Safeguard procedure: a lifeline before the storm?

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When a business is sailing through troubled waters, facing headwinds - be they economic difficulties, major disputes or financial tensions - the instinct may be to wait, hoping for a lull. However, waiting until the situation reaches the critical point of cessation of payments is not always the only way out. French law offers a mechanism designed specifically for companies that are anticipating the storm: the safeguard procedure.

Introduced in 2005, this legal procedure is designed to provide a protective framework for companies that, although experiencing serious difficulties that they are unable to overcome on their own, are not yet in a state of suspension of payments. It is a voluntary approach, a sort of hand outstretched by the law to enable reorganisation before it is too late. This article looks in detail at how the safeguard procedure works: what are the very specific conditions for accessing it, what objectives does it pursue, and how can it be a strategic option for a far-sighted manager?

What is the safeguard procedure?

The fundamental objective of the safeguard is clearly set out in Article L. 620-1 of the French Commercial Code: it is " aimed at facilitating the reorganisation of the company in order to enable it to continue as a going concern, maintain employment and pay off its debts ". Unlike receivership or liquidation by court order which take place once the cash flow crisis has become apparent (cessation of payments), the safeguard is positioned upstream.

Its main feature is that it is an approach volunteer. Only the debtor - whether an individual company director or the legal representative of a corporate entity - may request that the court with jurisdiction over the matter (Commercial Court for a commercial or craft business, Judicial Court for a civil, agricultural or liberal profession). Neither a creditor nor the public prosecutor can initiate the procedure. This exclusivity underlines the philosophy of the procedure: to encourage managers to act responsibly and in advance, as soon as significant difficulties arise.

By filing for protection, the company places itself under the protection of the court. This has significant immediate effects, in particular the freezing of debts incurred prior to the opening judgment and the suspension of individual proceedings by creditors. This gives the company a breathing space to draw up a safeguard plan, under the supervision of the bodies appointed by the court (juge-commissaire, mandataire judiciaire and, where appropriate, an administrator) to restructure its debts and ensure its long-term survival.

What are the conditions for opening a backup?

Access to the safeguard procedure is subject to strict criteria, defined in article L. 620-1 of the French Commercial Code, which clearly distinguish it from other procedures.

There must be no suspension of payments

This is the cardinal negative condition: to benefit from a safeguard, the company must not not be in a state of suspension of payments. Remember that the cessation of payments is the impossibility for the company to meet its current liabilities (debts that have fallen due) with its available assets (immediate or very short-term liquid assets).

This absence of cessation of payments must be verified by the court on the day it rules on the application to open the business. This is a major difference from :

• Reorganisation and liquidation by order of the court, which demand cessation of payments.
• The conciliation procedure (an amicable and confidential measure), which can be opened even if the company is no longer in payment, as long as it is less than 45 days old.

It is up to the debtor applying for protection to provide evidence that it is not in this critical situation. The debtor must demonstrate that it is still able to meet its outstanding debts with its available cash and any confirmed credit reserves.

Justify "insurmountable difficulties".

In addition to the absence of cessation of payments, the debtor must prove the existence of " difficulties it is unable to overcome ". This is the positive condition.

The nature of these difficulties is not limited by law. They may be :

• Economic : Significant drop in sales, loss of a key market, disruption of supplies...
• Financial : Difficulties in obtaining finance, increasing debt even if it is still covered by available assets, the need to restructure large debts in the future...
• Legal : A major dispute whose unfavourable outcome could destabilise the company, new and costly regulatory constraints...
• Social : Major internal tensions impacting business...

The key element is the insurmountable of these difficulties by the debtor alone. This means that without the help of the protective framework of the safeguard (suspension of proceedings, possibility of imposing deadlines or postponements in the plan), the company would not be able to resolve these problems and would risk, in the long term, falling into suspension of payments.

Initially, the law required proof that these difficulties were likely to lead to the cessation of payments. This requirement was abolished in 2008 to make access to the procedure more flexible. Today, all that is required is proof that the company is experiencing difficulties and that it is unable to overcome them without outside help. The court makes its own assessment, on a case-by-case basis, of whether these conditions have been met, based on the documents provided by the debtor (cash flow situation, projected profit and loss account, statement of debts, etc.).

It is important to note that, in the case of a company, these difficulties are assessed at the level of the company itself, regardless of the wealth of its shareholders or whether it belongs to a financially strong group. The principle of the autonomy of legal entities prevails. A subsidiary in difficulty may therefore apply for protection even if its parent company is prosperous (except in cases of proven confusion of assets and liabilities).

If the court considers that the difficulties exist but are not insurmountable within the meaning of the Safeguard Act, it may, since a 2016 amendment (article L. 621-1, para. 3), invite the debtor to turn to a conciliation procedure, which is better suited to less critical difficulties or difficulties requiring confidential negotiation with the main creditors.

When are difficulties assessed?

As in the case of cessation of payments, case law is clear: the conditions for opening a safeguard procedure (absence of cessation of payments and insurmountable difficulties) must be met. on the day the court renders its decision. If the company's situation changes between the filing of the application and the judgment, it is the situation on the date of the judgment that counts. In the event of an appeal against a judgement opening the safeguard procedure, the Court of Appeal will also use the date of the first instance judgement to check whether the conditions were met at that time.

Backup as a strategic management tool?

