Safeguard procedure

The safeguard procedure: a preventive and voluntary procedure

Introduced by Law 2005-845 of 26 July 2005, known as the «Business Safeguard Law», the safeguard procedure is based on a simple but demanding idea: intervene before disaster strikes, not afterwards. It is designed for companies that are in troubled waters but have not yet sunk.

Safeguarding is structurally defined by two elements. Firstly, its volunteer Only the debtor may request that the proceedings be opened. Neither the creditors, the public prosecutor's office nor the court can force the issue. Secondly, its preventive It opens before the cessation of payments, unlike receivership and liquidation, which presuppose that this red line has already been crossed.

By placing itself under the protection of the court, the company obtains immediate respite: its previous debts are frozen, proceedings by its creditors are halted, and it has an observation period in which to draw up a restructuring plan. The law is extending a helping hand to managers who have the courage to act early.

Conditions of access to back-up

Access to the safeguard procedure is subject to two cumulative conditions, defined by article L.620-1 of the French Commercial Code. The court assesses these conditions on the day it makes its decision - not on the day the application is filed.

No suspension of payments: the cardinal negative condition

The most imperative condition is also the most counter-intuitive: in order to benefit from a safeguard, the company must must not be in a state of suspension of payments. The cessation of payments is defined as the impossibility of meeting current liabilities with available assets (art. L.631-1 C.com). So it's not just a matter of having debts - it's a matter of not being able to pay them with the cash on hand.

There are two important caveats to this definition. On the one hand credit reserves If the company has undrawn confirmed credit lines, they constitute available assets within the meaning of the law. On the other hand moratoria granted by creditors: a debt whose due date has been postponed by agreement is not included in the liabilities due for payment. The Court of Cassation has specified that the judge must expressly identify the elements of available assets and current liabilities used to characterise the cessation of payments (Cass. com., 3 Apr. 2019, no. 17-28.359).

It is up to the debtor to demonstrate that he is not in suspension of payments - cash flow situation, statement of overdue debts, available credit reserves.

Insurmountable difficulties without a judicial framework: the positive condition

Safeguard is not a comfort tool for companies that are doing well. The debtor must prove the existence of «difficulties that it is unable to overcome». The law does not limit the nature of these difficulties - they may be economic (loss of a key market, drop in sales), financial (restructuring of a major future debt), legal (major litigation with an uncertain outcome) or social.

What counts is the character insurmountable of these difficulties by the debtor alone. Without the protective framework of the safeguard - debt freeze, suspension of proceedings, possibility of imposing deadlines in the plan - the company would not be able to resolve its problems. Note that since the 2008 Order, it is no longer necessary to demonstrate that the difficulties are «of such a nature as to lead» to the cessation of payments: it is sufficient to prove that they are real and insurmountable.

For companies belonging to a group, a clarification is in order: the difficulties are assessed at the level of the company itself, independently of the situation of the other entities in the group. A subsidiary in difficulty may apply for protection even if its parent company is prosperous - the principle of the autonomy of legal entities prevails.

Who can request a safeguard?

Article L.620-2 of the French Commercial Code sets out the list of eligible debtors. The procedure is open to any person carrying on a commercial or craft activity, any farmer, any other self-employed professional (including members of the regulated liberal professions), as well as any legal entity under private law. In practice, this covers most businesses - commercial companies, EIRLs, SCIs and associations.

The court of jurisdiction varies according to the nature of the business: **Commercial Court** for shopkeepers and craftsmen, **Judicial Court** for farmers, self-employed professionals and associations.

How do I submit an application?

The application is filed by the debtor - or its legal representative in the case of a legal entity - with the clerk of the relevant court. It must be accompanied by a file containing, in particular: the annual accounts for the last financial year, a recent cash flow statement, a quantified statement of receivables and debts, a list of employees, and an asset-liability statement of securities. The aim is to enable the court to assess whether the company is really in difficulty and whether payments have stopped.

The court rules in chambers, after hearing the debtor. If it considers that the legal conditions have been met, it issues a **judgment opening the proceedings**, which has immediate effect. The Court of Cassation has laid down a clear principle: if the legal conditions are objectively met, the court will must initiate the procedure, regardless of the debtor's motives. The judge does not have to exercise discretion (Cass. com., 8 March 2011, no. 10-13.988 - known as the «Cœur Défense» case). The only limit is manifest fraud.

