Attachment of assets and insolvency proceedings

The meeting of a seizure-attribution procedure and the opening of collective proceedings, whether safeguard, reorganisation or judicial liquidation, creates a major area of legal friction. It pits the law of enforcement, which aims to enable a creditor to recover its debt, against the law of companies in difficulty, whose objective is to preserve the economic fabric and work tools or to organise an equal distribution between creditors. For a clear understanding of the Before exploring its interaction with collective proceedings, see our reference article. The aim of this article is to demystify the complex rules governing the implementation and coordination of these procedures and to clarify what happens to the distraining creditor when its debtor is the subject of collective proceedings.

The principle of individual lawsuits being stayed by collective proceedings

The fundamental rule of insolvency law is a freeze on legal proceedings. As soon as the opening judgment is handed down, a protective shield is put in place around the debtor's assets, creating a general unavailability of the debtor's assets. Article L. 622-21 of the French Commercial Code is unequivocal: it states that this judgment "stops or prohibits all enforcement proceedings by creditors against both movable and immovable property". Any seizure of assets made against the debtor company after this ruling would therefore be null and void ipso jure, without the need to prove any grievance, as it would violate this cardinal principle.

The purpose of this suspension is twofold. Firstly, to preserve the assets of the company in difficulty in order to give it a chance to reorganise or, in the event of liquidation, to maximise the funds to be distributed. Secondly, this rule ensures that creditors are treated equally, by preventing certain creditors, who are quicker and act individually, from being paid to the detriment of the other creditors as a whole, thereby avoiding harmful competition. Individual action is replaced by collective discipline.

However, there is one notable exception to this principle. Claims that have been duly incurred after the opening of the insolvency proceedings, if they are necessary for the conduct of the proceedings or for the observation period, benefit from a special regime. Article L. 622-17 of the Commercial Code provides that they must be paid when due. If this is not the case, the holder can take individual legal action and, therefore, carry out a distraint by means of a bailiff without being opposed to the stay of proceedings. The aim of this measure is to encourage the company's partners (any legal entity or individual) to continue contracting with it during this critical period.

The fate of an attachment order made before the proceedings were opened

The central question for a creditor is what happens to a seizure that he was diligent enough to carry out just before his debtor was placed under the protection of the Commercial Court and the courts. The law provides a clear answer to this question, which constitutes a major departure from the principle of the stay of proceedings.

Immediate attributive effect: an acquired right for the distraining creditor

A seizure by way of sale carried out prior to the judgment opening insolvency proceedings remains fully effective. Article L. 211-2 of the Code of Civil Enforcement Procedures states that "the occurrence of a judgment opening safeguard, receivership or compulsory liquidation proceedings does not call this allocation into question".

The reason for this resistance lies in the very nature of the seizure-attribution and its immediate attributive effect, which entails a transfer of ownership. As soon as the writ of attachment is served on the garnishee (for example, the debtor's bank), the seized claim instantly leaves the debtor's assets and is immediately assigned to the benefit of the garnishee. The object of the attachment thus changes ownership. This mechanism is based on the combined application of the Code of Civil Procedure and the Civil Code. Consequently, when the collective proceedings are initiated, the amount of the sum seized no longer belongs to the debtor and is therefore no longer part of the common pledge of creditors. The immediate attributive effect of attachment for payment is the linchpin of this resistance; its effects and how to challenge it are explored in detail in our guide on this enforcement mechanism.

The Court of Cassation, in a decision of principle of its Commercial Division of 13 October 1998 (Appeal no. 96-14.295), confirmed this logic by quashing the decision of the Court of Appeal that had been challenged. The claim thus assigned need not be declared as a liability in the insolvency proceedings, since it has already been paid by the transfer of ownership. The key moment is therefore the date on which the writ of attachment is served on the third party, and not the date on which it is notified to the distrainee debtor or the date of actual payment.

The special case of successively enforceable claims

The treatment of successively enforceable debts, such as rent or royalties, has given rise to significant litigation. The question was whether an attachment for payment made before the judgment opening the account could continue to have effect for future instalments due after that judgment. The specific seizure-attribution of successively enforceable claims is often at the heart of disputes in insolvency proceedings.

In a fundamental decision of 22 November 2002 (no. 99-13.935, published in the Bulletin), the mixed chamber of the Cour de cassation, considering the scope of the attributive effect, ruled in favour of the seizing creditor. It ruled that the seizure-attribution "continues to have effect on the sums due under this claim after the said judgment". This means that the garnishee (the tenant, for example) must continue to pay each rent due to the garnishee, and not to the court-appointed agent, until the amount of the claim giving rise to the seizure has been paid in full. This solution, which has since been confirmed, represents a considerable advantage for creditors who have been able to anticipate their debtor's difficulties.

