AMERICAN INSTITUTE Journal Issues and Information for Today’s Busy Professional Making France a More Attractive Forum for in Europe: Part I Written by: safeguards have Anker Sorensen About the Authors been reinforced in Reed Smith; Paris the form of SIP 16,4 Anker Sorensen heads the Paris [email protected] introduced in January restructuring team of Reed Smith and 2009 to encourage Andrew Tetley specializes in the sale and acquisition greater transparency Reed Smith; Paris of underperforming companies, in cases where an [email protected] prebankruptcy strategy, restructuring insolvency practit- companies and related litigation. Editor’s Note: In 2006, €67 billion ioner envisages using Andrew Tetley is counsel with Reed of leveraged buyout (LBO) debt was Andrew Tetley a pre-pack solution. Smith in Paris and has expertise granted in France with nearly €20 In the U.S., pre-packs in cross-border restructuring and billion more added in 2008. According have become more commonplace as the insolvency issues. to sources, approximately a third of this surge in continues. In some debt was in in 2008.1 This article, pack process.2 The pre-pack is designed cases, courts have issued guidelines for appearing in two parts, examines the to allow a distressed business to be practitioners on pre-packaged chapter 11 latest developments in France in the area 5 reorganized quickly. By design, a pre- proceedings. of prepackaged restructuring plans—a pack arrangement removes or minimizes In France, the pre-pack does not have new, attractive and innovative technique the delay and uncertainty in the an equivalent history. It is a new concept for distressed companies that looks set insolvency process that might otherwise for the bankruptcy courts, made possible to be increasingly trialed and tested only recently thanks to a 2005 law that over the coming months to deal with the potential fallout from such default. n the United Kingdom and the United The International Scene States, prepackaged plans (pre-packs) Ihave become standard practice in insolvency proceedings, where they are derail a turnaround arrangement. It also 6 well-recognized as a practical tool. That has cost advantages. was amended in 2008, but does not have said, both nations’ approaches are not the guidelines that exist in the U.K. and Despite its attract- 7 directly comparable in terms of process. ions, a criticism not the U.S. In the U.K., a pre-pack is achieved by infrequently leveled The 2005 law introduced a new way of an proceeding, at pre-packs is that insolvency process that safeguarded with the objective being to obtain a the purchaser of the proceedings and was inspired by the U.S. rapid sale of a distressed business to a business may not be chapter 11 proceedings. The passage of predetermined buyer, with agreement at arm’s length (the the 2008 reforms has made safeguard being negotiated with the proposed purchaser may be a proceedings more attractive to a administrators prior to any court process. company owned by or 4 A Statement of Insolvency Practice (SIP) constitutes guidelines to practitioners operating in an insolvency context, issued with a view to In the U.S., a chapter 11 proceeding Anker Sorensen related to the managers maintaining certain standards. SIP 16 was issued under procedures is the preferred legal route and has more agreed upon among the insolvency regulatory authorities acting through of the distressed the Joint Insolvency Committee (JIC). It was commissioned by the JIC, options. The usual approach, if there business). While motive may be questioned produced by the Association of Business Recovery Professionals, and has been approved by the JIC and adopted by a number of regulatory are minority dissenters, is to vote on an on any given pre-pack arrangement, the bodies in the United Kingdom. agreed-upon plan prior to commencing countries in which pre-packs have evolved 5 See, for example, the U.S. Bankruptcy Court for the Southern District of New York. a chapter 11 proceeding. In this way, continue to explore its limits. 6 The amended legislation came into force on Feb. 15, 2009. the required majority of is able 7 It should be noted at the outset that what is now referred to as a “pre- In the U.K., courts have not been pack” arrangement in France differs from the U.S. chapter 11 pre-pack 3 to impose their will on the minority—a hostile to the concept. Most recently, equivalent in one key aspect: The operative voting takes place after commencement of the court process, not before. In this sense, the key component of a chapter 11 pre- French “pre-pack” is more akin to a U.S.-styled prenegotiated plan. In 2 See Bankruptcy in Practice, published by ABI, 4th Ed 2007, p. 464. common parlance, French practitioners nevertheless speak of a “pre-pack” 3 See, e.g., DKLL Solicitors v. Revenue and Customs Commissioners (2008) 1 See Les Echos, April 24, 2009, p. 26. arrangement—training on “pre-packs” was recently offered to French 1 BCLC 112. judges in July 2009. We therefore adopt the term “pre-pack” in this article.

