The French Accelerated Financial Safeguard (the French “Prepack”)

October 14, 2010

On October 11, 2010, the French Parliament adopted a significant amendment to the 2005 French Safeguard Procedure (procedure de sauvegarde), itself heavily inspired by the US Chapter 11 mechanisms.  The new legislation introduces into French law summary safeguard proceedings -named "Accelerated Financial Safeguard" (sauvegarde financière accélérée).  It grants legal basis to so-called "prepack" restructurings, i.e., out of court arrangements agreed to by a majority of creditors before the debtor files for a Court-driven restructuring.  The new legislation will enable the debtor to impose the arrangement on minority financial creditors.

In summary, debtor having reached an out-of-Court restructuring arrangement with a majority of its financial creditors (which cover, in very broad terms, any holder of financial debt) will be able, through summary Court proceedings, to then impose this arrangement on dissenting minority financial creditors, without adverse effects on its non financial creditors.

Highlights of the Accelerated Financial Safeguard

  • An Accelerated Financial Safeguard may be opened provided certain conditions are met.  As is the case under the existing Safeguard Procedure, the debtor must not be insolvent (i.e. be in a state of cessation des paiements), must face insurmountable difficulties and must meet certain thresholds (turnover or number of employees).  In addition, the Accelerated Financial Safeguard must be requested while a confidential voluntary pre-insolvency procedure (the Conciliation Procedure) is ongoing.  Finally, there must exist serious grounds for an arrangement ensuring the continuity of the debtor’s operations to be reached with a sufficiently large majority of its financial creditors and bondholders within a month.  
  • The Accelerated Financial Safeguard deals with financial creditors and bondholders only.  Suppliers of services and goods continue to be paid -including with respect to claims having their origin prior to the opening of the procedure- pursuant to contractual terms.  This represents a substantial change to French insolvency laws which provide, as a general principle, for a stay of all creditors’ payment from the opening of the insolvency procedure until an arrangement is approved in Court.  As a consequence, a committee of suppliers of services and goods will not be formed and will not vote on the arrangement.
  • As is the case under the existing Safeguard Procedure, financial creditors and bondholders will be regrouped in two separate Committees to vote on the arrangement proposed by the debtor.  Financial creditors or bondholders not impacted by the arrangement or that will be paid in full upon approval by the Court will not be allowed to vote.  This is a substantial change from the existing Safeguard Procedure which will apply to both the Accelerated Safeguard Procedure and the Safeguard Procedure.  Majority rules within these Committees remain unchanged (2/3rd of the debt held by financial creditors and/or bondholders taking part in the vote).
  • Within a month (as opposed to a 6 to 12 months time period under the existing Safeguard Procedure) from the opening of the Accelerated Safeguard Procedure, and after the Committees’ favorable vote, the Court will decide whether to approve the arrangement or not.  If approved, the arrangement will bind all financial creditors and bondholders including dissenting ones.  Failing such approval, the Accelerated Financial Safeguard will be terminated (without being automatically converted into a "normal" Safeguard Procedure). 

Other Significant Changes to the Safeguard Procedure

  • The new law introduces other substantial changes into the Safeguard Procedure and clarifies several ambiguities following recent case law.
  • A new provision adds that if the principal amount of a claim is not due in whole or in part on the first date on which other creditors start receiving their recoveries under the arrangement, the first payment of this principal will occur after the term of the principal only. The amount paid at such time will be equal to the quantum that would have been paid to the creditor had it been treated like the other creditors. Subsequent payments will be made in the same percentage as for other creditors or in equal installments until the term of the arrangement. In other words, bullet or in fine loans will start being repaid only after their agreed term and then in installments until the term of the arrangement.
  • A new provision also adds that arrangements voted by the Committees must take into account intercreditor and subordination arrangements entered into before opening of the Safeguard Procedure. An ambiguity existed previously in this respect even if turnover provisions binding the creditors (and not the debtor) should have remained enforceable.

The new Accelerated Financial Safeguard is a clear improvement to French safeguard rules and constitutes a significant change in certain key principles applicable to French insolvency law.  As other previous reforms, it does raise some substantial issues (how does the Accelerated Financial Safeguard articulate with the statement of claims process; no definition of impacted creditors) that practitioners and Courts will need to resolve.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following in the firm’s Paris office:

Benoît Fleury (+33 (0)1 56 43 13 00, [email protected])  
Jean-Philippe Robé (+33 (0)1 56 43 13 00, [email protected])
Fabiola Seibt (+33 (0)1 56 43 13 00, [email protected])

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