With the so-called “lex Petroplus” dated 12 March 2012, the French parliament passed a law in a record time of just three weeks that has left insolvency practitioners baffled. Anja Droege Gagnier of BMH Avocats clarifies the new regime.
This unusually speedy legislative process can be explained primarily by the economic situation and the political environment in France at the beginning of 2012: a whole series of already-weakened industrial and transport companies had to face bankruptcy. This was also true for Petroplus Raffinage Petit-Couronne SAS whose refinery at Petit-Couronne in Normandy had around 550 employees and which, like other European refineries, suffered from an excess of production capacity. On 24 January 2012, the company applied to Rouen Commercial Court for the opening of reorganisation proceedings because it was no longer able to fulfil its due payment obligations. This situation had been created by the fact that the companies at the head of the group in Switzerland – Petroplus Holdings AG and Petroplus Marketing AG – had had their credit lines terminated and the banks had immediately exercised an existing pledge on the bank credit balances of the French company Petroplus Marketing France SAS. The situation was worsened by the fact that the French refinery workers had already stopped working in December 2011 – partly due to a shortage of crude oil supplies – and, since then, had blocked the warehouse stocks in Petit-Couronne, consisting of various oil products owned by the Swiss Petroplus Marketing AG. Another direct consequence of the banks terminating the credit line was the opening of provisional proceedings in Switzerland for the group head companies Petroplus Holdings AG and Petroplus Marketing AG, with the appointment of provisional administrators.
The trade unions, blaming the Swiss head for the difficulties in France, feared that the oil stocks at Petit-Couronne would be “siphoned off” as assets for the insolvency proceedings of the Swiss companies and be used to satisfy solely their creditors. Employees at the Petit-Couronne site considered that these stocks, valued at approximately €220 million, should be used primarily for the benefit of this site. It was clear that if the employment relations were to be terminated in the course of the insolvency proceedings (especially in the event of a judicial liquidation), only the minimum statutory indemnity would be paid and no “social plan” with additional indemnities would take effect. The oil stocks were therefore considered by the refinery’s employees as their “war chest”.
Finally, the Petroplus insolvency occurred right in the middle of the election campaigns taking place for the presidential elections. Most of the candidates rushed off to visit the Petroplus refinery, where the media reported in detail about the regular visits and the promises to rescue the site. These circumstances help to explain how the lex Petroplus came to be passed, not only in record time, but unanimously in both chambers of parliament by the right and left, which explains why the parliamentarians did not exercise the right to challenge its constitutionality before the law was promulgated.
SAFEGUARD MEASURES IN JUDICIAL LIQUIDATION PROCEEDINGS
Until now, French law provided safeguard measures solely as part of judicial liquidation proceedings. These safeguard measures are intended to prevent the managing directors of an insolvent debtor from putting their own assets beyond the reach of the insolvency proceedings before potential claims for damages against them are enforceable. French insolvency law provides the possibility to hold the managing directors of the debtor personally liable – this applies to both registered members of company management as well as de facto managing directors – in the event of there being excess liabilities over assets under certain requirements. This piercing of the corporate veil can lead to a situation where members of the board of management or de facto managing directors (eg, the parent company) can be personally ordered to compensate for the missing assets wholly or in part and, therefore, assume the liabilities of the debtor. It must be proven that the persons in question have been at fault in the performance of their duties as managing directors, in a way that has contributed to the diminution of the assets. In connection with such actions, the insolvency judge may order, at the request of the liquidator, any expedient safeguard measures on the assets of the managing directors of the debtor, eg, the confiscation of assets. There is no need to prove any danger to the enforcement of a potential judgment against the managing director.
SAFEGUARD MEASURES UNDER LEX PETROPLUS
The lex Petroplus extends the possibility of ordering such safeguard measures, which were formerly only possible in judicial liquidation, to sauvegarde (bankruptcy protection) and reorganisation proceedings.
Safeguard measures in the event of extended pending insolvency proceedings
The new paragraph 4 of Article L. 621-2 of the French Commercial Code allows the insolvency judge to impose any safeguard measures on the assets of the defendant in an extended insolvency procedure. For this to happen, the proceedings only need to be pending; there is no need for any final and enforceable judgment.
The possibility of extending insolvency proceedings to another legal or natural person based on the intermingling of the assets with the assets of the debtor or on a shadow directorship is available for all types of procedures (sauvegarde, reorganisation and judicial liquidation proceedings). This gave rise to academic criticism with respect to the sauvegarde procedure. Such measures would have the effect of disturbing the atmosphere of trust necessary to pursue one of the aims of the sauvegarde proceedings: the management is supposed to apply as early as possible for the opening of such proceedings and a potential claim discourages the same. In practice, an extension of insolvency proceedings concerns not only natural persons recorded as “managing directors” but parent companies acting as de facto managers. However, the obstacles to such an extension of the insolvency proceedings tend to be rather high. In the Petroplus case, however, the administrator of the French companies had already announced the extension of such proceedings to the Swiss parent companies.
