Preventive measures to protect your activity from the state of cessation of payments and curative measures

Introduction

The financial management of a company must be subject to particular vigilance to avoid or even prevent the state of cessation of payments, synonymous with major financial difficulties. There are preventive procedures that allow these situations to be managed proactively and reactively.

Failing this, the judicial recovery procedure may constitute a curative measure whose aim will be, as its name indicates, “to restore” the activity of the company.

Preventive measures made available to business leaders and partners

Associates’ right to alert

In a company with two or more partners, the right to alert is a preventive procedure which allows partners to report facts likely to compromise the continuity of the company’s operations. (L 223-236 Commercial Code, L 225-232, 1855 Civil Code).

These facts are serious or can be serious, but do not cause the immediate ruin of the company; in fact, in this hypothesis, the company is not in cessation of payments, it can still meet its due liabilities with its available assets.

The triggering factors can be financial (negative net situation, negative cash flow situation, failure of a major debtor, etc.), other factors are linked to the operation of the company (negative self-financing capacity, loss of significant markets, notable and continuous underactivity, etc.), a third series includes facts of a diverse nature (large and repeated strikes, major tax adjustment, destruction of production tools, etc.).

In this regard, any partner may, twice per financial year, ask questions in writing to the manager on any fact likely to compromise the continuity of the operation. The manager’s response is communicated to the auditor, if one exists. If the answers are not satisfactory, the auditor may refer the matter to the president of the commercial court so that measures can be considered to remedy the company’s situation.

In the absence of an auditor, the partners cannot directly follow the alert procedure as provided for by articles L. 234-1 et seq. of the Commercial Code to refer the matter to the president of the court. However, they can resort to other legal mechanisms, such as the request for appointment of an ad hoc agent or a conciliator, or take legal action to protect the interests of the company and its creditors (appointment of a provisional administrator for example).

Conciliation and ad hoc mandate, confidential amicable settlement procedures

Conciliation and the ad hoc mandate are confidential procedures which make it possible to open a period of negotiations with creditors to find amicable solutions to the company’s financial difficulties (articles L. 611-4 et seq. of the Commercial Code).

The manager of the company himself can thus ask the president of the commercial court to appoint a conciliator or an ad hoc agent.

The ad hoc mandate procedure can be requested by any company which is encountering difficulties, whether financial, economic or social, but which has not yet ceased payments.

The conciliation procedure is open to companies which are experiencing proven or foreseeable difficulties, and which – likewise – have not been in cessation of payments for more than 45 days.

These measures both aim to facilitate negotiations between the company and its creditors, in order to reach an amicable agreement.

These measures offer an alternative to heavier and more restrictive collective procedures (safeguard or recovery procedure) and they are confidential. Finally, conciliation offers more formal legal protection in the event of approval of the agreement, which gives it enforceable force.

These confidential procedures make it possible to take corrective measures before the financial situation of the company deteriorates further. Often they will take the form of schedules concluded with the creditors, for a longer duration than those which could have been obtained before a judge (greater than 2 years). They offer a first line of defense against financial difficulties by encouraging managers to act quickly, while preserving the reputation of the structure. The confidentiality of these procedures makes their statistical evaluation difficult. Their success rate is therefore poorly known (some articles mention a rate of around 70%).

For the business manager who wishes to benefit from a safeguard plan allowing him to organize the restructuring of his company and the settlement of his debts over a period of up to ten years, it will be advisable to open a safeguard procedure.

The backup procedure, a procedure allowing a higher probability of survival

The safeguard procedure is the ultimate procedure which allows, while avoiding the state of cessation of payments, to find solutions to safeguard the activity and employment.

Indeed, it results from a study organization, France Stratégie, that companies which choose the safeguard procedure fare better than those which enter into receivership.

De facto, companies which enter into safeguarding are in better financial health than those which enter into receivership. More than 62% of them obtained a debt restructuring plan as part of the safeguard procedure. However, despite these figures, few companies adopt a proactive approach and request the opening of a safeguard procedure when the first difficulties appear.

The safeguard procedure is however intended for companies which, without being in cessation of payments, justify difficulties which they are not able to overcome.

Although the safeguard procedure is more formalized than previous procedures and involves the appointment of a judicial administrator responsible for assisting the debtor in the management of the company, unlike previous procedures it allows the debts of the company to be frozen.

The freezing of debts as part of a safeguard procedure is manifested by:

• the ban on payment of previous debts,
• the prohibition on creditors taking legal action against your company in order to obtain payment of a sum of money or the termination of a contract for non-payment,
• stopping the course of legal and conventional interest, as well as all late payment interest and surcharges,
• the prohibition on creditors from carrying out new registrations of mortgages, pledges and privileges on the assets of your company,
• or the power granted to the administrator to continue or not the contracts in progress when the procedure is opened.

