Expansion and strengthening of protective measures, and reforms to procedures relating to bondholders and to accelerated financial safeguards SUMMARY French bankruptcy law has been recently modified by Law no. 2012-346 of March 12, 2012 relating to protective measures (mesures conservatoires) applicable to safeguard, recovery and liquidation proceedings, and by Law no. 2012-387 of March 22, 2012 relating to the simplification and easing of administrative procedures. Law no. 2012-346 of March 12, 2012 modifies the manner in which protective measures may be used in the context of general enforcement proceedings (procédures d exécution); previously, such protective measures could only be taken in connection with a legal action based on insufficiency of assets brought against the managers of a company subject to judicial liquidation (namely, an action en comblement de passif). The main provisions of the new law are as follows: protective measures can now also be taken against the assets of an individual or a legal entity to whom a bankruptcy proceeding has been extended on the ground of the so-called co-mingling of assets (confusion des patrimoines) or fictitious company (fictivité) theories; within the scope of a legal action based on mismanagement (action en responsabilité pour faute) that contributed to a cessation of payments (état de cessation des paiements), protective measures can now also in certain cases be taken and maintained against the assets of de facto or de jure managers upon the opening of a recovery procedure; and the disposal of assets subject to security measures (mesures de sûreté) and the use of the proceeds from the sale are possible under certain conditions. These provisions are immediately applicable, including to ongoing bankruptcy proceedings. Law no. 2012-387 of March 22, 2012 is designed to ease debt restructurings by debtors subject to bankruptcy proceedings. Its main features are as follows: the integration into the proposed recovery plan of any subordination agreement amongst bondholders; and New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com
the eligibility of holding companies to accelerated safeguard procedures, subject to a minimum balance sheet condition. These provisions will only apply to proceedings initiated after the promulgation of the statute. EXTENSION AND ENHANCEMENT OF PROTECTIVE MEASURES Background Law no. 2012-346 of March 12, 2012 was adopted in a very short period of time, and was mainly designed to protect Petroplus Petit-Couronne, a French subsidiary of the Swiss refining company Petroplus, which is currently subject to a recovery procedure. The goal of this statute was to enable the French judicial administrator (administrateur judiciaire) of Petroplus in France to seize certain oil assets of the Swiss parent entity that were held by the French Petroplus subsidiary, after having brought a legal action against the parent company based on mismanagement but before the merits of the action were decided upon. Overview of the new statute Prior to the implementation of this statute, the only protective measures whose implementation did not depend on proving the existence of a legally grounded claim and circumstances threatening its recovery were those taken within the scope of a legal action for insufficiency of assets brought against the manager of a company subject to judicial liquidation (Article L. 651-4 of the French Commercial Code). Apart from this isolated case specific to judicial liquidation, the implementation within the scope of bankruptcy proceedings of exceptional protective measures was not possible. These measures are now available ahead of a judicial liquidation. The new mechanism is designed to prevent managers (including corporate parents) who contributed to the financial troubles of a company to escape liability by shielding their assets, and to ensure that such assets may be added to the assets of the company and used to pay off its creditors. Scope The provisions of the new law apply to the following assets: assets of an individual or a legal entity to which a bankruptcy proceeding has been extended on the basis of the so-called co-mingling of assets or fictitious company theories (similar to principles of corporate veil-piercing ); and assets of de facto or de jure managers (individuals or corporate entities) against whom a legal action has been brought based on mismanagement. These provisions are immediately applicable, including to ongoing bankruptcy proceedings. Liability of de facto and de jure managers As a result of the new law, the president of the court petitioned by the judicial administrator or the creditors representative (mandataire judiciaire) to decide on the merits of a legal action brought against de facto and de jure managers may impose any appropriate protective measure against the assets of such manager. -2-
The scope of this provision extends both to de jure managers, i.e., members of the managing body of the company as set forth in its by-laws, and de facto managers, i.e., the individual or legal entity involved in the decision-making process of the company and acting affirmatively in an independent manner 1. As a result, protective measures may now be taken against de facto and de jure managers after the institution of a legal action, and prior to any judgment on the merits being rendered. The protective measures that may be ordered by virtue of this statute consist of: freeze orders (saisies conservatoires); and judicial liens (sûretés judiciaires) on any type of asset, tangible or intangible, fixed or movable, included in the estate of the defendant. These measures may include, for example, the registration of a mortgage (inscription d une hypothèque) on real property, or the imposition of a freeze order (saisie conservatoire) with respect to bank accounts or other property (e.g., as in the Petroplus case, oil stocks). Such protective measures may be ordered by the president of the court by way of summary procedure (sur requête), and, under certain conditions, assets subject to protective measures may be sold. BONDHOLDER PROVISIONS Background Pursuant to Article L. 626-30 of the French Commercial Code, creditors of certain debtors 2 subject to a safeguard or recovery procedure are separated into two committees: the credit institutions committee (comité des établissements de credit); and the main suppliers committee, comprised of each product or service provider whose debt accounts for more than 3% of the total of suppliers debts. If a safeguard or recovery plan submitted to the committees provides for an extension of payment terms, discounts or, in certain cases, conversions of debt into securities granting direct or indirect access to the share capital, it must also take into account any subordination agreements entered into among creditors before the instigation of the procedure. As a result, amounts distributed according to the proposed plan generally will need to follow the order of preference contractually agreed upon by the creditors. Implementation of subordination agreements among bondholders Law No. 2012-387 of March 22, 2012 now explicitly provides that the foregoing principles also apply to subordination agreements entered into amongst bondholders. Accordingly, if the proposed plan submitted to a vote by bondholders provides for an extension of payment terms, discounts or, in certain cases, conversions of debt into securities granting direct or indirect access to the share 1 2 Cour de Cassation, Chambre Commerciale, February 13, 2007. Debtors whose financial statements have been certified by an auditor or prepared by a public accountant (expert-comptable) and who have more than 150 employees, or whose gross turnover is over 20 million, pursuant to Article L. 626-29 of the French Commercial Code. -3-
capital, such proposed plan must now take into account the subordination agreements entered into between the bondholders before the instigation of the procedure. In addition, the new law provides that bondholders will not be entitled to vote on the adoption of a proposed plan if such plan does not provide for any modification in payment terms and conditions, or provides for a full payment in cash upon approval of the plan. EXTENSION OF THE SCOPE OF ACCELERATED FINANCIAL SAFEGUARDS As introduced by Law no. 2010-1249 of October 22, 2010, the accelerated financial safeguard procedure is available to certain debtors, and has the effect of allowing a safeguard plan to be adopted and to be binding upon the members of the relevant committees even though a minority of them rejects it. Previously, the eligibility criteria for use of the accelerated procedure meant that in practice it was primarily available to operating companies. Under the new law, the procedure is also available when the debtor s balance sheet is above a certain amount to be determined by decree. This balance sheet criterion is aimed at making the procedure available to holding companies of medium and large corporations (e.g., acquired through a leveraged buyout) which do not meet the current threshold conditions for the accelerated financial safeguard procedure. This relevant threshold will be determined by a decree and is expected to be set between 10 and 20 million. * * * Copyright Sullivan & Cromwell LLP 2012-4-
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