The end of liquidation and professional recovery: what are the outcomes?

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When a company goes into compulsory liquidation, the outcome may seem inevitable: the disappearance of the business and the sale of the assets. However, the proceedings must formally come to an end, and this end, known as closure, can take different forms with varying consequences, particularly for the individual debtor. In addition, for sole traders facing difficulties but with very few assets, there is an alternative to traditional liquidation: professional recovery. This article explores the procedures for winding up a judicial liquidation and its main effects, as well as the characteristics of the business recovery procedure.

Closure of the judicial liquidation

Judicial liquidation proceedings are not eternal. In fact, at the outset, the court sets a provisional deadline by which closure must be considered (Art. L. 643-9 C. com.). This period (often two years initially) may be extended if necessary, but the objective is to bring the operations to an end. There are two distinct ways in which this closure can take place, as set out in Article L. 643-9 of the Commercial Code.

When does the procedure end?

The judicial liquidation is closed by a court decision, whether requested by the liquidator, the debtor, the public prosecutor or even ex officio.. After two years, any creditor may also make a request.. There are two possible reasons for this closure:  

1. Closing to extinguish liabilities : This is the most favourable scenario, but also the rarest in practice. It occurs when the liquidator has succeeded in paying off all creditors in full (current liabilities are extinguished) or when he has sufficient funds to do so. In this case, the objective of discharging the liabilities has been fully achieved.  
2. Closure for lack of assets : This is the most frequent case (more than 95% of closures). The court declares the liquidation closed when it has become impossible or pointless to continue the liquidation because there are insufficient assets to pay creditors, even partially. This happens when all the assets have been sold and the proceeds are insufficient to cover the debts, or when the remaining assets are unsaleable or of such low value that their sale would entail disproportionate costs. The mere fact that unsaleable assets remain is no longer sufficient to prevent closure following a legislative amendment aimed at speeding up the completion of proceedings.  

It is important to note that the closing judgement puts an end to the mission of the liquidator (who must render accounts) and the official receiver..  

The main effects of closure for lack of assets

While closure on the grounds of extinguishment of liabilities simply puts an end to the proceedings, closure on the grounds of insufficiency of assets has far more significant consequences, particularly for individual debtors.

Principle: no resumption of proceedings by creditors

Article L. 643-11 of the French Commercial Code sets out the main and most striking effect of closure on the grounds of insufficient assets. does not restore to creditors the individual exercise of their rights of action against the debtor. In other words, creditors whose debts have not been paid (or only partially) during the liquidation can no longer, in principle, sue the debtor after the closure to obtain payment of the balance.  

This is a powerful measure, sometimes referred to as a "debt purge" or a "right to forget", designed to enable individual debtors to "bounce back" and restart a business without being indefinitely burdened by their entrepreneurial past. This is the continuation of the stay of proceedings ordered at the time of the the opening of compulsory liquidation proceedings. In the case of companies, the question is less relevant, as closure for lack of assets results in their dissolution and the disappearance of their legal personality.  

This rule does not mean that the debt is legally extinguished, but that the creditor loses his right of action against the principal debtor.. The absence of recovery of lawsuits is considered necessary for economic activity and employment, allowing entrepreneurs who have failed to try again.. The European Directive on Restructuring and Insolvency also encourages Member States to provide debt forgiveness mechanisms for entrepreneurs.  

Exceptions: when can creditors act again?

However, there are important exceptions to this principle of non-recovery of claims, listed in Article L. 643-11 of the French Commercial Code. In these cases, certain creditors regain their right to sue the debtor after the closure for lack of assets:

• Specific receivables excluded by nature :
  • Actions concerning assets acquired by the debtor through an open succession for the liquidation procedure.
  • Claims arising from a criminal conviction of the debtor.  
  • Claims relating to "rights attached to the person of the creditor" (e.g. maintenance payments, compensation for personal injury caused by an employer's inexcusable fault).  
  • Claims arising from specific environmental obligations (restoration of a classified site, etc.).
  • Claims arising from fraud against social security bodies.  
• Cases linked to the debtor's behaviour : The "right to rebound" is not granted to debtors deemed "unworthy":
  • If the debtor has been sanctioned by a personal bankruptcy or bankruptcy.  
  • If the debtor is a "repeat offender": i.e. if he or a company he managed has already been the subject of a judicial liquidation closed for insufficient assets in the 5 years preceding the opening of the new proceedings. The same applies if they have benefited from a professional recovery within 5 years.  
  • In the event of fraud of the debtor in relation to one or more creditors. This fraud must be established by the court, either at the time of closure or subsequently at the request of any interested party.
• Situation of guarantors and co-obligated parties : No resumption of proceedings is an exception personal to the principal debtor. It does not benefit not persons who have stood surety for him or her, or co-obligors (for example, joint and several borrowers). These guarantors remain liable to pay the debt and can then take recourse action against the debtor, even after the closure of the debt. This recourse claim by the guarantor or co-obligor who has paid in place of the debtor is not affected by the principle that proceedings may not be resumed.  
• Unpaid subsequent preferential creditors : Creditors whose claims have arisen after the opening judgement for the purposes of the proceedings or the business (Art. L. 641-13) and who have not been paid recover their right to sue individually. However, the court may impose payment deadlines (of up to 2 years), except for public debts (taxes, URSSAF, etc.).  
• Territorial procedure : If the judicial liquidation opened in France was a "territorial" (secondary) procedure concerning the French establishment of a company whose registered office is in another EU country, creditors recover their right to take legal action. This is intended to prevent a foreign company from 'liquidating' its debts in France, only to do so again later.

When a creditor recovers his right to act, he must obtain a writ of execution (or have it declared that he meets the conditions if he already has one) before he can initiate seizures against the debtor (Art. L. 643-11, V).

End of divestiture for individual debtors

From the time of the closure judgement (on the grounds of insufficient assets or extinguishment of liabilities), the individual debtor is no longer divested of his assets.. He regains full capacity to administer and dispose of his assets, to enter into contracts and to set up a new business (unless he is personally bankrupt or disqualified from managing the business). The liquidator may also take legal action that was not related to the liquidated assets, or recover debts forgotten by the liquidator.. Closure also suspends the ban on issuing cheques that may have applied before the proceedings, unless creditors recover their right to take action.  

The possibility of reopening the proceedings

Even after a closure due to insufficient assets, the proceedings may be reopened if new elements emerge (Art. L. 643-13 C. com.). This reopening may be requested by any interested creditor or the public prosecutor.. The conditions are strict:  

• We have to discover that assets have not been realised.  
• Or that an action in the interest of creditors has been omitted (for example, a liability action against a third party).  

Reopening allows the liquidator (the same or a new one) to resume his duties to realise the assets discovered or to take the action omitted, and then to distribute the sums obtained. Reopening revives the previous proceedings and applies retroactively to all assets that should have been realised before the initial closing date. It must precede any liability action against a liquidator who has been negligent.  

Special case: closure despite ongoing proceedings

To prevent liquidations from dragging on simply because of lengthy and uncertain legal proceedings (industrial tribunals, liability, etc.), the court may now declare the liquidation closed even if proceedings initiated by the liquidator are still in progress (Art. L. 643-9, al. 3 C. com.). In this case, the court will appoint a special representative (often the former liquidator) whose sole task will be to continue these proceedings and distribute any sums obtained as a result.. The debtor himself cannot take over these proceedings after the closure..  

Professional recovery: an alternative to liquidation?

Faced with the fact that many judicial liquidations concern very small businesses with no significant assets ("impecunious"), making the traditional procedure cumbersome and costly for virtually no result for creditors, in 2014 the legislator created an alternative procedure: professional recovery (Art. L. 645-1 et seq. C. com.). Inspired by the personal recovery procedure for over-indebted individuals, this procedure aims to offer a quicker and simplified way out for certain sole traders, resulting in the wiping out of their debts without going through formal liquidation.

Who is this simplified procedure for?

The conditions for eligibility for professional recovery are strict and cumulative (Art. L. 645-1, L. 645-2 C. com.):

• Be a natural person : The procedure is reserved for sole traders, craftsmen, self-employed professionals and farmers. Companies are excluded. Since the Law of 2022, this has applied to sole traders covered by the new single status.  
• No employees : The company must not have had any employees in the 6 months preceding the application.  
• Having a low-value asset: The value of all declared assets (all assets combined for sole traders with the new status) must be less than a threshold set by decree, currently 15,000 euros. Important: the principal residence, which is exempt from seizure by law, is not taken into account in this calculation.  
• Be in suspension of payments and recovery clearly impossible: The substantive conditions that would justify liquidation have been met.  
• Not to be involved in any "pending" industrial tribunal proceedings.  
• Not have ceased trading for more than one year.  
• Do not be a "repeat offender": Not have been the subject of a court-ordered liquidation for insufficient assets or a professional recovery within the previous 5 years.  
• Good faith? Good faith is not explicitly a condition for commencement of proceedings, but its absence during the course of the proceedings necessarily leads to conversion into a judicial liquidation (Art. L. 645-9). It is likely that blatant bad faith from the outset would prevent the proceedings from being opened.

