French Insolvency Law Reform

Journal Issue

Nov 2005

Column Name

Citation

ABI Journal, Vol. XXIV, No. 9, p. 18, November 2005

Journal HTML Content

Editor's Note: Major reforms to French bankruptcy law suggest that France has
adopted an "earlier treatment" approach to ailing corporate debtors. The
EU Regulation on Insolvency Proceedings continues to inspire a race to
the courthouse to open "main" proceedings and jurisdictional results
that would not have been possible before the Regulation came into force
in May 2002. The U.K.'s highest court has clarified certain features of
the floating charge, a very flexible form of security that first saw the
light of day 150 years ago. Also see a related article in the October
2005 issue, "French Overhaul Bankruptcy Regime," by Michael Haravon.

</blockquote>

In 2003, nearly 90 percent of the insolvency
proceedings in France resulted in liquidation. As a result, the French
government has overhauled French insolvency law with a view to:

<ul>
<li>promoting voluntary arrangements between the debtor and its
creditors,

</li><li>anticipating the debtor's financial difficulties by allowing it to
commence insolvency proceedings before the traditional insolvency test
is met (the traditional insolvency test is known as cessation des
paiements and is basically a simple cash-flow test),

</li><li>simplifying proceedings, and

</li><li>reducing the length of the insolvency proceedings (in 2003, the
average length of French insolvency proceedings was approximately four
years).
</li></ul>

The legislation was approved in July 2005 and will come into force on
Jan.. 1 2006, at which time a debtor will have the following options,
which in certain cases will depend on whether it is cash-flow insolvent
or not:

<ul>

<li>If it is not yet insolvent according to the French insolvency test,
the debtor may file a petition for the appointment of a receiver
(mandataire ad hoc). The role of the receiver will be determined
by the judge in the light of the debtor's difficulties. The process will
be confidential.

</li><li>If it is not yet insolvent, the debtor may commence 'safeguard
proceedings' (procédure de sauvegarde). Two creditors'
committees (one for trade creditors and one for credit institutions)
will be set up for large companies and should be consulted on the
safeguard plan drafted by the debtor's management during the observation
period that may last up to a maximum of 12 months (other than in
exceptional cases where the period may be extended at the
attorney-general's request).

</li><li>The debtor may file a petition for the commencement of
conciliation proceedings (formerly a voluntary arrangement),
which will result in the appointment of a conciliator in charge of
supervising and facilitating a rescheduling agreement. Any creditors
that financially support the debtor's attempt to recover by providing
new money following the commencement of conciliation proceedings will be
privileged in the event of subsequent insolvency or liquidation
proceedings. The conciliation proceedings will be available to debtors
experiencing financial difficulties or debtors that have been insolvent
for no longer than 45 days.

<blockquote><blockquote>
<hr>
<big><center>
Although the Austrian Supreme Court did not elaborate in its ruling on
the COMI issue, this ruling can nevertheless be regarded as an
indication that Austrian courts would accept the opening of main
insolvency proceedings by a non-Austrian (EU) court...
</center></big>
<hr>

</blockquote></blockquote>

</li><li>If it is insolvent, the debtor may commence either reorganization or
liquidation proceedings, depending on the likelihood of the company's
recovery. It is expected that liquidation proceedings for small
companies<a href="#2" name="2a">2</a> that do
not own real estate will be completed within one year of the judgment
commencing the proceedings.
</li></ul>

The French insolvency law reforms also amend some of the criminal
sanctions applicable to directors and reduce the risk of a creditor
becoming liable for wrongful support.

<h3>Austria: EC Regulation on Insolvency Proceedings—Opening Main
Proceedings</h3>

Pursuant to Article 3(1) of the EC Regulation on Insolvency
Proceedings<a href="#3" name="3a">3</a> (the
Regulation), the courts of the member state where a debtor has its
centre of main interests (COMI) shall have jurisdiction to open main
proceedings with respect to that debtor. There can only be one COMI and
one set of main proceedings for any company to which the Regulation
applies.

Recently, the Austrian Supreme Court held<a href="#4" name="4a">4</a> that the opening of main proceedings by a
non-Austrian (EU) court in another member state that may not have been
competent within the meaning of Article 3(1) of the Regulation (and that
did not even give sufficient reasons for the opening of main insolvency
proceedings in its relevant decision) nevertheless had to be accepted
and complied with by Austrian courts. Although the Austrian Supreme
Court did not elaborate in its ruling on the COMI issue, this ruling can
nevertheless be regarded as an indication that Austrian courts would
accept the opening of main insolvency proceedings by a non-Austrian (EU)
court, even if such court were not competent in the particular case.

<h4>Background</h4>

On Nov. 26, 2003, a bank filed an application with the Austrian court
to open insolvency proceedings over the assets of a debtor. On Jan. 28,
2004, the Austrian court opened the insolvency proceedings. The day
after the proceedings were opened, the court received a written pleading
from the debtor stating that insolvency proceedings were already open in
the United Kingdom, that the debtor did not possess any assets in
Austria and that the debtor's centre of main interests was not in
Austria. Therefore, the debtor argued that the opening of another set of
main insolvency proceedings was not permitted pursuant to Article 3(2).

<h4>The Judgment</h4>

The U.K. High Court had claimed jurisdiction to open main proceedings
in respect of the debtor pursuant to Article 3(1) on the grounds that
the debtor's COMI was in the United Kingdom. Pursuant to Article 16, the
opening of collective insolvency proceedings in one member state has to
be recognized by all other member states from the time it becomes
effective. As a general rule, applying the principle of mutual trust,
the international jurisdiction of the court that opens insolvency
proceedings shall not be examined. The opinion of the court of another
member state on whether the court in the first member state has
correctly claimed jurisdiction is not relevant. What is relevant is
whether the court in the first member state has claimed jurisdiction
pursuant to Article 3(1).

