Companies in difficulty: who is affected and when does the situation become critical?

Dealing with financial difficulties is often a dreaded ordeal for any entrepreneur. Whether it's a drop in business, a costly dispute or an accumulation of unpaid bills, it is essential to understand at what point the situation changes from a simple cash flow problem to one that gives cause for legal concern. French law provides a framework for these situations through collective proceedings These are safeguard, receivership and compulsory liquidation. But before even considering these solutions, a key question arises: who is really affected? And what is the alert threshold that triggers the most severe mechanisms?

The purpose of this article is to clarify the scope of these procedures. Together, we will identify the various economic players - both natural persons and legal entities - likely to be subject to these procedures. We will then focus on a central concept: the state of cessation of payments. This is a real tipping point, and its definition and assessment are decisive, as it is the way it is characterised that mainly determines whether or not a receivership or liquidation is opened. Understanding these elements is an essential first step for any manager wishing to navigate the sometimes troubled waters of economic difficulties.

Who can be subject to collective proceedings?

The law governing companies in difficulty does not apply indiscriminately. Articles L. 620-2 (for sauvegarde), L. 631-2 (for redressement) and L. 640-2 (for liquidation) of the French Commercial Code define precisely who is eligible. They do not refer to the business as an abstract entity, but to the legal entity that runs it.

Individuals: a wide range of activities concerned

For a long time reserved solely for traders, insolvency proceedings are now open to a much wider range of self-employed professionals. This includes individuals who are engaged in :

• A commercial activity Purchasing for resale, commercial services, etc.
• A craft activity production, processing, repair or provision of services in the craft sector.
• A agricultural activityas defined by Article L. 311-1 of the French Rural and Maritime Fishing Code (mastery of a plant or animal biological cycle, extension activities, etc.).
• Any other self-employed professional activityThis broad category explicitly includes liberal professionsThis is the case whether they are subject to a legislative or regulatory status (lawyers, doctors, chartered accountants, etc.) or whether their title is protected.

The decisive factor is whether you are carrying on an activity professional and independent. This therefore excludes employees who are bound by a contract of employment and a relationship of subordination. Similarly, a company director (manager of a SARL, chairman of a SAS, etc.) acting in the name and on behalf of the company is not, in this capacity alone, personally subject to the insolvency proceedings. They could, however, be subject to collective proceedings if they carry on a self-employed activity on their own behalf at the same time as, or through, the company (e.g. a de facto partnership).

An important point to note is that, since a reform in 2008, theregistration registration in a professional register (Registre du Commerce et des Sociétés, Répertoire des Métiers) is no longer an absolute condition for eligibility. It is the exercise workforce an activity that counts. This means that a de facto trader or craftsman who is not registered can have collective proceedings opened against him. This has also made it possible to clearly include micro-entrepreneurs (formerly auto-entrepreneurs), even before they were required to register for certain activities. Their status as self-employed workers makes them eligible for collective proceedings, rather than the private-sector over-indebtedness procedures reserved for non-business debts. Beware, however, that self-employed status may be reclassified as disguised salaried employment if a subordinate relationship is proven, in which case the self-employed may lose the benefit of insolvency proceedings.

Finally, the activity must be lawful. Although the legislation does not explicitly rule this out, it would be difficult to envisage a reorganisation for an illegal business. A judicial liquidation could, however, be a way of putting an end to this activity and discharging the liabilities.

The sole trader: separation of assets and liabilities

Law no. 2022-172 of 14 February 2022 has profoundly changed the landscape for entrepreneurs operating in their own name, by automatically separating their business assets from their personal assets. This new status replaces the former EIRL (Entrepreneur Individuel à Responsabilité Limitée) regime, which required a specific declaration of assignment and is now being phased out.

Article L. 526-22 of the French Commercial Code now lays down the principle for all individuals engaged in self-employed professional activities:

• Le business assets consists of the assets, rights, obligations and securities useful business activity. It is these assets that constitute the main collateral for professional creditors.
• Le personal assets includes all other items not included in business assets. It is the main pledge of personal creditors.

This separation has direct consequences for insolvency proceedings. In principle, only the business assets is examined to determine whether the conditions for opening safeguard, reorganisation or liquidation proceedings have been met (article L. 681-1 C. com.). Barring exceptions (fraud, confusion of assets, serious breaches of accounting obligations, or manifest inadequacy of personal assets for personal creditors), the collective proceedings opened will only concern the assets and debts of the business. Personal assets, on the other hand, will potentially come under the personal over-indebtedness regime if their own conditions are met.

Legal entities: the requirement of legal personality

Insolvency proceedings also apply to "any legal entity governed by private law" (articles L. 620-2, L. 631-2, L. 640-2 C. com.). This covers a wide variety of structures:

• The commercial companies by form (SA, SAS, SARL, SNC, SCS, etc.) or by purpose.
• The civil partnerships (SCI, SCP, ETC.).
• The economic interest groups (GIE) for civil or commercial purposes.
• The registered associations (even if their object is civil, they may be subject to collective proceedings if they carry on a significant economic activity and are experiencing financial difficulties).
• Some mutuals (under specific conditions).

