Commencement of compulsory liquidation: conditions and initial effects for the debtor

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The prospect of compulsory liquidation is a critical time for any company and its director. Often dreaded, this procedure marks a decisive turning point, generally when financial difficulties reach a point of no return. It is essential to understand precisely the circumstances in which liquidation proceedings may be initiated and the immediate consequences for the debtor. This article details the conditions under which receivership is opened and analyses the first major effects, which have a direct impact on the company's directors and management.

Strict conditions for opening a judicial liquidation

Instigating compulsory liquidation proceedings is not a decision taken lightly. It is based on precise legal criteria defined by the French Commercial Code, which aim to establish that the company's economic situation has been irretrievably compromised. Two cumulative conditions must be met: cessation of payments and manifest impossibility of recovery.

Suspension of payments: definition and assessment

The first criterion is that the company has ceased payments. For understand its definition and assessmentAccording to article L. 631-1 of the French Commercial Code, a company is in suspension of payments when it is in the following situations inability to meet current liabilities with available assets. Let's analyse these terms.  

Current liabilities" represent debts that have fallen due and for which creditors can demand immediate payment.. This includes unpaid supplier invoices, outstanding loan instalments and overdue tax or social security debts. These are not all the company's debts, but only those that are due now.  

Available assets" are the cash that the company can draw on immediately or in the very short term to pay its debts.. These are mainly cash at bank and in hand. Inventories, trade receivables not yet collected and buildings are not generally considered to be available assets, as it takes time to convert them into cash.. However, a cash advance that is not blocked or for which repayment is not required may constitute an available asset.. Similarly, a debtor who can demonstrate that he has credit reserves or moratoria (deferment of payments) from his creditors enabling him to meet his obligations is not considered to be in suspension of payments..  

The assessment of this state is factual and falls within the jurisdiction of the court. It is not enough to have debts; you must be demonstrably unable to pay them using immediately available resources.

Manifestly impossible adjustment: a key criterion

The second condition, which is cumulative with the first, is that the company's recovery must be manifestly impossible. It is this criterion that distinguishes the situation that justifies immediate liquidation from that which could lead to a court-ordered reorganisation (which aims to find solutions to save the business).  

What is meant by "manifestly impossible"? The term indicates the obvious, that there is no serious prospect of a return to a viable situation.. The court must be convinced that no reorganisation measure, no continuation plan, even with major efforts, would enable the company to overcome its difficulties in the long term and become sustainable once again.  

The assessment of whether this is manifestly impossible is a matter for the judges of the court of first instance.. They examine the company's overall situation: the extent of its liabilities in relation to its assets and sales, the deterioration in its equity, the absence of an order book, the loss of key markets, the structural impossibility of returning to profitability, the absence of credible prospects for financing or a takeover, etc.. If a recovery plan appears unrealistic or doomed to failure, liquidation may be ordered directly. General grounds are not sufficientthe decision must be based on concrete and precise information.  

The various possible applicants

It is not just the debtor who takes the initiative in initiating compulsory liquidation proceedings. A number of parties may bring the matter before the competent court:

• The debtor himself : This is a legal obligation. The head of the business (or the legal representative of the company) must declare the cessation of payments to the clerk of the relevant court within 45 days of the cessation of payments, unless he or she has requested the opening of a conciliation procedure within this period (Art. L. 640-4 C. com.). Failure to comply with this obligation may result in liability.  
• A creditor : An unpaid creditor, whether a supplier, bank or other party, may bring an action against its debtor for compulsory liquidation (Art. L. 640-5, para. 2 C. com.). The creditor's application must be exclusive of all others (except for a subsidiary application for judicial reorganisation) and must prove the cessation of payments and the manifest impossibility of reorganisation. This is an often-used means of exerting pressure, but the court will rigorously check whether the conditions are met.  
• The Public Prosecutor's Office (Procureur de la République) : He may also request that the proceedings be opened, in particular if he is aware of facts revealing the cessation of payments and the impossibility of recovery, for example facts reported by employee representatives or other bodies (Art. L. 640-5, para. 1 C. com.).  
• The court (indirectly) : The court can no longer initiate liquidation proceedings on its own initiative ab initio (i.e. directly) or following the resolution of a plan. This option has been ruled unconstitutional. However, if the president of the court is aware of serious facts, he may inform the public prosecutor, who will decide whether or not to refer the matter to the court (Art. L. 640-3-1 C. com.).  

