Perverse Effects of the Absolute Rule of Confidentiality Applicable to French Amicable Settlement Procedures Serving as Preventive Restructuring Frameworks - Advocacy to Legislators and Courts for More Transparency.
Revue Trimestrielle de Droit Financier n°1 2019
24 Pages Posted: 20 Jan 2019
Date Written: December 28, 2018
This rule of confidentiality, which covers both the opening of the two French amicable settlement procedures serving as preventive restructuring frameworks and their content, pursues the noble objective of enabling the debtor to negotiate more calmly the restructuring of his liabilities with his main creditors, without jeopardising his relations with other economic partners and his reputation on his market. With the exception of the (limited) publicity provided for the approval of a conciliation agreement when parties desire it, the confidentiality attached to amicable settlement procedures (serving as preventive restructuring frameworks) is not affected in any way. In this respect, we call it an "absolute confidentiality rule."
Legal doctrine, practitioners, and now case law strongly defend the absolute rule of confidentiality. We strongly disagree with this majority position.
This article highlights various perverse effects of the absolute confidentiality rule on the debtor companies themselves, on their creditors and shareholders and more generally on the French economy and financial markets as a whole. The absolute rule of confidentiality of amicable settlement procedures serving as preventive restructuring frameworks reduces the company's chances of recovery because it leads to:
• reinforcing the climate of mistrust between the company and its own investors, and is likely to unduly protect companies hiding the reality of their financial difficulties in their financial statements;
• encouraging transfers of undue wealth between the different classes of creditors of the debtor company (and its subsidiaries), depending on whether the creditors are parties or third parties to the ad hoc mandate or conciliation procedure;
• making it more difficult to seek financing, given the impact of the confidentiality rule on the secondary debt market;
• encouraging the debtor company to sell its assets under poor conditions, as it fails to organize open and transparent auction procedures; and
• hindering the implementation of an in-depth corporate restructuring plan or a change in governance, which may be essential to the company's survival.
We will see to what extent the absolute confidentiality rule sometimes unduly protects the interests of the controlling shareholder of a distressed company - often also a corporate officer - who, having virtually lost his investment, has nothing more to lose and prevents the change of control of the company and therefore a change of corporate governance.
Through this article, we hope to encourage public authorities and Courts to put an end to the absolute rule of confidentiality in ad hoc mandates and conciliation procedures and to create the conditions for greater transparency in insolvency proceedings. The expected developments in European corporate insolvency laws raise hopes of such a shift in approach, even if the European Commission is not beyond reproach. It is indeed unfortunate that the Commission made no mention in the draft directive of the need to ensure transparency in restructuring frameworks.
Keywords: preventive restructuring frameworks, amicable court settlement, european directive, transparency confidentiality, secondary mark
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