If the court considers that the difficulties exist but are not insurmountable within the meaning of the Safeguard Act, it may invite the debtor to turn to a conciliation procedure (art. L.621-1, para. 3 C.com), which is better suited to confidential negotiations with the main creditors.

The immediate effects of the opening judgment

The opening judgment is published in the BODACC. This publication initiates the period for declaring claims - two months for creditors resident in France, four months for creditors established abroad. Once this period has elapsed, the claim becomes unenforceable against the insolvency proceedings.

Freezing of prior liabilities (art. L.622-7 C.com)

The opening judgment prohibits the debtor from settling any claim that has arisen. before the judgment. This prohibition is a matter of public policy: any payment made in breach of this rule may be set aside at the request of any interested party within three years. There are a few exceptions - set-off of related claims, maintenance claims, ad hoc authorisations by the official receiver - but they remain marginal.

Stay of individual proceedings (art. L.622-21 C.com)

This is the shield that immediately protects the company. The judgment prohibits any legal action aimed at ordering the debtor to pay a sum of money, and halts or prohibits any enforcement proceedings against his assets. A creditor who had a seizure in progress finds himself blocked. A supplier who was about to file a writ of execution finds his action rendered impossible.

Stopping the accrual of interest (art. L.622-28 C.com)

The opening judgment stops the accrual of legal and contractual interest, except for fixed-rate loans with a term of one year or more. Practical consequence: the debt no longer increases during the proceedings. Individual **guarantors** can take advantage of this cessation of interest.

In safeguard proceedings, the protection of guarantors goes further: proceedings against guarantors who are natural persons are prohibited. suspended This is a major difference from receivership, where the protection of sureties is much more limited (Cass. com., 2 June 2015, no. 14-10.673). This is a major difference from receivership, where the protection afforded to sureties is much more limited.

Preferential treatment for subsequent claims (art. L.622-17 C.com)

All receivables after the opening judgment are not treated in the same way. Those that meet two cumulative conditions - they must have arisen regularly for the purposes of the proceedings or in return for a service provided to the debtor - benefit from preferential treatment. These «privileged subsequent claims» are paid when due. In the event of default, they take precedence over all other claims according to a legal order of priority. This mechanism ensures that the business partners of the company under protection continue to be paid normally, thereby preserving the continuity of the business. Please note: this privilege is lost if the administrator is not notified of the claim within one year of the end of the observation period.

The observation period: drawing up a protected plan

The opening judgment opens a **observation period** lasting a maximum of six months, renewable once for a further six months, i.e. a total of twelve months (art. L.621-3 C.com). This is the heart of the safeguard procedure: the time when, under the supervision of the bodies appointed by the court, the company prepares its restructuring plan.

The procedural bodies

The opening judgment designates several players (art. L.621-4 C.com). The official receiver** is the court judge who supervises the day-to-day running of the proceedings and settles disputes. The **judicial representative** represents the collective interests of the creditors, verifies claims declarations and prepares distributions. The **judicial administrator** is appointed when the business exceeds certain thresholds (twenty employees and €3 million turnover); below these thresholds, appointment is optional. In safeguard proceedings, the administrator's role is limited to providing assistance or supervision: unlike in receivership proceedings, the administrator cannot take the place of the director. An employee representative is also appointed.

What happens during the observation period

The business continues to operate. The director retains his powers - this is a fundamental difference from judicial liquidation. He or she manages the business under the supervision of the court-appointed administrator (with a mission to assist or supervise, depending on the case). An economic, social and environmental report is drawn up to identify the causes of the difficulties and the prospects for recovery. Creditors declare their claims. The administrator prepares a report on the company's prospects.

The safeguard plan: the normal outcome of the procedure

The safeguard procedure is designed to result in a safeguard plan approved by a court. This plan sets out the conditions under which the company will pay off its previous liabilities: payment deadlines, debt write-offs accepted by creditors, sale of non-strategic assets. The maximum duration of the plan is ten years (fifteen years for agricultural businesses).

The safeguard plan - unlike the reorganisation plan - cannot include a total sale of the business to a buyer. It is the debtor who remains in control, which is both the procedure's main advantage and its limitation: if the business is not viable as it stands, the safeguard plan cannot force a sale.

In large companies (those exceeding certain turnover and debt thresholds), Order no. 2021-1193 of 15 September 2021 generalised the constitution of classes of parts affected - creditors and sometimes partners, grouped according to their rights - to vote on the plan. This mechanism, inspired by the European Restructuring and Insolvency Directive, allows a plan to be adopted even against the opinion of certain classes of creditors, provided that the other classes approve it and that the treatment imposed remains fair.

