Court-supervised reorganization: business owners, fear no more! – Caractère magazine, March 2022
On January 1, 2022, France’s suretyship law reform introduced by Decree (ordonnance) No. 2021-1192 of September 15, 2021, came into effect. It gives extra protection to guarantors, without undermining the rights of creditors.
This mirrors the insolvency law reform introduced by Decree (ordonnance) No. 2021-1193 of the same date, which applies to proceedings commenced on or after October 1, 2021, as discussed in our previous issue.
Before the reform, individual guarantors were protected by three key measures that only applied to pre-insolvency in-court reorganization proceedings called ‘safeguard proceedings’ (procédure de sauvegarde)
- A freeze on interest payments: the commencement of insolvency proceedings (other than liquidation) freezes interest payments on loans extended to the debtor.
- The right to invoke the terms of the ‘safeguard’ plan (plan de sauvegarde): creditors are prohibited from demanding payment from the debtor while it remains under the protection of the commercial court. Once the court has approved a debt repayment plan (which may stretch over up to ten years), creditors receive payment in installments in accordance with the schedule included in the plan.
- The right to object to unfiled or untimely filed claims: if a creditor fails to file proof of its claim within the statutory two-month period from the publication of the court order officially commencing the proceedings, it cannot be enforced against the debtor either during the term of the plan or thereafter.
The absence of these three protections may have deterred many business owners/guarantors from filing for court-supervised reorganization proceedings (redressement judiciaire). In fact, banks often require business owners to sign personal guarantees on business loans. In that case, if the business files for court-supervised reorganization and a debt repayment plan is approved, its creditors could demand payment directly from the individual business owners who provided these personal guarantees, instead of complying with the plan. The new legislation has extended these protections to court-supervised reorganization proceedings, making them much more appealing.
However, these protections still do not apply to corporate guarantors.