Faced with economic or financial difficulties, a company has legal mechanisms at its disposal to try to overcome its problems and ensure its continued existence. Safeguard and receivership are two distinct but often confused collective procedures. Understanding the differences between them, their objectives and how they work, is essential for any manager wishing to anticipate or manage a crisis. This guide summarises the key information needed to navigate these complex processes.
When is a company considered to be "in difficulty"?
Before tackling the procedures themselves, it is important to identify the signals that characterise a company in difficulty. French commercial law is based on precise criteria, but also on broader indicators that should alert managers.
The key concept of cessation of payments
The decisive legal criterion is "cessation of payments". According to the French Commercial Code, a company is in a state of suspension of payments when it is in it is unable to meet its current liabilities with its available assets. In practical terms, this means that the company can no longer pay its debts as they fall due (salaries, suppliers, social security contributions, tax, etc.) using its immediate cash resources or rapidly available assets (cash, very short-term trade receivables, etc.). This state is the threshold that triggers receivership.
Other indicators of difficulties
Long before you reach the point of insolvency, other signs may indicate serious difficulties that warrant a response:
- A significant and lasting fall in sales.
- Recurring operating losses.
- The loss of major customers or strategic markets.
- Difficulties in obtaining or renewing bank financing.
- Accumulation of late payments to suppliers or social security bodies.
- Growing cash flow pressures.
These indicators, even if they do not yet point to the cessation of payments, signal a high risk and may pave the way for the safeguard procedure, designed precisely to anticipate insolvency.
Safeguard: a procedure to anticipate
The safeguard procedure is a preventive tool designed for companies that are not in suspension of payments but are experiencing difficulties that they are unable to overcome on their own.
Opening conditions and objectives
Only the head of the company can apply for theopening of a safeguard. It must provide evidence of proven difficulties (economic, legal, financial) which, if left unaddressed, could lead to a suspension of payments. The main objective is to facilitate the reorganisation of the company to enable it to maintain its economic activity, preserve jobs and ensure the discharge of its liabilities.. It's a voluntary anticipatory approach.
The main stages: from request to plan
Following a request from the debtor, and if the conditions are met, the court opens the procedure with a ruling. This is followed by an observation period (generally 6 months, renewable) during which the company continues to operate under supervision. During this period, an economic, social and environmental report is drawn up. The aim is to draw up a draft safeguard plan setting out reorganisation measures and proposals for settling debts..
Focus on negotiations with creditors
Drawing up the plan involves a negotiation phase, often intense, with the creditors. Creditors are sometimes grouped together in committees (credit institutions committee, main suppliers committee) to facilitate discussions.. The outcome will depend on preparing and negotiating a safeguard plan acceptable to a majority of creditors while being realistic for the company. The plan is then submitted to the committees for a vote, if necessary, and then to the court for approval.
Receivership: reorganising to survive
Unlike the safeguard procedure, the receivership procedure takes place once the company has already ceased payments. It is a curative procedure, designed to rectify an already critical situation.
Fundamental differences from backup
The major difference lies in the timing of the intervention: safeguard anticipates the cessation of payments, while reorganisation deals with it. While only the debtor can apply for safeguard, reorganisation can also be requested by a creditor or the public prosecutor. The objective remains the same: to continue the business, maintain employment and pay off liabilities, but the chances of success are statistically lower because the situation is more deteriorated..
The observation period: a decisive moment
As in the safeguard procedure, an observation period begins after the opening judgment. This allows the company's viability to be analysed and solutions to be considered. A court-appointed administrator is often appointed to assist (or sometimes represent) the director in the management of the business.. A judicial representative represents the creditors. This period is essential to determine whether a turnaround is possible.
Possible outcomes: recovery plan or sale
At the end of the observation period, there are several possible outcomes:
- The recovery plan : If the company is deemed viable, a plan is drawn up by the court. It organises the continuation of the business, defines the terms and conditions for settling liabilities (often with deadlines and discounts) and may include reorganisation measures. The contents of a safeguard plan or recovery plan details these crucial aspects. L'execution and monitoring of the plan are then monitored.
- Transferring the business : If recovery by the debtor itself appears impossible, the court may order the sale of all or part of the business to a buyer. In this case, the aim is to safeguard the business activities and jobs that can be transferred.
- Judicial liquidation : If no recovery or sale plan is possible, the court will declare the company in liquidation, putting an end to its activities.
Key points in common and differences between safeguard and reorganisation
Despite their differences, these procedures share certain mechanisms:
- Objective: Trying to save the company and its jobs.
- Observation period : Analysis and solution development phase.
- Freezing of past liabilities : Prohibition on paying debts arising before the opening judgment.
- Stay of individual proceedings : Creditors can no longer take individual action against the company.
- Plan : The desired outcome is the adoption of a plan (safeguard or reorganisation) organising the repayment of debts over a period of up to 10 years.
The fundamental difference remains the triggering criterion: the backup is open before cessation of payments, on the debtor's initiative; reorganisation is initiated after the cessation of payments, at the request of the debtor, a creditor or the public prosecutor.
The central role of the lawyer in these proceedings
Navigating the intricacies of safeguard or receivership proceedings is complex and requires a certain amount of legal expertise. Whether it's assessing the situation, choosing the right procedure, preparing the application file, negotiating with creditors, drawing up a viable plan or defending the interests of the company's director in the face of the procedure's bodies, the assistance of a lawyer is essential. A lawyer who is an expert in companies in difficulty brings not only technical knowledge of the law, but also a strategic vision to maximise the chances of success and protect the manager's assets.
If your company is experiencing difficulties, or if you anticipate tensions in the future, it's a good idea to seek advice quickly. Don't hesitate to contact our firm for specialist legal advice for a confidential analysis of your situation and to define the most appropriate strategy.
Frequently asked questions
What is the main difference between safeguard and recovery?
Safeguard is requested by a company that has not yet suspended payments in order to anticipate its difficulties, whereas receivership concerns a company that has already suspended payments.
Who can request the opening of safeguard proceedings?
Only the legal representative of the company (the debtor) can request the opening of a safeguard procedure..
How long does an observation period last?
The observation period initially lasts a maximum of 6 months, but may be renewed once, or exceptionally a second time at the request of the public prosecutor, bringing the maximum duration to 18 months..
Can a safeguard plan be modified?
Yes, a safeguard (or recovery) plan may be substantially amended if this is justified by significant changes in the company's situation, under the supervision of the court..
What happens if no plan is adopted?
In safeguard proceedings, if no plan is possible, the proceedings may be closed if the difficulties have disappeared, or converted to reorganisation or liquidation if the company has meanwhile fallen into suspension of payments. In reorganisation, failure to adopt a plan generally leads to conversion to liquidation.. Sources and related content
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