Once the court has opened a safeguard or receivership procedure, the company does not immediately move towards a definitive solution. It enters a transitional phase, which is absolutely crucial: the observation period. For managers, employees, creditors and all the company's partners, this period is synonymous with uncertainty, but also with opportunities. What actually happens during these few months? Who makes the decisions? How are contracts and debts managed? And above all, how do you prepare for the end of the procedure?
This article takes you through the observation period. We will look in detail at its objectives, its duration, the role of the various players in day-to-day management, what happens to current contracts and debts, and finally, how the solutions that will be presented to the court in an attempt to save the business are worked out. Understanding the mechanisms of this phase is essential for anyone involved in a safeguard or reorganisation procedure.
Purpose and duration of the observation period
The observation period is above all a analysis and diagnosis time. Its main aim is to provide an in-depth assessment of the company's economic, financial and social situation. The aim is to understand the causes of the difficulties and to determine whether a turnaround is possible. During this time, the company's activities must be maintained as far as possible. This is a kind of "medical supervision", where the aim is to stabilise the patient while preparing the treatment plan.
The initial duration of this period is set by the court in the opening judgment, but may not exceed six months (article L. 621-3 of the French Commercial Code). However, if the analysis or preparation of a plan so requires, this period may be renewed once, or exceptionally a second time at the sole request of the Public Prosecutor. In practice, the total duration can therefore be up to 18 months, or even slightly longer in complex cases. However, shorter periods apply to so-called "accelerated" safeguard procedures.
Company management during the observation period
Contrary to popular belief, the opening of a safeguard or reorganisation procedure does not always mean that the director immediately loses control. The level of intervention by the bodies appointed by the court, and in particular the court-appointed administrator (if one is appointed), varies.
The role of the executive and the director
- Safeguard procedure : The principle is that the continues to manage of the company (article L. 622-1). If appointed (which is not always the case for small businesses), the court-appointed administrator will have the task of surveillance orassistance. In a supervisory capacity, it monitors management; in an assistance capacity, it must co-sign certain deeds with the director. The court specifies the scope of his duties.
- In receivership The situation is more restrictive. The court-appointed administrator (who is more frequently appointed) is given the task of eitherassistanceor representation (article L. 631-12). In representation, he alone takes management decisions in place of the manager.
In all cases, the executive's powers are limited. Significant acts that fall outside the scope of day-to-day management (sale of a major asset, taking out a mortgage, transaction, etc.) require the approval of the board of directors.prior authorisation by the juge-commissaire (article L. 622-7).
Continued activity
The number one objective during observation is, if possible, to maintain activity. This preserves the company's assets, jobs and commercial relations, and therefore the chances of presenting a credible plan.
This immediately raises the crucial question of funding for this period. The company must be able to continue paying its current expenses (salaries, suppliers for new services, rent, etc.). Finding the necessary funds (existing cash flow, new loans authorised by the judge, mobilisation of receivables, etc.) is a major challenge from the outset.
The fate of current contracts
What happens to contracts signed before the procedure was initiated (commercial lease, supplier contracts, customer contracts, leasing, etc.)? ? This is one of the most important questions for the company's partners.
The principle of continuation: the choice of administrator
The opening judgment does not entail no automatic termination current contracts. The law gives thereceiver (if one has been appointed): it is he, and he alone, who has the power ofdemand the continuation of contracts that it deems necessary to maintain the business (article L. 622-13 of the French Commercial Code).
The other party to the contract (supplier, landlord, etc.) may not oppose this continuation solely on the grounds that payments made prior to the judgment have not been honoured. In return, the other party must be paid for the services provided. after the opening judgment. The administrator must ensure that the company will have the means to pay these new instalments before requesting continuation.
What happens if the administrator does not make a decision? The co-contractor can send him a formal notice to take sides. If no response is received within one month (unless the juge-commissaire grants an extension), the contract will be cancelled. automatically terminated. This is an essential mechanism to ensure that partners are not left in limbo. If the administrator decides not to continue a contract, it is also terminated.
