On June 6, 2014, the French Constitutional Court (Conseil constitutionnel) ruled on the question of whether a court should be entitled to convert a receivership proceeding into a winding-up proceeding on its own initiative. The Cour de cassation (French Supreme Court in civil matters) referred to the Conseil constitutionnel (Constitutional Council) the question of whether a provision of the French Commercial Code, which states that a court can convert ex officio receivership proceedings into winding-up proceedings, is in accordance with the French Constitution.
Section L631-15 II of the French Commercial Code provides that the Commercial Courts — which are responsible for opening insolvency proceedings — can decide ex officio, among other possibilities, to close pending restructuring proceedings over the assets of a company in order to put the company into liquidation. In general, French insolvency law includes several categories of insolvency proceedings. On the one hand, it distinguishes considerably between restructuring proceedings aimed at continuing the business in order to overcome difficulties, and on the other hand winding up proceedings that tend to liquidate a company because a successful chance for recovery appears hopeless.Restructuring proceedings end with either a plan (of restructuring or disposal), i.e., the continuation of the business, or a winding-up proceeding. In practice, most restructuring proceedings end in liquidation proceedings.
The present case deals with a recent French procedural tool that allows each party to challenge the constitutionality of a particular piece of legislation during court proceedings. The “application for a priority preliminary ruling on the issue of constitutionality” entered into force in 2010. It provides the opportunity to ask the Constitutional Court, which is called the Constitutional Council, whether a provision already in force is in accordance with the Constitution. If it is not the case, the Council is empowered to repeal the legislation involved. Before the application can be considered by the Constitutional Council, the lower courts have to refer the question to a Supreme Court — i.e., the Cour de cassation — which examines the application. If the question is new, serious and concerns legislation that is applicable to the dispute, then the request is referred to the Constitutional Council.
In the past 18 months, French insolvency law has been marked by the issue of whether a court should be entitled to decide on its own motion to open insolvency proceedings or to convert restructuring proceedings into winding-up proceedings. It started with a Constitutional Council’s decision from Dec. 7, 2012 (No. 2012-286), which ruled that a statutory provision that made it possible for Commercial Courts to open receivership proceedings against a company, on their own initiative, infringed the principle of impartiality guaranteed by the French Declaration of Human Rights, a part of the Constitution. This decision has been followed by two other similar rulings, concerning comparable provisions, dated Nov. 15, 2013 (No. 2013-352), and March 7, 2014 (No. 2013-368).
In these three decisions, the Constitutional Council gave the same reasoning, which can be summed up as follows: The principle of impartiality, which is preserved in the Constitution, means that a court should not be able to ex officio open a trial in which it has the authority to render a judgment. The Constitutional Council further explains that there might be an exception to this principle when the purpose of the proceeding is not punitive in nature and two conditions are fulfilled. First, the objective must serve a public interest. Second, there must be legal guarantees in place to ensure that the principle of impartiality is respected.
The Constitutional Council stated that the opening of receivership proceedings is in accordance with a public interest objective because it prevents the crisis from escalating. This is consistent with the goals of French restructuring proceedings aimed at rescuing companies, and at the same time saves jobs and eliminates debts. Similarly, the decision to put a company into liquidation should not be delayed in order to avoid harming the interests of employees, debtors and third parties.
As a result, the Constitutional Council explained that the first condition regarding the public interest is fulfilled. However, the second condition, which ensures impartiality, is not fulfilled. Indeed, the court observed that there were no particular measures in the challenged statutes that could prevent a Commercial Court from opening insolvency proceedings and prejudicing its judgment. In fact, a judge who is about to decide whether proceedings will be opened is inevitably influenced by his own previous investigations that led to his choice to open a trial on its own motion. This reasoning led the Constitutional Council to decide that the second condition was not met; therefore, there was no justification of an exception to the principle that prohibits Courts from opening proceedings ex officio.
In a fourth decision (No. 2013-372) related to this issue, the Constitutional Council went a step further. It decided on March 7, 2014, that the permission given by the law to the Courts to terminate a recovery plan in progress — resulting from restructuring insolvency proceedings — was not in conformity with the Constitution. The Constitutional Council held that although in this situation insolvency proceedings had already been opened against the company before the restructuring plan was validated by the court and implemented, it was unconstitutional for a court to decide ex officio to terminate the plan in progress.
