Judicial liquidation: consequences for creditors and realisation of assets

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The opening of compulsory liquidation proceedings marks a turning point not only for the company and its director, but also very directly for its creditors. Suppliers, banks, social security bodies, tax authorities, employees... all find themselves faced with a situation where the recovery of their debts becomes uncertain and subject to strict collective rules. At the same time, the main task of the court-appointed liquidator is to transform the company's assets into cash - this is known as the realisation of assets - so that these creditors can be paid, at least in part. This article explores the major consequences of liquidation for the various categories of creditors and details the complex process of realising assets.

What happens to creditors in a compulsory liquidation?

From judgment initiating the proceedingsAs a result, creditors' individual rights are profoundly altered. The law introduces a collective discipline aimed at ensuring (relative) equality of treatment and organising payment according to a precise order. There are two main categories of creditors.

Previous creditors: declaration and stay of proceedings

These are creditors whose claims have arisen before the decision to open a compulsory liquidation. For them, the consequences are immediate and restrictive:

• Stay of individual proceedings : The opening of the insolvency proceedings brings to a halt any individual legal action aimed at obtaining payment of a previous claim (Art. L. 622-21 C. com., applicable by reference to Art. L. 641-3 C. com.). Similarly, any enforcement procedures (seizures, etc.) that may have been initiated are suspended. The aim is to freeze the liabilities and prevent one creditor from being paid to the detriment of others outside the collective proceedings.
• Obligation to declare the claim : In order to be paid, even partially, when the liquidation funds are distributed, these creditors must declare their claim and ensure that it is verified with the liquidator. This process is a crucial step that determines whether your rights as a previous creditor are taken into account. This declaration must be made within a strict deadline, generally two months from publication of the opening judgment in the BODACC (Art. L. 622-24 C. com.). A claim that is not declared within the deadline is, with certain exceptions (relief from foreclosure), considered to be extinguished with respect to the proceedings (it cannot be paid out of the liquidated assets). If the liquidation follows safeguard or reorganisation proceedings, creditors who have already declared their claims do not have to do so again.
• Stopping interest : Except for loans with a term of more than one year, the legal and contractual interest rate is set by the opening judgment (Art. L. 622-28 C. com.).
• Ban on payments : The debtor (or the liquidator on the debtor's behalf) may no longer pay any claims that arose prior to the opening judgment, with very limited exceptions (such as the withdrawal of a pledged asset).

The fate of these creditors will depend entirely on the proceeds of the sale of the assets and their ranking in the order of payments.

Subsequent creditors: different treatment

Receivables arising from after the judgment opening the judicial liquidation are governed by different rules. However, not all of them receive preferential treatment. The 2005 Act introduced a distinction based on the usefulness of the claim for the proceedings themselves (the so-called "teleological" criterion).

Article L. 641-13 of the French Commercial Code provides that certain later claims must be paid at maturity. If they are not, they benefit from a privilege of payment, placing them ahead of most prior creditors (but after certain super-privileged claims such as wages or legal costs). To benefit from this preferential treatment, the subsequent claim must meet one of the following conditions:

• Born for procedural requirements (examples: liquidator's fees, inventory costs, subsequent legal costs).
• Born for the needs of temporary business continuity authorised by the court (if the business is maintained temporarily, suppliers for this period are given preference).
• Being the consideration for a service provided to the debtor during this period.
• Resulting fromperformance of a current contract whose continuation has been duly requested by the liquidator or administrator.
• For a debtor who is a natural person, being born of everyday needs.

Subsequent claims that do not meet these conditions (for example, compensation due for termination of a contract decided by the liquidator but not relevant to the proceedings) do not benefit from the preferential right and are treated as standard prior claims: they must be declared and will only be paid at the end of the list, if any funds remain.

Declaring subsequent claims: a necessity

Please note: even subsequent creditors whose claims meet the conditions for payment by due date or by lien must make themselves known. Article L. 641-13, IV of the Commercial Code provides that they must bring their claim to the attention of the liquidator (or administrator if there is one) within six months of publication of the liquidation judgment (or one year after a judgment adopting a sale plan). If they fail to do so, they lose the benefit of their payment privilege..  

Realising assets: turning property into cash

The primary purpose of a judicial liquidation is to sell the debtor's assets in order to generate funds. This "realisation" is carried out by the liquidator, under the supervision of the official receiver. It can involve all types of assets: real estate, equipment, inventories, goodwill, trade receivables, etc. However, the process can encounter obstacles and is subject to different rules depending on the nature of the assets.

Possible obstacles to the sale

The liquidator cannot always freely dispose of all the assets that appear to belong to the company:

• Unseizable assets : Certain assets are protected by law. A sole trader's main residence is automatically exempt from seizure for business debts incurred after 7 August 2015 (Art. L. 526-1 C. com.). Other property not used for the business could also be made exempt from seizure by a notarised declaration before this date. Since the law of 14 February 2022, all the personal assets of the sole trader have been protected in principle, with some exceptions. The liquidator cannot therefore sell these assets, unless the unseizability is not enforceable against certain creditors (prior to the declaration or the law, or personal creditors).
• Inalienability clauses : An asset may have been given or bequeathed to the debtor with a prohibition on selling it. The liquidator cannot override this clause; it would be necessary to obtain a judicial release, which is complex and often linked to personal considerations beyond the liquidator's powers.
• Property belonging to third parties : The company may hold assets that do not belong to it (rental, deposit, leasing, sale with retention of title). The owners of these assets may bring an action to reclaim or restore them. The liquidator must be careful not to sell these assets, or risk incurring liability. A precise inventory is essential to identify these situations.

Terms and conditions for the sale of buildings

The sale of real estate (buildings, land) belonging to the debtor is a major step, governed by specific rules (Art. L. 642-18 C. com.). The official receiver, after obtaining the opinion of the auditors and hearing the debtor, chooses one of the following three forms of sale:  

1. Sale by public auction (judicial adjudication) : This is the procedure that most closely resembles the seizure of real estate under ordinary law. The official receiver sets the upset price and the conditions of sale. The sale takes place before the execution judge. Once the sale is completed, all mortgages and liens registered on the property are cancelled. If seizure proceedings had already been initiated prior to the liquidation, the liquidator may take over the proceedings and continue them.
2. Amicable auction: If justified by the nature of the asset or the bids received, the official receiver may opt for an auction organised by a notary, in accordance with precise specifications. This form of sale may sometimes enable a better price to be obtained. It also entails the purging of registrations.
3. Private sale: The official receiver may authorise the liquidator to sell the property directly to a buyer who has made an offer, at a price and subject to conditions set out in the order. This form is often used when serious offers are received quickly. However, it is viewed with some suspicion because it is less transparent than auctions. One important point: unlike auctions, private treaty sales are more transparent. does not imply automatic purging mortgages and liens. The purchaser will have to follow the amicable purge procedure under ordinary law to free himself from the registrations. In addition, as these sales are considered to have been made "by authority of law", the purchaser cannot invoke either the guarantee against latent defects or a defect in consent, such as fraud, against the liquidator.

In all cases, individual debtors can ask the court for time to vacate their main residence, which has been sold as part of the proceedings..  

Sale of movable property

For movable assets (equipment, vehicles, inventories, patents, business goodwill, etc.), the official receiver may also choose between a sale by public auction or a sale by mutual agreement (Art. L. 642-19 C. com.). He makes his decision after hearing the debtor and obtaining the opinion of the supervisory authorities.

• Public auction : It is carried out by a judicial auctioneer (or other authorised public officer).
• Private sale : The juge-commissaire authorises the liquidator to sell directly to a buyer, at a price and subject to conditions set by the juge-commissaire. He may ask to verify the proposed sale before it is concluded. As in the case of immovable property, the Cour de cassation (French Supreme Court) considers these private sales to be sales by judicial authority, which precludes annulment on the grounds of fraud.

The sale of a business follows these rules, but raises specific issues relating to the various elements of which it is composed (tangible, intangible, leasehold rights, etc.) and the securities that may be attached to them (pledge of the business, pledge of equipment, etc.).

The specific nature of simplified judicial liquidation

For small companies with no property assets and meeting certain turnover and employee thresholds (less than 5 employees and turnover < €750,000 excluding VAT for the compulsory procedure), a simplified judicial liquidation procedure is provided for (Art. L. 641-2, L. 644-1 et seq. C. com.)..  

Its aim is to speed up the procedure (closing in 6 to 9 months in principle). As regards the realisation of assets, the main simplification is that the liquidator proceeds with the sale of movable property (by mutual agreement or auction). within four months of the opening judgmentwithout requiring systematic authorisation from the official receiver for each sale (Art. L. 644-2 C. com.). Debt verification has also been streamlined.  

Who can't buy the company's assets?

In order to avoid conflicts of interest or buy-outs at rock-bottom prices, the law prohibits certain persons from acquiring the assets of a company in liquidation, either directly or indirectly (Art. L. 642-3 and L. 642-20 C. com.).:  

• The debtor itself (natural or legal person).
• The de jure or de facto directors of the company in liquidation.
• Relatives or relatives up to the second degree of kinship (children, parents, brothers, sisters, parents-in-law, brothers/sisters-in-law, etc.) of these directors or of the individual debtor.
• The controllers appointed in the procedure.

Very limited exemptions may be granted by the juge-commissaire at the request of the public prosecutor, in particular for low-value assets required for day-to-day living or for farms.

Distribution of funds among creditors

Once the assets have been sold and the funds collected (also from debt recovery or liability claims), the liquidator must distribute them among the creditors.. This distribution is not random, but follows a very strict order of payment, defined mainly by Article L. 643-8 of the French Commercial Code. The purpose of this order is to give priority to certain claims.  

The strict order of payments

The order of payments is complex, but the main ranks can be summarised as follows (from highest to lowest priority):

1. Employees' so-called "super-privileged" claims : These are the wages owed for the last 60 days of work before the opening judgment and certain indemnities linked to the termination of the contract, guaranteed by the super-privilege on wages (Art. L. 3253-2 C. trav.). These sums are often advanced by the AGS, which is then reimbursed with absolute priority from the first available funds.
2. Subsequent legal costs : Expenses incurred after the opening judgment for the purposes of the procedure itself (court registry fees, liquidator's fees for certain tasks, etc.).
3. The "new money" privilege of conciliation : If the company had benefited from a conciliation procedure prior to liquidation, creditors who contributed fresh money or goods/services under this procedure may benefit from a lien (Art. L. 611-11 C. com.).
4. Subsequent preferential claims (Art. L. 641-13) : Debts arising after the judgment for the purposes of the proceedings or maintaining the business, and which have not been paid when due. They are after the previous categories.
5. Receivables secured by real estate : These are paid from the sale price of the property concerned, according to their respective rank as defined by the Civil Code.
6. Receivables secured by special securities : Pledging of equipment, etc.
7. Other prior preferential claims : General privileges of the Treasury, social security bodies, etc.
8. Unsecured creditors : Those who do not benefit from any particular guarantee. They are paid last, if there are any funds left after all the previous categories have been paid. They often receive very little, if any, of their claim.

This order is imperative and the liquidator must respect it scrupulously when drawing up the proposed distribution.

The special ranking of secured creditors

Creditors with security interests (guarantees) in specific assets of the debtor are in a special situation:

• Immovable securities (mortgages, etc.) : They are paid from the sale price of the encumbered property, after superprivileges and legal costs, but before subsequent and unsecured creditors. Their ranking among themselves depends on the traditional rules (date of registration).
• Special securities (pledges, collateral, etc.) : Their rank varies according to the nature of the security. A pledge often confers a very powerful right of retention (real or fictitious).
• Right of retention : Whether it arises from a pledge or another situation (e.g. garage owner), the right of retention allows the creditor to retain an asset until it is paid for. To recover the asset, the liquidator may be authorised to pay the retaining creditor in priority (Art. L. 641-3 C. com.). If the asset is sold, the right of retention is transferred to the price, giving the retaining creditor a priority right to payment of the price, even before the creditors with super priority for that specific asset (Art. L. 642-20-1 C. com.).
• Judicial assignment of the pledge : A pledgee may apply to the official receiver to have the pledged asset assigned to him in payment of his claim (Art. L. 642-20-1 C. com.), thereby avoiding the sale and the order of payments.

The role of the liquidator in the distribution

It is the liquidator who, after verifying and admitting the declared claims, draws up a proposal for the distribution of the available funds.. This plan is submitted to the creditors, who may contest it before the official receiver. Once the plan has been finalised, the liquidator makes the payments in the established order. In simplified liquidation, this procedure is simplified. If an error is made in the order of payment, the liquidator may request restitution of the sums wrongly paid.  

The realisation of assets and the distribution of funds are technical steps that determine the outcome of the proceedings for the creditors, before considering the end of the judicial liquidation and its final consequences. For an overviewFor more information, please consult our general guide.

Advice tailored to your situation could save you time and resources. Contact us for expert legal assistance to defend your rights as a creditor in compulsory liquidation, help you declare and verify your claims, and understand the complex mechanisms for realising assets and distributing funds.

Sources

• Commercial Code: articles L. 526-1, L. 611-11, L. 622-7, L. 622-21, L. 622-24 to L. 622-28, L. 622-30, L. 641-3, L. 641-13, L. 642-3, L. 642-18 to L. 642-20-1, L. 642-22, L. 643-1, L. 643-2, L. 643-8, L. 644-1, L. 644-2, L. 644-4, R. 622-4, R. 641-21, R. 641-32, R. 642-22 to R. 642-41, R. 643-1, R. 643-3, R. 644-2, R. 644-3.
• Civil Code: articles 1844-5, 2276, 2286, 2347, 2476 et seq.
• French Labour Code: articles L. 3253-2, L. 3253-4, L. 3253-8, L. 7313-8.
• Code of civil enforcement procedures: articles L. 112-2, R. 112-2.

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