Specific cases
- Employment contracts Redundancies: These continue as normal during the observation period. However, if economic redundancies prove to be urgent, unavoidable and essential, the administrator may be authorised by the official receiver to proceed with them, in compliance with the rules of employment law (consultation of staff representatives, etc.) (article L. 631-17).
- Commercial lease Termination of lease: Specific rules apply, in particular concerning termination for non-payment of rent after the judgment (article L. 622-14). The fate of the lease is often a crucial point in drawing up the plan.
- Loan contracts As mentioned above, payment of previous instalments is prohibited and interest payments (except for loans of more than one year) are stopped.
Liability management during the observation period
The observation period is also the time when the company's indebtedness is "photographed" and debts arising after the judgment are managed.
Freezing previous debts
As we have seen, this is a major effect of the opening judgment: prohibition of proceedings and payments for debts arising before this date (articles L. 622-21, L. 622-7).
Declaration and verification of claims
For their rights to be recognised, all previous creditors (including the Treasury, social security bodies, etc.) must declare their claim with the judicial representative. They generally have a period of two months from the date of publication of the opening judgment in the Bulletin Officiel des Annonces Civiles et Commerciales (BODACC) to do so (article L. 622-24).
This declaration is fundamental. A creditor who forgets to declare his claim within the time limit runs the risk of having it cancelled. offIn other words, the debtor will no longer be able to claim payment (unless, under strict conditions, it obtains a "relief from foreclosure" from the official receiver, article L. 622-26).
Le judicial representative is then responsible for check each claim declared. It does this by comparing the declaration with the company's accounts and consulting the company's director. If a claim is contested, a dialogue is established with the creditor. In the end, the trustee proposes to the official receiver a list of claims to be admitted (for what amount, with what guarantees, if any) or to be rejected (article L. 624-1). It is the juge-commissaire who decides in the event of persistent disagreement.
Claims arising during the observation period
What about debts that arise after the opening judgment? The law lays down a simple principle: those who are born regularly for procedural requirements or the observation periodor consideration for a service provided to the debtor during this period, must be paid when due (article L. 622-17).
Why should we do this? To encourage partners (suppliers, landlords, etc.) to continue working with the company. If they were not assured of being paid for their new services, they would refuse to continue, making any attempt at recovery impossible.
If, despite this principle, these subsequent debts are not paid on the due date, their holders benefit from a privilege They will be paid before the previous non-preferential creditors if a plan is adopted or in the event of subsequent liquidation. These creditors must bring their unpaid claims to the attention of the court-appointed representatives so that their preferential claims can be taken into account.
Preparing the outcome: the assessment and the draft plan
The observation period is not an end in itself. It must lead to a proposed solution for the company. There are two key stages in this process:
- The Economic, Social (and Environmental if applicable) Report The assessment, which is carried out by the administrator (if there is one), provides a complete overview of the situation: the origin and nature of the difficulties, the financial situation, the company's potential, the employment situation, etc. (article L. 623-1). This is the essential diagnosis before any treatment can be considered.
- The Draft Plan : On the basis of this assessment, a draft plan is drawn up.
- Visit Backupis the debtor who prepares it, with the assistance of the administrator (article L. 626-2).
- Visit Turnaroundis thedirector which prepares it, with the assistance of the debtor (article L. 631-19). This plan details the measures envisaged to turn the business around: possible restructuring, continuation (or cessation) of certain activities, operating forecasts, debt repayment plan over time (maximum 10 or 15 years), social impact (maintaining or cutting jobs), etc.
It is this draft plan (or the absence of a viable plan) that will be submitted to the court at the end of the observation period for a decision on the company's future: adoption of the plan, or conversion to compulsory liquidation if recovery proves impossible.
The observation period is therefore a dynamic and complex phase, in which management under pressure, dealing with liabilities and building for the future all come together. For both the company director and the creditors, this is a time when the decisions taken and the information exchanged carry considerable weight. Understanding the rules that govern it and anticipating the stages to come is essential if you are to protect your interests in the best possible way.
Whether you are the director of a company under protection or reorganisation, or a creditor of such a company, our firm can provide you with the legal assistance you need to get through this decisive period. Do not hesitate to contact us for an analysis of your situation and tailor-made legal support.
Sources
- French Commercial Code (mainly Book VI)
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