Bankruptcy Law

Originally dominated by the principle of equality of creditors, liquidation operations have been made extremely complex by the recognition of numerous rights and privileges, until now scattered across a number of codes. For the sake of clarity, Ordinance 2011-1193 of 15 September 2021 brought together virtually all  of the privileged claims and special security interests recognized by law within A …

Clarification of the distribution system

Originally dominated by the principle of equality of creditors, liquidation operations have been made extremely complex by the recognition of numerous rights and privileges, until now scattered across a number of codes. For the sake of clarity, Ordinance 2011-1193 of 15 September 2021 brought together virtually all  of the privileged claims and special security interests recognized by law within Article L. 643-8 of the Commercial Code, which now establishes the order in which distributions must take place.

A number of caveats are in order from the outset. Despite the attempt to rationalize and systematize the new text, a number of disruptive elements need to be taken into account. Firstly, it is important to bear in mind that distributions are made for each asset sold, and not for all the debtor's assets. As a result, the priority claims that take precedence over the special security interests, whether in movable or immovable property, encumbering the asset, may absorb the entire proceeds of the sale, without any creditor holding such security interests ever being paid off. Depending on whether the asset sold is movable or immovable, the rules governing the classification of privileges laid down in the Civil Code must also be applied, in particular those of Article 2332-1, which stipulates that, in movable property matters, special creditor priorities (which concern certain items of furniture) take precedence over general creditor priorities (which concern all items of furniture), those of Article 2376, which indicate that real estate privileges are general, and those of Article 2378, which emphasize that general real estate privileges take precedence over the preferential right attached to real estate pledges and mortgages. Secondly, Article L. 643-8 provides, as a preamble, that the classification defined is subject to rights of ownership or retention enforceable against the insolvency procedure, priority claims from the observation period and the receivership procedure: the holders of these rights or claims are not subject to the law of competition. Thirdly, the last paragraph of I emphasizes that the ranking order defined is without harm to “other preferential rights” not specifically referred to in the text, which may be interposed between the categories defined. Lastly, paragraph II of the text provides for a reserve to be set aside for the portion corresponding to claims on whose admission a final decision has not yet been taken, in particular the remuneration of corporate officers until such time as a decision has been taken on their case, as well as the portion corresponding to foreseeable legal costs.

Subject to all these reservations, the assets available for distribution after the exercise of the rights and privileges referred to in the preamble are allocated in the following order:

1° The unpaid subsidies provided for in Article L. 631-11. These are subsidies that the bankruptcy judge may grant to the manager of the legal entity and his family in the absence of remuneration paid during the observation period of the receivership preceding, where applicable, liquidation.  

2° Claims guaranteed by the priority claim established in Articles L. 3253-2, L. 3253-4 and L. 7313-8 of the Labor Code. This is the “superprivilege” of employees, which covers remuneration of all kinds due to them for the last sixty days of work, up to a monthly ceiling which may not be less than twice the ceiling used to calculate social security contributions, as well as related vacation pay. The super-privilege also benefits, in a criticized manner , the AGS, which is subrogated to the rights of employees when it has advanced the funds .   

3° Legal costs regularly incurred after the opening of the procedure for the purposes of the procedure, but unpaid when due.  

4° Claims guaranteed by the privileged claim provided for in Article L. 624-21. This privileged claim covers sums owed to agricultural producers by their buyers for products delivered during the ninety days preceding the opening of the procedure.  

5° Claims guaranteed by the privileged claim established by Article L. 611-11. The claims in question correspond to new cash contributions granted to the debtor with a view to ensuring the company's continued operation and long-term viability during the conciliation procedure.  

6° Claims secured by real estate collateral  classified in the order set out in the Civil Code . When two mortgage registrations, taken out on the same day on the same property, are in competition and the debtor's assets are insufficient to fulfill the rights of the holders, the distribution of funds is made by contribution, in proportion to the amount of the admitted claims . Furthermore, a creditor in whose favor two spouses with joint and several ownership of property have jointly and severally pledged a mortgage on a common property as security is not entitled to participate in the distributions if he or she has not declared his or her claim as a liability in the court-supervised liquidation of one of the spouses, but may only, in his or her capacity as a creditor of the other spouse, enforce his or her mortgage on the proceeds of the sale of the encumbered property, after payment of all admitted creditors . The Court of Cassation emphasizes that the bank's privileged claim (now replaced by the special legal hypothec of the lender of funds) may be exercised over the distributable assets of the debtor, according to its rank, even if its beneficiary is the subject of an action for damages for granting ruinous credit or abusive support .  

7° Wage claims that have not been paid when due and whose amount has not been advanced in accordance with Articles L. 3253-6, L. 3253-8 to L. 3253-12 of the Labor Code, under the conditions set out in Article L. 641-13.  

8° Claims guaranteed by the priority claim set out in 2° of III of Article L. 622-17 which remain unpaid at maturity (claims resulting from a new cash contribution made to ensure the continuation of the business for the duration of the safeguard procedure) and by the priority claim set out in Article L. 626-10 (claims resulting from cash contributions made to implement the safeguard plan).   

9° Claims arising from the performance of contracts pursued during the observation period of the safeguard procedure, which remain unpaid when due.   

