Company safeguard plan

Companies in difficulty now have a preventive legal arsenal to avoid compulsory liquidation (liquidation judiciaire). The company safeguard plan (plan de sauvegarde) is the outcome of the safeguard procedure (procédure de sauvegarde), allowing a company to restructure its debts while continuing its business. Unlike court-supervised reorganisation (redressement judiciaire), this procedure opens before cessation of payments (cessation des paiements), giving the manager an early way of dealing with the company's difficulties. This article explains how the safeguard plan works in practice, from the conditions for opening the procedure to its implementation, including its content and legal effects.

Understanding the safeguard procedure that precedes the plan

Conditions for opening the procedure

The safeguard procedure can be opened only if the debtor shows that it faces difficulties that it is unable to overcome, without yet being in cessation of payments. This fundamental condition distinguishes safeguard from court-supervised reorganisation. The company must establish that it faces difficulties likely to lead it shortly to cessation of payments. The conditions, conduct and consequences of that other procedure are covered in our FAQ on court-supervised reorganisation of companies.

Only the debtor may apply for the opening of a safeguard procedure. This exclusivity protects the business owner against a malicious application by creditors and preserves the preventive nature of the procedure. The application is made to the commercial court (tribunal de commerce) or the judicial court (tribunal judiciaire) depending on whether the activity is civil or commercial.

The court examines the reality and seriousness of the difficulties alleged. It also verifies that there is no cessation of payments on the day of the application. If these conditions are met, the court delivers the opening judgment, which appoints a supervisory judge (juge-commissaire), a court-appointed administrator (administrateur judiciaire) and a creditors' representative (mandataire judiciaire).

The observation period and the preparation of the plan

The safeguard procedure begins with an observation period of six months, renewable once. This phase makes it possible to analyse the economic, financial and social situation of the company. The administrator carries out an in-depth diagnosis and examines the prospects for recovery. The differences between this standard procedure and the accelerated safeguard procedure are set out in our comparison of accelerated and standard safeguard.

During this period, the company is protected against proceedings by its prior creditors. Contracts in progress continue as of right, unless the administrator decides otherwise. This legal stabilisation gives the company the breathing space it needs to negotiate with its creditors and restructure its organisation.

The administrator prepares a draft plan in consultation with the debtor. The draft is based on an analysis of the causes of the difficulties and of the possible solutions. It incorporates the observations of the works council and staff representatives on the social aspects of the recovery.

The content of the company safeguard plan

Restructuring measures provided for by law

Under Article L626-1 of the French Commercial Code, "where there is a serious possibility that the company can be safeguarded, the court adopts for that purpose a plan which ends the observation period". The legislature makes adoption of the plan conditional on the existence of serious prospects of recovery.

The safeguard plan has several complementary components. It may provide for the discontinuation of loss-making activities, the addition of new activities or the partial disposal of assets. These operational restructurings aim to restore the company's competitiveness and its capacity to make profits.

Article L626-1 states that "the safeguard plan includes, where applicable, the discontinuation, addition or disposal of one or more activities". This wording leaves the court a wide margin of discretion to adapt the plan to the specific features of each company. The disposal of a line of business may fund the plan or eliminate a source of recurring losses.

Treatment of claims in the plan

The plan organises the clearing of liabilities on terms negotiated with the creditors. It generally distinguishes several categories of claims according to their nature and ranking. Employees' claims receive preferential treatment and are often paid in full and quickly.

Tax and social security claims are the subject of specific negotiations with the authorities. The plan may provide for partial write-offs, deferrals of instalments or payment arrangements spread over time. These arrangements require the formal agreement of the authorities concerned.

For unsecured claims (créances chirographaires), the plan generally offers payment periods of up to ten years. Reductions of principal may also be granted if the situation requires. The rate of reduction varies according to the company's ability to pay and the prospects of recovery in the event of liquidation.

The debtor's undertakings

The safeguard plan sets quantified targets for the company, in particular in terms of turnover, operating profit and self-financing capacity. These undertakings serve as a reference for monitoring the implementation of the plan and measuring the improvement in the economic situation.

The company often commits to precise financial ratios, such as the level of indebtedness or debt service cover. Compliance with these ratios sometimes determines whether the plan continues and may trigger corrective measures in the event of drift.

The undertakings also concern employment. The plan states the headcount to be maintained and may provide for a training or redeployment programme. These social provisions are the subject of in-depth consultation with staff representatives and the labour inspectorate.

Adoption and approval of the plan

The vote of creditors grouped in committees

Creditors are divided into committees according to the amount and nature of their claims. The committee of credit institutions and similar bodies groups the financial creditors. The committee of main suppliers brings together the largest trade creditors. This organisation allows a structured and fair negotiation. The creditors' point of view, from the filing of claims to the vote on the plan, is developed in our article on what the institutional creditor can do when a safeguard procedure is opened.

Each committee votes on the draft plan by a two-thirds majority of the amount of claims. This high threshold ensures significant creditor support for the proposed plan. The committees' agreement facilitates adoption of the plan by the court and strengthens its economic legitimacy.

Creditors not represented in the committees are consulted individually. Their silence amounts to acceptance of the proposals made to them. This simplified procedure speeds up the consultation while preserving the rights of each creditor.

The court's judgment adopting the plan

The court verifies that the plan adopted offers serious prospects of recovery. It checks the coherence of the proposed measures and their capacity to restore the company's economic balance on a lasting basis. This forward-looking analysis is a decisive element in the decision.

The court also ensures that the interests of all creditors are adequately protected. It verifies in particular that the sacrifices requested are proportionate to the prospects of recovery and fairly distributed between the different categories of creditors.

Once adopted, the plan is binding on all creditors, including those who voted against it or who did not take part in the consultation. This binding force allows the company to benefit from uniform treatment of its liabilities and from enhanced legal certainty.

Implementation of the continuation plan

Monitoring of implementation by the commissioner

The court appoints a commissioner for the execution of the plan (commissaire à l'exécution du plan), responsible for ensuring that the undertakings given are honoured. This court-appointed officer monitors payment due dates and checks that the targets set are met. The commissioner has extensive rights to information on the management of the company.

The commissioner draws up an annual report on the implementation of the plan, which is sent to the court and to the public prosecutor's office. This document reviews the results achieved and reports any difficulties encountered. The commissioner may propose adjustments to the plan if circumstances require.

The commissioner's assignment normally ends with full implementation of the plan. Its duration therefore corresponds to that of the plan, generally between five and ten years depending on the arrangements adopted for clearing the liabilities.

Sanctions for non-performance

Article L626-27 of the French Commercial Code provides that "the court that adopted the plan may, after hearing the public prosecutor's office, order its termination (résolution) if the debtor fails to perform its undertakings within the time limits set by the plan". This ultimate sanction applies in the event of serious and repeated breaches of contractual obligations.

Termination of the plan deprives the company of the protection it derived from it. Creditors regain their rights to take action and may apply for the opening of a reorganisation or compulsory liquidation procedure. This prospect strongly encourages the company to honour its undertakings.

Before considering termination, the court may grant additional time or modify certain terms of the plan. This flexibility makes it possible to take account of temporary difficulties without calling into question the overall economy of the recovery.

The advantages of the safeguard plan

Preservation of economic activity

The safeguard plan allows the company to continue its business under normalised conditions. Unlike compulsory liquidation, this solution preserves the means of production and maintains established commercial relationships. Continuity of operations facilitates the implementation of the recovery measures.

Maintaining the business also preserves employment, an essential objective of the legislation on companies in difficulty. Employees keep their employment contracts and continue their careers as normal. This social stability encourages staff to support the recovery project.

Finally, preserving the business serves a general economic interest. It avoids the destruction of value caused by the cessation of activity and maintains the local economic fabric. The company's suppliers and customers do not suffer the disruption of an abrupt liquidation.

Negotiated restructuring of liabilities

The safeguard plan provides a secure legal framework for renegotiating the company's debts. This contractual approach makes it possible to obtain significant concessions from creditors while preserving their long-term interests. A negotiated agreement has greater legitimacy than an imposed solution.

The restructuring may concern the amount of the debts, the terms of payment or the security. This flexibility makes it possible to adapt the treatment of liabilities to the specific features of each company and to the constraints of its creditors. The plan may include return-to-better-fortune clauses (retour à meilleure fortune), which associate creditors with the recovery.

The organised clearing of liabilities frees the company from the financial pressure that was hampering its development. It can devote its resources to investment and growth rather than to servicing excessive debt. This reallocation of resources is a key factor in the success of the recovery.

Risks and limits of the mechanism

Restrictive conditions of access

The safeguard procedure remains difficult to access in practice. The company must establish that it is going through serious difficulties without yet being in cessation of payments. This demonstration requires foresight and financial analysis that not all managers fully master.

The preventive nature of the procedure may paradoxically hold back its use. Managers often hesitate to acknowledge their difficulties as long as a solution still exists. This natural reluctance delays recourse to safeguard and may compromise the effectiveness of the recovery.

The opening of the procedure has reputational effects that may aggravate the company's difficulties. Some customers or suppliers break off their commercial relations out of caution. This mistrust on the part of the market may hamper recovery efforts and justify specific support measures.

Uncertainties as to implementation

Adoption of a safeguard plan does not guarantee the success of the recovery. The company remains exposed to economic and competitive hazards that may hinder the performance of its undertakings. A deterioration of the market or the arrival of a competitor may call the initial forecasts into question.

The duration of the plan, often between five and ten years, exposes the company to unpredictable changes in its environment. The assumptions adopted when the plan was prepared may prove obsolete and require significant adjustments. This uncertainty over time is a risk inherent in the mechanism.

Failure to perform the plan exposes the company to termination and to the opening of a more restrictive collective procedure. This prospect keeps a sword of Damocles hanging over the company throughout the term of the plan. The manager must handle this permanent pressure, which may affect strategic decisions.

Frequently asked questions

Can a company in cessation of payments benefit from a safeguard plan?

No, the safeguard procedure is reserved for companies that are not yet in cessation of payments. A company that can no longer meet its liabilities due with its available assets falls under court-supervised reorganisation. The boundary between the two procedures is strict and determines access to the preventive mechanism.

What is the maximum duration of a safeguard plan?

The safeguard plan may extend over a maximum period of ten years for the clearing of liabilities. This exceptionally long period makes it possible to spread repayments according to the company's ability to pay. The time allowed varies according to the nature of the claims and the negotiations conducted with each category of creditors.

Can creditors refuse the proposed plan?

Creditors grouped in committees vote on the draft plan by a two-thirds majority of the amount of claims. An individual creditor therefore cannot defeat the plan if it obtains majority support. However, the refusal of a committee may compromise adoption of the plan by the court. This majority rule balances the interests involved.

What happens if the company fails to honour its undertakings?

Failure to perform the undertakings may lead to termination of the plan by the court. This decision deprives the company of the protection of the procedure and allows the opening of a reorganisation or compulsory liquidation. Before this ultimate sanction, the court may grant time or modify certain terms of the plan to take account of temporary difficulties.

Does the manager keep his or her powers during the implementation of the plan?

Unlike court-supervised reorganisation, the safeguard procedure keeps the manager in office. The manager retains the management of the company under the supervision of the administrator during the observation period, then of the commissioner for the execution of the plan. This managerial continuity facilitates the implementation of the recovery measures while ensuring judicial oversight.

Are employees protected during the implementation of the plan?

The safeguard plan aims primarily at maintaining employment. Employees keep their employment contracts and receive their salaries as normal. Their claims arising before the opening of the procedure receive preferential treatment. The plan may nevertheless provide for reorganisations affecting employment, but within a protective legal framework.

Can a safeguard plan be modified during its implementation?

The court may modify the plan during its implementation at the request of the debtor, the commissioner or a creditor. Such modifications remain exceptional and must be justified by unforeseeable circumstances. The modification procedure respects the rights of creditors and may require their prior consultation depending on the extent of the changes envisaged.

The company safeguard plan is a sophisticated legal tool that deserves an early and professional approach. Its success rests on a precise diagnosis of the difficulties, a balanced negotiation with creditors and a firm commitment to implementing the measures adopted. Before considering this procedure, consult an adviser with experience in this field, who will assess the appropriateness and feasibility of your recovery project in the specific context of your company.