Company in Redressement Judiciaire

Redressement judiciaire (court-supervised reorganisation) is a collective insolvency procedure opened by the commercial court when a business is in a state of cessation des paiements (cash-flow insolvency). Contrary to received wisdom, this procedure is not a death sentence for the company. On the contrary, it is a protective mechanism intended to allow economic activity to continue, jobs to be maintained and liabilities to be cleared. For directors and creditors alike, understanding how redressement judiciaire works becomes essential in an economic climate marked by rising costs and tightening credit. This article sets out the stages of the procedure, the rights and obligations of each stakeholder, and the possible outcomes for a company in redressement judiciaire.

Conditions for opening redressement judiciaire

The test of cessation des paiements

Redressement judiciaire may be opened only in respect of a debtor in a state of cessation des paiements. This legal concept means the inability to meet due liabilities out of available assets. In practical terms, a company is in cessation des paiements when it can no longer pay its matured debts out of its cash and its immediately realisable receivables.

Case law carefully distinguishes available assets from realisable assets. A business with large stocks or substantial trade receivables may nevertheless be in cessation des paiements if those items cannot be converted into cash immediately. Conversely, a company that is temporarily overdrawn at the bank is not necessarily in cessation des paiements if it has sufficient credit facilities.

How the court is seised

Article L631-5 of the French Commercial Code provides that the court may be seised on the application of the public prosecutor (ministère public) to open redressement judiciaire proceedings where no conciliation procedure is under way. This referral by the public prosecutor's office of its own motion remains exceptional and generally follows a report from URSSAF (social security contributions collector), DGFIP (public finance directorate) or other public creditors.

More commonly, the procedure is opened at the request of the debtor itself. The director has forty-five days from the cessation des paiements to file the request. Beyond that, he or she is exposed to personal bankruptcy (faillite personnelle) or a management ban. Creditors may also seise the court, but they must show debts that are certain, liquid and due. The steps and formalities for a creditor seising the court are described in our article on the summons for redressement judiciaire.

Companies covered by the procedure

Redressement judiciaire applies to private-law legal entities carrying on a commercial, craft or agricultural activity. Non-trading companies (sociétés civiles) carrying on an economic activity may also be concerned. Article L631-5 of the French Commercial Code nevertheless sets out particular rules for debtors carrying on an agricultural activity that are not constituted as commercial companies, which fall within the jurisdiction of the tribunal judiciaire (judicial court).

Sole traders, liberal professions and micro-entrepreneurs (auto-entrepreneurs) also fall within the scope of the procedure. By contrast, associations under the 1901 law with no economic activity, trade unions and public authorities are outside redressement judiciaire.

Conduct of the reorganisation procedure

Opening and first effects

The judgment opening redressement judiciaire has immediate and radical effects on the company's legal position. It stops the running of statutory and contractual interest, except for creditors holding security in rem. Individual actions by prior creditors are suspended, creating an observation period conducive to developing a reorganisation solution. These effects on the business, its directors, its contracts and its employees are analysed more fully in our guide to the consequences of redressement judiciaire.

The court simultaneously appoints a juge-commissaire (supervisory judge) responsible for overseeing the procedure and an administrateur judiciaire (court-appointed administrator) whose assignment varies according to the circumstances. In small businesses with fewer than twenty employees and turnover below three million euros, the administrator simply assists the debtor in its management. For larger structures, the administrator may have a supervisory assignment or even a representation assignment with partial or total removal of the director's powers.

The observation period

This phase, with an initial duration of six months that may be renewed, makes it possible to carry out a precise diagnosis of the business and to identify the possible reorganisation solutions. The administrator, assisted where necessary by a chartered accountant, analyses the company's financial, commercial and social situation.

At the same time, the mandataire judiciaire (creditors' representative) verifies the claims. Each creditor must file its claim within two months of publication of the opening judgment in the BODACC (French official gazette of civil and commercial announcements). Claims not filed within that period are time-barred, subject to limited exceptions for claims for wages, industrial accidents or social security.

The observation period is characterised by continuation of the business under judicial supervision. Current contracts continue automatically, but the administrator may decide to terminate those that needlessly burden cash flow. Redundancies for economic reasons remain possible but are subject to authorisation by the juge-commissaire after consulting the employees' representative.

