Liens in insolvency proceedings: who gets paid first?

When a company goes through a financial crisis and enters insolvency proceedings, the normal system of securities is disrupted. This is particularly true for owner of a mortgaged property whose rights and obligations are affected. The usual rules of the Civil Code give way to a different logic, where the issue is no longer just the repayment of creditors, but also the possible survival of the business.

A modified set of privileges

Under normal circumstances, secured creditors are guaranteed payment in the order established by the Civil Code. General property liens take precedence over mortgages, which in turn take precedence over unsecured claims.

But the opening of collective proceedings changes everything. Safeguarding the business and protecting certain creditors deemed to be more vulnerable take priority.

The order of 15 September 2021 clarified this specific classification Article L.643-8 of the French Commercial Code, which establishes a precise hierarchy of creditors.

The superprivilege of employees: labour protection

Top of the list is the superprivilege for employees. This mechanism guarantees payment of wages for the last 60 days worked (90 days for sales representatives), subject to a monthly ceiling.

The Court of Cassation has issued a number of rulings to the effect that "employees, who do not benefit from the company's profits, must not bear its losses".

This superprivilege takes precedence over all others, with the exception of the right of ownership and the right of retention, which are considered to be "hors concours". It is based on two principles: the maintenance nature of the sums owed and the idea that the employee should not be exposed to the risks of the business.

The AGS: an additional safety net

Employee protection is further enhanced by the AGS (Association pour la Gestion du régime de garantie des créances des Salariés). This mechanism ensures payment of employee claims even if the company does not have the funds available.

The AGS is then subrogated to the rights of the employees and itself benefits from the super-privilege for the sums it has advanced.

The privilege of procedure: encouraging continued activity

Next come claims arising after the commencement of the collective proceedings, which benefit from the "preferential status of the proceedings" (articles L.622-17 and L.641-13 of the French Commercial Code).

This lien applies to claims arising from:

• Procedural requirements
• The observation period or provisional continuation of the business
• Services provided after the commencement of proceedings

Its purpose is simple: to enable the company to continue operating during the procedure. Without this guarantee, no one would agree to contract with a company in difficulty.

This privilege allows payment to be made on the due date, without waiting for the proceedings to be closed, and confers an advantageous rank in the event of liquidation.

The conciliation privilege: rewarding risk-taking

Less well known but just as important, the conciliation privilege (article L.611-11 of the French Commercial Code) protects those who have supported the company even before collective proceedings are opened.

This privilege, known as the "new money privilege", benefits those who have:

• Agreed to a new cash injection
• Provide a new good or service
• Agi as part of an approved conciliation agreement

What is special about this privilege? It only exists if the rescue attempt fails and collective proceedings are opened after the conciliation has failed.

Its ranking is particularly favourable, coming just after the employee superprivilege and legal costs.

A classification hierarchised by law

Article L.643-8 of the French Commercial Code now establishes a precise order for the distribution of funds in the event of judicial liquidation:

1. Non-competition receivables (property, retention)
2. Employee superprivilege
3. Legal costs incurred after the opening judgment
4. The privilege of agricultural producers
5. Conciliation privilege
6. Property security interests according to their ranking in the Civil Code
7. Non-super-privileged employee claims
8. Receivables related to cash contributions for the plan
9. Receivables from continuing contracts
10. Other receivables by ranking

This complex hierarchy clearly shows that collective proceedings are no longer simply a tool for repaying creditors, but a mechanism that attempts to reconcile job protection, incentives to support companies in difficulty and the preservation of the rights of previous creditors.

Mortgages and other traditional securities are relegated to sixth place, which explains why creditors holding these securities may feel adversely affected by the opening of collective proceedings.

This system of liens specific to insolvency proceedings illustrates the legislator's desire to protect certain categories of creditors deemed to be more vulnerable or more useful to the survival of the business, even if this means upsetting the normal order of securities. For an in-depth understanding of the impact of insolvency proceedings on real estate guarantees and the defence of your rights, the assistance of a lawyer specialised in mortgages is essential.

Sources

• French Commercial Code, Article L. 643-8 pursuant to Order no. 2021-1193 of 15 September 2021
• French Commercial Code, Articles L. 622-17 and L. 641-13
• French Labour Code, Articles L. 3253-2 to L. 3253-4 and L. 7313-8
• Fascicule 768: "Security interests in immovable property - liens on immovable property", JurisClasseur Droit bancaire et financier
• Fascicule 50: "Sûretés sur les immeubles - Présentation générale et classement", JurisClasseur Notarial Répertoire