In France the pre-pack equivalent for the purpose of restructuring a company’s debts is a “sauvegarde financière accéléré”. This is the French version of Chapter 11. This is a preventative measure which is entered into before a company becomes officially insolvent, or if it has been insolvent for less than 45 days.
An administrator is appointed not as an insolvency practitioner, but to supervise what are essentially conciliation negotiations between the company and the creditors to find a deal to rescue the business. Similar to the UK pre-pack administration, the fact that the company is having financial difficulties is kept confidential, but unlike the procedure in the UK, the main creditors are involved and consulted.
Traditional conciliation procedures can often take 4-5 months and require the 100% agreement of all parties. The reality is that a small minority of creditors can reject a deal that may be in the best interests of the majority of the creditors, the company and its employees. Once the conciliation process has failed, the company enters into insolvency proceedings. At this stage, the insolvency practitioner can force through a deal with the creditor committees, if it has 66%a greement, using a ‘cram-down’ facility.
However, with the “sauvegarde financière accéléré”, things are beginning to change. In February 2013 a new measure which was amended in 2012 was implemented in France for the first time. This new procedure is effectively a fast track financial restructuring, very similar to the UK pre-pack. Following a conciliation period, the company can jump straight to the presentation of a restructuring plan to the major financial creditors, with ‘cram-down’ powers. The new procedure means that it is possible to agree a rescue solution in just two to four weeks.
In Germany, creditors have a much greater role in the insolvency administration process compared to the UK and France
In Germany, creditors have a much greater role in the insolvency administration process compared to the UK and France. Changes to the German insolvency regulations which came into effect last March have further strengthened their influence. In important cases, creditors form a creditors committee which has a role in choosing the insolvency practitioner and supervising his actions. Previously, when a company filed for insolvency in the courts, the judge would choose the insolvency practitioner.
German companies that need rescuing must file for pre-administration in the courts and the company is listed on a public register. The company and its administrator are then given a three month protected window, called a preliminary insolvency administration, to find a solution for the company. As soon as the three month period expires, the company automatically enters insolvency proceedings.
The three month protected window allows the administrator to focus on putting a rescue deal together, or liquidating the company. To enable companies to stay in business during this period, the Government provides support in the form of a wage guarantee scheme. Ultimately, any deal must be approved by the creditor committee.
The key difference between Germany and both France and the UK is that a company in financial difficulty must publicly file for insolvency in the courts. Due to the absence of a pre-insolvency proceeding and the short deadlines obliging the directors to file it is difficult to arrange a rescue deal or sale, without the risk of insolvency becoming public knowledge, which arguably may have a negative impact on value of company.
Worth mentioning is the new protective shield proceeding. Companies in financial difficulties are incentivised to opt for this new proceeding at an early stage because it allows management to retain control of the company. A company that has not yet become insolvent files for insolvency in the courts, asking to stay in possession. If granted, the company is permitted to choose its own Insolvency Practitioner and given a three month protected window to prepare an insolvency plan. After the three months have expired, the management retains possession (under the IP’s supervision) and presents the plan for the creditors’ vote.
However, if a 50 per cent agreement cannot be reached with the creditors, the company enters normal insolvency proceedings.
At the end of the day, it is often not possible to find a solution that satisfies both the needs of the business and the demands of the creditors. No matter how involved in the rescue process creditors become, the accent in these circumstances should always be on rescue rather than the repayment of debts and creditors are unlikely to be fully content with any procedure.
Patrick Ehret is an attorney at law in Germany and France with legal firm, Schultze & Braun. He specialises in international business recovery, restructuring and insolvency
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