The bodies of the procedure

The juge-commissaire occupies a central position in the system. A judge of the commercial court, he or she authorises acts of disposal, rules on disputes relating to claims and oversees the management of the business. The juge-commissaire may also order the forced sale of assets or authorise dismissals.

The administrator, a professional entered on a national list, has varying powers depending on the assignment. Under an assistance assignment, the administrator advises the director and checks certain management acts. Under a supervision assignment, the administrator supervises management and may object to acts considered contrary to the interests of the business. Under a representation assignment, the administrator replaces the director entirely for acts of day-to-day management and disposal.

The mandataire judiciaire represents the prior creditors. The mandataire draws up the schedule of claims, oversees asset realisation operations and ensures that creditors' rights are respected. In businesses with fewer than five employees, its functions may be performed by the juge-commissaire himself or herself.

Outcomes of redressement judiciaire

The reorganisation or continuation plan

The priority objective of redressement judiciaire is to develop a plan allowing economic activity to continue. This plan, adopted by the court on the administrator's proposal, may take two main forms.

A continuation plan (plan de continuation) keeps the company under the control of its current directors. It provides for the clearing of liabilities according to a set schedule, generally spread over a maximum of ten years, and defines the means of reorganising the business. These means may include asset disposals, restructurings, reorganisations or injections of fresh capital.

Article L223-42 of the French Commercial Code provides that the provisions on early dissolution for losses do not apply to companies in redressement judiciaire that benefit from a continuation plan. This statutory exception allows companies whose equity has become negative to continue trading without having to rebuild their equity immediately.

A reorganisation plan by sale (plan de cession) transfers all or part of the business to a purchaser. This solution prioritises maintaining jobs and continuity of economic activity, even if the original company disappears legally. The transferee receives assets free of all prior liabilities, with the possible exception of certain tax and social security debts.

Judicial liquidation

Where no reorganisation plan appears viable, the court orders the judicial liquidation (liquidation judiciaire) of the company. This decision is made either immediately if reorganisation is manifestly impossible, or at the end of the observation period if no satisfactory solution has been found.

Judicial liquidation entails the immediate cessation of activity and the dismissal of all staff. A liquidateur judiciaire (court-appointed liquidator) realises the assets and settles the liabilities in an order of priority determined by law. Creditors holding security in rem exercise their rights over the sale price of the encumbered assets, while unsecured creditors share the available balance pro rata. On the successive stages of this procedure, see our article describing how a judicial liquidation proceeds.

Specific rights of creditors

Article L631-19-2 of the French Commercial Code provides for mechanisms for the release of sureties and personal guarantors. These persons may be released by set-off in respect of the amount of the claims against the company that have been admitted, within the limit of their commitment. This provision notably protects directors who have guaranteed their company's debts.

Article L228-83 of the French Commercial Code confers specific powers on the representatives of the bondholders' group (masse des obligataires) in the event of redressement judiciaire of the issuing company. These representatives are authorised to act in the name of the group to defend the interests of bondholders.

Consequences for directors and shareholders

Retention or removal of directors

Redressement judiciaire does not automatically lead to the removal of corporate directors. In the majority of procedures concerning small businesses, the director keeps management of the company under the supervision of the administrator. This solution has the advantage of maintaining managerial continuity and preserving intimate knowledge of the business.

However, the court may order the partial or total removal of the director's powers where past management reveals serious shortcomings or where keeping the director in place compromises the chances of reorganisation. The administrator then replaces the director for all or part of the management acts. This measure is not a criminal penalty but a measure to protect the business and its creditors.

Directors' personal liability

The opening of a collective procedure exposes directors to different types of liability. A liability action for insufficiency of assets (insuffisance d'actif) allows the liquidator or administrator to place all or part of the company's liabilities on the directors where their management fault contributed to the insufficiency of assets.

This action requires three cumulative conditions: a management fault attributable to the director, loss suffered by the creditors and a causal link between the fault and the loss. Case law notably treats as management faults the failure to keep proper accounts, continuing a loss-making business with no hope of recovery, or the diversion of assets to the detriment of creditors.

Impact on partners and shareholders

The rights of partners are profoundly affected by redressement judiciaire. The right to vote at general meetings remains, but the most important decisions are subject to authorisation by the juge-commissaire. The distribution of dividends becomes impossible and capital increases require the agreement of the bodies of the procedure.

