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Businesses with a hard time: the tools to avert bankruptcy

This article was originally published by Emmanuel Richard (Extens Consulting) on Chef D'Entrepise

While experts agree on an upsurge in bankruptcies in the spring of 2021, several effective legal mechanisms exist to deal with business difficulties. It's time to anticipate and spot the warning signals.

Paradoxically, while the crisis linked to the Covid-19 pandemic is having a strong impact on companies, the number of bankruptcies in France is falling this year. Indeed, according to the Banque de France, since March, the number of bankrupt companies has dropped by 45%.

However, this temporary decline should follow a resurgence of bankruptcies next spring if the government's support measures for businesses are not sufficient. This is why companies must, from now on, anticipate and pay attention to certain indicators to avoid bankruptcy. However, several effective legal mechanisms exist to deal with business difficulties, such as preventive or collective procedures.

Anticipate financial and cash flow difficulties

In order to forestall difficulties well ahead of time, it is essential that the manager identifies and analyzes certain warning signals to adapt the company's organization to the current crisis situation. It is therefore a matter of anticipating, month by month, the evolution of cash flow on a rolling 12-month basis, taking into account any requests for payment deferrals that may be made (social security contributions, tax settlement plan, rent deferrals, etc.).

In the event of major difficulties, it is advisable to resort to various types of financing (EMP, rebound loans, Solidarity Fund assistance, etc.). In the absence of obtaining these sources of financing, it is always possible to call on the credit mediator and possibly apply for a participative loan, a last resort solution set up by the State.

Moreover, redefining the company's activity, target markets or internal organization could enable it to get through this difficult period more easily. These elements could thus guide and adapt the company's strategic management to give it the means to face the current crisis.

In the face of difficulties: the solution of preventive procedures

But if the warning signals indicate a very deteriorated situation and the current aid linked to the health crisis is not enough, it is essential not to put the difficulties aside. Through rapid reaction, tools such as preventive procedures can save a company from bankruptcy.

There are two preventive procedures: the ad hoc mandate and conciliation. They are aimed at companies that are not in suspension of payments and wish to find an amicable agreement to redress the company's financial situation.

Thus, the ad hoc mandate facilitates the search for an agreement with the help of a third party who has no coercive power. In this context, the Commercial Court appoints a representative to give him a confidential assistance mission, without any time limit and relating to very diverse difficulties (financial, real estate, legal problems...).

On the other hand, conciliation allows the company to negotiate with its creditors through a conciliator. Just like the mandatary, the conciliator appointed by the Commercial Court must find adapted solutions in order to satisfy the company and the creditors. However, contrary to the ad hoc mandate, the conciliation can only last a maximum of 5 months and is not confidential. Indeed, the company must expose the proven or foreseeable difficulties it is experiencing before the Commercial Court.

As a last resort: collective proceedings

Companies experiencing major difficulties may resort to collective proceedings.

Thus, the safeguard procedure gives the possibility to a company, which is not yet in a state of insolvency, to reorganize itself, under the protection of justice. To do so, the court opens an observation period of a maximum of 6 months (renewable once). During this period, the manager retains his prerogatives in the management of the company. There is also a stay of proceedings, a suspension of prior claims and a continuation of current contracts. Following this observation period, if the company is considered sufficiently stable, the court can decide on a safeguard plan (of a maximum duration of 10 years for most companies).

However, when companies experience a suspension of payments, a declaration of suspension of payments must be filed by the manager within a maximum period of 45 days following the date of suspension of payments at the Commercial Court.

Companies in a state of suspension of payments, which can still sustain their activity and employment, will turn to receivership proceedings. This is analogous to the safeguard procedure. However, it imposes more constraints and frameworks on the company's management. The insolvency administrator can therefore carry out a mission of supervision, assistance or complete management on behalf of the manager.

The observation period may result either in the implementation of a recovery plan (limited to 10 years) if the company is viable, or in the partial or total sale of the business, or in the opening of a court-ordered liquidation if the situation cannot be improved.

Thus, if no solution is found, the judicial liquidation procedure is implemented: its purpose is to sell all the assets of the debtor company in order to allow the payment of its creditors.

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