INSOLVENCY DURING COVID-19 PERIOD

 

The French Parliament has by virtue of an emergency law dated 23 March 2020 empowered the French Government to take all necessary measures in order to cope with the economic, financial and social consequences of Covid-19 spread.

The Government enacted a first batch of 25 ordinances, two of which directly impact the French legal insolvency regime.

The ordinance n° 2020-306 dated 25 March 2020 related to suspension of time lapsing during the health emergency period dealing mainly with administrative and judicial time periods but also certain contractual delays and impacting pending payments suspension filing as well as creditors’ statement of claims filing.

The ordinance n° 2020-341 dated 27 March 2020 worth adaptations to insolvency rules aiming in particular at:

  • the suspension of insolvency filing obligation binding on companies and their managers;
  • preserving the availability of pre-insolvency proceedings even if the company becomes insolvent; and
  • facilitating the formalities for filing for insolvency or for a statement of claims.

 

The designated purpose of such reforms consists in avoiding bankruptcies while allowing companies with difficulties to face the crisis with available tools.

1.Freezing of the payments suspension state during the crisis protected period
  •  1.1 Principe of crystallisation of the insolvency test as at 12 March 2020

Pursuant to article I-1° of the 27 March 2020 ordinance, if, as at 12 March 2020, a company does not meet the insolvency test, it may benefit from a period of leniency.

Such a leniency period extends from 12 March (included) to 24 August 2020 (currently), which date corresponds to the expiry of the health emergency period (pending until 23 May) increased by 3 months (the ”Protected Period”).

 

During the Protected Period, the company may, even if it becomes insolvent:

  • Continue its business in the ordinary course; or
  • Petition for preventive restructuring measures (ad hoc mandate, conciliation, safegard).

 

As a consequence, its manager(s) may not expose their liability for late insolvency filing.

At the expiry of the Protected Period:

  • if the company is no longer insolvent, which means that the Protected Period will have enabled to recover, it will then be able to continue its business;
  • if the company is insolvent but for less than 45 days: it should be able to petition for the conciliation preventive proceeding measures; or if the company is still insolvent: it shall declare such an insolvency within 45 days[1].

 

  • 1.2 – Exceptions to the insolvency test freezing as at 12 March 2020

Article I-1° of the 27 March 2020 ordinance expressly provides for exceptions to the insolvency test freezing as at 12 March 2020, as follows:

  • Those pertaining to the insolvent company: maintaining during the Protected Period of the option to request the opening of bankruptcy proceedings (administrative receivership – redressement judiciaire – or judicial winding-up): such option though is only open to the benefit of insolvent companies, to the exclusion of their creditors.
  • Those pertaining to courts: a judicial carry back of the payments suspension date is possible under the following scenarios:
    • Hardening period by the application of the provisions of indents 2°, 3° and 4° of article L. 631-8 of the French commercial code: the court may carry back the payments suspension date to a date prior to the judgement opening the bankruptcy proceedings. Thus, the payments suspension date could be carried back to a date that would be prior to 12 March 2020, i.e. the beginning of the Protected Period.

    • Incase of fraud, possibility to fix a date of payments suspension that is posterior: this exception is not crystal clear but it could be construed, in our view, as allowing the judge to postpone, in case of fraud and in the instance of a later insolvency filing beyond the 12 March 2020, to fix the payments suspension date during the Protected Period, it being at a date which is posterior to the 12 March.

2. Specific case of companies which were insolvent for less than 45 days as of 12 March 2020

 

The ordinances dated 25 March and 27 March 2020 provide for some guidelines as regards the time limits and obligations applicable to companies which were insolvent for less than 45 days as at 12 March 2020. However, in the absence of specific provisions relating to this specific case, the following options could be considered:

  • Option a): based on the ordinance dated 27 March 2020, a company which was in a state of payments suspension for less than 45 days as at 12 March 2020 should be entitled to benefit from conciliation proceedings (procedures de conciliation) during the Protected Period although it would become in a state of suspension of payments for more than 45 days during this period of time[2];
  • Option b) : based on the ordinance dated 25 March 2020, these companies should officially file for bankruptcy at the latest within 45 days as from the end of the health emergency period increased by one month (i.e. within 45 days as from 24 June 2020)[3].

A clarification from the French Government as regards the relationship between these two options would prove useful.

[2] Based on a ministerial circular dated March 30, 2020 relating to the ordinance dated 27 March 2020, it is indeed specified that the calculation of the duration of the state of suspension of payments for the purposes of opening of a conciliation proceedings should not take into account the period elapsed after the 12 March.

[3] Indeed, based on the ordinance dated 25 March 2020, the time limit for the filing of the declaration should be suspended. In addition, one interpretation of the circular dated 26 March explaining certain items of the ordinance, would lead to consider that the suspension is worth interruption and that the time limit for the filing of the declaration should run again, in full, from 24 June until 20 August 2020.

3.From creditors’ standpoint
  • Impossibility to file for insolvency of the debtor: generally, the bankruptcy proceedings can also be initiated by creditors. However, creditors are prevented from doing so during the Protected Period.
  • Arrangements for filing declarations of claims:

    • The ordinance dated 25 March 2020 applies to the declaration of claims. As a consequence, the filing, if it should take place within a period expiring between 12 March and 24 June 2020 (that is to say at the expiry of the health emergency period increased by one month), may be made until the expiry of a new period of two months running from 24 June.

Indeed, the suspension of the time limits has been provided for a shorter duration than the Protected Period, the latter being applicable for the insolvency test but also for the possible adaptations of the time limits relating to ongoing proceedings.

    • As it stands, it seems that the ordinances have not considered the claims that should be filed by foreign companies, which are normally granted with a four-month period to file their claims. Therefore, to be on the safe side, it would be recommended to file the declaration of claims at the latest within two months as from 24 August.

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