In the case of a plan de cession, partners generally lose their rights without compensation. This rule follows from the principle that partners bear the company's losses up to the amount of their contributions. Only a continuation plan allows partners' rights to be preserved, subject to any restructuring that may be necessary.

Exit from the procedure and monitoring

Performance of the reorganisation plan

The reorganisation plan binds the company for its entire performance period, generally set at a maximum of ten years. A commissaire à l'exécution du plan (plan supervisor), often the former administrator, monitors compliance with the commitments made by the company. The plan supervisor may refer the matter to the juge-commissaire in the event of significant non-performance of the plan.

Creditors receive substantial debt write-offs, sometimes exceeding 50% of the original amount. In return, they accept staggered payment periods and waive the right to enforce their personal guarantees during performance of the plan. This joint constraint is the counterpart of the second chance given to the business.

The company gradually regains its freedom of management as the plan is performed. Authorisations from the juge-commissaire become less frequent and the plan supervisor is content with an after-the-event check on the main decisions. At the end of the plan, the company regains complete freedom of action and may make profit distributions.

Preventing recurrence

The legislature has strengthened the mechanisms for preventing business difficulties in order to avoid recurrence. Companies that have benefited from a reorganisation plan remain under supervision for three years after the end of its performance. They must regularly file their accounts with the registry and may benefit from a new procedure only after a waiting period.

Directors who have been subject to personal bankruptcy or management ban measures have their powers restricted for a set period. This sanction aims to make directors accountable and to protect third parties against the risk of recurrence. It may, however, be lifted early where commitments are satisfactorily performed.

Strategic recommendations

Faced with emerging financial difficulties, anticipation remains the best strategy. A request for redressement judiciaire filed within forty-five days of the cessation des paiements avoids personal sanctions and preserves the chances of reorganisation. Waiting worsens the financial position and reduces the options available.

For creditors, filing claims within the statutory time limits determines recovery of the sums owed. A claim that is not filed becomes irrecoverable, even partially. Professional creditors have every interest in setting up systematic monitoring of their debtor customers in order to react quickly if proceedings are opened.

Before embarking on any collective procedure, directors and creditors should surround themselves with advisers who master the subtleties of insolvency law. The complexity of these procedures and the considerable financial stakes justify quality legal assistance from the first signs of difficulty.

Frequently asked questions

How long does a redressement judiciaire procedure last?

The observation period lasts six months, renewable once. If a reorganisation plan is adopted, its performance is generally spread over a maximum of ten years. The total duration therefore varies from six months in the event of immediate liquidation to more than ten years in the event of a complex continuation plan.

Can a company in redressement judiciaire continue to invoice its customers?

Yes, the company continues its activity during the procedure under the supervision of the administrator. It may invoice its customers and honour its current contracts. New debts incurred during the procedure even receive preferential treatment if the reorganisation fails.

Do employees lose their jobs in redressement judiciaire?

Not automatically. Redressement judiciaire is precisely aimed at maintaining employment. Employment contracts continue normally, even though redundancies for economic reasons remain possible with the authorisation of the juge-commissaire. Only judicial liquidation entails the immediate cessation of activity and the dismissal of staff.

Can a director buy back his or her own business during the reorganisation?

Yes, but subject to strict conditions. The director may submit a takeover offer as part of a plan de cession, but must demonstrate financial capacity and the absence of any conflict of interest. The court generally prefers external offers, which better guarantee the independence of the new management.

Can creditors refuse a reorganisation plan?

Creditors are consulted on the draft plan but have no right of veto. The court may impose the plan even where a majority of creditors oppose it, provided it appears viable and fair. This rule prevents creditors from blocking a reorganisation solution out of a mere short-term calculation of interest.

Can a company distribute dividends during redressement judiciaire?

No, the distribution of dividends is strictly prohibited throughout the collective procedure. This prohibition aims to preserve the company's assets for the benefit of its reorganisation and its creditors. Only the end of performance of the reorganisation plan allows distributions to resume.

What happens to directors' personal guarantees after a reorganisation plan?

Personal guarantees remain but may benefit from write-offs proportionate to those granted to the principal debtor company. Article L631-19-2 of the French Commercial Code provides for release mechanisms by set-off that significantly lighten the burden on personal guarantors.