The relative flexibility of the opening conditions, in particular the removal of the direct link required with a future cessation of payments, has given rise to debate. Some have feared that companies will use safeguard procedures not to overcome real difficulties threatening their survival, but as a strategic means of freeing themselves from contractual obligations deemed too onerous (renegotiating a commercial lease, getting out of an expensive franchise contract, etc.).

The "Cœur Défense" case illustrated this debate a few years ago. The Court of Cassation (in a decision dated 8 March 2011, no. 10-13.988 et seq., handed down under the old text) finally ruled that if the legal conditions for opening a bankruptcy are objectively met (real and insurmountable difficulties, absence of cessation of payments), the court should must initiate proceedings, regardless of the debtor's motives or the consequences for his contracts. It is not the judge's role to review the appropriateness of the decision or to judge the intentions of the manager, provided that the law is respected.

However, this approach is limited by the fraud. If the court finds that the safeguard request is manifestly abusive, diverted from its legal purpose and motivated by fraudulent intent (for example, artificially protecting the interests of another entity), it may reject the request. The balance between the preventive tool and the risk of instrumentalisation remains delicate. However, statistics show that the safeguard remains a relatively little-used procedure, which tends to indicate that fears of massive misuse have not materialised.

And if the situation deteriorates? Backup conversion

Safeguard is not an absolute guarantee of success. The company's situation may continue to deteriorate during the observation period (the initial period opened by the judgment, generally 6 months renewable, during which the plan is prepared). In such cases, the law provides for mechanisms to "convert" the procedure to a system that is better suited to the new situation.

If the suspension of payments already existed (initial error of assessment)

It may happen that the court was mistaken when it opened the safeguard proceedings and that the company was in fact already in suspension of payments. If this situation is revealed after the fact, the court may, at the request of the debtor, the administrator (if there is one), the mandataire judiciaire or the public prosecutor, convert the safeguard into a receivership or directly into a judicial liquidation if recovery is manifestly impossible (article L. 621-12 C. com.).

If the suspension of payments occurs during the safeguard period

Even if the company was not in cessation of payments at the time of opening, it may become so during the observation period, for example by accumulating new debts that it cannot pay (debts arising after the opening judgment must in principle be paid as they fall due). In this case, article L. 622-10, paragraph 2 of the French Commercial Code also allows the court, seised of the matter by the same parties (debtor, administrator, trustee, insolvency representative), to order the conversion to receivership or compulsory liquidation.

If it is impossible to adopt a safeguard plan

Sometimes, even without immediate cessation of payments, it becomes clear during the observation period that no viable safeguard plan can be adopted (profound disagreement with creditors, lack of prospects for recovery, etc.). If, in such a case, the simple closure of the safeguard proceedings would "certainly and rapidly lead to the cessation of payments", the court may decide to convert the safeguard into a receivership (article L. 622-10, paragraph 3). This provision makes it possible to consider a plan to sell the business, a solution that is possible in reorganisation but not in safeguard.

Consequences of conversion

Conversion is not the opening of new proceedings. The proceedings initially opened continue, but under a different regime (reorganisation or liquidation). The main effects are :

• The court must (or may) set the date on which payments cease.
• Deadlines, in particular for declaring claims, are not reopened. Creditors who were foreclosed remain so.
• The remit of the bodies may be adapted (for example, the court-appointed administrator may be given the task of representing the company in reorganisation proceedings, but not in safeguard proceedings).
• The rules specific to the new regime apply (for example, the possibility of a disposal plan in reorganisation).

A special case: accelerated safeguarding

In addition to the "classic" safeguard, there is a faster procedure: the accelerated backup (articles L. 628-1 et seq. C. com.). Resulting from a 2021 reform transposing a European directive, it merges the former "sauvegarde accélérée" and "sauvegarde financière accélérée" (SFA).

Its aim is to enable very rapid restructuring for companies that have already made good progress in negotiating with their creditors in the context of insolvency proceedings. prior conciliation.

Access conditions

To request an accelerated safeguard, the debtor must :

• Be (or have very recently been) in conciliation proceedings.
• Justify the development of a proposed plan that is sufficiently advanced and likely to attract broad support the creditors concerned ("affected parties"). The conciliator's report is essential here.
• Have accounts certified by a statutory auditor or drawn up by a chartered accountant.

One notable point: unlike traditional backup, accelerated backup can be opened even if the debtor is in suspension of paymentsprovided that this is no more than 45 days prior to the date of the request to open the preliminary conciliation procedure. It is therefore not a purely preventive procedure, but rather a tool for rapidly finalising a negotiated restructuring. The constitution of classes of parts affected (groups of creditors and possibly partners, depending on their rights) is required to vote on the plan. It is also possible to limit the procedure to financial creditors (banks, funds, etc.), in the spirit of the former SFA.

Quick opening and unrolling

The court decides whether to initiate proceedings after receiving the conciliator's report. The procedure is then very short: the plan must be adopted within two months from the date of the opening judgment, extendable once for a maximum of two additional months (i.e. a maximum of 4 months in total).

Anticipation is often the key to safeguarding the future of your business. The safeguard procedure, although judicial, is designed with this in mind. If your company is facing serious but manageable difficulties, it may be wise to consider the safeguard option. Our team will be happy to analyse your situation and advise you on the best course of action. advise on the relevance of this approach.

Sources

• Commercial Code (Articles L. 620-1 et seq., L. 621-12, L. 622-10, L. 628-1 et seq.).
• Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks (for the accelerated safeguard context).

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