File : Judicial liquidation
Initiating judicial liquidation proceedings
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.
Any physical person or business exercising a commercial, craftsmen, professional and independent or agricultural activity, in suspension of payments and whose situation is not irretrievably compromised, must mandatorily make known that situation to the competent tribunal. This obligatory step is aimed at improving conditions for the sale of the company's assets and settling creditors. A specific legal framework is set up, and consists of:
- organising the company (relieving directors of their powers, which are then taken over by the liquidator), ending the company's existence and operation (suspension or temporary continuation of the company's activity);
- and finally, carrying out transfer of the company's assets. However transfer of all or part of the company (in the framework of a disposal plan) for purposes of settling at least part of the liabilities, remains a possibility if the court deems that circumstances allow.
Field of application
The judicial liquidation proceedings applies essentially to the following persons:
- any physical person practising an activity that is either commercial (a trader registered or not with the RCS; auto-entrepreneur (self-employed entrepreneur) performing this type of activity); or artisanal (craftsman who may or may not be registered in the directory of trades); auto-entrepreneur performing this type of activity); either liberal or agricultural;
- any physical person with the status of limited liability individual entrepreneur (EIRL);
- any legal person under private law, mainly: commercial companies (whether single person or multiperson); civil companies; economic interest groupings; credit establishments.
In addition to the status as a debtor person, the status of suspension of payments is also a crucial criterion for instituting judicial liquidation. This means that, as with initiating judicial correction, the company must be unable to meet its payables with the available assets. In addition, correction of the situation must be obviously impossible.
The competent tribunal
It is the commercial court that is competent when the business in question operates a commercial or craftsman activity, while the tribunal of Grande Instance is competent in all other cases (agricultural holdings, liberal professions, civil companies, mainly falling under the tribunal of Grande instance).
The territorially competent tribunal is that in which the main establishment is located, in the case of physical persons; if the trader does not have a fixed establishment, the competent jurisdiction is that in which he was inscribed in the Trade and Commerce Register, in cases where it is not his domicile or residence.
For legal persons, the rule is the same as for physical persons: the competent tribunal is that in which the company's headquarters are situated, on condition that it is not a fictitious company (the tribunal reserves the right to requalify the head offices if it deems they are not situated in the declared locality, but in a different jurisdiction). In order to avoid the practice of transferring the registered office, the court in the previous territory remains competent, in the case of change of registered office by a legal entity, for six months previous to the case been filed with the court (starting with the date of inscription with the RCS).
Should the debtor not have head offices on French soil, the competent tribunal is that of the centre of his main interests in France.
Who may request judicial liquidation?
Judicial liquidation proceedings can be requested by:
- either by the company (if it is a physical person, the declaration must be made by the debtor himself or by a signing officer in possession of a special power of attorney; for legal entities, only legal representatives may perform this procedure), within 45 days of suspension of payments;
- or through a summons from a creditor or at the request of the public prosecutor.
The judicial liquidation proceedings can also:
- become effective by conversion of a safekeeping or judicial correction procedure;
- arise out of a liquidation proceedings extension, in the event of confusion of the assets with those of the debtor, or where a legal entity is fictitious;
- in the event of a correction plan being resolved, if the debtor is in suspension of payments, the procedure can be pronounced by the court (in cases where the debtor was granted a correction plan, the court only declares the judicial liquidation in cases where correction is manifestly impossible).
Application of simplified judicial liquidation rules to the proceedings
In comparison to the common law or "ordinary" judicial liquidation proceedings, the simplified judicial liquidation proceedings appears more flexible and more rapid.
The simplified procedure is mandatorily applied where:
- the debtor's assets do not comprise fixed assets;
- the headcount (during the six months prior to initiating proceedings) is less than or equal to one co-worker, and company turnover before tax (on the last day of the previous fiscal year) is less than or equal to €300,000.
In cases where these thresholds are exceeded (1 co-worker and €300,000) but less than 5 co-workers (in the course of the six previous months) and a turnover of €750,000 before tax, as, application of the simplified procedure is optional.
If the court possesses immediate information to the effect that the foregoing conditions are satisfied, it will rule on that basis. Should this not be the case, the presiding judge of the court will rule on the basis of a report concerning the debtor, drawn up by the liquidator within one month of being appointed.
Application of the simplified procedure gives rise to consequences concerning verification of the payable claims: only those that rank directly or that are the result of a work contract, will be verified by the liquidator.
In principle, unless there is a three-month extension, judicial liquidation must be terminated through a court ruling within a period of one year of the ruling to initiate simplified proceedings. In the case of the ordinary proceedings, the initial time rate for the extension may be exceeded before handing down a ruling.
Content of the request filed by the debtor
The request to instigate judicial liquidation proceedings is filed at the Registry of the competent tribunal; it must set out the type of difficulties encountered by the debtor and the reasons for which he is not able to surmount these difficulties.
In addition to the annual accounts of the previous fiscal year, the request must be accompanied by a certain number of documents (each of which must be dated, signed and certified, by the debtor as sincere and genuine); the main document is the declaration of suspension of payments, and a list of the other documents.
Should it not be possible to provide or to fully provide, any of the documents listed below, the request shall be inadmissible unless reasons are given for the inability to provide such documents:
- list of current liabilities and available assets; declaration of suspension of payments;
- extract of the debtor's registration in the relevant registry or trade register (mainly the RCS or the directory of trades);
- cash flow situation less than one month old (in other words an accounting document comprising the business's debts and payables, with the balance);
- headcount status (number of workers employed on the date of the declaration, with identity and address of each of them) and turnover figure (understood as the net amount equal to sales of products and services of the company, from which must be subtracted sales rebates, VAT and similar taxes) of the preceding fiscal year;
- statement of receivables and payables, along with the identity and domicile or head offices of the creditors, and for co-workers, the overall amount of unpaid sums;
- statement of secured debts (i.e. of guarantees that may be invoked by creditors in order to collect their receivables) and off-balance sheet commitments;
- summary inventory of the debtor's property, including fixed assets (real estate, goodwill, movable assets, equipment, vehicles, financial fixed assets etc), operating values (stocks, work in progress), receivables (accounts receivable, other receivables) and liquid assets (bank and cash);
- list of co-liable members with regard to company debts, with indication of their identity and domicile, where applicable (in cases where the debtor is a legal entity comprising members carrying this type of liability);
- list of the names and addresses of works councils representatives or personnel delegates authorised to be heard by the tribunal if they have already been appointed;
- sworn affidavit certifying that there have been no ad hoc mandates or conciliation procedures in the 18 months prior to the date of the request, or if so, mentioning the date on which the ad hocrepresentative was appointed or the date on which the conciliation began, as well as the authority performing it;
- document designating the professional order or authority under which the debtor falls should he practice a liberal profession subject to legislative or regulatory statutes, or which has a protected title;
- copy of the authorisation for registration, or declaration regarding operation by the debtor of one or more installations classified in the meaning of the legislation pertaining to environmental protection.
Good to know: even when it is the creditor who files with the tribunal, the debtor is not relieved of the burden of declaring suspension of payments.