Contrary to the court’s decision in the three previously mentioned cases, the Commercial Court’s decision to terminate the recovery plan on its own initiative must be adopted after insolvency proceedings have already been opened over the assets of the company in question. However, by validating the plan to be implemented, the court brings the original proceedings to an end. Thus, by terminating the plan in progress, the court decides to open new, different proceedings that are not a continuation of the previous proceedings that were closed. For this reason, the Constitutional Court also held that the disputed provision was unconstitutional.
In the meantime, on March 12, 2014, the Legislature passed provisions that include removing the ex officio terms from three sections of the Commercial Code, which deal with the opening of insolvency proceedings. These provisions entered into force on July 1, 2014. Section L631-15 II, which is involved in the aforementioned ruling, is not affected by this reform. In addition, the Legislature stated that the president of the Commercial Court shall alert the public prosecutor if it is brought to his attention that a company is in a state of a so-called “suspension of payments” (insolvability). When this occurs, this particular judge should not sit on a court panel when such court decides whether to open insolvency proceedings because the judge informed the public prosecutor, thereby endangering impartiality.
This last provision appears to ensure that the constitutional principle of impartiality is respected by preventing the judge, who petitions the court to consider opening insolvency proceedings, from sitting on the court panel that rules on the issue. It is possible that this provision alone is enough to meet the aforementioned requirements. It is questionable, however, whether it was necessary to remove the ex officio terms from several sections of the Commercial Code, since the Constitutional Council did not explicitly prohibit a court from opening proceedings on its own motion, but merely highlighted the lack of legal guarantees in the previous legislation.
Indeed, with its June 6, 2014, decision, the Constitutional Council demonstrated that it can be in accordance with the Constitution by allowing a court to open winding-up proceedings on its own initiative. In this case, the challenged provision concerned the empowerment of a court to convert restructuring proceedings in progress into winding-up proceedings.
This time, the Constitutional Court did not accede to the request seeking for the words “or ex officio” to be declared unconstitutional. Does it mean that that the court has reversed its position? In reality, that is not the case. This trial was different from the previous ones for two reasons.
First, the entitlement to convert restructuring proceedings into winding-up proceedings, provided in the disputed provision, does not lead to the setting up of new proceedings. Actually, the decision to convert receivership proceedings into liquidation proceedings, according to this particular provision, is made during the so-called “observation period” of restructuring proceedings, before restructuring proceedings are terminated — either by a continuation of the business or by liquidation. At the time the decision occurs, the Commercial Court is already dealing with the concerned insolvency case and receivership proceedings are still in progress. In practice, the Commercial Court ascertains that the economic situation of the company is hopeless and that it does not make sense to continue the “observation period” until its scheduled end because it clearly appears already that the company will be put into liquidation.
Second, the Constitutional Court referred to its reasoning from the previous decisions. Thus, the Council pointed out that the decision to convert the proceedings into liquidation proceedings meets the condition of public interest because it prevents the irremediable deterioration of the desperate situation of a company. The Council also stressed that the decision to open winding-up proceedings can only be made after having heard the debtor, the insolvency administrator and the creditors’ representative and after receipt of the opinion of the public prosecutor. According to the Council, these measures ensure that the “principle of contradictory” (i.e., the principle of fair trial) is respected.
As a result, the Constitutional Council ruled that the Commercial Court’s decision complied with the requirement of public interest and the principle of contradictory. Consequently, the principle of impartiality is respected. Therefore, the Court ruled that it is constitutional for a Commercial Court, during the course of the “observation period” of restructuring proceedings, to convert receivership proceedings into winding-up proceedings on its own initiative.
This decision almost certainly concludes the series of decisions regarding the empowerment of Commercial Courts to ex officio open or converted insolvency proceedings. Since the above-mentioned Legislature of March 12, 2014, Section L631-15 II of the Commercial Code was the last provision of this type that was neither removed from this Code nor referred to the Constitutional Court.