French insolvency law provides for three main types of procedures:
- a safeguard procedure (procédure de sauvegarde) allows an entity facing financial difficulties to undergo a restructuring at a preventive stage under the court’s supervision;
- a judicial reorganisation (redressement judiciaire) allows an entity which has been declared insolvent to continue as a going concern through the appointment of an insolvency administrator and the implementation of a reorganisation plan; and
- a winding-up procedure (liquidation judiciaire) is ordered by the court when it considers that the entity is unlikely to recover.
The type of procedure initiated will determine the judicial officer in charge of the insolvency proceedings. In the case of a safeguard procedure or a judicial reorganisation, the distressed company’s directors will continue to manage the company but under the supervision and with the assistance of an administrator appointed by the French courts. In the case of winding-up proceedings, the French courts will appoint a liquidator who will act for and on behalf of the company for the duration of the insolvency procedure.
How does a party’s insolvency impact pending arbitration proceedings?
As the rules of French insolvency law, which may have implications for pending or future arbitration proceedings, are otherwise similar for the three available procedures, we will refer generally to “insolvency proceedings”.
Under Article 18 of the Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings, “[t]he effects of insolvency proceedings on a pending lawsuit or pending arbitral proceedings concerning an asset or a right which forms part of a debtor's insolvency estate shall be governed solely by the law of the Member State in which that lawsuit is pending or in which the arbitral tribunal has its seat”.
Under French law, the opening of insolvency proceedings against a party will have immediate consequences on any pending arbitration since certain core principles of French insolvency law will need to be complied with.
Subject to these requirements, arbitration pending in France will however be allowed to resume and lead to an award. The first and most immediate consequence of opening insolvency proceedings is the interruption of pending legal proceedings, including arbitration proceedings.
According to Article L.622-22 of the French Commercial Code, “pending legal proceedings are interrupted until the pursuing creditor has declared its debt” in the insolvency proceedings. If the arbitration has been initiated by the insolvent company itself (i.e. not by a “pursuing creditor”), the interruption of the proceedings is mandated by Article 369 of the French Code of Civil Procedure. The party which, in the arbitration, claims to be a creditor of the insolvent company will accordingly need to declare its alleged debt to the French insolvency judge.
Pursuant to the same Article L.622-22, the pending proceedings will “automatically resume” once this formality has been accomplished – i.e. in practice, once the creditor is able to submit a copy of its declaration of debt to the arbitral tribunal. This means that the proceedings can be resumed without having to await the decision of the insolvency judge, who in any event will invariably find that there are pending arbitration proceedings and defer to the decision of the arbitral tribunal as regards the existence and amount of the debt.
Creditors must however be mindful of a second requirement of Article L.622-22, pursuant to which they must duly summon the insolvent company’s administrator or liquidator (as the case may be) to appear in the arbitral proceedings before they resume.
If the administrator or liquidator refuses to take part in the arbitration after having been duly summoned and informed, he/she will not be able to rely on his/her own lack of participation to challenge the validity of the subsequent arbitral award.
Although the arbitration can be resumed within a relatively short time frame of the opening of insolvency proceedings, the effects of the debtor’s insolvency proceedings do not stop there and also affect the scope of the parties’ claims.
Indeed, according to the same Article L.622-22 of the French Commercial Code, proceedings interrupted by the opening of insolvency proceedings will resume “but only for the purpose of ruling on the existence of the debt and its amount”. As a result, the arbitral tribunal will only be able to rule on whether the alleged debt exists and, if so, on its quantum, but will not be in a position to issue an order for payment against the insolvent party. Instead, the creditor will have to rely on the tribunal’s award to seek payment within the context of the insolvency proceedings. A breach of this rule would constitute a violation of French international public policy.
Moreover, the arbitral tribunal’s jurisdiction may to some extent be curtailed by the French insolvency judge’s exclusive jurisdiction over disputes and claims arising out of or related to the insolvency proceedings.
This notably includes claims relating to the potential voidability of contracts concluded by the insolvent company during the so-called “suspect period”, which corresponds to the period between the date of the company’s cessation of payments (date de cessation de paiements, i.e., date on which it was no longer capable of paying amounts it owed) and the opening of the insolvency proceedings.
Can arbitration proceedings be commenced by or against an insolvent entity?
Can one initiate arbitration against an insolvent entity?
Pursuant to Article L.622-21 of the French Commercial Code, the opening of insolvency proceedings interrupts or forbids any legal proceedings by any creditor seeking (i) damages against the debtor or (ii) the termination of a contract for defaults on payments.
This rule precludes the introduction of any proceedings against the insolvent party, including arbitration proceedings, until the rules of the French insolvency law have been complied with.
