File : Judicial administration
Sequencing of the judicial administration proceedings
The modalities of the judicial administration fall into several main phases: preserving the company; preparing its future and restarting its activity with a view to re-establishment.
Start of observation period
The ruling initiating procedures marks the start of the observation period; it also defines the duration. This period is characterised by continuation of the company's activity under a protective framework intended to favour its re-establishment. The initial duration is six months maximum; it can be renewed once for the same maximum duration, by decision of the court (at the request of the administrator, the debtor or the public prosecutor). It can under exceptional circumstances be extended for another six months, upon request of the public prosecutor. However, no later than two months after the start of the observation period, the court must confirm continuation of the period, if it deems the company sufficiently able to continue from a financial standpoint.
The observation period may be suspended at any time, either by converting the insolvency proceedings into a judicial liquidation (upon request by the bodies involved in the proceedings) or by adopting a recovery plan, or because the difficulties no longer exist, should the debtor possess sufficient funds to reassure creditors and to settle the costs of the proceedings.
Redistributing management powers
The insolvency judge is authorised, within the framework set by the law, to authorise certain actions by the debtor and the administrator, where required for purposes of bailing out the company (compromises, transactions, sales lying outside day-to-day management of the company; the same applies for example, to setting up mortgages, pledges, collateral, and certain exceptional payments of claims that predate the ruling).
Should the tribunal appoint a judicial administrator, the latter will automatically be tasked with exclusive duties such as demanding that current contracts be continued, responsibility for drawing up the economic and social balance sheet, and preparation of the recovery plan. The administrator, where applicable, may also be tasked with additional briefs such as assisting the debtor in actions pertaining to management, or some of them (to be determined by the court), or to take over all or part of the administration. Such missions may be changed at any time by the court.
The role of the manager will depend on the decision of the court. The manager is not relieved of his powers during the observation period. He continues to perform acts of sale and transfer, as well as administration pertaining to his patrimony, and rights and actions not falling under the mission entrusted to the administrator. Subject to certain reservations (prohibition to make payments to creditors whose claims predate the opening of the procedure, and the continuation of current contracts), the debtor in practice maintains day-to-day management; in other words continues the work of managing the company.
Good to know: under all circumstances, wherever the debtor directly or indirectly opens stock or shares, he loses the right to transfer or sell them freely, under pain of nullification, and shall comply with the conditions set out by the court.
Protecting the company's assets
The rights and goods of the company are subjected to two important precautionary measures, among others.
– Mandatory drawing up of the inventory, as soon as the ruling to initiate proceedings has been handed down.
This is essentially the enumeration, description and evaluation of all the debtor's goods, and where applicable, the guarantees weighing upon them. It also identifies assets that possess special status (pledged, collateral, bonded, deposited, under reservation of ownership …). It further comprises an estimation of the debtor's goods, for purposes of informing creditors of the presence in the company of property upon which there is a claim. The inventory is drawn up by an auctioneer, a bailiff, a notary, or a sworn goods broker, appointed by the insolvency judge. The inventory is then filed with the registry of the court that handed down the ruling; copy is sent to the debtor, to the administrator and to the judicial representative.
– Upon the ruling to initiate proceedings, the manager, at the request of the administrator, or the administrator himself, performs the various actions necessary for preserving the company's rights against its debtors, and maintaining its production capacities.
Freezing of liabilities
The start of the observation period has the effect of preventing payment of most of the claims by the debtor in question. More exactly, this refers to claims that predate the ruling, as well as any subsequent claims that are not required for the company to continue its activity. The observation period also has the effect of suspending any procedures in progress (actions undertaken by a creditor prior to the ruling) that tend towards payment of a sum of money or annulment of a contract because of payment default. The same applies to all legal actions creditors after the ruling with the same purpose, whose services are not indispensable to continuation of the business. The following actions are also suspended or prohibited: executions on the part of creditors both on movable assets and immovable assets (procedure of attachment, garnishment of accounts, seizure for sale, third-party notification, escrow).
The ruling in favour of proceedings maintains the enforceability date for claims that have not matured on the date of its issue. It halts calculations of interest, legal and contractual, as well as any lateness penalty or surcharge (with the notable exception of loan contracts of a duration greater than one year). It prohibits registration of mortgages, pledges, collateral and privileged claims, except to the seller of a business goodwill and the Public Treasury.
Arrangement for continuation of the activity
In the case of contracts that are current on the date of the ruling for a proceedings, the principle is that the ruling shall not give rise to their termination. However there are special rules for some contracts, mainly: the work contract, the professional premises lease contract, general partnership company contracts, limited partnership companies contracts, and trust agreement contracts.
In addition, if the judicial administrator has been appointed, or if not, the debtor, on the recommendation of the judicial representative, may freely exercise his right to demand or abstain from demanding that the contract be continued.
Finally, assets may exceptionally be sold in order to provide funding for the company. In this case, the proceeds from their sale, which are not distributed to the creditors, are mainly paid either directly to the company for its cash flow, or are deposited.