The fundamental element is the acquisition of the legal entity. This generally arises from registration with the Registre du Commerce et des Sociétés (RCS) in the case of companies, or from declaration with the prefecture in the case of associations. Consequently, the following are excluded

• The legal entities governed by public law (State, local authorities, public administrative establishments, etc.). The distinction with certain public industrial and commercial establishments (EPIC) or semi-public companies can sometimes be subtle and depends on case law criteria (origin, mission, prerogatives, etc.).
• The unincorporated groups These include joint ventures, de facto companies, undeclared associations and joint ownership. In these cases, it is the partners or members who could be personally subject to proceedings if they meet the conditions (exercise of a self-employed activity, cessation of payments, etc.).
• The companies in formation (before registration). It is the founders who could be targeted if they have acted on their own behalf.

Even a company that is declared null and void after it has been registered can be the subject of collective proceedings, because nullity is not retroactive and the company has had a legal existence.

The end of the legal personality (dissolution followed by amicable liquidation and striking off the company register) normally marks the end of eligibility. However, proceedings may still be opened after dissolution, as long as the amicable liquidation has not been closed and published. If the closure is published, a creditor may still file a writ of summons within a period of one year from the date of publication, if the cessation of payments existed prior to the closure.

When can the procedure be extended? (Fictitiousness and confusion)

The principle is the autonomy of each legal entity. The opening of proceedings against a company A does not automatically lead to proceedings being opened against a company B in the same group, or against its directors or partners. However, article L. 621-2 of the French Commercial Code provides for exceptions that allow a company's directors or partners to be included in the proceedings.expand the proceedings opened against a debtor (A) to another person (B), or of meet assets (particularly for sole traders). These derogation mechanisms are strictly regulated and are aimed at situations where legal autonomy is only a façade or has been flouted:

• Fictitiousness : The legal entity (B) covered by the extension is merely an appearance, a "shell company" with no real existence of its own. The criteria used by judges often include a range of indicators: absence of an activity distinct from that of the "master of the business" (A), absence of any real affectio societatis between the partners, absence of its own resources (registered office, accounts, etc.), management entirely confused with that of A. If the fictitious status is recognised, B's legal personality disappears and its assets (if they exist) become part of A's proceedings.
• Confusion des Patrimoines : In this case, the legal entities (A and B) actually exist but their assets and liabilities have become indistinguishable. Case law mainly uses two criteria:
  • L'inextricable interweaving of accounts joint cash management, undifferentiated payments, no separate accounts making it impossible to attribute assets or liabilities to A or B.
  • The existence of abnormal financial flows Significant and repeated transfers of money or goods between A and B, without any real economic consideration or legal justification (e.g. unbilled or exorbitant rents between a property company and its operating company owned by the same people, unpaid interest-free advances, etc.). These flows must reflect a lack of real financial autonomy.

The action for extension on the grounds of fictitiousness or confusion is a specific action that can only be requested by the administrator, the judicial representative, the public prosecutor or, since 2014, by the debtor himself. If the extension is granted, there is only one action left to bring. only collective proceedings encompassing A and B, with common assets and liabilities. The date of cessation of payments is that of the first proceedings opened.

What happens if you stop working or die?

Collective proceedings (reorganisation or liquidation) may still be opened after the cessation of professional activity(articles L. 631-3 and L. 640-3 C. com.). The state of cessation of payments is then assessed on the day the court gives its ruling, taking into account the debts arising from the past business.

• If this is the debtor (or his heirs) who applies for the opening, there is no legal time limit after the cessation of activity.
• If it's a creditor (or the Public Prosecutor's Office) who issues the summons, he must do so in a one-year period from the date of removal from the Register of Companies (for traders) or from the effective cessation of activity (for craftsmen, farmers and the self-employed).

In the event of death of the debtor when it is in a state of suspension of payments, the matter may be referred to the court for the purposes of opening a receivership or compulsory liquidation:

• By a creditor or the public prosecutorwithin one year of the death.
• By a heirThere is no time limit. It may be in the interest of the heirs to have the business liabilities discharged as part of the collective proceedings, separately from the estate (subject to the rules on acceptance of the succession).

Suspension of payments: the alarm bell for reorganisation or liquidation

If the absence of cessation of payments is the condition for access the backupOn the other hand, its presence is the fundamental criterion opening the way to recovery or compulsory liquidation. This is the true indicator of a real crisis for the company.

What is the cessation of payments (Art. L. 631-1 C. com.)

The law precisely defines this state: the debtor is in cessation of payments when he is " unable to meet its current liabilities with its available assets ".

This definition calls for a number of important clarifications to avoid confusion:

• It's not insolvency: A company can be in suspension of payments (lack of immediate liquidity) while having assets that exceed its debts (it would be solvent if it sold all its assets). Insolvency occurs when the total value of assets is no longer sufficient to cover total liabilities. Suspension of payments is an acute cash flow problem, while insolvency is a deeper structural problem.
• It's not just a refusal to pay: A debtor may refuse to pay a debt for legitimate reasons (dispute over the invoice, contestation of the service, etc.). This one-off refusal is not sufficient to constitute suspension of payments.
• It's not just a temporary inconvenience: Temporary cash flow difficulties, if they can be overcome by the usual overdraft facilities or an authorised overdraft that has not been cancelled, do not constitute a suspension of payments.

