Breaking the Deadlock through Law & Economics: How Can We Reconcile the Effectiveness of the French Law of Security Interests with French Insolvency Law?

Abstract

The aim of this article is to demonstrate that: • security interests are an advantage for secured creditors and, rather than being disadvantageous to the borrower, they are disadvantageous to other, unsecured creditors of the business; • French law of security interests can facilitate companies' access to credit (and thereby be effective) provided that the security interests of secured creditors survive the commencement of insolvency proceedings (procedure collective - a type of insolvency proceeding under French law which places the operation of the business under judicial control, gathers all of the creditors together and prevents them from bringing individual claims against the defaulting entity) against the debtor and therefore are resistant to the claims of other creditors during insolvency proceedings; • respecting the rights of secured creditors means that : - secured creditors are not treated less favourably during a rescue procedure of a debtor (that is to say, either a safeguard procedure - procedure de sauvegarde - or receivership - redressement judiciaire -) than if they had been in a position to enforce their security, which means that a rescue procedure is only justified if it allows greater value to be preserved than a legal liquidation procedure (liquidation judiciaire) which would force the business to cease trading; and - the preferential rights of secured creditors in relation to other creditors is actually respected during a rescue procedure; that is to say that shareholders and unsecured creditors absorb the losses of the business which is the subject of the rescue procedure before secured creditors. This means that such secured creditors must not be affected by insolvency proceedings while the shareholders and unsecured creditors retain any right and/or interest in the company (provided that the value of the encumbered assets remains greater than the sum of the debt owed to the secured creditors); • therefore: - for the purposes of approving the reorganisation plan, secured creditors should not sit in the same creditor committees as unsecured creditors (contrary to the provisions of French insolvency law); and - the French legislature must ensure that the sum of the privileges are not so sizeable that they drain the rights of secured creditors of all substance. It is only on these conditions that the dual pursuit of the effectiveness of the law of security interests and the ex ante effectiveness of insolvency law becomes viable in such a way as to make it easier for businesses to access credit; and • provided that judicial institutions are sufficiently modernised, it is entirely possible and is in the best interests of society to reconcile the pursuit of ex post effectiveness in insolvency law – that is to say preserving the debtor’s pool of assets by preventing secured creditors from enforcing their security rights during the insolvency proceedings when such measure would lead to a diminution in value of the assets - with the pursuit of effectiveness in the law of security interests. The French version of this article was previously published in the Revue Trimestrielle de Droit Financier - Corporate Finance and Capital Markets Law Review, n°4-2013/n°1-2014 under the title “Sortir de l'impasse grâce a l'analyse economique du droit: Comment rendre a la fois le droit des suretes reelles et le droit des entreprises en difficulte efficaces?”.