When a company encounters serious difficulties, the law provides mechanisms to try to save it or, failing that, to organise its demise under the best possible conditions. At the heart of the safeguard and receivership procedures lies a decisive phase: the observation period.. This is a suspended moment, a kind of parenthesis during which the future of the company will be decided. The main objective is twofold: to establish a precise diagnosis of the situation and to actively explore possible ways of ensuring the continuity of the business, the settlement of liabilities and the maintenance of employment.. This guide summarises the key aspects of this period to help you better understand what's at stake.
What is the observation period and when does it begin?
Definition and context (safeguard, reorganisation)
The observation period is a procedural phase that begins as soon as the decision to initiate safeguard or receivership proceedings is handed down.. It does not exist in direct judicial liquidation. In safeguard proceedings, the company is not yet in a state of suspension of payments but is encountering difficulties that it cannot overcome on its own; in reorganisation proceedings, the company is already in a state of suspension of payments (unable to meet its current liabilities with its available assets). In both cases, this period provides a protective framework for seeking solutions.
The opening judgment: starting point
It is the competent court (generally the Commercial Court or the Court of First Instance, depending on the nature of the business) that decides whether to open the procedure and, consequently, the observation period. For a better understanding of theinitiation of these proceedingsThis judgment marks a break with the past: it halts individual proceedings by previous creditors and freezes liabilities arising prior to this date.. This is the official starting point for the search for solutions under the aegis of justice.
Main objectives of the observation period
Assess the company's actual situation (economic and social diagnosis)
The first objective is to draw up a complete and objective assessment of the company's situation. This involves analysing the causes of the difficulties, assessing the company's assets and liabilities, examining its profitability and market prospects, as well as its social situation (workforce, employment contracts). This assessment, which is often carried out by the court-appointed administrator if one has been appointed, is crucial in determining whether a turnaround is feasible.
Examine recovery options
On the basis of the diagnosis, the aim is to explore all avenues for recovery. This may involve an internal reorganisation, the search for new financing, the renegotiation of contracts, the sale of certain unprofitable business lines, or the drawing up of a business continuity plan to spread the repayment of debts.
Freezing past liabilities
A major and immediate effect of the opening judgment is the freezing of prior liabilities. In practical terms, the company is formally prohibited from paying debts that arose before this date (wages, suppliers, tax, social security contributions, loans, etc.). At the same time, creditors whose claims arose before the judgment can no longer take individual legal action to obtain payment.. This gives the company the breathing space it needs to focus on its turnaround.
How long is the observation period?
Initial term and renewal options
The initial duration of the observation period is set by the opening judgment, but may not exceed six months.. This period may be renewed once by reasoned decision of the court, at the request of the administrator, the debtor or the public prosecutor.. A second exceptional renewal is possible, but only at the request of the public prosecutor..
Maximum legal duration
In principle, the total duration of the observation period, including renewals, may not exceed eighteen months.. Specific rules exist, in particular for farms where the maximum duration can be extended.. The aim is to avoid leaving the company in a situation of prolonged uncertainty.
Who manages the company during this period?
The continuing (or otherwise) role of the executive
During the observation period, the company's director (manager, chairman, etc.) generally retains his duties and continues to manage the business on a day-to-day basis.. This is the "debtor in possession" principle. However, its powers may be restricted or limited by the presence of a court-appointed administrator.
The role of the court-appointed administrator: what are his duties?
The court often appoints an insolvency administrator, especially for companies of a certain size or complexity.. His mission is set out in the opening judgment: he may be responsible for supervising the management, assisting the director with certain actions, or even representing the company in its entirety and managing it alone.. To find out more about management of the business during the observation period and the role of the receiverFor more information, see our dedicated article.
What happens to existing contracts?
The principle of continuation of essential contracts
The opening of proceedings does not automatically result in the termination of current contracts (commercial lease, supply contracts, leasing, insurance, etc.).. The court-appointed administrator (or the debtor with his authorisation) has the power to require the continuation of contracts deemed necessary to maintain the business.. In return, the company must pay the instalments due after the opening judgment. You can find more details on the fate of current contracts in our special publication.
The fate of contracts not pursued
If the administrator (or the debtor) decides not to continue a current contract, it will be terminated.. Any indemnities or claims due to the co-contractor as a result of this termination must be declared as liabilities in the proceedings.
The situation of creditors and the declaration of claims
Prohibition on payment of prior claims
As mentioned above, a cardinal principle is the strict prohibition on settling debts that arose prior to the opening judgment.. Any payment made in breach of this rule may be cancelled and the payer or receiver held liable. There are very limited exceptions, such as the set-off of related claims.
The obligation to declare your claim
All creditors whose claims arose prior to the opening judgment must declare them to the judicial representative appointed by the court.. This declaration must be made within a strict legal deadline (generally two months from publication of the opening judgment in the BODACC). Failure to comply with this obligation has serious consequences for the creditor, who runs the risk of never being able to recover his debt. The claims declaration is an essential formal step for previous creditors.
Possible outcomes at the end of the observation period
At the end of the observation period, after analysing the situation and outlook, the court will take a decision on the company's future.. Several scenarios are possible :
Adoption of a safeguard or recovery plan
If the company's recovery appears possible, the court will draw up a plan (safeguard plan or recovery plan).. This plan organises the continuation of the business, provides for the necessary reorganisation measures (economic, social, financial) and sets out the arrangements for settling the liabilities over a period of up to 10 years (or even 15 years for farmers).
Sale of the company
If the continuation of the business by the debtor is not viable but the business (or part of its business) can be saved by a buyer, the court may order the sale of the business.. The purpose of the sale is to maintain the business and some or all of the related jobs, and to pay off the company's liabilities.
Conversion to compulsory liquidation
Finally, if no recovery or sale solution can be envisaged, or if the company can no longer meet the costs of the observation period, the court will order the proceedings to be converted into a judicial liquidation.. The aim is to realise the company's assets in order to pay off creditors as effectively as possible.
The observation period is a complex and decisive stage, marked by strategic decisions and subject to strict rules. For an in-depth analysis of your situation or that of your company, and to take advantage of a personalised, strategic legal support during the observation period, contact our firm.
Frequently asked questions
What is the maximum length of an observation period?
The initial period is generally 6 months maximumrenewable onceand exceptionally a second time at the request of the public prosecutorbut may not exceed a total of 18 months (or even 24 months in certain specific agricultural cases)..
Who runs the company during the observation period?
In principle, the manager remains in officebut may be assisted, supervised or represented by a court-appointed administrator whose remit is determined by the court.
Can invoices from before the procedure be paid?
No, it is forbidden to pay claims that arose before the opening judgment.There are very limited exceptions (set-off of related claims, withdrawal of pledges, etc.).
What happens to existing contracts (lease, suppliers, etc.)?
The court-appointed administrator (or the debtor) alone has the power to require the continuation of contracts deemed necessary for the business.provided you pay the instalments due after the opening of the account.
What happens if I don't declare my claim on time?
A creditor who fails to declare his claim within the legal time limits will no longer be able to assert it in the collective proceedings (it becomes unenforceable). and may never be paid, unless a statement of foreclosure is obtained. Sources and related content
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