On 7 December 2022, the European Commission unveiled a draft directive (2022/0408 (COD)) (the “Directive”) proposing to harmonise certain aspects of insolvency laws across the European Union^[1].

This blog specifically discusses the impact of the draft Directive on French law. For a more detailed and general analysis of the draft Directive, see our alert.

The draft Directive aims to encourage cross-border investments by reducing inconsistencies between insolvency rules and laws across the EU. The objective is to improve the development of the Capital Markets Union and to promote freedom of capital movement. This Directive focuses on formal insolvencies rather than pre-insolvency proceedings.

Three key dimensions are targeted by the Commission: (1) recovery of assets from the liquidated insolvency estate, (2) efficiency of insolvency procedures, and (3) improving predictability and fair distribution of recovered value among creditors.

The key proposals are as follows:

• Harmonisation of rules on avoidance actions.

• Strengthening asset traceability through improved access by insolvency practitioners to assets registers, including in a cross-border setting, and enhancing transparency for creditors.

• Structuring of “pre-pack” liquidation procedures.

• Harmonisation of the rules on directors’ obligations to file an insolvency application in good time in order to limit dissipation of asset values.

• Simplified winding-up proceedings for microenterprises.

• Creation of creditor’s committee.

The draft Directive is in line with the previous Directive (2019/1023) on preventive restructuring frameworks which was transposed into French Law in Autumn 2021, to rebalance relations between debtors and creditors with a view to better protecting the creditors’ interests in insolvency scenarios, but taken as a whole, we expect it will not entail a significant change to the current French Insolvency Law landscape.

An extensive conception of the “nullities of the hardening period”

Title II of the draft Directive proposes to harmonise the rules on avoidance actions with respect to legal acts perfected prior to the opening of insolvency proceedings to the detriment of the general body of creditors.

Reference is made to different time periods during which an act can be declared null and void (hardening period – “période suspecte”) depending on the nature of the act. In France, such a period is defined as the time between the date of cessation of payments and the opening judgment, although a French judge can elect to push back the date of cessation of payments by up to 18 months before the opening judgment.

The draft Directive proposes different hardening periods for the following three categories of legal acts:

• Acts benefitting a particular creditor or a group of creditors,

• Acts done against no or a manifestly inadequate consideration, and

• Acts performed with a fraudulent intention, by which the debtor has intentionally caused a detriment to the general body of creditors.

Depending on the relevant act and which category it falls under,the hardening periodproposed by the draft Directive ranges from 3 months in the first case, to 4 years in the case of fraudulent intent.

As the current French legal system provides that the hardening or “lookback” period is limited to 18 months prior to opening judgment, the proposed longer time periods under the draft Directive could be a source of legal uncertainty in France.

Moreover, the starting point for the determination of the hardening period would no longer be by reference to the date of cessation of payments but by reference to the submission of the request for the opening of insolvency proceedings.

As a result, it seems that the European Commission aims to make the existence of a hardening period automatic since there is no need for a judgement pushing back the date of cessation of payments.

Hence, an act could potentially be declared void just because it was carried out during the relevant period and fits into one of the categories listed, even if the debtor was not in a state of cessation of payments at the time of its execution. However, the avoidance of acts benefitting a creditor is conditional on such creditor being aware of the debtor’s inability to pay its mature debts. Implicitly, the reference to the debtor’s difficulties should therefore still apply.

Directors’ duty to officially report an insolvent situation

The draft Directive proposes that directors should be obliged to submit a request for the opening of insolvency proceedings no later than three months after they first become aware or could reasonably be expected to have been aware that the legal entity is insolvent. If not, directors may be held liable for delaying the opening of insolvency proceedings, which could potentially lead to being liable for damages to the creditors of the company.

As French Law already imposes a duty on directors to open insolvency proceedings within forty-five days of directors becoming aware that the company may be insolvent, the draft Directive should not impact the regulation of directors’ duties in this respect in France.

The failure to comply with this time-limit is considered a “mismanagement act” on the directors’ part and may trigger liability in the event of a shortfall in company assets during the winding-up process. Directors can also incur personal sanctions such as personal bankruptcy or a management ban.

Promotion of Pre-pack proceedings

The draft Directive aims to ensure that pre-pack proceedings is an available tool in all Member States in a structured manner. It is anticipated that pre-packs are planned and implemented in two successive phases: a preparation phase, which would consist of finding an appropriate buyer in a confidential manner, and a liquidation phase during which the court would authorise and execute the sale.

