Business in difficulty: how to prevent insolvency and choose the right procedure?

A drop in sales, the loss of an important client, excessively heavy bank loan repayments, the accumulation of tax or social security debts, or even a conflict between partners can quickly weaken a company's cash flow.

However, financial difficulties do not necessarily lead to receivership or liquidation. When identified early enough, several solutions exist to negotiate with creditors, restructure debt, and preserve business operations.

Ad hoc mandate, conciliation, safeguard, judicial reorganization or liquidation: the choice depends mainly on the seriousness of the difficulties, the viability of the company and the possible existence of a state of cessation of payments.

The key is to act before cash flow problems become irreversible.

What are the first signs of a company's difficulties?

A company's difficulties rarely appear overnight. They are generally preceded by several warning signs:

• sustained decline in turnover or margin;
• cash flow is regularly negative;
• increasing payment delays;
• unpaid tax or social security contributions;
• permanent use of bank overdraft facilities;
• refusal of financing or reduction of bank loans;
• loss of a customer, supplier or strategic contract;
• unpaid commercial rents;
• increase in litigation and formal notices;
• inability to finance salaries or current expenses;
• breakdown of relations with partners or investors;
• Business forecasts no longer allow for debt coverage.

Taken individually, each of these elements does not necessarily mean that the company is insolvent. However, their accumulation should lead the manager to quickly establish a legal and financial diagnosis.

This diagnosis must in particular focus on immediately available cash, maturing debts, business prospects, essential contracts, guarantees given and short-term financing needs.

How can you tell if a company is insolvent?

Cessation of payments constitutes the central criterion of insolvency law.

According to ArticleL. 631-1 of the Commercial Code, a company is in cessation of payments when it is unable to meet its liabilities as they fall due with its available assets.

Current liabilities include debts that are certain, liquid and due, for which creditors can demand immediate payment.

Available assets correspond to cash and readily available resources. Buildings, equipment, inventory, or receivables that are difficult to collect do not necessarily constitute available assets, even if they represent a significant value in the accounts.

Conversely, credit reserves and payment terms granted by creditors can be taken into account. A company facing cash flow difficulties is therefore not automatically insolvent.

This distinction is crucial:

• Before ceasing payments, the company can in particular resort to ad hoc mandate, conciliation or safeguard;
• After the cessation of payments, conciliation remains possible for a limited period, while judicial reorganization or liquidation must be considered.

In principle, the business owner must declare the cessation of payments within 45 days, unless they have requested the opening of conciliation proceedings within that period. The procedures for this declaration are outlined on the official portal Entreprendre.Service-Public.fr.

Therefore, determining the date of cessation of payments should never be approximate. It can have significant consequences for both the company and its manager.

What should I do before starting legal proceedings?

Before seeking the intervention of the court, several negotiations can be undertaken directly with the main creditors.

Depending on the situation, the company may look for:

• a deferral of bank loan repayments;
• an extension of the loan duration;
• a temporary capital franchise;
• a schedule with suppliers;
• a renegotiation of commercial rents;
• a tax or social security moratorium;
• a contribution to a current account or a capital increase;
• the entry of a new investor;
• the sale of non-strategic assets;
• a reduction or reorganization of costs;
• the sale of a loss-making business.

The negotiation must be based on reliable information: latest accounts, recent accounting situation, operating forecast, cash flow plan, detailed statement of debts and presentation of the measures envisaged.

It is often possible to request a coordinated payment schedule for certain tax and social debts from the Commission of Heads of Financial Services and Social Security and Unemployment Insurance Organizations, known as CCSF.

However, a payment extension is only useful if the company can simultaneously meet its existing debt repayment schedule and cover its new operating expenses. An unrealistic agreement generally only postpones the crisis.

When individual discussions are no longer sufficient, a preventive and confidential procedure can offer a more protective framework.

The ad hoc mandate: negotiating confidentially

The ad hoc mandate allows the manager to request the president of the court to appoint a professional to help him resolve the difficulties encountered.

Its mission may include, in particular:

• negotiate with banking institutions;
• to obtain extensions from creditors;
• reorganizing debt;
• seek funding;
• resolve a conflict between partners;
• prepare for the entry of an investor;
• to organize the transfer of a business or company.

The ad hoc mandate has three main advantages.

First, it is confidential. Its opening is not subject to a publication comparable to that of a collective procedure.

Furthermore, the manager retains control of the company. The ad hoc representative does not replace him.

Finally, the mission is flexible: its duration and objectives are determined according to the specific situation of the company.

The ad hoc mandate, however, does not automatically suspend creditor proceedings and cannot be used to impose an agreement on them. Its effectiveness therefore depends on the company's ability to initiate negotiations early enough. Its legal framework is governed by Articles L. 611-3 et seq. of the French Commercial Code.

Conciliation: seeking an agreement with the main creditors

Conciliation can be requested when a company encounters a proven or foreseeable legal, economic or financial difficulty and has not been in default of payments for more than 45 days.

A conciliator is appointed to facilitate the conclusion of an agreement with the company's main creditors and partners.

The negotiation may cover:

• debt deferrals or rescheduling;
• partial debt waivers;
• the granting of new funding;
• the modification of guarantees;
• the conversion of debt into capital;
• the entry of an investor;
• the sale of assets or a branch of activity;
• preparing for the sale of the company.

Like the ad hoc mandate, conciliation is in principle confidential. However, it allows for further action by having the agreement reached recorded or approved.

