Understanding insolvency law in France is essential for businesses operating in the country or planning to expand into the French market. Insolvency law provides a structured framework to manage companies facing financial distress, offering pathways for restructuring, debt repayment, or orderly liquidation.
This blog explores the key aspects of insolvency proceedings in France, including the conditions for entry into different procedures, and the distinction between insolvency, bankruptcy, and restructuring.
What Is Insolvency Law?
Insolvency law in France governs the legal processes applicable when companies face financial distress, including restructuring or winding-up procedures. Put simply, it is the framework established to manage companies that can no longer meet financial obligations, ensuring orderly treatment of creditors and attempts at business rescue where feasible.
When Is a Company Considered Insolvent?
In France, a company is deemed insolvent when it reaches the state of “cessation des paiements”, meaning it is no longer able to meet its financial obligations as they become due with the available liquid assets.
This status triggers the legal obligation for directors to act quickly, either by initiating insolvency proceedings in France or by seeking early-stage solutions like conciliation.
Difference Between Insolvency, Bankruptcy, and Restructuring
It is important to distinguish insolvency from related concepts:
- Insolvency vs. Bankruptcy
Insolvency is a financial condition indicating that a company cannot pay its debts on time. Bankruptcy, on the other hand, is a legal declaration by a court that the company is insolvent, often leading to judicial liquidation or reorganization.
Not all insolvent companies are automatically declared bankrupt; insolvency is a trigger, whereas bankruptcy is a legal consequence. - Insolvency vs. Restructuring
Restructuring involves reorganising a company’s debts, assets, or operations to restore financial health while maintaining business continuity. Insolvency is the condition that may necessitate restructuring.
Understanding these distinctions is crucial for directors and investors, as it informs which legal options are available under French insolvency law and the timing for taking protective or corrective action.
Legal Framework Governing Insolvency in France
The core legal basis for insolvency proceedings in France is contained in Book VI of the French Commercial Code (Code de Commerce), which outlines procedures applicable to enterprises in difficulty. These commercial provisions apply to all legal persons carrying out commercial, artisanal, agricultural or independent professional activities.
Triggers for Insolvency Proceedings: “Cessation des paiements”
The critical trigger for formal insolvency proceedings in France is the status known as “cessation des paiements,” which occurs when a company cannot pay its due debts with available liquid assets. This state of illiquidity, even if temporary, mandates swift legal action.
Upon entering this state, company directors are legally required to file for restructuring or liquidation within 45 days, unless they have already initiated conciliation proceedings
Court-Administered Proceedings
Three main judicial options exist once insolvency is reached:
- Safeguard Proceedings (Procédure de sauvegarde)
Initiated when the enterprise is not yet in cessation des paiements, allowing reorganization under court protection—often comparable to Chapter 11 in U.S. bankruptcy law. - Judicial Reorganisation (Redressement judiciaire)
Triggered when insolvency is confirmed. The court imposes a period of stabilization, during which the company continues operations while formulating a debt repayment or disposal plan. - Judicial Liquidation (Liquidation judiciaire)
Applied when recovery is not viable. The court orders the sale of assets to repay creditors, and the company is ultimately dissolved.
Criteria for Entry into Each Restructuring Procedure
Under French law, the determination of insolvency is based primarily on a cash-flow test. A company is considered insolvent (“en état de cessation des paiements”) when it cannot pay its due and payable debts from available liquid assets or assets that can be quickly converted into cash. This assessment takes into account undrawn credit facilities, other available credit reserves, and any moratoria or standstills agreed upon with creditors.
Based on this framework, the entry criteria for different insolvency proceedings in France are as follows:
- Ad Hoc Proceedings – The company must generally be solvent. In rare cases, these proceedings have been used for companies that were temporarily insolvent, but only for a very limited period.
- Conciliation Proceedings – The company must be experiencing actual or anticipated legal or financial difficulties. Insolvency is permissible if it has lasted less than 45 days prior to filing the petition.
- Safeguard Proceedings (Procédure de Sauvegarde) – The company must still be solvent but facing difficulties that it cannot resolve on its own. There are no strict limitations on how “difficulty” is defined.
- Judicial Reorganisation (Redressement Judiciaire) – The company must be insolvent; however, recovery or rescue must still be realistically achievable, rather than impossible.
These distinctions are crucial for determining which insolvency proceedings in France a company may pursue and for ensuring compliance with legal requirements under French insolvency law.
The insolvency proceedings in France, whether conciliation, safeguard, judicial reorganisation, or liquidation, provide structured paths for potential recovery or orderly exit.
Key to effective navigation is the prompt recognition of financial difficulties (cessation des paiements), adherence to legal timelines (such as the 45-day rule), and informed decision-making between proactive restructuring and necessary liquidation.
By comprehending these legal pathways, businesses and their advisors can better safeguard assets, preserve value, and ensure compliance throughout financial turbulence.
Want to learn about other proceedings in France? Check out our dedicated posts on accounting and tax obligations in France, transfer pricing requirements, or French GAAP.