Opening insolvency proceedings: the legal process explained

When a company is going through such intense economic turbulence that its future is threatened, theinitiation of collective proceedings - Safeguarding, reorganisation or judicial liquidation - is becoming a stage that is often unavoidable. Far from being an insignificant or improvised step, it marks the entry into a strict legal framework, designed to deal with the situation under the aegis of the court. But how is this procedure actually triggered? Who can apply? Before which court? And who are the players involved?

The purpose of this article is to demystify the process of initiating insolvency proceedings. Together, we will go through the key stages: from the referral to the court, through the determination of the competent court, to the presentation of the main parties appointed by the judge. Finally, we will look at the opening judgment itself, the crucial decision that formalises the launch of the proceedings and defines their initial outlines. Understanding this process is essential for any manager, creditor or employee faced with this delicate situation.

Initiating proceedings: who goes to court?

Collective proceedings are not triggered automatically. It requires a formal application to the competent court. The persons authorised to take this step vary according to the type of procedure envisaged.

Safeguarding: a debtor-only approach

As we saw in the previous article, the safeguard is an anticipatory procedure, reserved for companies that are not yet in suspension of payments but are experiencing insurmountable difficulties. In line with this preventive and voluntary approach, only the debtor they themselves can ask the court to open safeguard proceedings (article L. 620-1 of the French Commercial Code). In the case of a company, it is its legal representative (manager, chairman, etc.) who takes this step. The aim of this exclusive right is to make the manager aware of his responsibilities and to encourage him to act early.

Reorganisation and judicial liquidation: several possible players

When the situation is more critical, with thestate of suspension of paymentsThe initiative of going to court to initiate receivership or liquidation is more widely shared:

1. The debtor : It's even a legal obligation. Any debtor (trader, craftsman, farmer, self-employed professional, company, etc.) who is in a state of suspension of payments must apply for the opening of receivership or compulsory liquidation proceedings within the following deadlines 45 days following this cessation, unless the director has requested the opening of conciliation proceedings within this period (articles L. 631-4 and L. 640-4 C. com.). Failure to comply with this obligation may expose the director to personal sanctions, including a ban on managing the business.
2. A creditor : All creditors, regardless of the nature of their claim (commercial, civil, tax, employee, etc.), may assign its debtor in receivership or compulsory liquidation (articles L. 631-5 and L. 640-5 C. com.). However, this approach is demanding: the creditor must prove that the debtor is in a state of suspension of payments; the mere fact that its own claim is unpaid is generally not enough. The creditor must show that the debtor is more generally unable to pay its debts as they fall due. In addition, the writ of summons to initiate collective proceedings must be exclusive any other claim (for example, a claim for payment of its debt in the same summons would render the application to open the procedure inadmissible, article R. 631-2 C. com.). You should also be careful not to use this summons simply as a means of exerting pressure, at the risk of incurring liability for abusive proceedings. For farmers, the summons by a creditor must be preceded by a request for the appointment of a conciliator (article L. 631-5, last paragraph).
3. The Public Prosecutor : The Public Prosecutor may also request that the procedure be initiated, by means of a request (articles L. 631-5 and L. 640-5 C. com.). It thus acts on behalf of the general interest and economic public policy. It may be informed of the cessation of payments by various sources, in particular by the president of the court following the failure of a conciliation, or by the company's social and economic committee (article L. 631-6 C. com.).

It is important to remember that ex officio referral by the court (i.e. the possibility for the court to decide on its own to initiate proceedings without being invited to do so by one of the aforementioned players) has been abolished at first instance since 2012/2014 in order to guarantee the principle of the judge's impartiality. However, it remains possible on appeal in certain cases.

Information to be provided to the court

Regardless of who initiates the application, and especially when it is the debtor, a complete file must be filed with the court registry. Articles R. 621-1 (for sauvegarde) and R. 631-1 (for redressement/liquidation) of the Commercial Code list the documents required. These documents are intended to give the court a true and fair view of the situation:

• Annual accounts for the last financial year.
• Recent cash position.
• Quantified statement of receivables and payables, with the identity of creditors.
• Statement of available assets and current liabilities (to justify the cessation of payments in the event of an application for administration/liquidation).
• Statement of securities (pledges, mortgages, etc.) and off-balance sheet commitments.
• Summary inventory of assets.
• List of employees and information on staff representatives.
• Confirmation of the absence (or presence) of a recent amicable procedure (ad hoc mandate, conciliation).
• And other documents depending on the situation (classified installations, regulated liberal professions, etc.).

The completeness and sincerity of this information is essential to enable the court to make an informed decision.

Where do proceedings take place? (Jurisdiction)

Two questions arise: what type court has jurisdiction and where is it located? located at Geographically (territorial jurisdiction)?

Jurisdiction : Commercial Court or Court of First Instance?

