16.03.2021Numa Rengot

Buyers of distressed businesses: pre-pack sale gets debts out of your way – Caractère magazine, March 2021

The point is to arrange a sale that will later be carried out under bankruptcy protection.

Since the French Insolvency Act (“loi de sauvegarde des entreprises”) was enacted on July 27, 2005, French lawmakers have consistently stressed the importance of anticipating financial difficulties and tackling them as early as possible through pre-insolvency “mandat ad hoc” and “conciliation” proceedings. The earlier the problem is addressed, the more effective the solution will be. This is why French out-of-court, pre-insolvency proceedings are popular in practice. They have an estimated 70% success rate, which proves how highly effective they are.
However, business owners seem to remain largely unaware of their existence. The point of these out-of-court proceedings, which are opened by the presiding judge of the commercial court upon request by the seller, is to reach a confidential, unanimous agreement with creditors. French lawmakers’ intent was to make it easier for private investors to acquire distressed companies in conciliation proceedings.
Modeled on the US pre-packaged bankruptcy procedure, the French “prepack cession” was therefore introduced by decree (ordonnance) 2014-326 on March 12, 2014. Pursuant to Article L.611-7 of the French Commercial Code, the purpose of the “prepack cession” process is to arrange, as part of conciliation proceedings, a sale that will later be carried out under bankruptcy protection. The “prepack cession” is a two-step process: first, during the conciliation process, the conciliator draws up a sale plan whose terms, again, remain confidential.
Second, the sale of the business is carried out during the shortest possible bankruptcy proceedings. The “prepack cession” process serves to optimize offers received confidentially and to have the sale recorded in bankruptcy proceedings without incurring the detrimental effects of a bidding process, such as reduced revenues or higher working capital requirements. Because it is confidential and fast, this process ensures a better price for the business, whose value would otherwise have deteriorated during the bankruptcy stage.

Click HERE to read the column by our Restructuring, partner Numa Rengot, co-authored by Ronan Dréau and published in Caractère magazine in March 2021 (editor: Guillaume Prudent).