30.11.2020Numa Rengot

Acquisitions of insolvent companies: new opportunities for CEOs – Caractère magazine, November 2020

Click HERE to read the column by our Restructuring partner Numa Rengot, published in Caractère magazine’s November 2020 issue (editor: Guillaume Prudent).

Traditionally, court-supervised asset disposal must achieve three objectives: maintain the operation of autonomous business units, save jobs and clear debt. In light of these requirements, Book VI of the French Commercial Codes prohibits CEOs from taking over their own company. This prohibition (Article L. 642-3 of the Commercial Code) is based on the assumption that a CEO is always responsible for his or her company’s insolvency and should therefore be disqualified from acquiring any of the company’s assets within five years of any court-supervised disposal. However, this prohibition was never general or absolute. The court may, upon motion by the State Counsel (Ministère public) and after having sought the opinion of the officials overseeing the process, approve sales to the CEO by a ruling stating the specific reasons therefor. It is within this restrictive legal framework that we assisted Mr. Macheret, R&D manager and later CEO of Imprimeries de Champagne, a commercial printing company placed in reorganization on November 18, 2019, in his bid to take over the assets and business of his company.

The State Counsel granted Mr. Macheret’s request on the grounds that he could not be held responsible for the financial difficulties that had led to the commencement of insolvency proceedings. Moreover, because he knew the company inside out, Mr. Macheret was ideally qualified to carry out the proposed reorganization and rescue plan.

Numerous cases similar to this one have proved that commercial courts have discretion to approve acquisitions of insolvent companies by their CEO, so much so that these court-supervised transactions have become a key component of debtors’ right to bounce back. Still, it should be recalled that pursuant to Article L. 631-19-1 of the Commercial Code, the court may, upon motion by the State Counsel, make its approval of a reorganization plan contingent upon the replacement of one or more of the company’s current officers or directors, if that is necessary to turn the company around. It would still be unlikely for a management team that is entirely responsible for its company’s distress to be allowed again to take the helm of a company under a court-supervised asset disposal plan.

The current health crisis may have removed some of the roadblocks that make it harder for CEOs to take over their own bankrupt company. Article 7 of Decree (ordonnance) no. 2020-596, introducing adjustments to the rules applicable to businesses and farms facing COVID-19-related difficulties, provides that if the proposed asset disposal may ensure the retention of jobs, the debtor may directly submit a bid to take over his company. This applies to proceedings in progress until December 31, 2020. Its effects will automatically extend beyond that period and it will encourage CEOs to submit bids for their distressed company. We now routinely assist with such asset disposal plans, provided they ensure enough jobs are saved.

Asset disposal plans have therefore become an increasingly appealing option for CEOs, and an opportunity well worth considering.