France Gives the Thumbs Up to a Pre-Pack Restructuring Procedure – Introducing the Sauvegarde Express

Also contributed by Lionel Spizzichino

The French Parliament recently approved a law that makes available a new version of “Sauvegarde” proceedings capable of imposing a restructuring plan relatively speedily on minority hold-out financial creditors.  Sauvegarde proceedings are the French pre-insolvency proceedings most analogous to U.S. chapter 11.  The new version of the Sauvegarde procedure, the Accelerated Financial Sauvegarde, is a variant of the original Sauvegarde procedure (which will continue to be available), but one expected to be particularly useful for companies financed by leveraged buy-outs or otherwise seeking solely to deleverage their balance sheets.  The new law comes into effect on March 1, 2011 and is becoming known as the French Pre-pack.

The basic Sauvegarde procedure provides a restructuring procedure for companies in financial difficulty and, importantly, does not require unanimous creditor approval in order to implement a restructuring plan.  The other forms of French pre-insolvency procedures, namely Conciliation proceedings and Mandat ad hoc, depend entirely on the ability of the debtor to reach a consensual agreement with all of its creditors on a contractual basis.  One advantage of those proceedings, however, is that there is no requirement to disclose the existence of either Conciliation or Mandat ad hoc proceedings, the details of which remain confidential except to the extent any agreement is formally recognised or ‘homologated’ by the French court.

In Conciliation proceedings, the court appoints a conciliator who assists the debtor in its negotiations with third parties, and the debtor has a four month period, extendable by one month, to agree to a restructuring plan with its creditors.  The Mandat ad hoc procedure is a very flexible procedure, with no fixed time frame, during which a Mandataire ad hoc assists the managers of the business.  This may, for example, involve diagnosing business difficulties, strategic planning, and/or providing refinancing and financial restructuring advice.  All three of the procedures are court supervised procedures and ones in which existing management remains in control of the business as debtor in possession.  In the case of Sauvegarde proceedings, an automatic stay on enforcement action by creditors, including secured creditors, comes into effect when the petition to open Sauvegarde proceedings is filed at court.  Additionally, ipso facto clauses purporting to be triggered by, or that allow acceleration of debts on the basis of, insolvency are invalid.  In Conciliation proceedings and in the Mandat ad hoc procedure no automatic stay comes into effect, although in practice creditors do not usually pursue legal recovery action.

Experience to date of the use of the basic Sauvegarde procedure has shown that it usually takes several months to implement a restructuring plan, and this delay has sometimes led to a significant deterioration in the value of the business.  The new variant of the procedure provides for a much speedier implementation of what is essentially a pre-negotiated plan.  By way of further background, in the case of the basic Sauvegarde procedure where the debtor’s business turnover and headcount exceed certain thresholds, two creditors’ committees must be formed: (1) a committee of the debtor’s main suppliers and (2) a committee of all the debtor’s bank lenders. The Sauvegarde restructuring plan must be approved by two-thirds in value of the votes cast by each of those committees.  Where the debtor has bondholders, the restructuring plan must also be approved by a two-thirds in value vote of its bondholders voting on the plan at a general meeting of bondholders, with all of its bondholders constituting a single class.  If the plan is adopted by both committees and any applicable bondholders’ general meeting and is then also approved by the court, it becomes binding on all members of the committees and on the debtor’s bondholders, including any creditors in those constituencies who voted against the plan.  Creditors who are not members of a committee (in practice are likely to be a very limited category of minor suppliers) cannot be bound by the plan unless they individually consent.

The new Accelerated Financial Sauvegarde, or Sauvegarde Express, only applies to financial creditors, i.e., credit institutions and bondholders, all of which will be entitled to participate in a committee of credit institutions or of bondholders, as the case may be, if their rights are affected by the terms of the proposed restructuring.  Suppliers of goods and services will continue to be paid according to their applicable contract terms and are not subject to the moratorium on enforcement action, which applies only to the financial creditors.  Accordingly, those creditors are not involved in the approval of the plan, and there is no suppliers committee. The Sauvegarde Express procedure, however, can only be sought where there is an ongoing Conciliation proceeding and the court is satisfied that, whilst not enjoying the unanimous support required to conclude a restructuring through the Conciliation procedure, the proposed restructuring plan enjoys sufficient support from financial creditors such that it is likely to be approved within one month by a two-thirds in value of those voting at both the credit institutions and bondholders committees.  Because the restructuring plan will have been pre-negotiated in the Conciliation proceeding, the Sauvegarde Express procedure is being termed the French Pre-pack.

Significantly, under the Sauvegarde Express procedure (unlike the position under the basic Sauvegarde procedure), financial creditors whose rights are not affected by the restructuring plan or who under its terms are to be paid in full are not entitled to vote.  This is an important change that should reduce the scope for hold-outs by creditors.  The speedy time-frame for the new procedure also looks to be an important advantage of the new procedure.  As a variant of the basic Sauvegarde Procedure, the Sauvegarde Express will be a restructuring procedure covered by the provisions of the EC Regulation on Insolvency Proceedings so that it will enjoy automatic recognition within each of Europe’s twenty-seven jurisdictions, with the exception of Denmark.