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Judicial liquidation: understanding the procedure for selling a company's assets

By Yasmine EDDAM8 April 2025

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Sometimes, despite our best efforts, it proves impossible to turn around a company in difficulty. When the financial situation has deteriorated too much and there is no serious prospect of the business continuing, French law provides for an ultimate solution: the compulsory liquidation. This term, which is often dreaded, marks the end of the company's activity and the start of a process aimed at selling its assets to pay off its creditors as far as possible. How is this procedure triggered? Who steers it? How are assets sold and how are creditors paid? And what are the final consequences for the company and its director?

The aim of this article is to explain how a judicial liquidation works. We will look at the conditions under which the procedure is initiated, the key role of the liquidator, the different ways in which the company's assets can be sold, the complex order in which creditors are paid and, finally, the closure of the procedure, which signals the legal disappearance of the company.

When is a compulsory winding-up order issued?

Judicial liquidation is not a decision taken lightly. It is reserved for the most critical situations. The court pronounces it when two cumulative conditions are met (article L. 640-1 of the French Commercial Code) :

The company is in suspension of payments (it can no longer meet its current debts with its available assets).
Sound recovery is manifestly impossible. There is no longer any realistic hope of saving the business through a continuation plan.

This procedure can be initiated in several ways:

Directly As soon as the matter is referred to the court, if the situation appears to be immediately compromised. The application may be made by the director (who is obliged to declare the cessation of payments), a creditor or the Public Prosecutor.
After the failure of a safeguard or recovery plan If, during the observation period, it becomes clear that no recovery plan is possible, the court converts the proceedings into a judicial liquidation (articles L. 622-10, L. 631-15).
After resolving a plan Article L. 626-27: If a safeguard or recovery plan has been adopted but the debtor fails to meet its commitments, the termination of the plan may lead to the opening of a liquidation.

The central role of the Liquidator

Once the receivership has been declared, a key player comes into play: the judicial liquidator. Appointed by the court in the judgment opening or pronouncing the liquidation, this is most often the judicial representative who was involved in the previous phase (if there was one) (article L. 641-1).

Its mission is fundamental and covers several aspects:

End of activity management He takes over from the manager. The judgment of liquidation entails the divestiture of the debtor: the debtor may no longer administer or dispose of his assets. It is the liquidator who exercises the debtor's rights and actions over his assets for the duration of the proceedings (article L. 641-9).
Liquidation operations The company's main role is to organise the sale of all the company's assets (property, equipment, stock, goodwill, trade receivables, etc.) to transform them into cash (known as "asset realisation").
Audit of liabilities The auditor completes the verification of claims declared by creditors, if this has not already been done.
Defending the collective interest He represents the interests of all creditors and can take action on their behalf (for example, to cancel suspect deeds).
Redundancies Redundancies: It must make the company's employees redundant, in accordance with the specific rules laid down by the Labour Code in this context (article L. 641-4, paragraph 5).
Distribution of funds Once the assets have been sold, he distributes the proceeds among the various creditors, in strict order of priority.

The liquidator is therefore the central player who manages the procedure from A to Z, under the supervision of the official receiver and the court.

Realising assets: selling to pay creditors

The primary objective of liquidation is to sell the company's assets to generate funds. The law provides for various methods of achieving this.

The different sales methods

The Commercial Code distinguishes between two main approaches:

Isolated sales (or "retail sales") :
- Property The principle is to sell the assets by public auction before the execution judge (judicial auction). However, the official receiver may, on a proposal from the liquidator and after hearing the debtor and the creditors concerned, authorise an "amicable" auction (organised by a notary) or an "amicable" sale (organised by a creditor). private sale (direct sale to a chosen buyer, at the price and under the conditions set by the judge) if this makes it possible to obtain a better price (article L. 642-18).
- Personal property (equipment, stocks, vehicles, goodwill, etc.): The official receiver orders either the sale to public auctionsor authorises private sale (article L. 642-19). A private sale is often preferred if it provides a better valuation. This method is frequently used to sell a business, for example.
The Disposal Plan (Sale of the entire company) : Even in liquidation, the law seeks, if possible, to safeguarding business and jobs. If one or more branches of the company's business are viable and may be of interest to a buyer, the court may decide to set up a liquidation plan. disposal plan (article L. 642-1).
- It is no longer a question of selling the assets separately, but of selling the business (or part of it) as a whole. all in operation to a buyer.
- The liquidator (or the administrator if a continuation of activity has been ordered with his appointment) actively seeks candidates and analyses their offers.
- The court chooses the buyer whose bid appears to be the most serious in terms of securing the company's future. business continuityguarantee the maintaining as many jobs as possibleand offer the best prospects for payment to creditors (article L. 642-5).
- The transfer order transfers the assets, the employment contracts of the employees taken over and certain contracts necessary for the business to the buyer, who is released from most of the previous debts.