The creditor will, accordingly, first need to declare its debt to the French insolvency judge before it can contemplate initiating proceedings. Unlike in the case where the arbitration is already pending at the time the insolvency proceedings are opening, the creditor will in these circumstances have to await the decision of the insolvency judge, who must examine the declaration and the debt.
The creditor will however be able to invoke the arbitration agreement concluded with the debtor as grounds for permitting it to initiate arbitration. The French Supreme Court confirmed that the insolvency judge is bound by the principle of competence-competence and must in such circumstances defer to an arbitral tribunal to rule on the existence and amount of the debt.
The creditor will thus be able to initiate arbitration against the insolvent party, provided that:
- the insolvent company’s administrator or liquidator must be summoned to appear in the proceedings; and
- the arbitral tribunal may only rule on the debt’s existence and amount but may not issue any orders for payment against the insolvent party.
The insolvency judge may refuse to permit commencement of arbitration if the arbitration agreement is held to be manifestly void or manifestly inapplicable to the claim. This is the same high threshold that is generally applied by French courts pursuant to Article 1448 of the French Code of Civil Procedure when assessing whether to decline jurisdiction in favour of an arbitral tribunal.
This standard is met for disputes and claims arising out of or related to the insolvency proceedings falling within the exclusive jurisdiction of the insolvency judge that cannot be submitted to arbitration. Examples are claims pertaining to the insolvency proceedings’ validity, the powers of the administrator or liquidator, or the penalties incurred by the company’s directors, but also the potential voidability of contracts concluded by the insolvent company during the “suspect period”.
Can an insolvent entity commence arbitration?
The insolvent company can also initiate arbitration after the opening of insolvency proceedings and, in fact, is bound to do so with respect to any claim that would be covered by an existing arbitration agreement.
Indeed, the debtor or, as the case may be, the administrator, or the liquidator appointed to act for and on behalf of the debtor, remain bound by valid arbitration agreements contained in the contracts concluded by the debtor prior to its insolvency.
The debtor, administrator or liquidator may however bring claims arising out of or related to the insolvency proceedings, and which accordingly do not fall within the scope of the arbitration agreement.
The French Supreme Court has clarified that this notably includes any claims where the administrator or liquidator acts not on behalf of the insolvent company, but in the interest of its creditors. It applies, for example, to claims against company managers for repayment of liabilities they negligently permitted the company to incur (comblement de passif) and claims of improper financial support against credit institutions that artificially propped up the company (soutien abusif).
What processes are available to raise the objection of pending arbitration proceedings against insolvency proceedings?
Under French law, all debts allegedly held against an insolvent company must be declared to the insolvency judge, including debts arising out of a claim covered by an arbitration agreement.
The creditor should accordingly raise the existence of any applicable arbitration agreement in the course of the procedure for declaring its debt.
Faced with a valid arbitration agreement and a valid declaration of debt, the French insolvency judge will defer to the arbitral tribunal to rule on debt’s existence and amount.
How does insolvency affect recognition and enforcement of an arbitral award against an insolvent party?
Under French law, an arbitral tribunal is prohibited from issuing an order for payment against a party undergoing insolvency proceedings and must limit itself to ruling on the existence and amount of the alleged debt.
The French Supreme Court has confirmed that this prohibition is a rule of French international public policy.
This means that, if breached, such an award may be set aside in case of a French-seated arbitration, since violation of international public policy is one of the few grounds on which annulment of an award may be sought under French law.
The rule also comes into play as regards foreign awards, i.e. rendered by an arbitral tribunal not seated in France: The Supreme Court has ruled that in such a case, the exequatur decision by which foreign awards are granted recognition and enforcement within the French legal order should be limited to only recognising the award, i.e. without providing for its enforcement.
As a result, whether the award has been rendered in the context of French or foreign arbitral proceedings, the creditor will not be able to directly enforce it against the insolvent party and will instead have to seek payment within the context of the insolvency proceedings.
The insolvency judge will defer to the award as regards the existence and the amount of the creditor’s debt, but it retains jurisdiction to determine each creditor’s rank, as well as the amount distributed out of the insolvency’s proceeds.
Has a special insolvency regime been introduced in response to the SARS-CoV-2 / Covid-19 pandemic?
As a response to the Covid-19 pandemic, the French authorities adopted three Orders relating to insolvency proceedings under French law, on 27 March 2020 (No. 2020-341), 20 May 2020 (No. 2020-596) and 25 November 2020 (No. 1443).
These Orders are mainly concerned with adapting certain procedural aspects of French law rules of insolvency, in particular in terms of time periods and notification requirements. They do not introduce any substantive changes to the principles set out in this article.