The choice depends mainly on the type of activity exercised by the debtor (Article L. 621-2 C. com.) :

• Le Commercial court is responsible for debtors carrying on a business commercial or craft. This includes commercial companies by form (SARL, SAS, SA, etc.) even if their object is civil, as well as traders and craftsmen who are natural persons (registered or de facto).
• Le Court of First Instance has jurisdiction "in other cases", i.e. mainly for :
  • Debtors in business agricultural.
  • The liberal professionals and others self-employed individuals whose business is neither commercial nor small-scale.
  • The non-trading legal entities under private law (non-trading companies, associations, economic interest groupings for civil purposes, etc.).

There are also Specialised commercial courtsdesignated in certain regions to handle the procedures of large companies (exceeding certain employee or turnover thresholds) or large groups of companies (Article L. 721-8 C. com.).

Concerning thesole trader subject to the separation of assets, the competent court for the collective proceedings (concerning the business assets) is determined according to the nature of the business. In certain cases, this same court may also be called upon to deal with personal debts, particularly if the conditions for excessive debt are also met and the assets have not been strictly separated (article L. 681-2 C. com.).

Once the procedure has been opened, the court seised becomes competent to hear most of the disputes arising from the procedure or which are subject to its legal influence (principle of the attractiveness of the collective procedure, article R. 662-3 C. com.), with certain exceptions (industrial tribunal disputes, certain property actions, etc.).

Geographic (territorial) jurisdiction: Where to go?

The general rule is set out in Article R. 600-1 of the French Commercial Code:

• For a legal personthe competent court is the one in whose jurisdiction his or her head office. This is the registered office realIn other words, where the management and administrative activities are actually located, not just a letterbox.
• For a natural personthe competent court is the one in whose jurisdiction it has declared the case.company address or, failing that, its personal address.

Please note: if the registered office or business address has been transferred less than six months before the matter is referred to the court, the court of the former registered office or address retains jurisdiction.

There are exceptions for company groups. In order to promote coordinated management, the law allows, under certain conditions, the proceedings of several companies in the group to be brought before a single court, often that of the head office of the dominant company or the court first seised (Articles L. 662-2 and L. 662-8 C. com.).

Finally, in a international context (European Union), the European Regulation on Insolvency Proceedings (No. 2015/848) designates as competent to open the main proceedings (with effects throughout the EU) the court of the Member State in which the "insolvency estate" is located. centre of main interests "(COMI) of the debtor. This COMI is presumed to be the place of the registered office for a company, or the place of principal activity for an individual, unless proven otherwise.

Who are the key players in the procedure?

The opening of insolvency proceedings brings together a number of a series of actors with well-defined rolesunder the authority of the court.

Legal representatives

• The Court : It is the central decision-making body. It initiates the proceedings, appoints the other bodies, decides on the major orientations (continuation of business, safeguard/restructuring/assignment plan, conversion to liquidation, etc.), settles major disputes and pronounces the closure. Its composition is subject to precise rules, particularly in terms of the experience of consular judges.
• The official receiver : Appointed by the court at the start of the proceedings, he is responsible for ensuring that the proceedings run smoothly and that the interests of all parties are protected (article L. 621-9 C. com.). He is the real day-to-day "conductor of the orchestra". It takes a large number of decisions by way of order, authorises certain acts (transactions, sales of assets, etc.), rules on the admission of claims, monitors business activity, etc.
• The Public Prosecutor's Office (Procureur de la République) : It is the guarantor of public economic order and the correct application of the law. It has extensive rights of information, can refer cases to the court in certain circumstances, issues opinions (which are sometimes mandatory), and exercises specific remedies. Its presence is required at certain key hearings.

Designated legal representatives

These are liberal professionals, registered on national lists after a demanding course of study, and appointed by the court to carry out specific tasks:

• The Judicial Administrator : They are frequently appointed in the case of receivership (mandatory if the company exceeds certain thresholds or if a disposal plan is envisaged) and may be appointed in the case of safeguarding (often optional). Their remit, set by the court, varies: they may monitor management of the debtor (in safeguard), theassist for certain procedures, or the represent totally involved in management (especially in reorganisation). Its main role is to analyse the situation, draw up solutions (safeguard or recovery plan) and help with management during the observation period.
• The judicial representative : His appointment is mandatory in safeguard and recovery proceedings. It acts on behalf of and in the name ofcollective interest of creditors (article L. 622-20 C. com.). Its main role is to receive claims declarations, verify liabilities in conjunction with the official receiver, and defend the interests of creditors in the context of the procedure (consultation on the plan, etc.).
• The Liquidator : Appointed in the event of a judicial liquidation (often, the mandataire judiciaire becomes the liquidator). He has a dual role: he represents the creditors (continues the verification of liabilities) and represents the debtor, who is then "divested" of the administration of his assets. Its main mission is to sell assets of the company ("realising the assets") and allocate funds obtained between creditors, according to the legal order of liens and security interests.
• The Commissioner for the execution of the plan : Appointed if a safeguard or recovery plan is adopted, it ensures that the plan is properly implemented over the long term.