What happens if the plan cannot be adopted?

If, during the observation period, it becomes clear that no viable plan can be agreed and that closure of the safeguard would lead to a definite and imminent cessation of payments, the court may convert the safeguard into a receivership (art. L.622-10 C.com). This conversion does not result in the opening of a new procedure - the procedure continues, but under a different regime. The deadlines for filing claims do not reopen.

Safeguard, receivership, compulsory liquidation: comparative benchmarks

French law on companies in difficulty is based on a gradation of procedures based on the seriousness of the situation. The rule is simple: the earlier you intervene, the greater the chances of success. The safeguard procedure has a success rate of 62 %, against 27 % for receivership (France Stratégie, analysis note no. 84, Feb. 2020). The difference can be explained by the fact that in a safeguard procedure, the company is not yet asphyxiated.

Criteria	Backup	Receivership	Court-ordered liquidation
Main condition	Insurmountable difficulties without suspension of payments	Suspension of payments, recovery possible	Suspension of payments, reorganisation manifestly impossible
Who can apply	The debtor alone	Debtor, creditors, public prosecutor, court ex officio	Debtor, creditors, public prosecutor, court ex officio
Executive powers	Retained (director on assistance or supervision)	Retained or limited depending on the administrator's mission	Deleted - the liquidator replaces the manager
Issue	Safeguard plan (no sale possible)	Continuation or sale plan	Realisation of assets, payment of creditors
Individual guarantors	Proceedings suspended until the plan; benefit from the plan	Protection during the observation period only	No protection - creditors can sue immediately
Text	Art. L620-1 C.com	Art. L631-1 C.com	Art. L640-1 C.com
Success rate	62 %	27 %	N/A

Accelerated safeguard: restructuring in four months

In addition to the traditional safeguard procedure, there is a hybrid procedure: the accelerated backup (art. L.628-1 et seq. C.com), reformed by the Order of 15 September 2021, which merged the former sauvegarde accélérée and sauvegarde financière accélérée (SFA).

Accelerated backup is designed for companies that have already well advanced in negotiations with their creditors as part of a preliminary conciliation procedure. The idea: to transform an amicably negotiated agreement into a judicial plan enforceable against all creditors, including those who refuse.

Specific access conditions

To apply for an accelerated safeguard, the debtor must be in conciliation proceedings and demonstrate that it has drawn up a sufficiently advanced draft plan that is likely to receive broad support from the creditors concerned. The constitution of classes of parts affected is mandatory. A notable feature: unlike conventional backup, accelerated backup may be opened if the debtor is in suspension of payments, provided that this is no more than forty-five days prior to the request to open the preliminary conciliation procedure.

A radical delay

Speed is the key factor: the plan must be adopted within a period of two months This period may be extended once for two months. After four months, the procedure is closed if no plan has been agreed. This is a procedure for prepared cases - not for emergency cases.

Practical advantages and limitations of backup

What backup really brings

Safeguard offers managers a framework that amicable negotiation cannot guarantee. The freezing of liabilities and the stay of proceedings are enforceable against all creditors, including those who refuse to negotiate. A bank creditor preparing to terminate its credit lines, a supplier threatening to take legal action: the opening judgment immediately neutralises these pressures.

The protection of the executive acting as guarantor is often the decisive argument. When the director has personally guaranteed the company's debts - which is often the case for SMEs - the safeguard suspends proceedings against him and allows him to benefit from the plan. In reorganisation, this protection is much more limited.

Finally, the director remains in charge. His powers are not relinquished, unlike in the case of liquidation or partial receivership, when the administrator is appointed to represent the company.

Limits not to be ignored

Safeguarding does not work miracles. It offers time and protection - but if the company does not have a viable business model, the court will adopt a plan that will be poorly executed and may be resolved, leading to the opening of a judicial liquidation.

Publication in the BODACC is unavoidable: the opening of the procedure becomes public, which some directors fear for commercial or contractual reasons. On this point, conciliation remains a confidential alternative, but it does not offer the same protection against recalcitrant creditors.

Safeguarding by its very nature excludes a transfer plan. If the only viable solution is to sell the company to a buyer while wiping out its liabilities, it will have to go into receivership. Safeguarding preserves the company as it is - with its management and shareholders.

La realisation of securities creditors with a real guarantee - mortgage, pledge - is also suspended during the proceedings. These creditors retain their ranking, but must wait for the closure or distribution of the plan to enforce their security.