10° Amounts advanced in accordance with 5° of Article L. 3253-8 of the Labor Code, under the conditions set out in Article L. 641-13. These are advances made by the AGS, up to a maximum amount corresponding to one and a half months' work, in respect of sums due during the observation period, during the fifteen days, or twenty-one days when a job safeguard plan has been drawn up, following the liquidation ruling, during the month following the liquidation ruling, for employee representatives, during the provisional business continuity authorized by the liquidation ruling and during the fifteen days, or twenty-one days where a job safeguard plan has been drawn up, following the end of this business continuity.  

11° Other claims not subject to the prohibition on payment of prior claims that remain unpaid, according to their rank.

12° Claims guaranteed by the priority claim of the Trésor Public established in Article 1920 of the General Tax Code, with the exception of claims of all kinds relating to indirect taxes and those mentioned in Article 379 of the Customs Code. The Trésor Public's privileged claim covers taxes of all kinds and assimilated taxes, tax and criminal fines, the fixed procedural duty referred to in Article 1018 A and claims of all kinds relating to indirect taxes, collected by public accountants.  

13° Claims secured by a pledge , by the lessor's priority claim under Article 2332 of the Civil Code, up to a maximum of six months' rent , and claims secured by the privileged claim under Article L. 141-5 et seq. of the Commercial Code  (vendor's privileged claim) .

14° Claims of all kinds in respect of indirect taxes and those mentioned in Article 379 of the Customs Code.  

15° Unsecured claims, i.e. claims which are not subject to any payment privileges, in proportion to their amount . An unsecured creditor who has benefited from an assignment of anteriority, mentioned in an everyday account contribution agreement, but who has not constituted a security, cannot claim any priority over other unsecured creditors . The same applies to an automobile pledge provided for in a loan agreement, which has not been entered in the special register provided for this purpose, so that the bank's claim must be admitted as an unsecured creditor under the company's liabilities . Creditors may furthermore contest the privileged nature of a claim, in order to have it admitted on an unsecured basis only, provided they have a personal interest distinct from that of other creditors in taking action where the success of their challenge could enable them to obtain a more advantageous position when distributions are made following the realization of the debtor's assets .

Art. L. 643-8, I, in fine C. com. itself recognizes that classification is without harm “to other preferential rights”.

See, in this sense, CA Toulouse, 20 January 2023, LawLex202300007241JBJ (LJ), holding that the AGS, which has assumed the super-privileged employee claims, cannot avoid the order of distributions before the bankruptcy judge by demanding repayment of the advance granted as soon as the first funds are received, since this right is attached to the person of the employee.

Cass. com., 6 May 2008, LawLex202300005452JBJ (LJ), emphasizing that an error concerning the address of the pledged business on the pledge and vendor's privileged claim registration forms, provided that it does not prevent third parties from making any useful enquiries, does not have the effect of depriving the registration of effect with regard to the debtor company, nor the creditor of his privileged rank.

Although the text does not expressly refer to the pledgee, it should be considered that this provision also applies to the creditor. On the rights of the latter in the context of distributions, see CA Caen, 29 April 2010, LawLex202300005608JBJ (LJ), holding that the sale of a pledged vehicle does not result in the loss of the pledgee's privileged claim when it is carried out without his knowledge; Cass. com, 3 December 2003, LawLex202300005609JBJ (LJ), holding that a pledgee who has neither duly declared his claim, nor been relieved of foreclosure, cannot object to the funds from the sale of the pledged asset being apprehended by the liquidator.

Cass. com. 11 June 2014, LawLex202100001833JBJ (LJ), emphasizing that sums recovered as a result of actions taken by the legal representative in the collective interest of creditors are not distributed among all creditors on a pound-for-pound basis but according to their rank.

CA Paris, 9 November 2017, LawLex202300007191JBJ (LJ).

Cass. com., 22 January 2002, LawLex202300005447JBJ (LJ).

Cass. com., 2 June 2021, LawLex202200003783JBJ (LJ).

See for applications, Cass. com., 6 February 2001, LawLex202300007260JBJ (LJ); 11 June 2014, LawLex202100003820JBJ (LJ); CA Aix-en-Provence, 21 March 1989, LawLex202300007268JBJ (LJ).

Cass. com. 21 September 2010, LawLex202100003074JBJ, holding that a mortgage claim takes precedence, in the order of payment of creditors, over wage claims not benefiting from the super-privilege, subsequent to the opening court ruling.

See Cass. com, 7 December 2004, LawLex202300007473JBJ, providing that the holder of a conventional mortgage registration must take precedence over the holder of the seller's privileged claim, if the latter has granted him an assignment of anteriority.

Cass. com., 5 May 2015, LawLex202300007482JBJ (LJ).

Cass. com., 23 May 2000, LawLex202300005265JBJ (LJ).

Cass. com., 22 January 2020, LawLex202300007035JBJ (LJ).

Cass. com. 18 July 1977, LawLex202300005644JBJ (LJ), holding that the privileged claim of the secured creditor may only be exercised over the proceeds from the sale of equipment, assigned as security for the loan granted to the debtor, subject to the privilege granted to employees in the event of opening of the procedure.

Rappr. Cass. com. 25 October 2011, LawLex202100001125JBJ (LJ), providing that the lessor's privileged claim applies to all claims arising from the occupation of the premises on any grounds whatsoever, and in particular to an occupancy indemnity.

Bankruptcy Law

935. Clarification of the distribution system

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935. Clarification of the distribution system

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