The company will thus benefit from a set of rules derogating from common law and protective, which will allow it to continue its activity, encourage the adoption of a safeguard plan while ensuring that the liabilities do not worsen.

In order to allow the company to reorganize, a judicial administrator is appointed by the court to support the manager.

The latter is only there to assist you.

The principle is in fact that the manager ensures the administration of the company placed in safeguard.

The administrator cannot have the mission of managing the company in place of the debtor.

Thus, its missions will consist, within the framework of the safeguard procedure, of monitoring (the administrator verifies that the acts carried out within the framework of the management of the company are not contrary to the interest of the company or its creditors), or assistance (the administrator assists the manager of the company in difficulty with all management acts or for some of them).

In addition, at the end of an observation period, a safeguard plan is drawn up to organize the restructuring of the company and the settlement of its debts over a period of up to ten years (articles L. 620-1 et seq. of the Commercial Code), where before a judge in the context of a procedure with a judge having assigned you, you could only obtain a grace period of two years.

During the execution of the plan, your company will continue to carry out its activity normally.

However, if it appears that you are in a state of cessation of payments, you should request the opening of a judicial recovery procedure, which is intended to allow the continuation of the company’s activity, the maintenance of employment and the settlement of liabilities.

Judicial recovery, a curative measure upon the occurrence of a state of cessation of payments (L. 631-1 et seq. of the Commercial Code).

In the life of a company, certain difficult moments may require going through legal receivership. This is a dreaded passage but not necessarily insurmountable,

Thus, judicial recovery is a curative procedure which makes it possible to deal with the state of cessation of payments of a company by establishing a debt repayment plan over a maximum period of 10 years.

In this hypothesis, the company is in a state of cessation of payments, which means that it finds itself unable to meet the liabilities (debts claimed by your co-contractors, social debts, tax debts) due with its available assets (the sums which the company can immediately dispose of, such as cash, bank accounts, authorized account overdrafts).

Nevertheless, the judge considers that the liability to be taken into consideration to characterize the state of cessation of payments is the liability immediately due, which has not given rise to a moratorium or payment facilities on the part of the creditor.

The court will open an observation period during which the company will continue its activity with the assistance of the procedural bodies (administrator and judicial representative, the representative of the creditors), which will make it possible to assess the economic and social situation of the structure.

Here, the role of the administrator may be to assist you, and in much rarer cases, to ensure the representation of the company (the administrator may be responsible for partially or entirely ensuring the administration of the company in difficulty, which entails total or partial divestment of the debtor). This assistance allows you to benefit from the legal practice of professionals to maximize the chances of success of the reorganization.

The objective of a recovery procedure is to establish a diagnosis of the situation of the company and to develop a recovery plan by means of continuation of the activity (debt repayment plan spread over 10 years maximum) or if necessary by transfer of all or part of the company to a third party.

It offers a second chance to viable businesses to recover and clear their liabilities. It also offers them significant protection due to the protective rules for the benefit of society identical to those of the safeguard procedure:

• stopping of individual proceedings, stopping of the rate of interest and registrations: Creditors can no longer initiate or continue legal actions to obtain payment of their debts prior to the opening judgment. This suspension of individual proceedings protects the company against actions that could compromise its reorganization and allows it to protect its assets against creditors.
• prohibition on settlement of previous creditors: as soon as the procedure is opened, the repayment of the majority of previous debts is frozen. This gives the company a “breathing block” by suspending payments and stopping individual creditor lawsuits, allowing resources to be focused on reorganization and continuation of the business.

However, the sooner the company places itself under a judicial recovery measure from the status of cessation of payments, the more likely it will be to adopt a survival plan for its activity.

Conclusion

The preventive and curative procedures presented are essential to avoid the state of cessation of payments and the dramatic consequences that result from it. Partners and managers must be aware of these tools and use them wisely to preserve the financial health of the company.

Aware of the imminence of a difficulty that he knows is insurmountable, a business manager can place himself under legal protection without waiting to suffer a cessation of his payments (due liabilities higher than available assets). In all cases, as soon as this state of cessation of payments occurs, the manager is advised to quickly request the opening of a judicial recovery procedure in order to preserve the sustainability of his activity.

Knowing these procedures better is already a first step to taking them in time and avoiding liquidations with often irreversible consequences.

The LEGALPROTECH-AVOCATS firm has the legal practice to advise you and direct you towards the procedure that will be most suited to resolving your difficulties.

 

by Anouk Thomar