Incorrectly assuming jurisdiction pursuant to the Regulation is not,
prima facie, contrary to public policy. Recognition of main
insolvency proceedings opened in another member state may only be
refused pursuant to Article 26 if recognition or enforcement of a
judgment would be clearly incompatible with public policy, and in
particular incompatible with basic principles or constitutionally
guaranteed rights and freedoms of the individual. If the court of
another member state incorrectly claims jurisdiction or another EU law
is breached, this will not be automatically contrary to public policy
under Austrian law unless fundamental rules of the EU had been grossly
disregarded.

The Austrian courts should only refuse to recognize insolvency
proceedings opened in another member state in exceptional circumstances.
It could be argued the exceptional circumstances existed because the
U.K. High Court failed to give substantive reasons for its decision to
open main insolvency proceedings. This is a fundamental requirement for
a fair trial. However, even in these circumstances the refusal of
recognition is not mandatory but optional. It could be seen from the
application of the bank that the debtor had links to the United Kingdom
and at least in part conducted business there. With respect to the
requirements for opening insolvency proceedings, although there did not
seem to be sufficient proof to counter the presumption that the debtor's
COMI is in the place of its registered office as required by Article
3(1), no violation of public policy was apparent. It might have been
different had there been no internationally recognized connection at all
or had additional exceptional circumstances led to an unfair trial.

Once main insolvency proceedings have been opened in a member state,
only secondary insolvency proceedings can be opened in another member
state. These secondary proceedings are restricted to the assets of the
debtor situated in that other member state. The existence of an
"establishment" is a precondition to opening secondary insolvency
proceedings. In this case, it was held that there was no establishment
because although assets were situated within Austria, the debtor did not
have an office, employees or conduct any noticeable activities there.

This case is another in a long line of cases that U.S. lawyers will
need to understand in order to make appropriate use of the new chapter
15, which came into force on Oct. 17. Specialist advice on the European
experience of the new concepts of COMI and "establishment" may in
appropriate cases be well worthwhile.

<h3>U.K.: Recent Case Law on Security Interests</h3>

The House of Lords (the highest court in the United Kingdom) has
recently given an important judgment clarifying certain aspects of the
law on granting security.<a href="#5" name="5a">5</a>

The question that was considered by the House of Lords in
Spectrum was whether a charge over present and future book debts
took effect as a fixed charge (which was how it had been drafted) or as
a floating charge. The charge was drafted in a form that had been
approved by the court of appeal little more than 25 years earlier. The
charge prevented the charger from disposing of or charging the
uncollected book debts, but allowed it to deal with its debtors and
collect the debts. Proceeds of collection were to be paid into a
designated account with the chargee bank, but the charger was allowed to
draw freely on the account for its business purposes, provided that the
overdraft limit was not exceeded. Natwest argued that the charge created
a fixed charge, and the Crown creditors argued that the charge created a
floating charge.

Whether a charge is a fixed or floating charge has implications for
the priority of payments to the lender. Preferential creditors rank
ahead of a floating chargeholder in respect of floating charge
realisations, but not ahead of a fixed chargeholder in respect of fixed
charge realisations.

The House of Lords held that the hallmark of a floating charge is
that, until some further step by way of intervention is taken by the
chargee, the charger company can use the assets in question for its
normal business purposes and, in using them, remove them from the
security. If this characteristic is present, the charge will be a
floating charge and cannot be a fixed charge, whatever its other
characteristics may be. In this case, Spectrum was able to draw on the
account once the book debts had been collected, and so the charge was a
floating charge.

Although the charge considered in Spectrum was not a fixed
charge, the court held that it was conceptually possible to take an
effective fixed charge over present and future book debts, although they
gave little by way of practical guidance as to how effective fixed
charges over book debts should be taken going forward. However, the
House of Lords also made it clear that even if the charge had contained
sufficient restrictions on how the money in the account could be used,
if that was not how the account operated in practice then the charge
would still be a floating charge.

This ruling put an end to the wait of approximately 550 corporate
insolvencies that have been frozen because of the legal uncertainty
arising from an earlier decision of the Privy Council in
2001<a href="#6" name="6a">6</a> that came to
the same conclusions as the House of Lords in Spectrum.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Contributing authors
include Fabienne Goubault (Paris), Friedrich Jergitsch (Vienna) and
Catherine Derrick (London). <a href="#1a">Return to article</a>

<a name="2">2</a> A company is small if its
number of employees and turnover does not exceed specified thresholds.
<a href="#2a">Return to article</a>

<a name="3">3</a> Council Regulation (EC)
No 1346/2000 of 29 May 2000 on Insolvency Proceedings. <a href="#3a">Return to article</a>

<a name="4">4</a> OGH 17.3.2005, 8 Ob
135/04t. <a href="#4a">Return to article</a>

<a name="5">5</a> National Westminster
Bank v Spectrum Plus Limited [2005] 3 WLR 58. <a href="#5a">Return
to article</a>

<a name="6">6</a> Agnew v Commissioners
of Inland Revenue [2001] 2 AC 710. <a href="#6a">Return to
article</a>

Journal Authors

Sandy Shandro

Journal Date

Tuesday, November 1, 2005 - 12:00

Bankruptcy Rule

2005