44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org facing financial difficulties. French courts procedure11 but differ from judicial in each committee by majority vote are only beginning to see the emergence reorganisation and proceedings comprising two thirds of the total amount of pre-pack techniques, with in that they can only be invoked prior to the of claims made by the members who vote. negotiating turnaround arrangements debtor encountering cashflow problems, at Where the creditors’ committees with major creditors, and then invoking which time safeguard proceedings are no approve a safeguard plan, the plan is not safeguard proceedings to carry the longer an option.12 subject to a number of restrictions that arrangement through and bind other The central feature of safeguard would otherwise apply.14 For example, creditors. For the first time in France, proceedings, as opposed to judicial the plan may extend beyond 10 years there is now a real prospect of a significant reorganisation or liquidation proceedings, and there is no requirement that the first degree of “contractualised” restructuring is that the debtor remains largely in repayments be made within a year, or that organised through a court process. control of the business.13 The 2008 reform repayments equal at least 5 percent of the significantly reinforced this aspect: The total due for each subsequent year. As Safeguard Proceedings debtor is now permitted to propose his or well, creditors may be treated differently Safeguard proceedings represent one her chosen administrator, the debtor draws provided it is justified by the situation, of five types of proceedings currently up the restructuring plan (previously the and in the case of a company limited by available in France to a financially- duty of the administrator), and it can no shares, debt may be exchanged for equity. 8 distressed debtor. While not expressly longer be a condition of the restructuring Those creditors who are not members interlinked, the different types of plan that management be removed. of a creditors’ committee must be consulted proceedings may complement one another, Under the new law, while the court will individually or collectively.15 Unlike their with one proceeding capable of following appoint an administrator to accompany committee counterparts, no reduction in another as necessary. Whereas agreement management in the safeguard process, the their claims may be imposed, and this is of main creditors may not be enough to administrator’s role will be limited to that the case irrespective of whether a safeguard turn around the distressed debtor under of an informed observer and guide. plan is voted through by the creditors’ 9 available preventive proceedings, it may When given the task of simply committees. Indeed, it is not possible to be sufficient in safeguard proceedings to overseeing the company, the administrator’s impose on noncommittee creditors any of bind the minority to a restructuring plan assignment consists, first and foremost, the more flexible arrangements (described proposed by a majority or the in checking that the management’s above) that can be included in a plan debtor’s management. actions are not compromising creditors that is voted through by the creditors’ The 2005 law that introduced or the company’s recovery. If given the committees. In this respect, there may be safeguard proceedings came into responsibility of supporting management, an advantage in not being on a creditors’ force on Jan. 1, 2006, and received the administrator’s primary role is to committee. At the end of the process, the an almost immediate baptism of fire countersign management decisions made restructuring plan is approved by the court, when Eurotunnel filed for safeguard by the distressed company’s directors. which then appoints a commissioner to proceedings to restructure its considerable While the administrator continues to play an oversee implementation of the plan. debt in July 2006. Although it took a important role, since the 2008 reform, the year before a restructuring plan surfaced administrator cannot supplant management Pre-pack à la Française from the proceedings, the result has in the context of safeguard proceedings. The new law provides a workable generally been considered a success. In Another significant feature of structure within which to operate a February 2009, some 22 years after its safeguard proceedings is the automatic pre-pack arrangement. While it is not incorporation and nearly 15 years since it stay of claims that arises upon possible to simply have the court approve started operations, Eurotunnel announced commencement of the proceedings. This a preagreed restructuring plan with no 10 its first-ever dividend to shareholders. protection provides the backdrop against voting by creditors in the court process, if Safeguard proceedings have all the which the debtor will seek to reorganise a sufficient number of creditors are willing, 16 characteristics of a collective insolvency its affairs. a restructuring plan can be put in place. 