The Member States will have to ensure that a “monitor”, appointed by the court, checks compliance with the relevant standards of competitiveness, transparency, and fairness during the preparation stage. In addition, the monitor must ensure that the best bid does not constitute a manifest breach of the best-interests-of-creditors test.

A few points remain unclear. It is not yet known to whom the role of the “monitor” will devolve. In the current French legal system, this is the Court appointed administrator who is the guarantor of the optimization of the process.

In addition, the reference to the best-interests-of-creditors test is ambiguous. The “best-interests-of-creditors” test (as is currently relevant for French reorganisation plans) normally requires that creditors are not worse off in a continuation plan than in a judicial liquidation procedure. Thus, it is not yet clear what the relevant comparator is – a liquidation process or the continuation of the company. In fact, in a pre-packed transfer it is almost certain that creditors will be better off in such scenario than in a liquidation process.

Concerning the consequences of the sale, the draft Directive states that on-going contracts necessary for the continuation of the debtor’s business shall be transferred to the purchaser without the need of the other party’s consent. Also, the acquisition shall be free of debts and liabilities.

Another potential issue is the proposed stay of individual enforcement actions during the preparation phase. As the upstream preparation is intended to be confidential, it is difficult to reconcile how a stay of individual enforcement actions could be implemented without the intervention of a court order. Moreover, if in practice a stay of individual actions can already be negotiated with certain creditors, it seems that the draft Directive envisages a wider scope of application, the precise implementation of which seems to be difficult to imagine yet.

Implementation of simplified winding-up proceedings

The draft Directive proposes that simplified winding-up proceedings be available in all Member States. A similar regime already exists in French law, but the Directive provides shorter procedural deadlines and higher activation thresholds.

Another difference with the French system is that the debtor is left in control of their business, sometimes even without the appointment of an insolvency practitioner.

Reinforcement of protection of creditors’ interest through the institution of a new creditors’ committee

The creditors’ committee proposed by the draft Directive should not be confused with the creditors’ committees known under French law until the reform of 15 September 2021.

The draft Directive proposes creditors’ committees which would have rights of supervision and control over the insolvency procedures. This proposal is somewhat similar to the role of supervisors (“contrôleurs”) under French law but seems to correspond to a different reality.

Under French law, the judge appoints one to five supervisors from among the creditor pool at their request. The supervisors assist the creditor representative in their functions and the judge in his mission to supervise the administration of the company. The supervisors are informed or consulted at various stages of the procedure and may formulate a certain number of requests.

In the draft Directive, it is proposed that creditors’ committee should be formed only if the general meeting of creditors so decides and should be composed of three to seven members. They should be appointed either at the general meeting of creditors or by decision of the court, within 30 days from the date of the opening of the insolvency proceedings.

The rules of operation of these committees are still unclear. The draft Directive only states that a creditors’ committee should lay down a protocol of working methods within 15 working days following the appointment of its members. That protocol shall at least address the following matters: eligibility to attend and participate in creditors’ committee meetings, eligibility to vote and the necessary quorum, conflict of interests and confidentiality of information.

Furthermore, it would be up to individual Member States to ensure that creditors’ committees have at least certain rights and powers, for instance rights to be consulted and to have access to a range of information.

It will therefore be necessary to consider in due course the compatibility of these two regimes, as well as the relationship between a new committee (as proposed under the draft Directive) and the creditor representative appointed by the French court.

Concluding Thoughts

To conclude, through the proposed draft Directive, the European Commission is strengthening its overriding objective to find a better balance between the interests of debtors and creditors. Here, it appears that the specific aim is to give more security and predictability to creditors, thereby potentially stimulating investment within the EU.

The draft Directive sets a range of minimum standards across the EU, meaning that Member States which already have in place stricter regimes would not be required to amend their existing legislation to be in compliance.

Nevertheless, in view of some of the more general references in these proposals, it may be difficult to assess whether a Member States’ national legislation adequately meets the requirements of the draft Directive. It will be interesting to see how the draft Directive is shaped and developed before it is required to be implemented across the EU.

For a more detailed and general analysis of the draft Directive, please refer to our alert.

FOOTNOTES

^[1] Proposal for a directive of the European Parliament and of the Council harmonising certain aspects of insolvency law (COM (2022) 702; 2022/0408 (COD))