Using Ad Hoc Mandates to Renegotiate Safeguard Plans and Prevent Formal Insolvency
When a company is implementing a safeguard plan, there is no guarantee that the economic balance initially established will withstand the passage of time or successive crises. Faced with the major risk of a default on a plan installment — which often leads to judicial termination and the opening of more burdensome proceedings — French law offers a still underused option: recourse to an ad hoc mandate during the performance of the plan.
When a company is granted a court-approved safeguard plan, it is not necessarily immune from further difficulties. By nature, the implementation of such a plan extends over a long period of time: it is generally spread over several annual installments (eight, nine), and may not exceed ten years, pursuant to Article L. 626-12 of the French Commercial Code. Such a timeframe presupposes a degree of economic and financial stability that can easily be undermined by market shifts, successive crises or operational contingencies.
In practice, it is not uncommon for a company, when implementing its safeguard plan, to encounter setbacks that make it impossible to meet the repayment schedule agreed upon with its creditors.
Failure to meet a scheduled annual instalment under the court-approved plan is a serious warning sign. Very often, it reveals liquidity pressures that are likely to characterize a state of cessation of payments, triggering immediate procedural consequences. Indeed, pursuant to Article L. 626-27, I, paragraph 3 of the French Commercial Code, the court that approved the plan may, after hearing the public prosecutor, decide to terminate the plan and initiate:
- judicial reorganization proceedings, if a turnaround remains possible; or
- judicial liquidation proceedings, if a turnaround is clearly impossible.
Naturally, a substantial modification of the plan is the primary legal lever for such an adjustment. However, its approval is never guaranteed. Where the proposed modification affects the terms for the repayment of liabilities, the relevant creditors must be consulted, pursuant to Article L. 626-26, paragraph 2 of the French Commercial Code. Failure to respond constitutes acceptance, except in case of debt forgiveness or conversion of securities giving or potentially giving access to capital.
In practice, if creditors respond and oppose the proposed adjustment, there is a real risk that the court will refuse to approve the modification. The company is then exposed, in the short term, to the termination of the plan and the commencement of new insolvency proceedings (judicial reorganization or, potentially, liquidation).
It is precisely in this critical risk zone that French insolvency law offers an intermediate path: negotiations under the aegis of a court-appointed ad hoc representative, with a view to securing in advance the consent of the main creditors for the concessions they will be asked to make (Article L. 611-3 of the French Commercial Code).
Use of an ad hoc mandate during the implementation of a safeguard plan
Article L. 611-3 of the French Commercial Code allows the presiding judge of the competent court, at the debtor’s request, to appoint an ad hoc representative tasked with assisting management in reaching an out-of-court agreement with its creditors.While the ad hoc mandate is traditionally used prior to formal insolvency proceedings, it may also, in more exceptional circumstances, be implemented during the performance of a safeguard plan.
A company remains eligible for such a mechanism provided that it is not in a state of cessation of payments, (that is, where its available assets are sufficient to meet its due and payable liabilities). This requirement is central: in practice, it means that action must be taken before a cash-flow crisis arises.
This approach offers a twofold benefit.
On the one hand, the ad hoc mandate makes it possible to restore dialogue with creditors without initiating new insolvency proceedings, thereby avoiding public disclosure and the loss of confidence that would follow. On the other hand, its confidential and consensual framework fosters the emergence of a balanced agreement: it allows the company to present its economic reality, to propose reasonable adjustments (rescheduling, payment deferrals, or even partial debt forgiveness), and to preserve business continuity.
Out-of-court negotiations as a useful prerequisite to the substantial modification of the plan
Discussions conducted under the aegis of the ad hoc representative are intended to lead to an agreement which, while preserving the overall framework of the plan, adjusts its terms so as to ensure its continued viability.In practice, this most often involves recalibrating the repayment trajectory: modifying installments, introducing a deferral period, providing for a one-year "payment holiday” with repayment deferred to the end of the plan, or adjusting certain ancillary commitments.
The operational value of the ad hoc mandate lies in its ability to focus negotiations on the key creditors holding the bulk of the liabilities, in order to secure their consent before any court filing. This enables the company to appear before the court with a "pre-packaged” and, therefore, more robust solution.
Once an agreement has been reached with the relevant creditors, court approval remains a mandatory step.
Any adjustment to the objectives or key provisions of the plan constitutes a substantial modification under Article L. 626-26 of the French Commercial Code and, therefore, requires the involvement of the court that approved the original plan.
The matter is then formally referred to the plan supervisor (commissaire à l’exécution du plan), who prepares a report on the company’s situation and on the agreement reached. On that basis, the debtor files a petition for a substantial modification of the plan, supported by the supervisor’s report and by the documentation resulting from the negotiations (in particular, the signed agreement reached with the main creditors).
The petition is filed with the court registry in accordance with Article R. 626-45 of the French Commercial Code, which triggers the summoning of all interested parties to a hearing.
The court then assesses the veracity of the alleged difficulties, the debtor’s good faith, and whether the proposed adjustments are proportionate. If the agreement reached during the ad hoc mandate has secured the consent of the relevant creditors, the court may formally approve the substantial modification of the plan by judgment, thereby rendering the new commitments legally binding.
Effective coordination between prevention and judicial restructuring
This mechanism illustrates a particularly valuable interplay between out-of-court proceedings and formal insolvency frameworks.As a confidential negotiation tool, the ad hoc mandate helps prevent cyclical difficulties from spiraling into a failure to perform the plan, which could ultimately lead to its termination followed by the liquidation of the company. It promotes the continuity of the turnaround by allowing management to retain control of the company while preserving a climate of trust with financial partners.
Court approval, by contrast, provides legal certainty: it makes the new commitments binding on all parties and ensures the proper implementation of the amended plan under the supervision of the plan supervisor.
The company thus benefits from both the flexibility of out-of-court negotiations and the binding effect of a court decision.
Scope and key takeaways
The coordination between the ad hoc mandate and the amended safeguard plan highlights the increasing flexibility of French restructuring and insolvency law, a trend further strengthened by the reform introduced by the Ordinance of September 15, 2021.This approach enables a company already operating under a safeguard plan to absorb a shock, restore a realistic trajectory and mitigate the risk of a procedural "relapse”, without being forced into new insolvency proceedings.
From a creditor’s perspective, it offers a structured negotiation framework and enhanced transparency. Most importantly, it may ultimately maximize recovery rates compared with worst-case scenarios – namely, the termination of the plan followed by the liquidation of the company – which are often value-destructive.