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14 July 2011
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French Legal News

The French Constitutional Court has declared reform provisions in insolvency law as unconstitutional. In the following, we are explaining the background for its decision. Besides, we would like to inform you about topical developments in the jurisprudence of the French Cour de cassation in connection with the recognition of insolvency proceedings opened in other European member states. Moreover,  we are dealing with the subject of the set-off of connected claims after the opening of insolvency proceedings in France.

Patrick Ehret
Attorney at Law in Germany and France
Certified Specialist in International Law in France

Patrick Ehret

Patrick Ehret

The French Constitutional Court declares reform provisions in insolvency law as unconstitutional

The law aimed at the simplification and improvement of the quality of legislation which was passed on 14 April by the French Parliament provides the broadening of the scope of application of the so-called Sauvegarde financière accélérée proceedings (in the following SFA proceedings). Besides, it provides the application of subordination agreements (especially used in syndicated credit agreements) in restructuring plans and the reform of the exercising of voting rights in creditor committees.

In France, the SFA proceedings entered into force on 1 March 2011. After the opening of conciliation proceedings, these new proceedings make it possible to cram down the resistance of a minority of creditors against a pre-negotiated restructuring plan. SFA proceedings can be filed without the finalization of the conciliation proceedings and without the separate opening of Sauvegarde proceedings if the implementation of the restructuring plan has failed (cp. our detailed Newsletter of 24 January 2011).

SFA proceedings concern exclusively financial creditors, but, however, can currently only be applied in cases of companies with more than 150 employees or if turnover exceeds 20 million Euros. On this basis, holding structures – typical for LBOs – are exempt from the scope of application. This stands in contrast to the intentions of the lawmaker who had especially created SFA proceedings for LBOs confronted with a wall of debts.

As a remedy, it was provided in sec. III and IV of para. 62 of the draft law that the complete balance sheet of companies compiling consolidated statements should be considered when examining the criteria for the application of SFA proceedings in the sense of number of employees and turnover. Furthermore, the turnover limit was supposed to be lowered to 10 million Euros by decree.

Besides, the draft law provided a simplification of the provisions regarding the proof of debt within the scope of SFA proceedings as well as details regarding the application of these provisions in already opened proceedings.

With its decision of 12 May 2011, the French Constitutional Court declared sec. III and IV of para. 62 of the draft law aimed at the simplification and improvement of the quality of legislation mentioned above as unconstitutional for formal reasons.

Thus, errors in the legislative procedure lead to a delay regarding the broadening of the scope of application of SFA proceedings. The report to the President of the French Republic, presented on 6 July 2011, with suggestions concerning a further simplification of legislation has picked up on these provisions again and it can be heard from the Elysée Palace that the passing of the law can be reckoned with before the end of this year.

Patrick Ehret, Attorney at Law in Germany and France, Certified Specialist in International Law in France

Appropriation of Eurofood case law by the French Cassation Court: Between the principle of mutual trust and the right to judicial review

Per judgment of 15 February 2011 (Cass. com., 15.2.2011, No 09-71.436, FS-P+B: JurisData No 2011-001685), the Commercial Chamber of the French Court of Cassation was able to substantiate the basic principles drafted by the European Court of Justice in the Eurofood IFSC proceedings with regard to the recognition of insolvency proceedings opened in another member state.

The following facts were the basis of the decision of the French Court of Cassation:

Kartogroup S.r.l., a company incorporated under Italian law with its registered office in Lunata (Italy), had filed for the opening of a concordato preventivo - an insolvency proceeding within the meaning of the European Insolvency Regulation due to its mentioning in annex A - on 14 August 2008 before the competent court in Luca.  The filing pertained to the assets of the Italian holding company as well as to the assets of the two 100 percent subsidiaries, Dalle Hygiène Production and Dalle Hygiène with their seats in France. The French companies served on the one hand to running the commercial business and on the other hand to administrating diverse real estate assets in France.

The competent court in Luca opened insolvency proceedings regarding said three companies per its decision of 12 September 2008 referring to sec. 3 I European Insolvency Regulation and with regard to their centre of main interest.

After learning about the opening of insolvency proceedings, several institutional creditors, among others HSBC France, tried to secure their claims in the amounts of 610,000.00 € or 715,000.00 € respectively by the registration of interim liens regarding the real estate assets and liens on the commercial business of the French debtor.

After the judge of first instance had rejected the claims for cancellation of the interim liens by the companies Dalle Hygiène Production and Dalle Hygiène per judgment of 25 May 2009, the appellate court in Douai dealt with this case. The appellate court decreed per 24 September 2009 the cancellation of the registration of the liens and other interim securities. The appeal to the Cour de Cassation against this decision remained unsuccessful.

Quoting sec. 16 of the European Insolvency Regulation and the Eurofood decision of the European Court of Justice (here especially point 41 and 42), the French Court of Cassation initially refers to the principle of mutual trust and declares that the member states must acknowledge any opening of insolvency proceedings with their effects in the respective member states, without being able to assess the jurisdiction of the court that opens the proceedings. It rests only with the court opening the proceedings to assess its jurisdiction on the basis of the European Insolvency Regulation.

