Contracts with French clients or suppliers undergoing insolvency proceedings

Your French client is in safeguard proceedings, in judicial reorganisation or in judicial liquidation: what becomes of your contracts and your rents?

When a French client is placed under safeguard, judicial reorganisation or judicial liquidation, many creditors instinctively think:

“My contract is terminated, I can immediately stop my services.”

In French law, it is often… the opposite.
The principle is the continuation of current contracts in order to promote the survival or the realisation of the business.

This post takes stock, in a practical way, of the reactions you should have as a supplier, landlord or co-contracting party of a company in insolvency proceedings in France.

1. Principle: the opening of insolvency proceedings does not entail termination of the contracts

The texts are clear: whether in safeguard, judicial reorganisation or judicial liquidation,
the opening of the proceedings does not allow, by itself, to:

• terminate the contract,

• note its rescission,

• nor invoke an indivisibility to be released from it.

Any clause of the contract providing for automatic termination in the event of insolvency proceedings is deemed unwritten.

You cannot refuse to perform your contract solely because your client is placed in insolvency proceedings.

Concrete examples

Delivery of goods already paid

You cannot refuse to deliver goods already paid before the opening of the proceedings in order to “make up for it” on other unpaid invoices.
The contract continues for orders in progress, and the sums prior to the judgment opening the proceedings must be declared as liabilities.

Insurance contracts

An insurer cannot use the opening of insolvency proceedings to:

• limit its cover,

• exclude a type of loss,

• or unfavourably modify its obligations towards the company in difficulty.

The opening of the proceedings must neither terminate the contract nor worsen the situation of the insured.

Bank current account

A company’s current account which was not closed before the judgment opening the proceedings is considered as a contract in progress: the opening of the liquidation does not automatically entail its closure.

Prohibited clauses

Any clause is prohibited which, solely by reason of the insolvency proceedings:

• reduces the debtor’s rights, or

• aggravates his obligations

(for example: increase of rate, additional fees, automatic acceleration of term, etc.).

2. What to do if you wish to exit the contract? The formal notice to the administrator or the liquidator

In safeguard and in judicial reorganisation, if you want to know whether the contract will continue or not, you must formally put the court-appointed administrator on notice.

The procedure in practice

• You send a registered letter with acknowledgement of receipt to the administrator asking him to indicate to you whether he intends to continue the contract.

• The administrator has a period of one month from receipt to reply.

• Lack of response within this period = termination of the contract by operation of law.

⚠️ The supervising judge (juge-commissaire) can:

• shorten this period, or

• extend it (within the limit of two additional months).

Beware of “implicit” behaviour

Even without a written answer, certain behaviours of the administrator can be interpreted as an intention to continue the contract.
For example:

• regular payment of invoices arising after the opening of the proceedings (rents, royalties, etc.),

• express request for deliveries.

In such a case, it will be difficult to argue that the contract was terminated for lack of reply.

3. Consequences if the administrator decides to continue the contract

If the contract is continued, each party must perform its obligations… but not under the same conditions depending on the type of proceedings.

In safeguard proceedings

• The administrator may require the performance of current contracts.

• The payment deadlines granted before the opening of the safeguard are in principle maintained.

In judicial reorganisation

A stricter regime for suppliers:

• The principle is cash payment for services arising after the judgment opening the proceedings if the administrator wants the continuation of the contract.

• In case of non-payment on the agreed dates:

  • the contract is terminated by operation of law, and

  • this may lead to the end of the observation period, unless you still accept the continuation of the contractual relationship.

Your claim arising after the judgment benefits from a preferential rank compared with prior claims, which increases your chances of recovery.

Case of contracts with successive performance

If the contract provides for deliveries or payments staggered over time, the administrator must put an end to the contract as soon as he notes that he will no longer have the funds necessary for the following instalments.
Failing that, his liability can be engaged.

Creditors who are owners (leasing, rental, etc.)

If you are the owner of goods made available (e.g. vehicles on hire), you must:

• Put the administrator on notice to state his position on the continuation of the contract, and

• In parallel, revendicate the ownership of the goods within the time limits (generally three months from publication of the judgment opening the proceedings).

