French law provides considerable protection to firms in difficulty in order to prevent them, at any price, from disappearing completely and to preserve jobs so as not to add to the unemployment figures. This deep-seated reluctance to let the mechanisms of the market take their course can however create significant perverse effects.
The French State devotes huge resources to the survival of doomed undertakings and sacrifices the rights of creditors and co-contractors in favor of keeping companies in difficulty on their feet at all costs. Failing companies are over-protected whereas solvent firms and new market entrants are over-burdened with charges and constraints. As the law currently stands, the partners of an undertaking in difficulty need to be aware of the constraints and the risks they face and adopt appropriate prevention and management strategies.
1. Anticipate and manage insolvency procedures. In many countries a business can obtain the termination of the contract with a trading partner declared insolvent. French law doggedly forbids this. It is impossible to terminate a contract on the grounds of an insolvency procedure and the administrator can force the continuation of current contracts. In the case of unpaid debts, it is therefore advisable to terminate the contract with one’s buyer or distributor before bankruptcy proceedings are initiated, if necessary using a bailiff to serve the notification of termination in order to avoid the non-acceptance of a registered letter followed by a petition to file for bankruptcy. It is also important not to terminate on the grounds of cessation of payments since this may be interpreted by the courts as a termination on the grounds of the opening of insolvency proceedings, and to make sure that actions taken cannot be invalidated during the so called “suspect period”.
2. Ensure you keep to the deadlines. Under the insolvency laws creditors only have a very limited time in which to state their claims and it is important to do so within the deadlines (two months from publication of the judgment opening the proceedings (plus a further two months for creditors based outside continental France) and to claim goods subject to retention of title (within three months of the publication of the judgment).
3. Choose a jurisdiction to govern the contract that is distant from local eventualities. It is essential that the forum selection clause stipulates that the court in the place of your head office has jurisdiction, as far as is possible making it the same as the specialized courts having the power to rule on the application of Article L. 442-6 of the Commercial Code (especially in cases relating to the termination of established commercial relations) and of competition law. Where ongoing contracts remain in force, their provisions – including jurisdiction clauses – should be respected. In this way, most disputes can be tried before the courts elected in the jurisdiction clause rather than the bankruptcy court competent to rule on matters related purely to the insolvency procedure.
4. Anticipate and forestall a labor law offensive. Some lawyers have made a specialization of using employment law in insolvency proceedings to place the burden of a company’s liabilities on its principal trading partners, which is then accused of having been the co-employer of its supplier’s staff. The conditions of application of the rules governing co-employers are nevertheless very strict and this type of action should be avoided at all costs. Another labor law loophole consists in the transfer of the staff with the transfer of an economic and social entity. Where a new exclusive dealer is appointed on a territory, the former dealer might attempt to claim that the transfer to the new dealer of the economic and social unit constituting the concession includes all of its employees as well. A division of the territory of the former concession limits this risk.
5. Guard against the general rules of ordinary law. In addition to insolvency and employment law, the trading partner in difficulty will also rely on the rules of ordinary law – most frequently the law on terminations of established commercial relations, which is a formidable legal instrument. For example, even where there is clear evidence that a partner in difficulty has blatantly failed to comply with the objectives set, the courts will refuse to validate a termination on the grounds of serious breach of contract. Even a resolutory clause expressly stipulating termination for such cases will not defeat the mandatory public order provisions of Article L. 442-6, I, 5° of the Commercial Code. Caution is required in the form of the provision of well-defined contractual obligations of which failure to comply will authorize an extraordinary termination. For ordinary terminations, the notice period granted must take account of the duration of the whole of the commercial relationship with the trading partner. All these constraints and risks create unfavorable macroeconomic effects; the creditors and partners of overprotected undertakings in difficulty are not inclined to cooperate or offer support for fear of finding themselves in difficulty too, while foreign partners will often prefer to do business in other countries where the law provides a higher degree of legal certainty than in France.