Cœur Défense: the Chronicle of a Foretold Reform of the French Safeguard Proceedings

By on July 2, 2014

The end of a legal saga

On April 7, 2014, the Commercial Court of Paris put an end to the Coeur Défense’s legal saga by acknowledging the implementation of the two safeguard plans adopted for Heart La Défense (HoLD), a French corporation, and Dame Luxembourg S.à r.l. (Dame), HoLD’s sole shareholder.  As a reminder, HoLD subscribed to a 1.64B-Euro loan in July 2007 in order to purchase “Coeur Défense”, the largest office building in Europe.  In 2008, further to Lehman Brothers’s bankruptcy, safeguard proceedings were initiated to the benefit of HoLD and Dame.  Under the safeguard plans, HoLD had to repay the principal of the loan on July 10, 2014 to Windermere XII, a French securitization mutual fund.  From the beginning of these proceedings, Coeur Défense has attracted the attention of French courts, authors and specialists due to its potential impact on French bankruptcy proceedings.

The reform of the French safeguard proceedings: the rebalancing of powers between debtors and creditors

The end of Coeur Defense’s legal proceedings happened to occur at the same time as the introduction of Order No. 2014-326 dated March 12, 2014, modifying the French safeguard proceedings and due to enter into force on July 1, 2014 (the Order).  This reform aims at restoring balance in the powers of the debtor and its creditors, and grants the latter a significant role in the preparation of a safeguard plan implemented by a distressed company.  One would say this reform is creditor-friendly and makes French bankruptcy laws closer to U.S. laws.

Mainly, the Order modifies Article L. 626-30-2 of the French Commercial Code and enables creditors to take part in the preparation of the safeguard plan.  As a consequence, in the presence of creditors’ committees, creditors are now allowed to submit their own plan to the court.  In introducing a countervailing strength to the debtor’s power to elaborate a safeguard plan, the reform should foster discussions between creditors and debtors, and prevent debtors from forcing an inefficient plan onto creditors by threatening them to implement a more traditional 10-year plan.  In fact, one of the issues in Coeur Défense was that Windermere XII, the main creditor, had failed to introduce to the court modifications that HoLD had previously refused to integrate in its plan.

In addition, as of the entry into force of the Order, if creditors’ committees fail to adopt a safeguard plan and if closure of the proceedings would lead, in a short period of time, to a “cessation of payments” (or inability of the company to meet its financial obligations), the safeguard proceedings may be converted into reorganization proceedings at the request of the court-appointed officers or the public prosecutor (in addition to the debtor, as provided prior to the reform).  Taken together with Article 55 of the Order, which allows the court to order the sale of all or part of a debtor company in the event the submitted safeguard plans seem clearly unlikely to lead to a recovery of the company or in the event no safeguard plan was submitted, the reforms should deter debtors from seeking subsequent extensions of the observation period in order to gain additional time.  In addition, such ability to convert safeguard proceedings into reorganization proceedings may be detrimental to the shareholders if the company is under-capitalized.  Indeed, Article 52 of the Order states that the court may, in the framework of reorganization proceedings, appoint a representative who will be in charge of voting in lieu of the shareholders, should such shareholders refrain from restoring the equity capital when it is required by the plan.

A key takeaway is that French bankruptcy laws, which used to be debtor-friendly, are now alerting reluctant shareholders of the consequences of their resistance to reorganization proceedings.