8 In addition to safeguard proceedings (procedure de sauvegarde), Finally, particularly in the context of One clear limitation is that any restructuring the other four types of proceedings are (1) ad hoc representative plan proposed by the debtor needs the (mandataire ad hoc), a type of mediator to whom resort in practice is not a pre-pack arrangement, the role of the infrequently made and whose role was fully recognized in the 2005 law; creditors’ committees is important. In support of at least two, and possibly three, (2) conciliation (conciliation), introduced in the 2005 law, replacing the classes of creditors before it will be capable former composition with creditors procedure; (3) judicial reorganization any significant safeguard proceedings, the (redressemement judiciaire); and (4) judicial liquidation (liquidation of expedited pre-pack treatment. Where judiciaire). Ad hoc representative and conciliation proceedings are debtor is required to put its restructuring commonly referred to as “preventive” procedures. plan to the vote of two creditors’ bondholders exist, as is not infrequently the 9 See fn. 8. case for companies of a certain size, and 10 Litigation surrounding the Eurotunnel safeguard proceedings continues committees. The first committee is made nevertheless. In particular, the gambit of third-party proceedings directed up of financial and assimilated institutions, almost invariably for LBOs, priority lenders at the commencement order are still going through the courts. In a will not necessarily be able to impose the series of decisions handed down on June 30, 2009, the French Supreme while the second is made up of the debtor’s Court overturned the Paris Court of Appeal in connection with third-party principal suppliers. Since the 2008 reform, plan over recalcitrant junior lenders, even applications to review the commencement orders affecting Eurotunnel PLC, Eurotunnel Finance Ltd., Eurotunnel Services Ltd. and Eurotunnel a third body of stakeholders must also if the priority lenders are unanimous in Plus Ltd.—all companies incorporated in the U.K. In the court of appeal, their view. Reductions in debt cannot be the third-party applications to review were dismissed on the grounds approve the plan—the bondholders (if that a third-party creditor, at a threshold level, had to show fraud or a any). In all cases, decisions are taken imposed on creditors who are not members distinct interest (motif propre) in order to challenge a commencement 14 Refer to Commercial Code L.626-30-2, para 2. order authorizing safeguard proceedings. The French Supreme Court 11 Safeguard proceedings are expressly recognized as collective 15 All credit institutions or similar, and all major suppliers, are members of has referred the matter back to a reconstituted Paris Court of Appeal for insolvency proceedings under EU Insolvency Regulation 1346/2000, a creditors’ committee as of right. See fn. 17. reconsideration. The substantive issue turns on the application of article Annex A. 16 This situation may be contrasted with the possibilities offered by 3 of EU Regulation 1346/2000 and whether the French courts have 12 In French terms, the critical criterion is that of payment failure (cessation chapter 11 proceedings. Under U.S. law, there is a specific chapter jurisdiction to commence safeguard proceedings affecting each of the de paiements) where the debtor is no longer able to meet current debts 11 provision that precommencement acceptance by a creditor Eurotunnel companies, which depends on determining the centre of main from available assets. constitutes acceptance of the restructuring plan on its part, without the interest (COMI) of each debtor company. Under article 3, the place of the 13 Safeguard proceedings nevertheless remain subject to overarching requirement of any further vote in the court process, provided that the registered office i.e.,( the U.K. in this case) is presumed to be company’s control by a court-appointed supervisory judge and, ultimately, the creditor in question received proper disclosure. See 11 U.S.C. §1126(b). COMI, subject to contrary proof. Court itself. No such provision exists under French law.

