When a company encounters insurmountable financial difficulties, collective procedures such as safeguard, receivership or liquidation offer a legal framework for managing the situation. However, this common law system, well known to entrepreneurs, does not apply as such to players in the financial sector. Banks, finance companies and insurance companies are subject to special rules that are profoundly different. This specificity is no mere technical detail: it aims to protect the entire economic system and the customers of these establishments. Understanding these mechanisms is essential to anticipating the consequences of a failure in this sector. This article sets out the specific features of the judicial insolvency procedures applicable to these companies, which are linked to a a much broader overall legal framework for regulated companies in difficulty.
Why a system that differs from ordinary insolvency law?
The main aim of insolvency law is to preserve economic activity and employment, while arranging payments to creditors. For a traditional business, the impact of insolvency is generally limited. The same cannot be said for a credit institution or insurance company. The failure of such a player can trigger a crisis of confidence and, through a contagion effect, destabilise the entire financial system. This is known as systemic risk.
To counter this danger, the legislator has developed a tailor-made system. The idea is to intervene at a much earlier stage, using different tools from those available under ordinary law. Supervision is constant and exercised by dedicated authorities, such as the Autorité de contrôle prudentiel et de résolution (ACPR) in France. These authorities have considerable powers to rectify a situation before it becomes critical. The administrative handling of difficulties, through policing or resolution measures, therefore takes precedence. Judicial proceedings are often used only as a last resort, when all other solutions have failed, and even then they remain highly restricted.
Suitable failure criteria
Under ordinary law, a company is in a state of suspension of payments when it can no longer meet its current liabilities with its available assets. This is a snapshot of its cash position at a given point in time. This definition is ill-suited to a credit institution whose very business is based on maturity transformation, i.e. borrowing in the short term (deposits) to lend in the long term.
Cessation of payments and insolvency
The Monetary and Financial Code has therefore redefined this concept for the sector. According to Article L. 613-26, a credit institution is in a state of suspension of payments when it is not "in a position to make payments, immediately or in the near future".. The difference is fundamental. We no longer simply look at liabilities that have already fallen due, but anticipate the inability to honour commitments that are very close, such as the repayment of current accounts or savings books. This means that the procedure can be triggered earlier, in the face of an imminent liquidity crisis rather than one that has simply been observed.
Insolvency is another criterion that can be used to initiate liquidation proceedings. This is no longer a question of liquidity, but of the structure of the balance sheet. Liquidation may be requested if the institution's liabilities have become greater than its assets, after deduction of certain debts (known as subordinated debts) and constitution of the necessary provisions. This situation reflects an irremediable loss of the institution's substance.
Links with withdrawal of approval
The activity of a bank or investment firm is conditional on obtaining authorisation, issued and monitored by the supervisory authorities (ACPR or European Central Bank). Withdrawal of this authorisation is an extremely serious sanction or the consequence of a deteriorated financial situation. Legally, the withdrawal of authorisation and the opening of insolvency proceedings are two separate matters. A company can have its authorisation withdrawn without immediately going into receivership.
In practice, however, the two are often linked. Withdrawal of authorisation is a decision that frequently precedes the declaration of cessation of payments. In addition, the law provides that the compulsory liquidation of a credit institution entails its deregistration and therefore, de facto, the loss of its authorisation. These legal proceedings are closely linked to the administrative mechanisms overseen by the supervisor, in particular the resolution and recovery procedures managed by the ACPRwhich are designed to avoid liquidation altogether.
Commencement and conduct of proceedings: substantial changes
Under ordinary law, the Commercial Court has full discretion to decide whether or not to initiate safeguard, reorganisation or liquidation proceedings. In the case of a regulated company, this sovereignty is subject to restrictions. Article L. 613-27 of the Monetary and Financial Code is very clear: none of these procedures may be opened without the assent of the ACPR.
Assent of the Autorité de contrôle prudentiel et de résolution
This opinion is a condition of admissibility of the claim. If the court has not sought and obtained this opinion, it cannot rule. Although the court is not legally bound by the meaning of the ACPR's opinion (for example, if the ACPR recommends liquidation and the judge prefers reorganisation), its practical weight is immense. Ignoring the supervisory authority's opinion would be a bold decision, as the ACPR retains its own powers, such as the power to deregister the institution, which would inevitably lead to its liquidation.