These professionals are subject to strict ethical rules and regular inspections, and are liable in the event of misconduct in the performance of their duties.

Employee representation

Employees are directly affected by the procedure. They are represented by :

• The Social and Economic Committee (CSE) or, failing that, staff representatives: They are informed and consulted at key stages (opening, redundancies, plan, etc.) and can be heard by the court.
• Employee Representative : Elected by the employees specifically after the opening judgment, their main role is to verify the wage claims established by the judicial representative or liquidator, and to assist the employees in their dealings (in particular with AGS - the wage guarantee insurance company). During their term of office, they enjoy protected employee status.

Experts (who may be appointed)

The court or the official receiver may appoint experts to advise them on technical points: a business diagnostics expert, an expert to value specific assets, a technician for a fact-finding mission, etc.

The opening judgment: the decision that launches the proceedings

The culmination of this initial phase is the opening judgment, handed down by the court after hearing the parties and examining the documents in the file.

Content and form

The judgement must state that the legal conditions for the proceedings have been met (insurmountable difficulties and no cessation of payments in the case of safeguard; cessation of payments in the case of reorganisation; cessation of payments and manifestly impossible reorganisation in the case of liquidation). It appoints the organs of the procedure (official receiver, representatives, etc.). It opens the observation period (in safeguard and reorganisation), for which it sets the initial term (generally a maximum of 6 months). In the case of reorganisation or liquidation, it sets the initial term. date of cessation of payments. The judgment is normally handed down in open court.

Effects and enforceability

The opening judgment takes effect immediately, as soon as 0 hours on the day it is delivered (article R. 621-4 C. com. and subsequent texts). This means that all acts carried out on that day are considered to have been carried out after the opening of the debt (payments of previous debts prohibited, ineffective seizures, etc.). It is provisionally enforceable by operation of law (article R. 661-1 C. com.), even in the event of an appeal (unless provisional enforcement is halted, or in the event of a suspensive appeal by the public prosecutor in a compulsory liquidation). It is enforceable against all (erga omnes): the legal situation created by the judgment is binding on everyone, including those who were not party to the proceedings. A company cannot be in collective proceedings for some and not for others. in bonis (not subject to proceedings) for others. This is the basis of the "bankruptcy on bankruptcy is not valid" rule: new collective proceedings cannot be opened until the previous one has been closed (article L. 620-2 C. com.).

Information and publicity

To ensure that it is enforceable and to inform third parties (in particular creditors), the opening judgment is subject to rigorous publicity, organised by the court clerk within 15 days:

• Entry in legal registers (RCS for commercial companies, Répertoire des Métiers for tradespeople, or special registers for others).
• Publication of a notice in BODACC (Bulletin Officiel des Annonces Civiles et Commerciales).
• Publication of a notice in a legal notices (JAL) of the place of the registered office or principal place of business.

Publication in the BODACC is particularly important because it marks the starting point of certain essential time limits, in particular the time limit for creditors to declare their claims (generally 2 months after publication).

Challenging the opening judgment

Appeals may be lodged against the opening judgment, but only under strict conditions so as not to paralyse the proceedings:

• The call : It is opened within 10 days from the date of notification of the judgment, to the debtor, the creditor who has served the summons and the public prosecutor. In the event of compulsory liquidation, the CSE (or the employee representative) may also appeal (article L. 661-1 C. com.).
• Third party opposition : It is open to persons who were neither parties nor represented at the judgment, but whose rights are affected by the decision (for example, a partner personally liable for the debts, the debtor's spouse, etc.). It must be lodged by declaration with the court registry within 10 days publication of the judgment in the BODACC (articles L. 661-2 and R. 661-2 C. com.).

Navigating the procedural intricacies of initiating insolvency proceedings requires specialised legal expertise. Whether you are a company director, creditor or other stakeholder, be well advised from the outset is essential. If you would like assistance with these procedures or to understand your rights and obligations, our firm is here to help. Get in touch with us to discuss your needs.

Sources

• French Commercial Code (in particular Book VI: Articles L. 621-1 et seq., L. 631-1 et seq., L. 640-1 et seq., L. 661-1 et seq., L. 662-1 et seq.; Book VII: Article L. 721-8; Book VIII: Articles L. 811-1 et seq., L. 812-1 et seq.; and associated regulatory articles R).
• Code of Civil Procedure (general rules of procedure and remedies).
• Labour Code (role of staff representative bodies).
• Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (for international jurisdiction).