4. If the contract is not continued: termination and damages

If the administrator or the liquidator indicates that he does not wish to continue the contract, or does not reply within the time limit, the contract is terminated by operation of law.

You can then refer the matter to the supervising judge in order to have the termination (and its date) recorded, or clarify the amount of your claim.

Attention: declare your damages

Non-performance of the contract may give rise to damages, but:

• you must declare this claim within the time limits,

• otherwise, you risk never being paid.

As long as no decision has been made on your damages, you may, in certain cases, defer the restitution of sums over-paid in performance of the contract.

5. Particular case: absence of administrator

Sometimes, the court opens safeguard or judicial reorganisation without appointing an administrator.

In this case:

• it is the manager of the company (with the conforming opinion of the court-appointed representative of the creditors) who decides whether or not to continue the contracts.

In practice

• You send your formal notice to the company (its manager), by registered letter with acknowledgement of receipt.

• You send a copy by registered letter with acknowledgement of receipt to the creditors’ representative (mandataire judiciaire).

• The representative must give his opinion “without delay”.

• If he does not reply within 15 days, you can refer the matter to the supervising judge; this suspends the period of one month for termination by operation of law.

6. Very important particularity: the commercial lease

The commercial lease is a strategic contract: without premises, the company can no longer operate.

The lease is not terminated automatically

The opening of insolvency proceedings never entails, by itself, termination of the lease.

Any clause for automatic termination in the event of safeguard, judicial reorganisation or liquidation is deemed unwritten.

The landlord must declare his claim for unpaid rents and benefits from a preferential right for the last two years of rent before the judgment opening the proceedings (and for certain occupation indemnities).

In safeguard / reorganisation: who can terminate, and when?

• The administrator can terminate the lease if there are not sufficient funds to pay future rents. He may even put an end to it while the rents can still be paid, for restructuring strategy reasons.

• The landlord can request termination for non-payment of rents after the judgment, but:

  • only after a period of three months from the opening, and

  • provided that the rents and charges arising after remain unpaid.

The tenant can save his lease by regularising the rents up to the day when the supervising judge rules, even if the three months have already passed.

In judicial liquidation

• The liquidator may decide at any time not to continue the lease (termination on the date on which the landlord is informed).

• The landlord may request:

  • termination for unpaid rents after the judgment of liquidation (same conditions as above),

  • but also termination for prior reasons (for example non-performance of maintenance obligations), within a strict period.

The supervising judge cannot grant payment deadlines if the conditions of the text on termination are fulfilled: he merely notes the termination.

Lease already terminated before the proceedings

If a final decision or an amicable agreement has already terminated the lease before the judgment opening the proceedings, the administrator or the liquidator cannot make it live again.

On the other hand, if an action for termination was pending but not yet finally judged, the opening of the proceedings in principle blocks the implementation of the termination clause linked to unpaid rents.

7. What to do concretely as a creditor or landlord?

In practice, if one of your clients is placed under insolvency proceedings in France:

• Identify your current contracts: sales, services, leasing, commercial lease, distribution contracts, etc.

• Determine your objectives:

  • Do you wish to continue the relationship (e.g. strategic client)?

  • Or, on the contrary, exit quickly from the contract to limit risks?

• Send, if necessary, a formal notice:

  • to the administrator or the liquidator,

  • or to the manager in the absence of administrator (with copy to the creditors’ representative).

• Strictly comply with the deadlines for declaration of claim and formal notice: a delay can cause you to lose your rights.

• Monitor payments after the judgment: these are often your most protected claims.

8. Need help to secure your contracts with a debtor in difficulty in France?

The treatment of contracts in the event of safeguard, judicial reorganisation or judicial liquidation is a key point to optimise your chances of recovering your claims, in particular if you are a foreign creditor of a French debtor.

On debtcollectionfrance.com, we regularly assist:

• French and foreign suppliers,

• commercial landlords,

• commercial partners (franchise, distribution, licence, etc.),

to:

• analyse the impact of insolvency proceedings on their contracts,

• prepare suitable formal notices,

• secure or terminate their leases,

• efficiently declare their claims and their damages.

If you are faced with the placing under insolvency proceedings of a client in France, we can help you define a concrete strategy: continuation of the contract or controlled exit, protection of your rights and maximisation of your chances of recovery.