Survival kit for companies in difficulty

Ad hoc mandate procedures

The ad hoc mandate and conciliation procedures provide a confidential and secure legal framework for the restructuring of companies in difficulty. They are so-called "in bonis" solutions because they aim to avoid the opening of collective proceedings. The latter can be: safeguard, receivership or judicial liquidation. Initiated early enough by their managers and shareholders, they have a high success rate.

 

Cycles of destruction

The cycles of creative destruction theorised by Schumpeter affect business activity. They can be confronted with:

  • A decline in revenue due in particular to the loss or default of a significant customer,
  • A declining historical market,
  • Social or political unrest.

On the other hand, the development of new technologies leads entrepreneurs to raise funds to finance their WCR. But not only that. It leads to innovation during the phase when the turnover generated does not cover either operating costs or R&D.

Thus, these situations generate cash flow tensions requiring restructuring measures that can be usefully implemented within the framework of ad hoc mandate and conciliation procedures.

 

Survival kit for companies in difficulty

Confidential and tailor-made procedures

These procedures are intended to assist the manager in his negotiations with his partners. They are confidential and relatively informal. They are initiated by a simple request from the manager to the President of the Commercial Court of the company's head office.

Finally, this application sets out:

  • The difficulties facing the company,
  • The restructuring measures envisaged,
  • The mission of the prospective ad hoc representative or conciliator[1].

The assistance mission of the ad hoc representative/conciliator is tailor-made and the manager retains all his management powers.

 
Depending on the company's problems, the mission of the ad hoc representative may consist in assisting it in:
  • Its negotiations with its partners in sight,
  • To obtain a provisional suspension of payment of bank credits and/or their rescheduling
  • To facilitate a capital restructuring or fund raising,
  • To allow a backing or to reschedule one's debt with public actors (URSSAF for employer's contributions and the Treasury for VAT, CET and corporation tax).

Seized before a statement of cessation of payments*, the confidence of business and financial partners is still preserved and efforts will be more easily made. Similarly, the longer the standstill period** during these procedures, the more time the parties will have to negotiate their agreement, which remains essentially contractual.

* I.e. the inability to meet its current liabilities with its available assets
** That is to say, in substance, suspension of proceedings and payments.

 

A toolbox with a variety of tools depending on the objective

The choice of procedure will be influenced by whether or not a state of cessation of payments has been identified.

If it is not characterised, an ad hoc mandate of unlimited duration may be requested. Conversely, if the company has already been in suspension of payments for 45 days at most, it must opt for a conciliation procedure.[2]. Similarly, if the diagnosis requires a "freeze of liabilities", it can only be obtained in the context of a receivership (if the activity can be continued).  Or, in the case of a judicial liquidation (if it must be stopped) which must be requested within the same 45-day period.

On the other hand, if an ad hoc mandate is possible, this first phase will bring the parties' points of view closer together. In practice, at the stage of the conclusion of the agreement, the company "switches" to conciliation, which offers a legal framework that provides security for the parties*. This agreement is either confirmed by an order of the President of the Commercial Court or approved by a judgment. Arbitration between these two options is carried out on a case-by-case basis.

* Business partner, lender, public bodies, transferor, assignee, etc.

 

A multiple-choice procedure output

If an agreement is reached, it is simply submitted to the President of the Commercial Court, who issues an order giving it enforceability. It rules on the basis of a certified statement by the manager certifying that the company is not in a state of suspension of payments at the time of its conclusion or that the agreement is terminated. Such order shall not be subject to appeal. The procedure is terminated and the agreement remains confidential. Moreover, in practice, a finding is the most commonly used method, unless it is appropriate to have the agreement approved.

This is particularly the case when new cash contributions are made to ensure the continuation of the company's activity and its sustainability. Thus, they benefit from priority payment in the event of any post-restructuring insolvency proceedings[3]. In this hypothesis, probate also makes it possible to "freeze" the date of cessation of payments. However, this date cannot be set earlier than the date of the probate judgment. As a result, any security granted to the lenders in the agreement cannot be cancelled on the basis of the so-called "suspect" period. Finally, if the agreement provides for the sale of the business, the assignor/manager cannot be blamed for having sold a company in a state of suspension of payments. It would be difficult for the judicial representatives to seek liability on this basis in the event of a shortfall in assets.

On the other hand, the agreement loses its confidential nature when it is approved. It gives rise to a hearing in the presence of the staff representatives and insertion into the BODACC.

 

The originality of the "pre-pack transfer" mechanism

The objective of conciliation may also lie in the implementation of a "pre-pack assignment". At the request of the manager and after consulting the participating creditors, this task may be entrusted to the conciliator[4]. Essentially, the aim is to organise the sale of the company's assets without the social debts in the framework of a restricted and short call for tenders.[5].

At the end of this process, the offers are sent to the conciliator. De facto, the company requests the opening of collective proceedings. It is necessary for the purposes of this transfer with a summons to appear before the Court at short notice so that it can examine them. And if the cash situation allows it and if the offers seem too low in relation to the value of the company sold: it is not uncommon for the Court to ask for a second, extended call for tenders to be made. Nevertheless, the preparation of the sale in the confidential framework of the conciliation allows to limit the period of publicity linked to the opening of collective proceedings. To a certain extent, it makes it possible to further preserve the value of the company.

In the end, the sale decided as part of a "pre-pack sale" takes place following a judgment of the Commercial Court comparable to that of a sale plan under court-ordered receivership.

 

A collective implementation of these procedures

Within the company, the management and financial director tandem is key to anticipating and sharing the diagnosis. While remaining fully in control of the company, the manager will find an ally in the ad hoc representative/conciliator. Indeed, it enables him to move negotiations forward in the event of a deadlock. Although the manager has no management powers, he or she nevertheless has:

  • The moral authority linked to its designation by ordinance,
  • Restructuring practice,
  • The knowledge of its actors.

Finally, this team will be able to provide useful support both during the negotiations and during the implementation of the agreements. Also on the legal skills of their specialised lawyers and financial diagnostic analysts.

 

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[1] This is a judicial administrator or a judicial representative. They belong to a regulated profession represented by a national council (CNAMJ) and are professionals in corporate financial crisis situations.

[2] The duration of the conciliation is four months with the possibility of a one-month extension, i.e. a maximum of five months.

[3] Article L 611-11 of the Commercial Code.

[4] Article L 611-7 of the Commercial Code.

[5] These offers are similar to those for takeovers under a disposal plan as part of a receivership (i.e. takeover of all or part of the company's assets and related jobs and contracts without debts).