proceedings

Legal definition of insolvency

Insolvency describes a situation where a company is " … unable to face up to the liabilities due with its available assets".

Detection of such a situation firstly requires isolated appreciation of the "liabilities due", on the one hand, and the "available assets" on the other,
Comparison of these two values will allow it to be determined whether the company is able to "respect" its "liabilities due", namely if it can regain a balanced accounting and financial position. If not, the company is declared insolvent.

"The available assets" can be distinguished from the estate and only includea portion of elements appearing in the assets of the balance sheet, namely:

  • liquid assets, which primarily correspond to amounts in cash, provisional credit balances for short term bank accounts, short term commercial papers, credit reserves or interest granted (and not only planned or promised) by creditors (unless these illustrate an artificial means of support granted in abnormal conditions, hiding any insufficient assets);
  • andassets to be settled (namely those which can be converted to money) immediately, which correspond, insofar as their easy and rapid transfer can be planned, for instance, to commercial papers, securities which can be rapidly settled.

However, available assets do not include those which cannot be settled in the short term such as amounts for work undertaken in company premises, the value of merchandise, the purchase price of a business and company assets.

"Liabilities due" do not include the estate. They only include elements on the liabilities side of the balance sheet concerning debts for which payment is required immediately. Liabilities due, in principle, concern company debts, whatever their civil or commercial nature, insofar as they are
-    certain (their existence is incontestable),
-    liquid (the value is determined or can be determined),
-    and due(the term has expired even if the third party creditors have not made a claim).
Inversely, due liabilities automatically exclude any disputed credits by third parties, namely credits which are being legally disputed and those for which proof has been provided that they do not have at least one of the above criteria.


Distinction of insolvency from other difficulties

It is important to make a distinction between insolvency and other difficulties observed by companies, namely "difficulties which the company cannot overcome alone", bankruptcy, irremediable compromise, temporary problems and continued trading at loss.
Each of these situations are legally defined as follows.

"Difficulties which the company cannot overcome alone":

Generally, "difficulties which the company cannot overcome alone" correspond toevents or circumstances sufficiently serious not to be resolved by the company resources alone, with the exclusion of any potential assistance by third parties (for instance, guarantee which a group may provide to a company subject to this type of difficulty).

The nature (social, legal, accounting, economic, and financial) of said events is of little importance, whilst the occurrence of insolvency results solely from the characterisation of a precise accounting and financial situation, the insufficiency of available assets to respect due liabilities.

More precisely, for case law, insurmountable difficulties do not concernsimple impediments or passing difficulties, not inversely any situation which can be deduced from the occurrence of insolvency,whether immediate, imminent or distant. This is the reason why establishing a link between insurmountable difficulties and potential insolvency, and therefore accounting, financial or economic problems is not required to characterise these difficulties.

In order to establish whether difficulties are insurmountable, it is only required to prove occurrence of precise events such as for instance:
- losses during the past financial year;
- large turnover with low and reduced profits;
- a provision account which shows a negative short term cash flow balance;
- a sharp imbalance between capital and fixed asset values;
- triggering the alert procedure by the auditor;
- considerable extension of the stock rotation period;
- implementation of a social plan with planned redundancies.

Moreover, insurmountable difficulties, aside for those which preceded insolvency, lead to the entitlement to request safeguarding proceedings, whilst insolvency proceedings exclude this possibility and require bankruptcy proceedings, where applicable, or judicial liquidation or administration.

Bankruptcy :

Bankruptcy is a situation where liabilities are higher than assets

In practice, this situation is characterised by a lack of means or assets which would allow the company to settle its debts, even over instalments.

Observing bankruptcy therefore involves appreciation of the situation of the company concerning its assets, namely depending on all of its credits and assets (primarily, its moveable and immoveable assets, tangible and intangible assets) forming all of its assets, compared to all of its obligations or debts, forming its liabilities.

However, determining whether or not a company is bankrupt leads to comparisonnot of both amounts together of the liabilities and assets of the company forming its estate, but both of these amounts, namely the portion of assets known as "immediately available"with the portion of liabilities "immediately due".

Consequently, the notion of bankruptcy is clearly different to that of insolvency.

  • a company can be solvent, namely have estate which includes assets in excess of its liabilities, allowing it to cover these in full but still be insolvent. This is the case, if faced with due liabilities, the assets are over the long term (for conversion into money) and not therefore immediately available so as to be used instantaneously, which for instance corresponds to the situation of assets resulting from property of buildings, of which the sale may take place immediately;
  • a company man, inversely, be bankrupt as all of its liabilities clearly exceed its assets without this situation being sufficient to identify insolvency, because, for instance, this may potentially benefit from a loan allowing the portion of its immediately due liabilities to be covered.

An irremediable compromise :

Observation of insolvency primarily results from an examination of immediate due dates, namely from debts to be paid in the short term and credits to be received in the same period, and does not consequently provide any indication as to sustainability of the company.

Inversely, an irremediable compromise leads to a prospective analysis of results. It focuses on the case of a company whose situation is completely in debt and without any resolution or which is clearly insolvent and cannot be turned around.
Continued operations, planned in a likely future, can no longer be assured in normal conditions of operations, for instance, without the supply of means or abnormal levels of support - namely, abusive, ruinous, or fraudulent - such as granting bank credits intended to conceal a continuous deficit, and therefore insufficient available assets.

Temporary difficulties :

Observation of temporary difficulties, which do not require any legal observation, concern a passing difficulty or provisional issue in the payment of debts, due to a simple temporary problem with cashflow.

It is distinct from insolvency, which requires a legal decision and corresponds to a persistent state of insolvency.

Continued trading at a loss :

Observation of continued trading by a company at loss results from observation of repeated losses over several financial years, and at least the last two financial years.
However, detection of insolvency is based on a much shorter time scale and requires evaluation over a very short term future period, generally within a single financial year (the current year) of available assets and immediately due liabilities.
Consequently, continued trading at loss is not automatically synonymous with insolvency. Consequently, continued operation, even at loss, from one financial year to another may be undertaken by the provision of abusive, ruinous or even fraudulent means. This is, for instance, the case for misuse of bank credits with the sole purpose of concealing insufficient assets actually available and therefore insolvency dating back some time.

Good to know: continued operation in such conditionsis characteristic of an error in management, as well as the pure and simply declaration by the latter of insolvency.


Company which may be the subject of insolvency

The following people may be the subject of insolvency:

  • any physical person exercising either a commercial activity (trader who is or is not incorporated on the trade and companies register; sole trader operating this type of activity), or artisanal activity (an artisan entered on the company list; sole trader operating this type of activity) either a liberal or agricultural activity;
  • any physical person with the capacity of sole trader with limited liability (EIRL);
  • any private legal entity, including primarily: commercial companies (with single or multiple members), civil companies, economic interest groups, credit establishments.

Insolvency may not be applied to the following people:

  • private individuals in bankruptcy proceedings;
  • physical people residing in Alsace and Moselle;
  • credit establishments;
  • people subject to extension of bankruptcy proceedings already open against a company, in the event of confusion of their estate with that of the company:
    - one or more companies within the same group in the event of safeguarding proceedings, judicial liquidation or administration affecting one company already within the group.
    - any member having confused its assets with those of a company already having been the object of safeguarding proceedings, judicial liquidation or administration.
    - the director of a company having already been object of safeguarding proceedings, judicial liquidation or administration.


Search for a matter