Anticipating numerous applications for judicial reorganization proceedings (JRPs), by companies affected by the Covid-19 economic crisis, the legislator decided to modify some of the rules in order to make them more flexible and effective, by adopting the Law of 21 March 2021 (“L.21Mar21”).
The Ministry of Justice has recently indicated that it intends to extend the duration of this law, which gives us the opportunity to review and comment on several improvements in favour of the continuity of struggling companies.
1. Immediate access to the JRP pursuant to a reduction in formalities.
Certain documents that a debtor, requesting the opening of a JRP, is required to attach to its application may be filed at a later date, and at the very latest two days before the hearing of the application.
The debtor will therefore be able to postpone submission of the documents relating to: its current accounting situation, the budget containing the estimate of income and expenditure for the duration of the requested suspension of payments, the list of deferred creditors, the statement of the measures proposed to re-establish the viability of its business or the report showing that it has properly fulfilled its obligations to inform and consult the employees or their representatives.
On the other hand, it will still be required to attach to its application the remaining information and documents required by Article XX.41 §2 of the Code of Economic Law (CEL), namely: a statement of the circumstances on which its application is based, the objectives of opening the JRP, the electronic address at which it can be contacted, and the last two annual accounts that should have been filed in accordance with the articles of association, as well as the annual accounts for the last financial year (which may not have been filed yet), and (where applicable), a copy of the seizure orders and writs of attachment of movable and immovable property, as recorded in the central file of seizure notices (“Fichier central des avis de saisie”) abbreviated as the FCA.
Again, to counter the excessive formalism imposed by the previous wording of the law and the obstacle for SMEs seeking access to JRPs, the L.21Mar21 also states that omission of the annexes, that are to be attached to the application, will no longer sanctionable by inadmissibility.
Even if it is commendable to allow companies in difficulty rapid access to JRPs, is it not also essential to have prior access to accounting data and the assistance of a professional accountant, in order to assess the appropriateness and the chances of success of any restructuring measures, whether before or during the JRP? Unfortunately, it cannot be excluded that this new flexibility will lead to problems of abuse..
2. Preparing for reorganization away from the spotlight.
In order to avoid the harmful consequences that publication of the initiation of judicial reorganization proceedings may entail, the legislator has introduced a second amendment, namely the possibility of making use of a confidential preparatory phase with a view to reaching an amicable or a collective agreement, following the example of the “pre-pack” procedures, which are widespread in Anglo-Saxon legal systems.
During this phase, new article XX.39/1 of the CEL (inserted by article 6 of L.21Mar21) provides that a judicial representative will be appointed to facilitate the conclusion, in complete confidentiality, of an agreement between the debtor and its creditors, so that the former can benefit from favorable payment conditions and thus mitigate its situation. During this phase, in order for the negotiations to be carried out, the judicial representative may apply to the President of the Court to request terms and deadlines and to delay, for a maximum period of four months, any proceedings that may be initiated by the creditors.
Since any arrangement will not be published until after it has been concluded, this phase is particularly useful for debtors who fear that too hasty a publication of their situation could damage their reputation or may undermine the willingness of certain commercial partners to cooperate.
It should be recalled that article XX.36 of the CEL already offered debtors, prior to the commencement of a JRP, the possibility of appointing a company mediator to help facilitate a future JRP, irrespective of the mechanism used (amicable agreement, collective agreement or reorganisation under court supervision). By virtue of his experience and authority, the company mediator helps the debtor to restore any possible imbalance that the latter may experience in its confidential negotiations with certain major creditors, in order to reach negotiated agreements. The use of the new article XX.39/1 will allow the debtor – this time assisted by a judicial representative – to continue the work of the company mediator, by offering the possibility to obtain, in the preparatory and confidential phase, the suspension of one or more claims.
In practice, it appears that few debtors have actually made use of the ‘pre-pack’ procedure. Perhaps this is because distressed debtors are more interested in obtaining immediate protection against all creditors under Article XX.44 of the CEL after filing of the JRP application. During the article XX.39/1 preparatory phase, the debtor will not only have to wait for a certain number of days before the judicial representative is appointed by the court, but will also have to wait for the representative to take the initiative to request relief from the court, with respect to certain individual creditors. In the meantime, certain (other) creditors may pursue enforcement measures, such as seizures of movable property or bank assets, thereby definitively obstructing the debtor’s ability to seek a compromise.
3. Debt relief is no longer taxed.
Finally, a third change concerns the tax benefits for collective agreements, which are extended to voluntary arrangements (“accords amiables”). Whereas the tax authorities previously considered that debt write-offs resulting from a voluntary arrangement generated a taxable profit, in proportion to the reduction obtained, Article 48 of the 1992 Income Tax Code (CIR 92) now provides that write-offs and provisions resulting from a voluntary arrangement will be exempt, in the same way as those obtained via a collective agreement. (This exemption will apply during the relevant taxable periods until the voluntary arrangement has been fully implemented.)
In reality, it is too early to provide an in-depth assessment of what effect the measures introduced by the Law of 21 March will have, but it is very likely that those measures will be extended, at the initiative of the Council of Ministers, until 16 July 2022..