COVID-19: The adaptation of French bankruptcy law to the crisis

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To help protect companies, employees and managers from the cash flow consequences of the current health crisis, the French Government, in an order dated March 27, 2020 (No. 2020-341), made temporary changes to its bankruptcy law.

The postponement of the cessation of payments and the obligation to file for bankruptcy

Under French bankruptcy law, when a debtor is in cessation of payments (i.e. it cannot pay its due debts with its available assets) it had 45 days from the cessation of payment to file for bankruptcy. To protect companies in temporary difficulty due to the COVID-19 crisis, the new order states that cessation of payments of companies is assessed based on their status on March 12, 2020, until three months after the end of the health emergency (currently set at May 23, 2020), so as it stands now, until August 23, 2020.

Consequently, a company that was in cessation of payments for less than 45 days on March 12, 2020, and for which the 45-day period expires after March 12, 2020:

  • Does not have to file for bankruptcy
  • May apply for the opening of preventive procedure (ad hoc mandate and conciliation), even if it does not meet the legal criterion of absence of cessation of payment.

It will thus have a period of three months after the end of the state of emergency (i.e. as things stand, until August 23, 2020) to file for bankruptcy as the case may be.

This allows the manager, if the company’s cash flow allows it, to apply for the opening of a preventive procedure (ad hoc mandate or conciliation) in order to be assisted in negotiations with its main creditors to agree the restructuring of its debt and implement all measures to ensure the sustainability of the company’s activity throughout the health crisis.

Opening preventive and bankruptcy procedures electronically

The opening of a bankruptcy procedure may sometimes be necessary if a company does not have sufficient cash to cover its current expenses, mainly the payment of salaries. Opening a bankruptcy procedure allows the company to benefit from protective measures, such as the assumption of unpaid salaries by the Wage Guarantee Insurance Association (“AGS”) and the freeze of its former debts.

The order allows debtors to file the cessation of payments form and any documents at court electronically or by post.

Furthermore, the order provides that (i) the debtor may ask to be authorized to make its claims and its arguments in writing and (ii) the Presiding Judge of the court can obtain observations from the applicant by any means.

The law thus lays the foundations for the opening of the preventive and bankruptcy procedures and their follow-up without physical hearings. However, it seems that for bankruptcy procedure openings, it is only possible to hold the hearing virtually in order to comply with the rules related to the convocation and audition of personnel representatives.

In any event, this should not be a difficulty, as most French courts have organized themselves to open preventive or bankruptcy procedures through virtual hearings.

The main deadline extensions

The observation period of ongoing bankruptcy procedures is extended until one month after the end of the state of emergency;

The continuation or safeguard plans implemented during the period of health emergency may be extended by the court until three months after the end of the state of emergency, or even by one year at the request of the public prosecutor’s office.

The order also adapts the rules applicable to preventive procedures. Thus, the ongoing conciliation procedures are extended until three months after the end of the state of emergency. This will allow companies to resume as soon as they can their negotiations with their creditors and partners taking into account the effects of the health crisis.

Thanks to this order, a company can request the opening of a bankruptcy procedure to ensure the payment of salaries if its activity and cash flow are too deteriorated. It can also open a preventive measure (ad hoc mandate or conciliation) to obtain assistance from an ad hoc third party representative or conciliator to in seeking measures to safeguard its activity and avoid a bankruptcy procedure.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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