Safeguard measures in the event of a pending action for damages against the managing directors of a company in “sauvegarde” or reorganisation proceedings
The new article L. 631-10-1 of the French Commercial Code provides that the presiding judge of the commercial court may order safeguard measures, in order to maintain access to the assets of the legal or de facto managing director accused to have caused the insolvency.
The mere pending nature of an action for damages suffices to order the safeguard measures – in practice this means confiscation of assets – without it being a matter of the prospects of success of the claims brought, or the outcome of the action for damages. The new provisions have ignored the rights of the persons affected by such measures. In particular, no consideration has been given to the fact that in case the legal action is being dismissed, there is in practice no chance of receiving a reasonable compensation. Criticism is all the more justified as the case law of the French courts is little foreseeable. Ultimately, the court proceedings aimed at enforcing actions for damages in insolvency law often prove to be complex, lengthy and uncertain as to the outcome. Given this fact, the possibility of ordering safeguard measures solely on the basis of a pending action for damages hardly appear justifiable. However, these were not the concerns of the proponents of the lex Petroplus and equally not those of the Petroplus employees in France who wished to safeguard a “war chest” in the form of the warehouse stocks of oil owned by the Swiss company Petroplus Marketing AG. The law described above was tailored to the Petroplus case in order to allow the (formerly impossible) access to the assets of the companies at the head of the group subsumed under the heading “managing directors”. This also explains why the legislator ensured that these new rules had backdated application to insolvency proceedings already instituted.
The application of these new rules to the Petroplus case shows that the outcome of the action for damages would ultimately have had to be ignored, because the warehouse stocks of oil on which the safeguard measures were to be imposed were perishable and self-destructing goods that would not have survived a long storage period without harm, ie these goods would have perished long before the matter of liability had been clarified. This very circumstance was the starting point for other rules of the lex Petroplus which did not remain mere safeguard measures.
Sale of the safeguarded goods
The new Article L. 663-1-1 of the French Commercial Code adds further possibilities for ordering safeguard measures: if the safeguarded assets are goods that incur maintenance costs or which could decay or perish, the insolvency judge may grant the administrator permission to sell these goods at a price defined by him. The proceeds must flow into a sequestered account with the public law savings bank Caisse des Dépôts et des Consignations. The possibility of selling the confiscated assets is new in principle and is available both in the case of Article L. 621-2 and the case of Article L 631-10-1. According to the debate in Parliament, the requirement for approval of the sale by the insolvency judge is sufficient to ensure that the ownership rights of the defendant, as protected by the French Constitution, the declaration of human rights of 1789 and the European Human Rights Convention, are not impaired. This is very doubtful as a defendant who has been provisionally dispossessed of his property can almost never have received a judgment with final and binding effect before his assets are sold. Unfortunately the legislator went even further in making special provisions to cater for the particular circumstances of the Petroplus insolvency.
The appropriation of the proceeds of sale for costs of maintenance and for social law and ecological obligations
The insolvency judge can order that the proceeds of the realisation of assets confiscated be used to cover the expenses required to maintain these goods, which may in practice still be justifiable in the case of complex and expensive storage (for example, stocks of oil).
Moreover, under the new rules, the judge can approve the appropriation of the proceeds of sale of the confiscated assets to settle “social law and ecological obligations which have arisen by reason of the title to such goods”, insofar as the funds available to the insolvent company do not suffice.
The intention of the legislator is clear: the proceeds are to be used to finance a generous social plan and to cover the costs of decontamination of the grounds of the site which, under environmental legislation, are to be paid by the last operator. Even if this may appear politically legitimate at first glance, the legislator has lost sight of the fact that at the time of the realising the goods and applying the proceeds to cover obligations of the insolvent company, there is as yet no final judgment of the person against whom such actions for damages are brought. Moreover, the outcome of the action for damages is likely to be uncertain. Any rights of recovery of persons affected by such compulsory measures which, in practice, can only be asserted years later, are in fact non-existent, because there is unlikely to be any solvent party against whom the claim can then be brought at that time. For this reason, it is quite justified to talk of confiscation, in which case the question arises as to whether an action for damages can be brought, based on the public liability of the administrator of the insolvency proceedings who applied for, approved and executed such safeguard measures, if the actions for damages brought against the owner of the confiscated goods are subsequently dismissed by the courts.
The author considers it doubtful that these rules are compatible with the Constitution; it can be assumed that a constitutional challenge will be lodged against these rules in the event of their being applied in practice.