A scheme of composition (concordat préventif de faillite) is a protective measure that enables traders or commercial companies in financial difficulty to come to an arrangement with their creditors and to avoid being declared bankrupt.
The scheme of composition must be accepted/approved by the court and the creditors.
As is the case for a suspension of payments, seeking a composition is a long and complex procedure involving a large number of parties/interveners.
Who is concerned
Any trader can seek and benefit from a scheme of composition.
The term 'trader' refers to 'any natural or legal person who carries out commercial activities as their profession'.
A scheme of composition may also be granted to operators of industrial establishments, although they are not legally considered traders.
A scheme of composition may only be approved for honest but unfortunate debtors; any failure to act in good faith leads to de facto bankruptcy.
The judge has the discretionary power to assess, on the basis of the facts and circumstances of the case, whether or not the debtor has acted in good faith.
How to proceed
Submission of the request
The debtor must submit a request on plain paper to the commercial district court (tribunal d’arrondissement siégeant en matière commerciale) with jurisdiction over his place of residence.
The following must be enclosed with the request:
- an account of the events on which the request is based;
- a detailed estimate statement of his assets;
- a list indicating the names of acknowledged or alleged creditors, their addresses and the amount of their claims;
- the proposed composition.
Appointment of a judge to establish a report
If the court deems the request admissible, it appoints a juge délégué (deputy of the presiding judge) to investigate the debtor's situation and establish a report within 8 days.
Two scenarios are then possible:
- the court deems that there are no grounds for pursuing the procedure to obtain a composition with creditors and issues a bankruptcy order; or
- the court accepts the scheme of composition request and sets the date, time and place for a meeting of creditors.
In the latter case, the debtor must deposit the sum deemed necessary to cover the costs of issuing the notice to attend the meeting with the court clerk.
Throughout the proceedings to obtain a composition with creditors, the debtor may not dispose of or mortgage any assets or enter into any commitments without the prior authorisation of the juge délégué.
Meeting of creditors
On the basis of the debtor's proposed composition, the juge délégué issues a notice to attend to the creditors by means of a publication in the daily newspapers and by registered letter at least 8 days before the meeting is held.
The juge délégué ensures that the composition procedure is carried out correctly and chairs the meeting of creditors.
On the day of the meeting, the juge délégué reports on the state of the debtor's affairs.
The debtor then presents the proposed scheme of composition directly to the creditors.
The creditors are then invited to declare the amount of their claims in writing and to declare whether or not they agree to the composition.
The composition may only be established with the approval of the majority of the creditors, representing 3/4 of the total claims accepted definitively or provisionally.
A creditor may be represented by an authorised representative.
Creditors who are unable to present themselves beforehand may submit any claims to the court clerk, along with the supporting documentation, during the week following the meeting of creditors and prior to the final deliberation meeting. They will then be required to accept or refuse the composition.
Following the meeting of creditors, the court convenes another meeting in order to definitively approve the composition.
Judgement approving the scheme of composition
At a second meeting, the court announces its judgement and approves (or does not approve) the scheme of composition.
Within 3 days of being issued, the judgement is posted in the auditorium of the court and extracts are published in the indicated newspapers.
If the scheme of composition is approved, the trader/debtor is automatically granted a temporary suspension of all subsequent enforcement measures.
The scheme of composition becomes binding on all creditors and only applies to liabilities incurred prior to the approval.
An appeal or objection by creditors or by the debtor vis-à-vis the judgement approving (or not approving) the composition does not suspend its execution.
However, the scheme of composition does not apply to certain types of debt, including:
- taxes and other public charges;
- debt covered by a lien, pledge or mortgage;
- debt in respect of alimony.
Creditors whose claims are covered by a lien, pledge or mortgage are not entitled to vote in the operations relating to the composition, with regard to their claims, unless they forgo their lien, pledge or mortgage.
Special case: composition agreement with assignment of assets (concordat par abandon d'actif)
The debtor may opt for a composition agreement with assignment of assets (concordat par abandon d'actif). In this case, the debtor and creditors must appoint one or more persons (liquidators) who shall be responsible for selling the assets of the debtor under the supervision of the juge délégué.
End of the composition
The scheme of composition is examined every 3 months by the juge délégué, who may be assisted by one or more experts.
If the debtor's situation has improved, the scheme of composition shall come to an end and the debtor shall be obliged to pay his creditors in full.
Any scheme of composition may be cancelled if the debtor is sentenced for reckless or fraudulent bankruptcy as a result of a fraud discovered after the approval of the composition and resulting from the concealment of assets or the exaggeration of liabilities. This cancellation automatically discharges all sureties.
The scheme of composition also comes to an end if the debtor is declared bankrupt.
If the debtor is declared bankrupt within 6 months following the termination of the scheme of composition, the date of cessation of payments may be set as the date on which the scheme of composition was requested.