French insolvency law is set for a shake-up in 2014 with the introduction of a Chapter 11 style shareholder cram-down principle and other measures aimed at reducing frustration for creditors in sauvegarde and other French insolvency proceedings. A package of reforms is currently being prepared by the French government, as authorised by Law N°2014-1 of 2 January 2014.
Following calls for the bargaining power of shareholders to be lessened, the majority required to approve debt-for-equity swaps will be reduced from two-thirds of shareholders to a mere majority in certain circumstances. In redressements judiciaires proceedings, the receivers will be able to request that the court appoints legal representatives in lieu of dissenting shareholders to vote the necessary changes in share capital and ‘cram-down’ shareholders if the reorganisation plan provides for changes in share capital or equity transfers in favour of persons that have undertaken to implement such plan. The courts will also have the power to order the sale of controlling equity interests to creditors or third parties that have undertaken to implement the reorganisation. These changes should stifle minority shareholders who, with little left to lose, decide to block the issue of shares required to complete a debt-for-equity swap in order to obtain disproportionate concessions in the restructuring. However, the court will be able to subject any debt-for-equity swap to a ban on the re-sale of those shares until the company’s debt has been repaid in full.
If the package of reforms is approved, the French sauvegarde procedure will be overhauled with the expansion of the accelerated sauvegarde procedure, which due to numerous thresholds (turnover, employees, maximum duration) has been used only four times since it was passed into law in 2010. The proposed changes would also allow creditors of French companies in sauvegarde or redressement judiciaire proceedings to formulate their own reorganisation proposal and put it to a vote of creditors’ committees, in competition with the debtor company’s proposal. Plans will still require approval of two-thirds by value of creditors whose rights are modified by the plan and who attend and vote in each committee, and in the event of a debt-for-equity swap (subject to the cram-down proposal outlined above) two-thirds shareholder approval will still be needed. The intention is that because companies will no longer simply be able to ignore creditors’ plans, creditors will have greater negotiating leverage and debtors will be more incentivised to produce fair and competitive reorganisation proposals which take creditors’ interests into serious consideration.
A key aim of the entire package is to encourage the development of a secondary market for non-performing loans, which, in return, will help finance weaker credits with greater available liquidity. The secondary market is very active in the US and UK, but not in France and new legal rights for creditors may encourage hedge funds and other distressed debt investors to acquire and trade debt in troubled French companies.