It should be noted that the staff representatives (social and economic committee) can inform the public prosecutor or the president of the court of facts revealing the cessation of payments, but cannot directly request the opening of proceedings..  

The special case of ab initio liquidation vs. conversion

Judicial liquidation can be ordered in two main ways:

1. "Ab initio (from the outset): At the first hearing, the court establishes that the conditions (cessation of payments and manifest impossibility of recovery) have been met, and opens the judicial liquidation directly, without going through a prior recovery phase (observation period). This is a pragmatic measure introduced to avoid reorganisation procedures that are doomed to failure from the outset.  
2. By conversion : Liquidation may also be ordered during or at the end of an observation period opened as part of safeguard or receivership proceedings. If, during this period, it appears that it is impossible to draw up a safeguard or recovery plan and that the situation is not improving, the court may decide to convert the proceedings into a judicial liquidation (Art. L. 622-10, L. 631-15 C. com.). In this case, the cessation of payments is generally already established (except in the special case of conversion of a safeguard); the court then focuses on demonstrating that it is clearly impossible to turn the business around. Conversion may be requested by the administrator, the judicial representative, an auditor, the debtor, the public prosecutor, or even be decided ex officio by the court (after respecting the adversarial principle).  

A specific case of conversion occurs when a disposal plan (sale of the business) is approved during reorganisation proceedings. If the activities that have not been sold cannot be covered by a continuation plan, the court will order the liquidation of these residual activities (Art. L. 631-22 C. com.).

The opening judgment: procedure and content

The judgement opening the judicial liquidation is a formal decision taken by the Commercial Court (for traders and artisans) or the Judicial Court (for other eligible debtors). It follows a specific procedure and contains compulsory information.

Court proceedings

Before ruling, the court must respect the adversarial principle. It hears (or regularly summons) the debtor in chambers (non-public hearing).. Employee representatives (CSE) must also be heard or duly summoned.. If the debtor practises a regulated liberal profession, the relevant professional association must also be notified.  

Before making its decision, the court may appoint a judge (juge commis) to conduct a rapid investigation into the economic, financial and social situation of the company (Art. L. 621-1 C. com.). This judge may be assisted by experts. The court may also hear any person it deems appropriate.  

Once the judgment has been handed down, it is notified to the debtor, the claimant (if not the debtor) and the designated bodies. The judgement is published in the RCS or Répertoire des Métiers, in the BODACC and in a legal gazette, in order to inform third parties, particularly creditors.

The essential content of the judgment

The judgment opening the judicial liquidation (whether it be ab initio or by conversion) must contain several key elements:

• Appointment of the liquidator : This is the main body of the procedure, responsible for representing the creditors, managing the liquidation operations (sale of assets, possible redundancies) and distributing the funds. If there was already a court-appointed representative in a previous procedure (converted safeguard or reorganisation), he or she is generally appointed liquidator. The court may, however, appoint another liquidator on a reasoned request. Several liquidators may be appointed in large cases.  
• Appointment of the official receiver : Magistrate responsible for overseeing the rapid progress of proceedings and taking certain important decisions (authorisations to sell, etc.).  
• The date of cessation of payments : The court sets this date, which may be earlier than the date of the judgment (but not more than 18 months earlier, except in exceptional cases). This date is important because it determines the "suspect period" during which certain actions taken by the debtor may be annulled.  
• If the opening is ab initioThe judgment also appoints the other initial bodies, such as the employees' representative and the auditors (creditors who volunteer to follow the procedure).

The judgment also sets a provisional deadline by which the termination of the proceedings must be examined..  

Appeal against the judgment

In principle, the judgment opening a judicial liquidation is enforceable by operation of law on a provisional basis (Art. R. 661-1 C. com.).. This means that its effects apply immediately, even if an appeal is lodged. However, provisional execution may be halted by the first president of the court of appeal if the grounds for appeal appear serious.. An appeal by the public prosecutor's office has suspensive effect in the case of liquidation..  

