Special edition LFA Covid 19: Insolvency Law I Update April 23, 2020

The COVID-19 health crisis has very serious economic consequences for companies that suffer a decline or even a cessation of their activities. Some companies, especially bars, restaurants and other shops, are probably already insolvent, no longer generate turnover or no longer have the cash flow to pay their debts.

In his speech of 16 March 2020, President Macron stated that “no company will be exposed to the risk of insolvency”. 

To support companies in financial trouble, the government first adopted financial and social aid measures. However, this aid may prove insufficient for a large number of companies that have already suspended payments or are in serious financial difficulties and need insolvency proceedings to restructure.

The Emergency Act No 2020-290 of 23 March 2020 declaring a health emergency in relation to Covid-19 authorises the Government to take all measures “to adapt the provisions of Book VI of the Commercial Code […] to take account of the consequences of the health crisis for companies“.

This was done by Decree No 2020-341 of 27 March 2020 adapting the provisions of the insolvency law concerning the health emergency and amending certain provisions of the Criminal Procedure Code. 

The regulation adapts the rules for the insolvency treatment of companies during the COVID 19 crisis, in particular by

• the opening of new insolvency proceedings,
• the follow up of ongoing procedures,
• the reorganisation of courts and procedural bodies.

These measures have just been supplemented by new aid for companies in financial trouble. On 16 April 2020, the Minister of Economy and Finance issued Decree No 2020-433, which aims to extend the guarantee scheme granted by the Solidarity Fund to certain companies in trouble.

During the COVID 19 crisis, any company in trouble may ask the court to open insolvency proceedings – protective measures, receivership or liquidation – in its favour. It can also request the opening of conciliation proceedings in order to negotiate new payment plans in confidence with its creditors.

In all cases, only the company in difficulty may request recourse to one of these procedures. This means that it is not possible to initiate receivership or liquidation proceedings at the request of a creditor. 

The purpose of this mechanism is to allow companies that might get into difficulties during the COVID 19 crisis to negotiate payment plans with their creditors without pressure.

Insolvency proceedings are normally oral and the company in difficulty – or its legal representative – must be physically present at the hearing in order to be heard.

However, during the COVID 19 crisis, the courts are closed because of the confinement and the hearings are cancelled and postponed to a later date. 

The question therefore arises as to how companies in trouble can apply to open insolvency or conciliation proceedings.

The Regulation provides that the matter can be brought before the Commercial Court by means of an internet-based petition for insolvency via the website www.tribunaldigital.fr.The company in difficulty can then formulate its requests. 

The Commercial Court may also decide for hearings to be held by video conference in order to respect the principle of contradictory proceedings and the confidentiality of the proceedings. If it is technically or materially impossible to use video conferencing, the hearing may be held by any electronic means of communication, including telephone. 

For example, since 17 March 2020, the Paris Commercial Court has successfully dealt with nearly one hundred urgent cases of insolvency proceedings by videoconference, thanks to the use of software that guarantees the confidentiality of proceedings. 

Thanks to digital technology (www.tribunaldigital.fr), the court offers a complete range of procedures for dealing with companies in difficulty and for the protection of employees.

Moreover, communication between the court office and the procedural bodies, such as the insolvency administrator, can be carried out by any means.

A company is in a state of suspension of payments when it can no longer meet its short-term liabilities with its available assets. In practice this means that the company no longer has the cash assets to pay these debts. 

However, during the COVID 19 crisis, the state of suspension of payments of a company is “suspended”. In fact, the regulation stipulates that “the state of suspension of payments shall be assessed taking into account the situation of the debtor on 12 March 2020”. The suspension of payments of companies will thus be frozen from 12 March 2020 until the expiration of a period of three months after the end of the health emergency, currently set at 24 May 2020. 

In practice, this means that a company will not be considered insolvent for the period from 12 March to 24 August 2020, as its financial situation will be assessed on 12 March 2020 and frozen until the end of the COVID 19 crisis. 

In this way, the company in trouble can benefit from the measures and procedures to prevent difficulties (ad hoc mandate, arbitration, safeguard measures) until 24 August 2020, even if its financial situation deteriorates to such an extent that it would be in a state of suspension of payments.

Thanks to this measure, managers of companies in difficulty can go to court more quickly to negotiate payment deferrals and obtain assistance through conciliation procedures: In particular, they can obtain payment of their employees’ salaries by the Association for the Management of the Guarantee Fund for Workers’ Claims (AGS).

Most of the legal deadlines normally applicable to collective proceedings cannot be respected given the suspension of the courts’ activities. They will therefore be extended, either until 24 June 2020 or until 24 August 2020.

The following periods and time limits are therefore extended until 24 August 2020 (unless they are amended):

• In conciliation procedures, the conciliation period, which in principle is four months and can be extended by one month, is automatically extended until 24 August 2020; in order to give negotiations maximum chances, it is also possible to carry out several conciliation procedures in succession without a waiting period of three months if a first conciliation attempt fails.
• The duration of the receivership procedures can also be extended until 24 August 2020, unless a longer duration or an extension has been granted by a court decision;
• All time limits which normally apply to the duties of insolvency administrators and authorised representatives may be extended until 24 August 2020: a simple request by the insolvency administrator to the insolvency court is sufficient. It will decide on a case-by-case basis;
• In the case of companies that are subject to acquisitions or liquidation plans, the deadline for the AGS to take over salaries and the guarantee periods will also be extended. 

In addition, the following periods and deadlines will be extended until 24 June 2020 (unless changed meanwhile):

• When insolvency proceedings are opened, the court must normally hold first hearing no later than two months after the decision to open proceedings in order to decide whether to continue the observation period: Since this deadline cannot be met, it is extended until 24 June 2020. 
• The duration of the current observation periods, restructuring plans, continued activities in the compulsory liquidation and simplified compulsory liquidation procedures will be automatically extended until 24 June 2020.

Companies in difficulty may also apply for financial assistance from the Solidarity Fund.

These grants are available to all companies, whether natural or legal persons, resident in France for tax purposes and carrying out an economic activity, provided they meet the following conditions:

• The company must have started its activities before 1 February 2020,
• It must not have been in compulsory liquidation on 1 March 2020,
• The company must comply with certain thresholds, such as the number of employees and the amount of turnover (e.g. less than 10 employees and a turnover not exceeding EUR 1 million for the last financial year),
• The company may not be controlled by a commercial company within the meaning of Article L.233-3 of the French Commercial Code.

In order to be eligible for these subsidies, the company must also prove that it has suffered an order to close down the business and has lost a certain turnover. It must also declare the amount of taxable profit for the last financial year.

Finally, the aid application must be submitted by 30 April or 31 May 2020 at the latest, depending on the date on which the company received the order to close the business. Applications can be sent out via the Internet.