Equally, referring to the Eurofood decision, the French Court of Cassation limits the principle of mutual trust to that effect that the recognition of insolvency proceedings opened in another member state does not take effect if the opening decision was passed breaching the modalities of proceedings which are protected by the Ordre Public. According to the French Court of Cassation, such a violation of the French procedural Ordre Public could especially manifest in the fact that the creditors residing in another member state do not have the possibility to effectively attack the opening decision, and thus its basic right to judicial review would be violated.

The French Court of Cassation, however, then explained that the Italian concordato preventivo provides that any creditor can appeal against the opening decision and thus does not violate the procedural French Ordre Public. In the opinion of the French courts, the referral of the appellants to the fact that the publication in the French official register BODACC of order opening the insolvency proceedings by the Italian court took place only after the registration of liens in France, does not lead to another decision.

The decision of the French Court of Cassation can be welcomed, as the procedural Ordre Public is narrowly interpreted within the scope of the European Insolvency Regulation and thus gives the principle of mutual trust its validity. In the opinion of the Court of Cassation, it would only be a violation of the procedural Ordre Public, if the creditor proves that his principle right to judicial review was completely undermined. The recognition of European insolvency proceedings, however, shall be imperative, provided that the lex fori concursus grants the creditor a legal remedy no matter of which kind by which he can concretely attack the decision giving main jurisdiction on the basis of the debtor’s centre of main interests.

The decision is linked to the decision of the Court of Cassation in the matter of Eurotunnel of 30 June 2009 (Cass. com., 30.06.2009, No 08-11-902, FS-P+B+R, JurisData No 2009-048941) by which the highest French Civil Court conceded foreign creditors to attack the opening decision of French courts merely on the basis of the principle of effective legal protection and of right to judicial review – and thus “sidestepping” French provisions. In French insolvency law, a legal remedy of a creditor against the opening decision is only valid, if he proves that the decision puts him at an improper disadvantage or that he holds a personal need for legal protection beyond the interest of the body of creditors. The Court of Cassation possibly feared that the prerequisites for legal remedies in French law could be regarded as too narrow by other member states and that French opening decisions could be denied their recognition due to their violation of the Ordre Public. The discussion which had arisen in French literature if this legislation is also to be applied on purely French cases, was ended by the Court of Cassation with its decision in the matter of Coeur de Défense of 8 March 2011 (Cass. comm., 8.03.2011, No 10-13-989 and No 10-13.990, FS-P+B-R-I, Sté Heart of La Défense (HOLD) and a. c/ Procureur general près CA Paris et a.: JurisData No 2011-002852).  A creditor still has to prove a personal need for legal protection which distinguishes him from the body of creditors. Whereas it is sufficient that the creditor argues that the Sauvegarde proceedings were only filed in order to flee the contractual obligations and to force the contracting party to renegotiate these obligations.

Patrick Ehret, Attorney at Law in Germany and France, Certified Specialist in International Law in France

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The set-off of connected claims after the opening of insolvency proceedings requires a valid filing of proof of debt

French insolvency law provides that claims that have arisen before the opening of insolvency proceedings may basically not be paid after the opening of proceedings and must be filed as proof of claims during the proceedings.

Ronan Dugué
Attorney at Law in France

Ronan Dugué

This principle, however, has one exception in the case of the set-off of reciprocate claims.

In French law, claims which were already quantifiable, due and enforceable before the opening of insolvency proceedings are subject to set-off automatically without the need for a further statement  concerning the set-off.

In case of the lack of one of the prerequisites before the opening of insolvency proceedings, it is stipulated as an exception in sec. L622-7 I para. 1 of the French Civil Code that a set-off after the opening of insolvency proceedings can only be considered, if the main claim and the counter claim are connected.

Step by step, jurisprudence has defined more clearly and extensively the concept of connected claims. In summary, reciprocal claims should arise from the same contract or at least from the same contractual complex. It is decisive that the reciprocal claims have their origin in at least the same global business. Thus, it depends on the commercial connection of the claims.

The French Court of Cassation clarified in its decision of 3 May 2011 (Cass. com., 3.5.2011, F S-P+B+R+I, No 10-16.758, JurisData No 2011-007711) that the possibility to set off connected claims after the opening of insolvency proceedings is only given if the counter claim was correctly filed in due time during the insolvency proceedings.

The prerequisites of the correct filing of a claim which cannot be derived from the wording of sec. L662-7 I para. 1 of the French Civil Code, can be deduced from the long-standing jurisprudence of the French Court of Cassation. With its decision of 3 May 2011, this jurisprudence has been continued, even after the coming into effect of the Loi de sauvegarde of the year 2005, according to which a missing or an undue filing of a claim does no longer result in its extinction but merely in its non-consideration in the insolvency proceedings.

Ronan Dugué, Attorney at Law in France

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