Determining the prospects of recovery
The economic and social balance sheet is drawn up at the start of the observation period, and analyses the cause, the type and extent of the difficulties, by means of a retrospective examination of the company's situation. It must be produced before the end of the observation period, especially to the debtor, the judicial representative, to the workforce representatives, and to the labour inspector. It is drawn up by the judicial administrator with the help of the debtor. Absent an administrator, the balance sheet is not required.
Where the company is operating installations that are classified in the meaning of the environmental Code, and environmental balance sheet is also drawn up.
Preparing the recovery plan
On the basis of the economic and social balance sheet, the administrator draws up the recovery plan, assisted by the debtor.
Preparation of the plan requires, in principle, consultation with creditors prior to the start of the proceedings, who have declared their claims, concerning proposals for terms of payment and debt restructuring /write-offs that are made to each of them.
The draft of the plan comprises:
- recovery prospects;
- modalities for settling liabilities and any guarantees that the debtor must take out in order to ensure performance;
- the level and prospects for jobs, as well as the social conditions envisaged in continuing the activity.
The draft lists, annexes and analyses any buyout offers that apply to one or more branches of activity, made by third parties. It mentions the activity or activities that it proposes to stop, transfer or add. Where possible the draft mentions the possibility of proposing to certain creditors to convert their claims into equity.
The draft of the recovery plan may stipulate certain conditions for its adoption by the court: e.g. realisation of the company on the basis of increase in equity; or replacement of a director.
Adopting the recovery plan
The court will only approve a recovery plan if it deems that the company has a serious chance of recovering.
It will only do so after convening the debtor, works council representatives or workforce delegates, after informing the public prosecutor, the administrator, the judicial representative, and after taking into account the economic and social balance sheet. It consults the public prosecutor (who is present at the hearing, for a company with more than 20 co-workers and a turnover of more than three million euros).
In cases where a recovery plan provides for economic layoffs, the court also will also take into account, when reaching a decision, a report filed with the Registry before the ruling, that shows among other things, the number of layoffs envisaged, and the professional categories involved.
Content of the ruling to adopt the recovery plan
The plan adopted by the court must mandatorily specify:
- those persons tasked with performing the plan (mention must be made of all of their commitments concerning the future of the activity, continuation and funding modalities, settlement of liabilities subject to declaration, and where applicable, guarantees provided in order to guarantee performance);
- statement and justifications of the level and prospects for jobs and the social conditions envisaged in continuing the activity;
- duration of the recovery plan, which may not exceed ten years, and the appointment of a commissioner to oversee the plan;
- taking into consideration the payment terms and restructuring accepted by the creditors prior to the recovery plan;
- where applicable, approval by the creditors concerned, of the agreements to convert the receivables into equity.
Information provided to third parties
The ruling to adopt the recovery plan is filed with the Trade and Companies Register (RCS).
Good to know: all mention is automatically struck off from the RCS, of procedures concerning recovery plans after a period of five years.
Effect of the adopted plan
The mention in the RCS of the ruling to set the recovery plan in motion makes the latter enforceable, especially concerning:
- designation of a Commissioner to oversee the plan; his role is to perform the actions provided for by the administrator or the judiciary representative, or to undertake actions on behalf of creditors; he may also demand any information useful to his mission, and report any failure to perform the plan to the court and to the public prosecutor;
- redefining of the administrator's powers for purposes of implementing the plan;
- maintaining the judicial representative until the claims statement has been definitively drawn up;
- recovery by the debtor of the right to dispose of his goods and to set their price without having to obtain authorisation from the court or the insolvency judge;
- where applicable, temporary non-alienability of certain goods indispensable to continuing the company's activity;
- lifting of all prohibitions imposed on the debtor to issue cheques;
- payment to creditors, subject to definitive admissibility of the claims, and within the bounds set by the recovery plan;
- immediate payment of small claims of three hundred euros or less, not to exceed 5% of the estimated liabilities;
- payment of salary claims;
- advance payment, under certain conditions, of privileged creditors in the case of the sale of encumbered goods;
- continuation of the activity by the debtor (maintaining current contracts and preventing their termination by co-signatories in the event of non-payment of a prior claim).
Performance of a recovery plan; closure of judicial administration proceedings
After the administrator or the judicial representative has filed an end of mission report with the registry, and after this document has been approved by the insolvency judge, the insolvency proceedings are terminated by order of the president of the court; this order is not subject to appeal.
The Commissioner in charge of overseeing the plan draws up an annual report on the fulfilment of commitments by the debtor; this report is filed with the registry and is communicated to the public prosecutor, and is made and kept available to all creditors.
The court determines performance of the recovery plan on the basis of the recovery plan commissioner's report.
While in progress, the plan may be modified by the court at the request of the debtor, subject to a report by the application Commissioner.
Sanction for failure to perform the plan
The court declares the recovery plan resolved i.e. fully performed, and if applicable judicial liquidation should the debtor not fulfil his commitments within the time frames set out in the plan.