There are several possible avenues of appeal:

• The call : The judgment may be contested before the Court of Appeal. The persons entitled to appeal vary slightly depending on whether it is a case of an opening of an insolvency procedure. ab initio or conversion, but generally include the debtor, the pursuing creditor (in the case of opening), the administrator or the judicial representative (in the case of conversion), the employee representatives and the public prosecutor (Art. L. 661-1 C. com.). The appeal period is short (generally 10 days from notification).  
• Third party opposition : It is open to interested parties who were neither parties nor represented in the proceedings and who do not have the right to appeal (Art. L. 661-2 C. com.). For example, a creditor who is not a claimant could use it.
• Appeal in cassation : It is possible to appeal against the judgment of the Court of Appeal under the conditions of ordinary law.

If the Court of Appeal quashes the opening judgment, it may itself open liquidation or reorganisation proceedings if the conditions are met.

The immediate effects on the debtor and the company

As soon as it is pronounced, the judgment of compulsory liquidation produces radical effects on the individual debtor or the company, and on the conduct of the business.

The removal of the manager: loss of control and management

This is the most obvious consequence for the debtor. Article L. 641-9 of the French Commercial Code stipulates that the judgement entails, by operation of lawfrom its date (0:00 on D-day), divestment of the debtor of the administration and disposal of his assets.  

In practical terms, this means that the debtor (natural person or director of the legal entity) loses the power to act on the assets covered by the proceedings.. They can no longer sell goods, collect debts, enter into contracts, make payments or take legal action in property matters.. It is the liquidator who now exercises these rights and actions on behalf of and in the collective interest of the creditors..  

The scope of divestiture is broad:

• Property concerned : It affects all the present and future assets of the estate concerned by the procedure, until its closure. For a traditional sole trader, this concerned all of his assets (except for assets that were exempt from seizure by nature or by declaration prior to the PACTE/Loi EI Act). Since the Act of 14 February 2022 creating a single status for sole proprietors with automatic separation of business and personal assets, the divestiture applies in principle only to business assets. Personal assets are outside the scope of the procedure, barring exceptions (fraud, confusion of assets, waiver of protection). In the case of a company, these are all its assets.  
• Acts concerned : All acts of management and disposal are covered. The liquidator takes the place of the debtor to administer and sell the assets.  
• Legal action : The debtor loses his capacity to act or defend himself in court in matters concerning his assets. The liquidator represents the debtor. Proceedings in progress are suspended and must be resumed by or against the liquidator.  

The sanction for an act performed by the debtor in breach of the divestiture is not nullity, but rather the "right of the debtor to withdraw".not enforceable to the collective proceedings. The deed remains valid as between the debtor and the third party, but the liquidator may ignore it (for example, to recover a property that was sold irregularly). Only the liquidator can invoke this unenforceability..  

However, divestiture is not absolute. The debtor retains the exercise of his own rightsIn other words, those that are attached to his person and are not of a purely patrimonial nature (Art. L. 641-9, I, para. 3 C. com.). This includes, for example :

• The right to bring a civil action to establish the guilt of the perpetrator of an offence of which it is the victim (but the damages will go to the liquidator).  
• Actions relating to personal status (divorce, filiation).  
• The right to accept or renounce an estate (even though the assets received may subsequently fall into liquidation).
• The right to defend oneself in certain proceedings (e.g. eviction from one's own home) or to appeal against decisions of the insolvency proceedings themselves (opening judgment, decisions of the official receiver), but often in the presence of or against the liquidator.  
• Company directors retain their functions as legal representatives (unless revoked or an ad hoc agent is appointed), but can no longer act on the company's assets. The political rights of shareholders (voting at general meetings) are also retained, but financial rights (dividends, current account) are exercised by the liquidator.  

It is important to note that mail addressed to the debtor may be intercepted by the liquidator with the authorisation of the juge-commissaire, in order to identify assets or creditors, but personal mail must be returned to the debtor.

