Temporary inability to pay debts does not necessarily mean immediate seizure of your assets. French law offers a number of mechanisms that allow debtors in difficulty to breathe easy financially while protecting the interests of creditors.
The grace period: a breath of judicial fresh air
Terms and conditions
The period of grace is granted by court order. It is additional time granted to fulfil an obligation, taking into account the situation of the parties.
The judge has broad discretionary powers. Under article 1343-5 of the French Civil Code, the court may "defer or stagger payment of the sums due, up to a maximum of two years". This decision may be taken by the courts, the interim relief judge or the enforcement judge.
In practical terms, after a summons or seizure, the enforcement judge has jurisdiction to grant this period (article 510 of the Code of Civil Procedure). In the case of wage garnishments, the court of first instance is responsible.
Effects on the debtor
Once the grace period has been obtained, a number of consequences favourable to the debtor apply:
- Suspension of enforcement proceedings already commenced (article 1343-5, paragraph 4 of the Civil Code)
- Non-application of interest surcharges or late payment penalties during the set period
- The judge may order that the sums corresponding to the deferred instalments bear interest at a reduced rate (at least equal to the legal rate).
- Priority option for capital payments
The time limit begins to run on the day of the judgment in the case of an adversarial decision, or on notification in other cases.
Payment guarantees
Article 1343-5, paragraph 3 of the Civil Code authorises the court to "make these measures conditional on the debtor performing acts to facilitate or guarantee payment of the debt".
In a judgment handed down by the Tribunal de Grande Instance de Saint-Dié on 19 February 1993, the grace period was made conditional on "a serious and immediate financial effort" on the part of the debtor. Conversely, failure to begin repayment may justify a refusal.
Cases of refusal
The grace period is not granted automatically. Article 1343-5 of the Civil Code expressly excludes maintenance debts.
There are other exclusions:
- When the debtor's assets are seized by other creditors
- If the debtor has reduced the contractual guarantees
- For bills of exchange
- In the event of a sale with right of repurchase
Contractual procedures
Conciliation for companies
Conciliation, introduced by the Business Safeguard Act of 26 July 2005, is aimed at debtors engaged in a commercial or craft activity who are experiencing "legal, economic or financial difficulties, whether actual or foreseeable, and who have not been in suspension of payments for more than forty-five days" (article L.611-4 of the French Commercial Code).
This procedure favours a negotiated solution rather than an imposed one. It avoids the more restrictive collective procedures such as receivership or compulsory liquidation.
The conciliator's procedure and mission
The procedure is initiated before the Commercial Court. A conciliator is appointed for a maximum of four months, extendable by one month.
Its mission is set out in Article L.611-7 of the French Commercial Code: "to encourage the debtor to reach an amicable agreement with its main creditors and, where applicable, its usual co-contractors, with a view to putting an end to the company's difficulties".
The conciliator can also put forward proposals for safeguarding the company, continuing the business and maintaining employment. Since the 2008 reform, he can even organise a partial or total sale of the company.
Effects on enforcement procedures
Unlike the out-of-court settlement that it replaces, conciliation does not automatically lead to a stay of proceedings. However, the debtor may ask the judge to grant a period of grace.
Article L.611-7, paragraph 5 of the French Commercial Code provides that during the course of proceedings, "a debtor who has been put in default or sued by a creditor may ask the judge who opened the proceedings to apply article 1343-5 of the French Civil Code".
Once the agreement has been concluded and approved, Article L.611-10-1 of the French Commercial Code stipulates that the agreement "suspends or prohibits any legal action and suspends or prohibits any individual lawsuit against both the movable and immovable property of the debtor with the aim of obtaining payment of the claims that are the subject of the agreement".
Out-of-court settlements for agricultural businesses
For farms, a specific system exists in the Code rural et de la pêche maritime (articles L.351-1 to L.351-7).
This procedure is designed to "prevent and resolve financial difficulties on farms as soon as they can be foreseen or as soon as they arise".
A conciliator may be appointed by the President of the Tribunal de Grande Instance. The conciliator's role is to "encourage a settlement of the farm's financial situation by reaching an amicable agreement between the debtor and his main creditors on payment deadlines or debt remission".
An important feature: the president of the court may order a provisional stay of proceedings for a period not exceeding two months, which may be extended once.
The specific features of sole proprietorship
Subsidiarity of execution on personal property
The law of 11 February 1994, known as the "Madelin law", protects the personal assets of sole traders. Article L.161-1 of the Code des procédures civiles d'exécution (French Code of Civil Enforcement Procedures) introduces the subsidiarity of compulsory enforcement against personal assets.
In practical terms, the contractor may request that priority be given to the assets needed to run the business, if he can prove that their value is sufficient to guarantee payment.
This provision is in line with the rationale of separating personal and business assets, without going so far as to create a genuine special-purpose asset.
Measures applicable to sole traders with limited liability
The individual entrepreneur with limited liability (EIRL) benefits from a special regime. Under article L.711-7 of the Code of Civil Enforcement Procedures, the provisions for dealing with over-indebtedness apply, but only to non-business debts.
In addition, the provisions concerning the debtor's assets, rights and obligations apply only to the elements of the unaffected patrimony. The provisions concerning the rights and obligations of creditors apply within the limits of the unaffected patrimony.
This technical arrangement protects the business while providing guarantees for creditors. It isolates business assets from personal financial problems.
Our firm regularly assists entrepreneurs and private individuals in financial difficulty. Each situation requires a personalised analysis of the legal options available. Don't wait for enforcement proceedings to begin before taking action. Contact us to assess your situation together and determine the most appropriate strategy for you.
Sources
- Civil Code: articles 1343-4 to 1343-5 (grace periods)
- Code of civil procedure: articles 510 to 513 (granting of time limits)
- French Commercial Code: articles L.611-4 to L.611-12 (conciliation)
- Code rural et de la pêche maritime: articles L.351-1 to L.351-7 (amicable agricultural settlement)
- Code of civil enforcement procedures: articles L.161-1 and L.161-2 (subsidiarity on personal property)
- Code of civil enforcement procedures: article L.711-7 (EIRL)
- Law no. 94-126 of 11 February 1994 on initiative and individual enterprise
- Order n°2011-1895 of 19 December 2011 relating to the legislative part of the code of civil enforcement procedures
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