Simplified judicial liquidation procedure

For "small" liquidations, the law provides for an accelerated procedure: simplified judicial liquidation. It is :

Mandatory if the company has no property assetsemploys no more than 1 employee and produces a sales less than or equal to €300,000 excluding VAT (articles L. 641-2 and D. 641-10).
Optional (decided by the court) if the company has not no property assetsemploys between 2 and 5 employees and produces a sales between €300,000 and €750,000 EXCL.

This simplified approach is designed to speed up the procedure, in particular towards its closure and, where appropriate, the professional recovery.

The advantages of this simplified procedure are

Speed It must be closed in one year maximum (or even 6 months if it is compulsory), extendable once by 3 months (article L. 644-5).
Simplified sale of goods The liquidator decides alone the terms of sale (by mutual agreement or public auction) for movable property, without needing the authorisation of the juge-commissaire for each sale (article L. 644-2).
Simplified verification of claims Only wage claims and claims that have a chance of being paid (privileged or guaranteed claims) are verified (article L. 644-3). Unsecured claims (without guarantee or privilege) are generally not verified, as it is presumed that there will not be enough money to pay them.

Distribution of funds to creditors

Once the assets have been sold, the liquidator must distribute the sums obtained among the creditors. This is a delicate stage because, very often, there are insufficient funds to pay everyone off. The law therefore requires a strict order of priority for payments.

Order of priorities (Order of payments)

Here are the main categories of creditors and their ranking:

Super-privileged" salaries Salaries: These are the salaries owed for the last 60 days of work before the opening judgment (or the end of the contract if earlier), within certain limits. They are paid as a matter of absolute priority, often via an advance from the AGS (Association pour la Gestion du régime de garantie des créances des Salariés).
Legal fees Costs incurred for the purposes of the insolvency proceedings themselves (court registry fees, liquidator's fees, advertising costs, etc.).
Subsequent privileged receivables Debts incurred on a regular basis after the opening judgment for the purposes of the proceedings or in consideration for a service provided (article L. 622-17). These "subsequent" creditors are given priority in order to encourage the continuation of the business.
Creditors with special guarantees Creditors holding a mortgage, pledge, lien or special privilege (such as the seller of a business) are paid from the sale price of the specific asset that secured their claim (article L. 643-8). They take precedence over other creditors in respect of that specific asset.
Other wage claims : Those who do not benefit from the superprivilege but still have priority.
Other preferential creditors The Treasury and social security bodies (URSSAF, pension funds, etc.) have general liens on movable and immovable property.
Unsecured creditors Creditors: These are all the other creditors, those who have no guarantees or special privileges (traditional suppliers, etc.). They are only paid last, if there is money left over after all the previous categories have been paid off. In practice, they often receive nothing or only a tiny fraction of their claim.

The role of the Liquidator in the distribution

The liquidator draws up the statement of collocation (the payment order) for each asset sold. He then proceeds to breakdown as soon as it has sufficient funds. He may, with the authorisation of the juge-commissaire, pay out advance payments (provisional payments) to creditors whose claims have been definitively accepted (article L. 643-3).

Closure of the judicial liquidation

The judicial liquidation proceedings are terminated by a closing judgment.

Closing conditions

The court closes the accounts in several cases (article L. 643-9):

Extinguishing liabilities : All creditors have been paid in full. Unfortunately, this is very rare.
Insufficient assets Liquidation: This is the most common case. The liquidator finds that there is no more money available (all the assets have been sold) and that it is impossible to continue paying the creditors.
Disproportionate prosecution Even if there are still some assets that are difficult to sell or long and costly legal actions to be taken, the court may decide to close if the costs and time involved in continuing the proceedings are disproportionate to the hope of recovering significant additional funds. In this case, the court may appoint a specific agent to monitor the ongoing proceedings after closure.

Effects of closure for lack of assets

Closure for lack of assets puts an end to the liquidator's mission and to the debtor's divestiture. Above all, its main effect is that the unpaid creditors do not, in principle, recover their individual right of pursuit against the individual debtor or against the company. Unpaid debts are, as it were, wiped out vis-à-vis the liquidated entity.

However, there are important exceptions to this principle (article L. 643-11): creditors regain their right to take individual legal action, in particular if :

The director's personal bankruptcy has been declared.
The debtor (or manager) has been convicted of certain management-related offences.
The claim arises from fraud committed against this organisation (for example, in the case of social security organisations).
The individual debtor returns to better fortunes or forgotten assets reappear.
These are actions relating to assets acquired by the individual debtor as part of an estate opened during the liquidation.
The guarantor or co-obligor who has paid in place of the debtor acts against the latter.

Judicial liquidation is therefore a complex procedure, the outcome of which is often difficult for creditors. The rules governing the sale of assets and the order of payment are strict and require rigorous management by the liquidator.

Whether you are the director of a company faced with this outcome or a creditor seeking to recover as much of your debt as possible in this context, the assistance of a lawyer specialised in insolvency law is crucial to understanding your rights and possible strategies. Our firm can provide you with the legal support you need. Please do not hesitate to contact us for advice.