The division of powers between judicial representatives and liquidators ACPR
Another specific feature is the coexistence of court-appointed and ACPR-appointed procedural bodies. This duality entails a division of powers that is meticulously organised by law.
In the event of receivership, if the ACPR has already appointed a provisional administrator, the role of the court-appointed administrator will be limited to a simple supervisory role. He will not be able to interfere in the management, which remains in the hands of the body appointed by the ACPR.
The situation is even clearer in the case of compulsory liquidation. The court appoints a liquidator, as in any other procedure. But the ACPR appoints its own liquidator. Their tasks are clearly separate. The liquidator appointed by the ACPR is responsible for pure liquidation operations: he makes an inventory of the assets and sells them. The court-appointed liquidator represents the creditors. His main task is to verify the liabilities (debts), establish the order of creditors and take legal action on their behalf. In practical terms, one person sells the assets, while the other distributes the money collected.
Specific features for insurance companies
Insurance companies are subject to a regime which, while similar to that of banks, has its own specific characteristics. The cessation of payments requirement, as defined for banks, does not apply to them. In principle, ordinary law applies, but with adjustments that, once again, give the ACPR a central role.
Initiation of proceedings and the role of the ACPR
The ACPR has virtually exclusive jurisdiction to request the opening of a compulsory liquidation procedure when reorganisation is manifestly impossible. The court may take the matter up on its own initiative or may be asked to do so by the public prosecutor, but always after obtaining the ACPR's assent. What's more, the total withdrawal of an insurance undertaking's authorisation by the ACPR automatically results in its dissolution. In this case, liquidation by the court is an automatic consequence that the court is obliged to order at the request of the ACPR. The decision of the supervisory authority is a sufficient condition in this case, as the cessation of payments does not have to be demonstrated.
Fate of insurance contracts and premiums
The failure of an insurer raises an essential question for its customers: what happens to current policies? The law organises their fate differently depending on the nature of the insurance.
For non-life insurance policies (car, home, civil liability, etc.), the rule is automatic termination. Contracts cease to have effect at noon on the fortieth day following publication of the decision to withdraw authorisation. However, premiums due before this date remain payable in full, even if the period of cover is shortened. This rule may come as a surprise, but it has been confirmed by the courts. Policyholders should therefore find a new insurer as soon as possible to avoid being left without cover.
For life insurance policies, the situation is more complex. With the agreement of the court, the liquidator may suspend payment of sums due (surrenders, advances). The ACPR can then intervene to organise the transfer of the policy portfolio to another company, or decide to reduce the commitments to the level that the liquidation can cover. The aim of these mechanisms is to protect policyholders' savings as effectively as possible, in conjunction with the guarantee and compensation systems to protect customers.
Extension of proceedings
Insolvency law provides for so-called "extension" mechanisms. If a company in liquidation has maintained an abnormal financial relationship with another company (for example, its parent company) to the point where their assets and liabilities are indistinguishable (known as confusion des patrimonies), or if the company in difficulty was merely a front (fictitious), the court may extend the liquidation proceedings to this other company. This company is then dragged into the bankruptcy.
Are these rules applicable in the very specific context of the financial sector? The answer is yes, in principle. Collective proceedings brought against an investment firm could be extended to its holding company if the conditions of confusion or fictitious status are met. However, the legislator has made some notable exceptions to protect the stability of certain structures. This is the case for sociétés de crédit foncier, which issue covered bonds (obligations foncières). Article L. 513-20 of the French Monetary and Financial Code expressly prohibits the extension of their parent company's insolvency proceedings to these companies, in order to guarantee investors that the assets dedicated to repaying these bonds will never be affected by the difficulties of the rest of the group.
Managing the difficulties of a regulated company is a highly complex legal area, in which the rules of ordinary law are systematically adapted, or even set aside, in favour of special provisions. The interweaving of administrative procedures conducted by the ACPR and judicial procedures conducted by the courts, the redefinition of default criteria and the atypical distribution of powers between the parties involved create a unique legal environment. Navigating this framework requires expertise in the texts specific to the financial and banking sector. For an analysis of your situation and advice tailored to the issues at stake, our team of lawyers with expertise in this field is at your disposal, including for a in-depth legal expertise in insolvency proceedings specific to regulated companies.
Sources
- Commercial code
- Monetary and Financial Code
- Insurance Code
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