Immediate cessation of business: the principle

Logically, since reorganisation is deemed impossible, judicial liquidation means that the company's activities cease immediately.. The objective is no longer to continue the business but to realise the assets to pay the creditors.. This ruling generally implies :  

• Closure of the establishment.
• Dismissal of employees by the liquidator. These dismissals follow the rules for economic redundancies. In order for wage claims (compensation, etc.) to be covered by the AGS (Assurance Garantie des Salaires), redundancies must take place quickly (15 days after the judgment, 21 days if PSE).  
• Forfeiture of debts: all previous debts, even if not yet due, become immediately payable (Art. L. 643-1 C. com.), making it easier to establish liabilities. This forfeiture applies only to the debtor, not to guarantors or co-obligors.  

Temporary employment: a regulated exception

For explore in more detail the consequences for creditors and the realisation of assetsIt should be noted that in certain very specific situations, the court may authorise a provisional continuation of the business after the liquidation judgment (Art. L. 641-10 C. com.).. This exception is designed to maximise the value of assets or to protect specific interests :  

• If a total or partial sale of the company is envisaged : Keeping the business going allows potential buyers to see a company that is "up and running", which can improve the sale price.  
• If the public interest so requires : For example, to complete a major project, ensure continuity of public service, or avoid too brutal a social impact.  
• If the interests of the creditors so require : In particular, to complete production in progress and sell finished products rather than raw materials, or to sell off stocks under better conditions.

This retention is strictly regulated:

• Duration: Maximum 3 months, renewable once at the request of the public prosecutor (i.e. 6 months in total). For farms, the period may run until the end of the crop year.  
• Management : It is the liquidator who manages the business during this period. If an administrator had been appointed in a previous procedure (converted reorganisation), he or she may remain in office. An administrator may also be appointed specifically if the business exceeds certain thresholds. He or she may require the continuation of current contracts necessary for this provisional activity.  
• Receivables : Receivables arising during this provisional maintenance for the needs of the business benefit from a payment privilege and must be paid on the due date (Art. L. 641-13 C. com.). They will be dealt with in more detail below.

This phase is similar to a "mini observation period".The aim is to prepare for a better sale or to optimise the sale of assets.  

Dissolution of the company

For a long time, an important consequence for businesses operating as companies was that they were automatically dissolved as soon as they were wound up by court order. For understand the possible outcomes at the end of the judicial liquidation and the professional recovery procedurethis meant the legal end of the company, even if its legal personality remained for the purposes of the liquidation operations until the close of the liquidation.. This dissolution entailed the end of the powers of the company's directors.  

However, the order of 12 March 2014 changed this rule. From now on, the company is no longer dissolved by the judgment opening the liquidation. It is only dissolved at the time of the closure of the judicial liquidation due to insufficient assets (Art. 1844-7, 7° C. civ.). The company directors therefore remain in office (even if they are stripped of their powers of asset management), unless the court decides to appoint an agent to replace them (Art. L. 641-9, II C. com.). This change simplifies the management of the proceedings, particularly as regards the exercise of the company's own rights or residual administrative management. The termination of the company and the consequences of closure are dealt with in more detail.

For an overview of the process, please consult our essential guide to judicial liquidationThis report provides a context for the opening of the procedure, its conditions and its initial effects, in order to understand the entire process of selling assets and discharging the debts of a company in difficulty.

If this sounds like you, please do not hesitate to contact our office. for strategic legal advice and support in declaring the cessation of payments, preparing for the opening of compulsory liquidation proceedings, or defending your interests in the face of divestiture and cessation of activity to discuss your options.

Sources

• Commercial Code: articles L. 621-1, L. 622-10, L. 631-1, L. 631-12, L. 631-15, L. 631-22, L. 640-1 to L. 640-6, L. 641-1 to L. 641-10, L. 641-13, L. 641-15, L. 643-1, L. 661-1, L. 661-2, R. 621-4, R. 621-8, R. 631-24, R. 640-1, R. 641-1, R. 641-6, R. 641-7, R. 641-18, R. 641-19, R. 641-36, R. 641-40, R. 661-1.
• Civil Code: article 1844-7.

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