French Sauvegarde class composition changes to reduce debtor friendly outcomes

But wholesale insolvency law changes unlikely

This is an abridged version of an update published on 9fin on 18 December. Subscribers can find the full version here

9fin

By Chris Haffenden | Editor | chris@9fin.com

Those hoping that adherence to new EU minimum restructuring standards will dramatically shift the balance in the debtor-friendly French jurisdiction may be disappointed, say local legal advisors.

Under new draft proposals creditor class composition will be more flexible and better reflect economic interests and ranking, with cross-class cram down now possible, including shareholders. But Mandat and Sauvegarde should retain their dominance and it remains to be seen if the proposed changes will significantly alter the mindset of courts and influence restructuring outcomes, they added.

Utilising Chapter 11 principles, the aim of the draft reforms is to create more representative creditor classes and introduce the ability to cram down dissenting classes, they said.

The text of the reforms is yet to emerge, but a draft is expected by year end, and be out soon for consultation to garner views before the regulation is put to parliament, said the first lawyer. 

Changes to adhere to the minimum standards must be implemented by this July. But France is acting more slowly, jurisdictions such as Germany and the Netherlands are more ready with their new procedures coming into force on 1 January 2021.

Currently under Sauvegarde, a maximum of three creditor classes is allowed. 

One committee is Credit Institutions – comprising all institutions which have extended credit, except suppliers and bondholders; a second committee composed of major suppliers; and finally, a bondholders’ committee, with all bond debt lumped together regardless of security and ranking. 

At least two-thirds of each class must agree to a restructuring plan and while creditors have limited ability to submit proposals, ultimately the plan is determined by the debtor and/or the judicial administrator, a court appointee, who has significant influence over the process.

If there are changes to share capital such as under a debt for equity swap, shareholders currently have a veto right. The Macron law can force a cram down on shareholders in order to protect the business – with a long list of conditions – but has not been used since introduced in 2015, lessening the threat.

Under discussion are changes to the code which say that shareholders must not unreasonably block a deal, said the first lawyer. 

The system is [currently] set up to protect the company and the shareholders, noted the second lawyer. The priorities in descending order are the business, jobs and only then repayment of creditors. “It is difficult to say whether the new classes and cram down will change outcomes. But it changes the options from a simple term-out. We will have to see how long it takes to evolve.” 

If agreement cannot be reached across the classes, currently there is the option to term out the debt for up to 10-years (often with below market interest rates) with a minimum 5% of principal payable per year – for example, as with Groupe Rallye in 2019. 

Rallye however, did not have to form creditor committees, this was not mandatory as being holding companies they were not classified as large debtors, the lawyers said. Therefore, it could consult on an individual basis. This meant that creditors were unable to propose alternative plans. 

Under the new draft plans, the holding company will be assessed as part of the group structure and a repeat of Rallye would not be possible, said the first source, who added the French Treasury is proposing that the 10-year term option should also be dropped. 

Another bugbear for creditors is difficulties in enforcement. There is no concept of floating charge under French Law and shares in SARLs and other companies are not classified as financial securities.

“Security and collateral need to be better recognised in France,” noted the second lawyer. There is a lot of debate on this as it is virtually impossible to enforce security. It doesn’t stop a pre-pack, but it does limit creditor options.

Employees come first under the plan, with French state claims ranking alongside other financial creditors - apart from a liquidation scenario. 

Covid loans carry a non-recourse guarantee to the French State and are treated alongside other lenders with the French government not expected to enter into the discussions. There is generally no collateral, but there have been two exceptions so far, one of which was mortgage pledges granted in the case of Conforama. Strategic and politically sensitive businesses (insert no jokes about Yogurt here please) are likely to be exceptions to the rule, noted the second lawyer.  

Amicable solutions

Perceived abuses of the process by companies such as Belvedere, Groupe Partouche and most notably Coeur Defense has led to France being portrayed as a difficult jurisdiction for creditors. For the latter, the highest court of cassation indicated safeguard proceedings “cannot be refused to a debtor on the grounds that the debtor may be requesting the protection afforded by the proceedings purely in order to escape from its contractual obligations,” references Jones Day in a client note.

Despite the Coeur Defense setback, there were positive developments in the interim. 

A repeat of 2008, when the Belvedere CFO walked across the street to file with the Beaune Commercial Court in Burgundy with its bondholders only finding out five-days later is unlikely. (Stories about secret hedge fund loans, convenient management divorces, shareholder parties and dancing with Bruce Willis – are omitted here for risk of going off on a tangent). 

Two years ago, measures were put in place to reform the courts – with special commercial courts introduced for businesses over certain thresholds, to handle larger cases. 

In contrast, the so-called amicable restructuring proceedings – Mandat and Concilliation - have achieved greater success and are seen as good market practice and will remain in place under the reforms, noted the second lawyer.

It is a flexible consensual process under a confidential framework and can be efficient in large cap deals they said, citing Technicolor, Marie Brizard and CGG as examples. Some larger companies such as Camieaux and Orchestra are using pre-packs, as they seek to adapt to changes in economic conditions.