Simplifying Insolvency: Support for Entrepreneurs from the PACTE Act

Published 22 February 2019 by Ravet & Associés

French insolvency law is constantly being reshaped, with multiple new laws, amendments and reforms taking place across the last three decades.

This article aims to present the latest amendments introduced by the ‘PACTE Act’, which is currently being discussed by the French parliament.

The PACTE Act, has a broader scheme than just insolvency procedure, but the five major amendments introduced by this law deal with the resurrection of debtors, company owners and entrepreneurs. The law is actually being discussed by the French parliament at present and is subject to change, but covers the following areas;

Remuneration for company owners and entrepreneurs during the receivership

The PACTE Act changes the circumstances in which the remuneration of company owners and entrepreneurs is determined.

Remuneration used to be determined by the judge at the opening of the procedure, according to a law passed in 1967, at a time when debtors had little to no role to play throughout the ongoing procedure.

Over time, their role completely changed as they were given a key role during the procedure, rendering that law dated and useless. As a result, according to the new legislation, the determination of the remuneration by the judge is no longer mandatory. Remuneration shall now be maintained, and only reduced, if necessary, by the judge.

Systematising the use of the ‘rétablissement professionnel’ procedure

This procedure was introduced in French law by the statute of March 12th, 2014. This enables any individual with low-value assets to erase their liabilities without going through a bankruptcy procedure. To be eligible for that procedure previously, debtors had to file for bankruptcy first and request the application of the ‘rétablissement professionnel’, which is a process with no equivalent in other European legal systems. Statistics show that only 257 procedures were opened since 2014 since debtors were not aware of its existence and legal practitioners not used to it.

The ‘rétablissement professionnel’ procedure will now be used as a way to promote the resurrection of company owners and entrepreneurs, by giving the judges the power to evaluate the opportunity to in agreement with the debtor. Furthermore, the procedure can now be opened to the benefit of a debtor that has previously been granted a safeguard or a receivership procedure.

Simplified bankruptcy procedure

The French commercial code used to provide a choice between two types of simplified bankruptcy procedure: one was mandatory and the other was optional.
A survey conducted among insolvency professionals showed that there was no need for the mandatory procedure to be maintained. As a result, in order to simplify that procedure, the new law only keeps the optional bankruptcy procedure, which becomes the new mandatory bankruptcy.

In addition, that procedure will only last six months, which allows the debtor to rebound even more quickly.

Simplifying the ‘EIRL’ status

Another innovation introduced by the new law targets any individual who wishes to do business by using the EIRL status. This status enables them to create a trust estate only used for their business. From now on they can do so without initially having any assets, rights or warranty.

Neutralising solidarity clauses in commercial leases

In case of a sale agreement implemented by the court during a receivership procedure, the French commercial code provides that all contracts transferred to the purchaser must be performed the same way as agreed by the original parties.
However, some clauses such as solidarity clauses in commercial leases were nullified. Furthermore, no legislation was provided when solidarity was reversed. As a result, the purchaser could be burdened with unpaid rents, from before the contract was transferred, preventing the implementation of the sale agreement.

The PACTE Act now nullifies those clauses, whether they burden the purchaser or the seller. The clauses still apply when the transfer occurs during a bankruptcy procedure.

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