44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org of a creditors’ committee.17 However, it statutory period of conciliation, or most is possible to sell off or assign parts of of it, will undoubtedly be needed to the debtor’s activity as an adjunct to any enable negotiation with the stakeholders safeguard plan,18 but the debtor may elect and proper preparation to ensure to sell or assign particular assets.19 At the expeditious treatment in the safeguard end of the process, the court remains final proceedings. Speed and security is arbiter on whether a plan is approved and is assisted by the fact that the court is required to ensure that “the interests of all required to rule on any challenges to creditors are sufficiently protected.”20 The the composition of the committees, committee-voting process does not offer any procedural irregularities and the carte blanche to the debtor, who has the content of the plan, at the same time as support of the majority of creditors to freely it rules on whether to adopt the plan.25 rewrite the debtor’s future. It is noteworthy as well that in the In terms of speed of execution, case of a plan that stays on track for which is a critical feature of any pre- more than two years, after which the pack arrangement, the new law provides debtor can request that any trace of the a challenging environment. Within procedure and plan be expunged from any safeguard proceedings, there are the company’s register.26 a number of time limits that, on first In Part II, we will look at the practical appearance, would appear to make a application of the French pre-pack speedy resolution impossible to achieve, approach to cases currently or recently not least of which being the time within before the courts. n which proofs of debt must be lodged (two months for creditors situated Reprinted with permission from the ABI in France, four months for overseas Journal, Vol. XXVIII, No. 7, September 2009. 21 creditors). Other limits include: the The American Bankruptcy Institute is a time within which committees must vote 22 multi-disciplinary, nonpartisan organization on the restructuring plan (20-30 days); devoted to bankruptcy issues. ABI has a limitation on convening bondholders more than 12,300 members, representing only after the creditors’ committees have 23 all facets of the insolvency field. For more voted (15 days notice); and the time information, visit ABI World at www. within which creditors outside of the abiworld.org. committees must respond to proposals on accommodating their claims (30 days).24 Despite this, it is possible with careful planning, cooperation from stakeholders and diligence to obtain a court-approved restructuring plan within 60 days from the date of commencement of the safeguard proceedings. Prior to commencing the safeguard proceedings, the full four- to five-month 17 From amongst suppliers, those whose claims represent more than 3 percent of total claims are members of the suppliers’ committee as of right. Commercial Code L.626-30 and R.626-56. The administrator has the power to invite other nonqualifying suppliers to become a member of the committee (R.626-57). See fn. 24. 18 Commercial Code L.626-1. The part to be sold or assigned must constitute “a group of means of production that form one or more complete and autonomous branch or branches of activity” (L.642-1). Any such sale/assignment will be subject to the same restraints as would apply in the case of a sale or assignment in liquidation, including as to publicity (L.642-22). In the context of safeguard proceedings, one complication is that it is not possible to simply agree an assignment or sale between the debtor and the intended purchaser. The process requires that offers be invited and approved by the Court. As part of the safeguard proceedings commencement order, it would be prudent to seek a short time limit within which offers should be tendered so as to minimize the possibility of any disruption to pre-pack arrangements (refer to L.642-2). 19 In this case, the proceeds would revert to the debtor, subject to any or security interests (Commercial Code L.626-23). 20 Commercial Code L.626-31. 21 Time runs from publication of the safeguard proceedings in the Official Bulletin of Civil and Commercial Announcements (BODACC). 22 This period may be reduced to 15 days by the supervising judge upon application of the debtor or administrator; Commercial Code L.626-30- 2, para 3. Bondholders may only vote after the plan has been accepted 25 Commercial Code L.626-34-1. Commentators have referred to this by the creditors’ committees. conjuncture as a mechanism to “purge” claims from the outset of the 23 Commercial Code R.626-60. plan that might otherwise be brought by disgruntled creditors to disrupt 24 In practice, the administrator will send out proposals for a reduction in the legal process and thwart efforts of the majority creditors/the debtor. claims and/or extension of time for payments. Failure by the creditor to 26 Commercial Code R.626-20. Introduced with the 2008 reforms, this is respond within 30 days of receipt of the administrator’s letter is deemed clearly an attractive provision for the debtor but may obscure matters to be acceptance of the proposal (Commercial Code L.626-5). However, for new partners who are introduced to the debtor after the two-year the creditor can refuse the proposal, in which event no reduction of the window has expired. creditor’s claim can be imposed in the safeguard proceedings.

44 Canal Center Plaza, Suite 400 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org