The cessation of payments reflects a structural inability, at a given point in time, to pay its debts as they fall due with the cash that the company has or can immediately dispose of.

How do you value available assets?

Available assets correspond to what the company can mobilise immediately or in the very short term to pay its debts. This is essentially "effective cash flow". It generally includes :

• Cash in hand.
• Credit balances on immediately available bank accounts.
• Trade bills that have matured and have not yet been paid by the customer (bills receivable) if they can be mobilised immediately (for example, by certain discounting).
• Securities that are listed and easy to sell.
• A valid bank cheque.

On the other hand excluded of available assets because they are illiquid or cannot be realised in the short term:

• Fixed assets (buildings, machinery, goodwill, etc.). Selling them takes time.
• Inventories of goods or raw materials (except in exceptional cases of almost immediate and certain sale).
• Receivables from customers, even undisputed, if they are not immediately recoverable (term receivables, payment deadlines, etc.).
• The share capital not yet paid up by the partners.

One point deserves particular attention: the credit reserves and moratoria. Article L. 631-1 specifies that a debtor who establishes that the credit reserves or moratoria from which he benefits allow to meet its current liabilities with its available assets. not in suspension of payments.  

• A credit reserve corresponds to a confirmed and unused line of credit (undrawn credit facility, confirmed overdraft facility, advance on a partner's current account that is not due for repayment, etc.). It is virtually added to available assets. Please note that a mere hope of credit or one-off support from a manager that is immediately repayable does not constitute a valid credit reserve.
• A moratorium is an express agreement (not a mere tolerance) by one or more creditors to postpone the due date of their debts. These debts, although initially due, are temporarily removed from current liabilities, thereby reducing pressure on cash flow.

How do you measure current liabilities?

Current liabilities include all company debts that meet three cumulative conditions:

• They must be certain Their existence must not be seriously disputable. A debt that is the subject of a serious dispute before a court is generally not considered to be certain until the dispute has been finally resolved. However, a simple dilatory dispute by the debtor is not sufficient to disregard the debt. In the case of tax or social security debts, the rules governing disputes in these areas apply.
• They must be liquids their amount must be fixed or easily determinable.
• They must be due Their term must have come to an end.

The nature of the debt (commercial, civil, tax, social security, etc.) or its origin (contractual, tortious, etc.) is irrelevant. A single debt that is certain, liquid and due may be sufficient to constitute a current liability if the available assets are insufficient to cover it.

An essential point confirmed by case law is that the liabilities to be taken into account are the following dueand not just liabilities required. In other words, a debt that has fallen due is recorded as a current liability even if the creditor has not yet formally demanded payment or taken legal action, unless the creditor has granted a formal moratorium. Mere inaction or tolerance on the part of a creditor is not sufficient to remove the debt from current liabilities.

Proof and date of cessation of payments

The burden of proof lies with the party claiming that payments have ceased.

• If this is the debtor who declares his situation, he must provide the accounting and financial information justifying his situation.
• If it's a creditor who assigns, the task is more difficult. He cannot simply invoke his own unpaid claim. He must show that it is impossible general for the debtor to meet all of its current liabilities with its available assets. It may be based on corroborating evidence: multiple payment incidents, repeated protests, unpaid cheques returned, seizures or third-party notices that have had no effect, failure to respond to formal notices, refusal of credit by banks, etc. The court will make its own assessment of the situation in the light of the evidence presented.

The judgment opening the receivership or compulsory liquidation must set the date on which the assets are to be sold. date of cessation of payments. This date is crucial because it marks the starting point of the " suspect period "This is a period prior to the judgment during which certain acts carried out by the debtor may be annulled.

• The court sets this date on the basis of the information in the file. If it is not possible to determine the exact date, it will be the date of the opening judgment.
• This initial date may subsequently be the subject of an action in reportThis action must be brought within one year of the opening of the insolvency proceedings, at the request of the administrator, the judicial representative or the public prosecutor (but not the debtor or the creditors directly). This action must be brought within one year of the opening judgment. The postponement may not set the date of cessation of payments more than 18 months before the date of the opening judgment. There are "deadlines" that prevent the date from being postponed before a judgment approving a conciliation agreement or before a judgment adopting a safeguard plan, except in the case of fraud.

Understanding these thresholds and conditions is essential if you are to anticipate and react. If your business is experiencing difficulties or if you are wondering about your situation with regard to cessation of payments, our firm can help you assess the options and defend your interests. Contact us for a confidential analysis.

Sources

• Commercial Code, in particular Book VI (Articles L. 620-1 et seq., L. 631-1 et seq., L. 640-1 et seq.) and Articles L. 526-22 et seq., L. 681-1 et seq.
• Code rural et de la pêche maritime (Article L. 311-1).
• Law no. 2022-172 of 14 February 2022 to promote self-employed professional activity.
• Civil Code (general principles of companies and legal personality).

Here is Article 1, drafted in accordance with your guide and the approved plan: