Pre-pack sale and classes of affected parties: where a creditor's blocking power lies

The number of company failures recorded each month by the Banque de France has settled durably above its pre-2020 level, and significant cases now come before the courts with a solution already arranged beforehand. For a mortgage lender, a bank pool or a debt fund that has bought a senior debt at a discount, the question is no longer whether it will be consulted, but whether it still has leverage once the proceedings are opened. The answer depends on a procedural choice made without it, sometimes several months before the hearing: the choice of route, a pre-pack sale (prepack cession) prepared under the aegis of a conciliator, or a plan adopted after a vote by classes of affected parties (classes de parties affectées). The two mechanisms are often mentioned together, although they follow opposite logics in terms of blocking power. This analysis separates them, identifies where the creditor's capacity to obstruct really lies, and examines in mirror image how a buyer builds its offer in conciliation in order to extract a property or industrial asset before the opening.

Two mechanisms that practice wrongly lumps together

The pre-pack sale derives from Article L. 611-7, paragraph 1, of the French Commercial Code, introduced by Ordinance No. 2014-326 of 12 March 2014.

At the request of the debtor, the conciliator may be given an assignment to organise a partial or total sale of the business which could be implemented, where appropriate, within the framework of subsequent safeguard, judicial reorganisation or judicial liquidation proceedings.

The sale is prepared within the confidential framework of the conciliation, then approved in the form of a sale plan (plan de cession) governed by Articles L. 642-1 et seq. No creditor votes. The court adopts the plan in light of the criteria of Article L. 642-5: continuation of the business, of employment, and settlement of the liabilities. Settlement of the liabilities is only the third criterion, and it refers to the price offered, not to the creditors' consent. The rules applicable to the offer and its examination by the court are set out in our article on the sale plan and taking over a business at the court hearing.

Classes of affected parties fall under an entirely different body of rules: Articles L. 626-29 to L. 626-34-1 of the French Commercial Code, introduced by Ordinance No. 2021-1193 of 15 September 2021 transposing Directive (EU) 2019/1023 of 20 June 2019. They concern only safeguard, accelerated safeguard and reorganisation plans, that is, plans restructuring the liabilities of a debtor that continues its business. Their constitution is mandatory above the thresholds set by Article R. 626-52 of the French Commercial Code (two hundred and fifty employees and net turnover of twenty million euros, or net turnover of forty million euros), systematic in accelerated safeguard pursuant to Article L. 628-4, and optional at the debtor's request below those thresholds.

A structuring consequence follows from this separation for any creditor in collective insolvency proceedings: a sale plan is not voted on. The constitution of classes of affected parties never occurs in a pre-pack sale in the strict sense. The two can cross where a safeguard or reorganisation plan adopted by classes includes a partial sale of activity, a possibility opened by Article L. 626-1, but it is then a continuation plan with a reduced scope, not a sale plan.

The choice of route is therefore not neutral. Steering the case towards accelerated safeguard means giving creditors a vote. Steering it towards a judicial reorganisation opened in order to receive an offer prepared in conciliation means taking it away from them.

Blocking power in a plan adopted by classes: misleading arithmetic

The blocking minority exists, but it is fragmented

The plan is deemed adopted by a class when it obtains a two-thirds majority of the amount of the claims or rights held by the members who have cast a vote. A creditor holding more than one third of the voting amounts in its class therefore has, apparently, a veto.

This reading ignores two mechanisms of dilution. First, the court-appointed administrator (administrateur judiciaire) allocates the affected parties according to the criterion of sufficient common economic interest laid down by Article L. 626-30, creditors holding real security being placed in classes separate from unsecured creditors (chirographaires). A mortgage lender whose security covers only part of its exposure finds itself split: its secured claim, up to the value of the security, in a class of secured creditors, the balance in an unsecured class where it weighs much less. The blocking minority evaporates in the allocation.

Second, the perimeter of affected parties is itself an instrument. Employees' claims and a few other exhaustively listed categories cannot be affected. The debtor and the administrator have real latitude to decide which creditors will see their rights modified by the plan, and therefore who will vote. A creditor whose rights are not affected does not vote and has nothing to block.

Cross-class cram down neutralises the class veto

Even where it is constituted, the blocking minority locks nothing. Article L. 626-32 of the French Commercial Code authorises the court, at the request of the debtor or of the administrator with the debtor's agreement, to adopt the plan despite the negative vote of one or more classes. This is cross-class cram down (application forcée interclasses), the transposition of the cross-class cram down. The conditions are cumulative:

• the plan complies with the conditions for adoption in Article L. 626-31, including the best-interests-of-creditors test, no dissenting affected party being in a less favourable position than under the most likely alternative scenario if the plan is rejected;
• the plan has been approved either by a majority of voting classes including at least one class of creditors secured by real security or ranking above the class of unsecured creditors, or, failing that, by at least one affected class other than a class of equity holders or a class which can reasonably be assumed to receive nothing if the order of priorities applicable in judicial liquidation were respected;
• the claims of the dissenting classes are paid in full by identical or equivalent means where a lower-ranking class is entitled to a payment or retains an interest, which is the absolute priority rule adopted by French law;
• no class receives or retains more than the total amount of its claims or interests.

Paragraph II of Article L. 626-32 further allows a departure from the absolute priority rule where the departure is necessary to achieve the objectives of the plan and does not unduly prejudice the rights of the affected parties. This safety valve deserves the attention of senior creditors: it allows, under the court's supervision, favourable treatment of lower-ranking creditors regarded as strategic, critical suppliers or providers of new money.

The useful ground: the composition of the classes and valuation

Real blocking power is therefore not played out on the day of the vote, but upstream, on two fronts.

The first is the challenge to the composition of the classes and the calculation of voting rights. Article L. 626-34-1 of the French Commercial Code opens this challenge before the supervising judge (juge-commissaire), within a short period running from the time the affected parties are informed. This period is strict: a creditor that lets the remedy lapse accepts de facto an allocation that may have placed it in a class where it is in the minority, or undervalued its security. For an institutional creditor, the decision is made in days, not weeks.

The second front is valuation. The best-interests-of-creditors test and the determination of the in the money classes both rest on an estimate of the value of the business and of the alternative scenario. Whoever controls the valuation controls the hierarchy of classes and therefore eligibility for cram down. A creditor that merely votes against without producing a documented counter-valuation, supported by an independent expert, deprives itself of its only argument before the court.

What cross-class cram down can impose on rank and security

Cram down makes it possible to impose on a dissenting creditor time limits, write-offs, a conversion of its claim into equity, a change in the terms of its security. It does not make it possible to reverse the order of priorities to the detriment of a dissenting class, except by the derogation in paragraph II of Article L. 626-32. A senior creditor's protection therefore lies not in its right to vote, but in its rank and the value of its collateral.

Two practical consequences follow. On the one hand, a secured creditor whose security fully covers its exposure is very difficult to override: the absolute priority rule requires it to be paid in full as soon as a lower-ranking class retains an interest. On the other hand, a partially secured creditor bears, on its unsecured portion, the same fate as the suppliers. The quality of the security, its collateral, the date of its registration and its resistance to the nullities of the suspect period determine the outcome more reliably than any voting strategy.

In judicial reorganisation, the arsenal extends to equity. Article L. 631-19-2 of the French Commercial Code allows, for companies with at least one hundred and fifty employees or controlling a group reaching that threshold, the forced sale of the shares of opposing shareholders. Since equity holders form one or more classes of affected parties, their opposition can be dealt with by the same mechanism of cross-class cram down.

The pre-pack sale: a mechanism in which the creditor does not vote

The residual levers

In a pre-pack sale, the creditor has three positions, all imperfect.

The status of creditors' supervisor (contrôleur), obtained on application to the supervising judge pursuant to Article L. 621-10 of the French Commercial Code, gives access to information and requires prior consultation. The court's ability to accept the offer prepared in conciliation without reopening publicity presupposes that the supervisors and the employee representatives have been consulted and that the conciliator has reported on the steps taken to seek offers. A creditor supervisor that challenges the reality of those steps creates a serious procedural risk for the buyer. But the status of supervisor carries a dissuasive counterpart: Article L. 642-3 prohibits a supervisor from making an offer itself, which closes the door on a takeover strategy by the creditor.

The hearing is the second lever. The court rules after hearing or duly summoning the debtor, the administrator or the liquidator, the employee representatives and the supervisors. There the creditor defends the perimeter and the price, not a right of veto.

The third lever is the perimeter itself. A mortgage creditor over a property asset included in the overall sale has an interest in requesting its exclusion, so that it is sold separately, where appropriate by auction in judicial liquidation under Article L. 642-18, at a market value rather than at a share of an overall price negotiated with a single buyer. This is the most frequent point of friction in cases involving logistics, industrial or office assets.

Article L. 642-12: the real front line

The distribution of the sale price is governed by Article L. 642-12 of the French Commercial Code. The court allocates to each encumbered asset a share of the overall price, for the distribution and the exercise of the right of preference. Payment of the price bars the exercise of the rights of registered creditors against the purchaser. In other words, the asset comes out cleared, and the creditor is paid out of a share determined by the court, not by the market.

One exception changes the economics of the case:

However, the burden of real property and special movable security interests securing repayment of a loan granted to the business to enable it to finance the asset over which those security interests are held is transferred to the purchaser.

The purchaser is then required to pay the instalments remaining due from the transfer of ownership. This transfer of burden operates only for loans allocated to financing the encumbered asset. The characterisation of the loan, acquisition of the building or general financing of the business, becomes the sticking point between the bank, which wants the burden transferred, and the buyer, which wants to acquire free of debt. The original credit documentation, the purpose of the loan as stipulated and the actual use of the funds are the decisive documents in this debate.

For assets held under a property finance lease (crédit-bail immobilier), Article L. 642-7 allows the contract to be transferred, the transferee being able to exercise the option only after payment of the sums remaining due, up to the value of the asset fixed by agreement or by the court.

Remedies almost closed downstream

Article L. 661-6, III, of the French Commercial Code reserves the right to appeal against the judgment adopting the sale plan to the debtor, the public prosecutor's office and, under the conditions it provides, the purchaser and the counterparty whose contract is transferred. Creditors are not listed. Their challenge is limited, on restrictive conditions, to third-party opposition (tierce opposition).

This locking-in justifies a simple rule of conduct for any institutional creditor informed of a conciliation at a significant debtor: energy must be invested before the judgment, not after. Once the plan is adopted, the file is closed for the creditor.

That leaves the most effective preventive card: the security trust (fiducie-sûreté). An asset transferred into a trust estate no longer forms part of the debtor's assets and falls outside the transferable perimeter. Where the establishment of the trust is not accompanied by an agreement placing the asset at the disposal of the settlor debtor, the trustee creditor retains control of the asset, which Article L. 622-23-1 of the French Commercial Code, on the contrary, neutralises during the observation period where such an agreement exists. For a lender financing a property asset or a strategic industrial tool, the choice between a mortgage and a security trust turns precisely on this ability to stay out of the sale plan. The use of this mechanism to secure property financing or to secure a restructuring is analysed in our article on the property security trust.

The buyer's side: building the offer in conciliation

The timetable as the main constraint

Conciliation cannot exceed four months, extendable to five months at the conciliator's request, pursuant to Article L. 611-6. Within that time, the conciliator entrusted with the assignment of preparing a sale must organise a search for offers, open a data room, collect expressions of interest, decide between the candidates and report to the court on the steps taken. A buyer that arrives in the third month is negotiating a file already structured by others. The conduct of this amicable procedure and its differences from the ad hoc mandate (mandat ad hoc) are set out in our article on conciliation and the ad hoc mandate.

The offer must meet the content requirements of Article L. 642-2, II: precise designation of the assets, rights and contracts taken over, forecasts of activity and financing, price and terms of payment, completion date, level and prospects of employment, guarantees given, and the fate of the security interests. An incomplete offer exposes the buyer to rejection or, worse, to a reopening of publicity that ruins the advantage of confidential preparation. The offer is also irrevocable: it may be modified only in a direction more favourable to the objectives of Article L. 642-1 and binds its author until the court's decision.

Confidentiality: a principle with identified breaches

Article L. 611-15 of the French Commercial Code imposes confidentiality on any person called to the conciliation or having access to it. This protection has three limits that the buyer must take into account from the outset.

Article L. 611-7 requires the debtor to inform the works council (comité social et économique) of the content of the sale preparation assignment given to the conciliator. Discussion with employee representatives therefore begins before the opening of the proceedings.

For a listed debtor or one whose financial instruments are admitted to trading, Article 17 of Regulation (EU) No. 596/2014 on market abuse requires inside information to be published, subject to a delay meeting the conditions it sets. The preparation of a sale of a significant asset falls within that scope.

Finally, the consultation of the supervisors and the employee representatives, prior to examination of the offer without new publicity, circulates the information to third parties whose interests may diverge. The buyer must anticipate that its offer will be read by the creditors that it only partly satisfies.

The points of challenge to be neutralised

A pre-pack sale is rarely challenged on the merits and almost always on method. Four angles recur: the insufficiency of the conciliator's steps in seeking competing offers, which weakens the exemption from publicity; the irregularity of the consultation of the supervisors and employee representatives; breach of Article L. 642-3, which prohibits an offer from the manager, its relatives and in-laws up to the second degree inclusive, or from a supervisor, unless the court derogates on application by the public prosecutor's office; and finally, challenge to the allocation of price shares to the encumbered assets, which is the mortgage creditor's preferred angle.

Two clauses deserve particular attention in structuring. Substitution of the purchaser, frequent where the property asset is to be placed in a dedicated vehicle separate from the operating company, requires the court's authorisation and does not release the original purchaser from its undertakings. The temporary inalienability of the assets sold, ordered under Article L. 642-9, may interfere with a sale and lease back structure envisaged to refinance the transaction.

The decisive link: the pre-pack sale as the value benchmark for cram down

The two mechanisms meet on a point that practice still under-exploits. The best-interests-of-creditors test, a condition for adoption of the plan by cross-class cram down, is measured by comparison with the most likely alternative scenario. In a significant case, that scenario is precisely a sale plan.

A creditor that intends to block a restructuring plan considered expropriatory therefore has an interest in bringing forward, in parallel, a credible takeover offer: it raises the value floor against which the plan will be judged. Symmetrically, a debtor that wants to impose its plan by cram down has an interest in no serious offer being in circulation. And a buyer that positions itself early in conciliation is not only building an acquisition project: it is producing the counterfactual that will serve as the benchmark for the whole negotiation of the liabilities.

This is where the creditor's real blocking power lies. Not in the vote, which cross-class cram down can override. Not in remedies, which Article L. 661-6 closes to it. But in its ability to document a quantified alternative, to put it forward before the supervising judge on the composition of the classes and before the court on the best-interests test, and to secure upstream, at the credit documentation stage, a security whose collateral and characterisation withstand the plan's trade-offs.

Conclusion: the game is played before the opening

Reasoning in terms of a voting majority is a false trail. In a pre-pack sale, there is no vote. In a plan adopted by classes of affected parties, the vote can be overridden by the court once the conditions of Article L. 626-32 are met. What remains, and cannot be negotiated within the proceedings, is rank, the quality of the collateral, the structuring of the security and control of the challenge timetable.

Three trade-offs follow. For the institutional lender: have audited now, on the exposed lines, the characterisation of the loan in light of Article L. 642-12, paragraph 4, and the advisability of a security trust without an agreement placing the asset at the settlor's disposal on critical property or industrial assets. For the finance department of a debtor under strain: choose the procedural route knowing its effects on creditors' power, and not by default. For the buyer: enter conciliation in the first weeks, since an offer filed late faces a perimeter that has already been decided.

If a conciliation is opened at a significant debtor, apply immediately to be appointed as supervisor after the collective proceedings are opened, unless you yourself envisage taking over: Article L. 642-3 would bar you from doing so.

Frequently asked questions

Do classes of affected parties apply to a sale plan? No. Articles L. 626-29 et seq. of the French Commercial Code reserve the constitution of classes of affected parties for safeguard, accelerated safeguard and reorganisation plans, that is, plans restructuring the liabilities. The sale plan falls under Articles L. 642-1 et seq. and gives rise to no vote by creditors. The court adopts it in light of the criteria of Article L. 642-5, among which settlement of the liabilities occupies only third place, after continuation of the business and of employment.

Can a creditor oppose a pre-pack sale? It has no right of veto. Its levers are an application to be appointed as supervisor under Article L. 621-10, a challenge to the steps taken by the conciliator to seek competing offers, and discussion of the perimeter sold and of the allocation of price shares under Article L. 642-12. Article L. 661-6, III, does not allow it to appeal against the judgment adopting the sale plan, its only residual route being third-party opposition on restrictive conditions.

What is the blocking minority in a class of affected parties? The plan is adopted in a class by a two-thirds majority of the amount of the claims or rights held by the members who have cast a vote. Holding more than one third of the voting amounts in a class therefore makes it possible to defeat the plan in that class. This blocking remains relative: the cross-class cram down of Article L. 626-32 authorises the court to adopt the plan despite the negative vote of one or more classes, under the cumulative conditions it lists.

Which companies are mandatorily subject to classes of affected parties? Article R. 626-52 of the French Commercial Code sets the thresholds at two hundred and fifty employees and net turnover of twenty million euros, or net turnover of forty million euros. Below those thresholds, the debtor may apply to the supervising judge for the mechanism to apply. In accelerated safeguard, the constitution of classes is mandatory whatever the size of the debtor, pursuant to Article L. 628-4.

Must the purchaser take over the mortgage debt encumbering the property sold? Only if the secured loan was granted to finance the asset over which the security is held. Article L. 642-12, paragraph 4, of the French Commercial Code then transfers the burden of the security to the purchaser, who is required to pay the instalments remaining due from the transfer of ownership. For other security interests, payment of the price bars the exercise of the rights of registered creditors against the purchaser, the creditor being paid out of the share of the price allocated to the asset by the court.

How can the composition of the classes be challenged? Article L. 626-34-1 of the French Commercial Code opens a challenge to the allocation into classes and the calculation of voting rights before the supervising judge, within a short period running from the time the affected parties are informed. This period is mandatory (délai préfix): its expiry definitively extinguishes the challenge. The challenge must address the statutory criterion of sufficient common economic interest laid down by Article L. 626-30 and, most often, the valuation of the security that determines the split between the secured portion and the unsecured portion.

How long does a pre-pack sale prepared in conciliation take? Conciliation cannot exceed four months, extendable to five months at the conciliator's request pursuant to Article L. 611-6. The offer prepared during that period is then presented to the court after the opening of safeguard, reorganisation or judicial liquidation proceedings. In practice, the interval between the opening judgment and the judgment adopting the sale plan is counted in weeks where consultation of the works council and the supervisors has been properly anticipated.