Insolvency in France

Hopefully the unthinkable will never happen but if the worst comes to the worst, it pays to understand how insolvency rules operate in France, says Matthew Cameron…

It is perhaps an unfortunate sign of the times that we should see a need to consider writing about insolvency and the impact it may have on ownership of a property in France. However, it is a fact that we see an increasing number of enquiries from people with concerns about insolvency matters. What happens if the owner cannot pay his or her charges? What is the impact in France of insolvency proceedings being brought against a UK resident who owns a property in France? What are the powers of a British trustee in bankruptcy in France? How is insolvency addressed in France? These issues may be unappealing yet are worthy of consideration here.

The first point to note is that wherever one is resident, once an administrator is appointed, there is an overriding obligation to make a full and frank disclosure of one’s affairs and to assist with the procedures. It follows from this that where the bankrupt person is a UK resident, he must make a full disclosure of the house that he owns in France. We have on occasion been asked if it was necessary to declare the existence of assets based outside of the UK in the event of bankruptcy. This cannot be avoided.

Furthermore, with a slightly longer-term view, it is generally not right that, where a businessman is concerned about the future state of his business, he could pass the property absolutely to his spouse or children in an attempt to distance his assets from his creditors. Such transactions can be investigated by the trustee in bankruptcy or French mandataire judiciaire and possibly set aside. So how then is a trustee in bankruptcy or mandataire judiciaire instituted? What powers does he have?

In the UK, a trustee in bankruptcy is appointed by the court upon the petition of one or more of the person’s creditors, when he is unable to pay his debts. At that point, the bankrupt sets out all of his assets and the trustee is then instituted to take control of them. He has a power to sell assets. As an initial step he will enter restrictions on title deeds to the bankrupt’s estate, to prevent the bankrupt in dealing with them without the trustee’s involvement.

One main question is to know if a bankruptcy judgment issued in the UK can apply on French assets. The answer is clearly positive, and European Regulation (EC) No 1346/2000 governs this. Provided that a judgment is valid in the country where it was issued, it can apply in all the member countries of the European Union without any further formalities.

In France, the trustee will certainly be able to register a charge against the bankrupt’s French property, which would work to ensure that in the event of a sale, the proceeds would not be paid out without him first taking his due portion.

Sale by auction

A concern, though, arises when the trustee in bankruptcy wants to enforce a sale of the property. While in the UK, the court will grant him the power to do so, he does not on the face of it have such a right in France. France does not of course recognise trusts, so how could a trustee be able to sell the property? If a sale is necessary, then two options are available. First, the bankrupt may be sufficiently compliant in the whole procedure – he does, after all, have an interest in moving through the bankruptcy process as quickly as possible so that he may start again – in which case, the trustee may agree to allow him to market and sell, ensuring that the proceeds would be directed to him before he releases the charge that he’s secured against the property. Alternatively, if the bankrupt is not being helpful, then the next step would be for the trustee to look to force a sale through the French courts. Here, though, the costs of sale would in all probability be much greater, so much so that it is unlikely to be in anybody’s interest to refuse to assist.

In the event of a forced sale, it is likely that an auction would finally be enforced, unless a purchaser were identified on the open market relatively quickly. There is of course no guarantee that the best price would be reached on a sale by auction.

In France, bankruptcy proceedings have been reformed by a law dated 26 July 2005 and another reform is due to take place shortly. However, at the moment there are three main steps in insolvency in France. In many cases it is advisable to make an appointment with a mandataire judiciaire as soon as possible to consider the problems the debtor has to deal with. Often such an appointment is made too late and it is impossible to avoid a decision of liquidation judiciaire. The tribunal de commerce is sufficient for most people. The tribunal de grande instance is required for those who are farmers.

The first step is called the sauvegarde. In this process, at the debtor’s request, the court will open a plan de sauvegarde. This plan will help the debtor to find a way to pay his debts in order to save the enterprise. A control of the debtor’s management can be organised by the court.

The second step is the redressement judiciaire. A decision of redressement judiciaire is taken by the court when the debtor is in cessation des paiements, that is to say that he cannot pay his debts with his available assets. However at this stage the court believes that it is still possible to save the enterprise. The debtor is allowed to pursue his activities but under control and has to refer to the court for the main decisions.

The third step is the liquidation judiciaire. At this stage it appears impossible to pursue the activities because the debts are too great. The decision is also taken by the court. The mandataire judiciaire acts here as a liquidateur, that is to say that upon control of the court he will try to sell what is possible to sell in order to pay the debts. In this case the debtor cannot manage his assets himself any more. For example the mandataire judiciaire is likely to decide to sell all the immoveable properties if it is necessary. Once a purchaser is found, the mandataire judiciaire will ask the court for a juridical authorisation of sale. When granted, this decision is forwarded to a French notaire who will draw up the deed of sale. The deed will be signed by the mandataire judiciaire and not by the debtor himself. The price paid by the purchaser is transferred to the mandataire judiciaire who uses it to pay the debts. When all the debts have been paid, or more often when there are no other assets to be sold, the mandataire judiciaire asks the court to take a decision of cl�ture de la liquidation judiciaire.

Hopefully, few readers will have to face up to such a situation, although in the event of any difficulty it is always wise to seek legal advice at the earliest moment.