It is essential not to confuse a claim for successive performance, which arises from a single contract (a lease), with successive claims, which arise from separate contracts that are renewed over time (regular orders). In the case of successive claims, only the claim existing on the date of the seizure is assigned to the creditor. Claims arising from contracts entered into after the seizure will fall within the scope of the collective proceedings.

Suspension of attachment: the suspect period

Even if a seizure of assets has been carried out prior to the opening of insolvency proceedings, it is not totally immune. Under insolvency law, there is a mechanism for monitoring actions taken during the "suspect period". This period extends from the date of cessation of payments, which can be set by the court up to 18 months before the opening judgment (pre-judgment period), until the judgment itself.

Conditions for cancelling a seizure

The Act of 26 July 2005 and its implementing decrees introduced a specific ground of nullity for seizures made during this period. Under article L. 632-2 of the French Commercial Code, an attachment for payment may be declared null and void if two cumulative conditions are met:

• It must have been carried out after the date of cessation of payments;
• The distraining creditor must have been aware of the company's suspension of payments at the time of the seizure.

The burden of proving that the creditor was aware of the cessation of payments lies with the party applying for nullity (the administrator, trustee or liquidator). This proof is often difficult to provide, but it can be based on a number of indicators (previous refusals to pay, requests for deadlines, unsuccessful reminder letters, etc.). This is an optional nullity; a commentary on the leading decision (Cass. com., 12 January 2010, no. 09-11.119) emphasises that even if the conditions are met, the judge retains discretionary powers and is not obliged to declare it null and void.

Exclusive jurisdiction of the court of first instance

It is important to note that this legal action, which is a form of challenge to the attachment on a particular ground, does not fall within the jurisdiction of the enforcement judge, but within that of the court that opened the collective proceedings. The Court of Cassation considers that this challenge "arises from the collective proceedings" and must therefore be dealt with by the judge of those proceedings (Cass. com., 29 April 2014, no. 13-13.572). This procedural specificity is important to master for creditors who see their seizure challenged on this basis.

Attachment in bankruptcy proceedings: a race against time

A creditor who does not yet have a writ of execution can take a preventive measure: precautionary attachment. This makes the claim unavailable, but does not assign it to the creditor. To obtain payment, the creditor must "convert" it into an attachment for payment once the writ of execution has been obtained. The creditor's reaction must be swift, because the timing of this conversion is decisive in the event of insolvency proceedings.

The importance of conversion before the opening judgment

If the protective attachment is converted into an attachment for payment before the opening judgment, it has full attributive effect, thereby conferring immediate attribution of the claim. The claim is then transferred to the seizing creditor and escapes the collective proceedings, in the same way as a conventional attachment for payment. Case law is consistent on this point (Cass. com., 10 December 2002, no. 99-16.603). A creditor who has taken the precaution of a protective measure and acts quickly to obtain a title and convert his attachment thus secures his position for his own benefit.

The impossibility of conversion after opening and its consequences

On the other hand, the situation is radically different if the judgment opening collective proceedings against the debtor company is handed down before the conversion can be carried out. As the act of conversion is an act of execution, it is paralysed by the stay on individual proceedings (which freezes both an attachment for sale and the provisional execution of a judgment) dictated by article L. 622-21 of the Commercial Code. The protective attachment becomes null and void and must be discharged; it has no effect. The creditor loses the benefit of its anteriority and diligence. It finds itself in the same situation as other unsecured creditors and must declare its claim as a liability of the latter, with an often limited chance of recovery.

The obligations and liability of garnishees in this complex context

The garnishee, often a bank holding the debtor's bank balance, finds itself in a delicate position. If the seizure is validly carried out before the insolvency proceedings are opened, the garnishee becomes personally indebted to the seizing creditor. The garnishee is therefore obliged to pay the funds to the seizing creditor, even after the opening judgment, on presentation of the certificate of non-contestation. If the garnishee were to pay the funds to the court-appointed agent, he would run the risk of having to pay a second time, into the hands of the seizing creditor. In case of doubt, the only way out is to deposit the sums, for example via a court-appointed receiver, until the situation is clarified by the judge or by an appointed receiver.

The relationship between attachment of assets and insolvency proceedings is a technical area of law in which every day, if not every hour, counts. A good understanding of these rules is essential if creditors are to protect their rights, or if a company in difficulty and its bodies are to ensure that the principles of public policy are respected.

Whether the debtor is a company based in Paris or in the provinces, the rules are the same, and applying them rigorously has far-reaching consequences. In addition to these interactions, seizure-attribution can also have other consequences. special situations requiring expert analysis. When the stakes are so high, the assistance of a quality lawyer is invaluable. Our firm, whose contact details can be found on this website, can offer you legal support for seizure of assetsto secure your rights and optimise your strategies in these delicate circumstances.

Sources

• French Commercial Code, in particular Articles L. 622-17, L. 622-21, L. 632-1 and L. 632-2
• Code des procédures civiles d'exécution, in particular articles L. 211-1 to L. 211-5 and R. 211-1 to R. 211-23