How is it opened?

Initially, only the debtor could apply for professional recovery. In view of the low take-up of this option, the 2019 PACTE Act made it subject to review by the Commission. mandatory by the court when a petition for compulsory liquidation is filed (by the debtor, a creditor or the public prosecutor) and the conditions for recovery appear to have been met (Art. L. 645-3 C. com.). The court must then check whether the debtor fulfils the criteria and, if so, whether the debtor is entitled to a refund, must initiate the business recovery procedure, with the agreement of the debtor. This preliminary examination is also carried out in the event of resolution of a safeguard or recovery plan.  

The procedure itself is rapid (4 months maximum). The court appoints a judge and a judicial representative (or an equivalent qualified person). The representative informs known creditors and gathers information about the debtor's liabilities. The appointed judge investigates the debtor's situation.

What are its main effects?

Professional recovery is clearly distinct from liquidation:

• No divestiture : The debtor retains the administration and disposal of his assets.
• No automatic stay of proceedings : Creditors may continue to take legal action, but the judge may grant the debtor deferred payment (max. 4 months) and suspend seizures during this period (Art. L. 645-6 C. com.).
• Major effect: cancellation of debts : If the proceedings are successful, the judgment of closure entails the termination of the proceedings.deletion of certain debts (Art. L. 645-11 C. com.). This applies to debts arising from before the opening judgment, which were brought to the attention of the judge assigned to the case and which were part of the assets whose situation is irretrievably compromised. The central objective of this "express" procedure is to erase the debt.  

The limits of debt forgiveness

However, erasure is not total and the procedure involves risks:

• Non-erasable debts : As with the closure of the liquidation, certain debts are excluded from erasure (Art. L. 645-11). These include
  • Wage claims (if the absence of an employee within 6 months was not respected or for previous debts).
  • Alimony payments.
  • Claims arising from criminal convictions or relating to the person of the creditor.
  • Tax and social security debts? The text does not explicitly mention them as being excluded. deletionThis is not the case for payment deadlines after liquidation. The question is still being debated, but it is likely that they will be erased if they are known to have occurred prior to the liquidation.
  • Claims by guarantors and co-obligors who have paid: they retain their recourse against the debtor.
  • Debts incurred after or those that have not been brought to the attention of the judge.
• No write-off if liabilities disproportionate : The 2022 Act added that no debt may be written off if the total liabilities appear to be disproportionate to the value of the assets (excluding legally unseizable assets). This is a safeguard against abuse.
• May be challenged: If, after the closure, it turns out that the debtor has concealed assets or underestimated its liabilities, the court may, on application, reopen a judicial liquidation procedure and cancel the debt write-off (Art. L. 645-12 C. com.). Creditors then recover their rights.

Possible conversion to compulsory liquidation

Professional recovery is not a guarantee of success. If, during the 4-month procedure, the appointed judge finds that the conditions are not (or are no longer) met (for example, discovery of assets in excess of the threshold, bad faith on the part of the debtor, proven absence of cessation of payments, etc.), he reports to the court, which may then order the conversion of the recovery procedure into a judicial liquidation (Art. L. 645-9 C. com.). The debtor then finds himself back in the procedure he was trying to avoid. The same applies if fraud is discovered after the closure.

The choice between liquidation and professional recovery therefore depends crucially on the specific situation of the company and the entrepreneur. For a detailed analysis of consequences for creditors and the realisation of assets for liquidation, you can consult our dedicated article. A general overview of the process is also available.

For a personalised analysis of your case and to obtain a quotation, please contact legal advice on the outcome of the liquidationOur team is at your disposal.

Sources

• French Commercial Code: articles L. 643-9, L. 643-10, L. 643-11, L. 643-12, L. 643-13, L. 645-1 to L. 645-12, R. 643-16, R. 643-24, R. 644-2, R. 644-3, R. 645-1, R. 645-10, R. 645-11, R. 645-14, R. 645-18.
• Civil Code: articles 1844-7, 1844-8.

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