Approval can strengthen the legal security of the operation and allow persons bringing new cash or new goods or services to benefit, under certain conditions, from a privilege in the event of subsequent opening of collective proceedings.

The conciliation process is limited in time: it is open for a maximum period of four months, which can be extended by one month.

It must therefore be prepared in advance, with a serious diagnosis and a credible restructuring plan.

Safeguarding the business: restructuring the company before it ceases payments

Safeguarding is aimed at a company that is not in default of payments but is experiencing difficulties that it is unable to overcome on its own.

Unlike ad hoc mandates and conciliation, this is a collective and public procedure.

Its opening allows, in particular:

• to prohibit the payment of most prior debts;
• to interrupt or prohibit individual legal proceedings relating to these claims;
• to organize the continuation of the activity;
• to maintain the necessary contracts;
• to establish a plan for settling the liabilities.

An observation period allows for analysis of the company's economic and financial situation and the preparation of a safeguard plan.

Safeguarding can be a particularly effective solution when the business remains viable but the company needs to reorganize a debt that has become too heavy.

When the company has prepared a restructuring within the framework of a conciliation, the accelerated safeguard can, under certain conditions, allow a plan to be adopted quickly by the classes of affected parties.

The reform stemming from the ordinance of September 15, 2021, has profoundly renewed the rules applicable to major restructurings, notably through the generalization of classes of affected parties in cases meeting the legal requirements. These classes group creditors and, where applicable, shareholders according to their rights and ranking so that they can comment on the draft plan.

Judicial reorganization: continuing business despite the cessation of payments

Judicial reorganization concerns a company that has ceased payments but whose recovery is not manifestly impossible.

It pursues three objectives:

• to allow the continuation of the activity;
• preserve employment as much as possible;
• organize the settlement of liabilities.

The commencement of insolvency proceedings entails, in particular, a prohibition on paying most prior debts and the suspension of corresponding individual legal actions. Creditors must file their claims with the insolvency practitioner.

The activity can continue during an observation period during which the possibilities for recovery are examined.

At the end of this process, several solutions are possible:

• the adoption of a recovery plan;
• the total or partial sale of the company;
• Conversion to judicial liquidation if recovery becomes impossible.

The opening of insolvency proceedings does not necessarily mean the disappearance of the company. However, it presupposes that the new activity can be financed and that serious prospects for recovery exist.

Our article on the cost of judicial reorganization also explains why the cost of a procedure must be compared to that of a lack of anticipation.

The effects and the course of the procedure are also presented in the official information sheet relating to the judicial reorganization of a company.

When does judicial liquidation become necessary?

Judicial liquidation is initiated when the company is insolvent and its recovery is clearly impossible.

In principle, this leads to the cessation of business activity and the realization of assets in order to satisfy creditors according to their priority. However, a temporary continuation of business activity may be authorized when necessary to prepare for a sale or in the best interests of the creditors.

Liquidation may result in:

• the sale of assets;
• the sale of the business or a branch of activity;
• the termination of certain contracts;
• the dismissal of employees;
• the examination of actions taken before the start of the proceedings;
• the possible implementation of guarantees granted by the directors or partners.

It should therefore not be viewed as a mere formality of closure. Its preparation requires examining the assets, contracts, employees, personal guarantees and the potential risks of liability of the manager.

When a liquidation order appears to have been issued wrongfully or under questionable circumstances, legal recourse may be available. Our series on a company liquidated without having been properly notified highlights the practical difficulties faced by a company liquidated without its knowledge.

Which court should I contact in case of difficulty?

The competent jurisdiction depends on the activity carried out and the location of the company's establishment.

Since January 1, 2025, a pilot program has replaced the commercial courts of twelve cities with courts of economic activities. These courts are notably competent for ad hoc mandate procedures, conciliation, and collective proceedings within their jurisdiction.

The jurisdictions concerned include Paris, Nanterre, Versailles, Marseille, Lyon, and Le Mans. The official portal offers a simulator to identify the competent jurisdiction.

This development changes the jurisdiction involved, but not the need to intervene quickly as soon as difficulties arise.

How to choose the appropriate procedure?

The choice does not depend solely on the amount of debt. It requires answering several questions:

1. Is the company already insolvent?
2. From what date?
3. Is its business still economically viable?
4. Does it have the necessary cash flow to continue operations?
5. Which creditors are likely to accept a negotiation?
6. Are there any essential contracts or clients?
7. Did the manager or the partners provide personal guarantees?
8. Are a sale, a recapitalization, or the entry of an investor conceivable possibilities?
9. Are the difficulties temporary or structural?
10. What social consequences should be anticipated?

An ad hoc mandate may suffice to address a still limited difficulty. Conciliation may allow for a more organized restructuring. Safeguard proceedings become relevant when difficulties can no longer be overcome without judicial protection. Judicial reorganization must be considered when a cessation of payments is established but the continuation of business activity remains possible.

The correct procedure is therefore the one that corresponds to the actual situation of the company, and not the one that appears to be the least restrictive.

Why is it necessary to act quickly?

When it comes to business difficulties, time is often the most valuable resource.

Early intervention allows for:

• retain more solutions;
• preserve confidentiality;
• negotiate before the lawsuits multiply;
• reassure key partners;
• avoid the breach of strategic contracts;
• seek new funding;
• protect the value of the company;
• anticipate the situation of employees;
• examine the personal guarantees of the manager;
• prepare a credible plan.

Conversely, waiting until cash is completely depleted significantly reduces negotiation opportunities and can jeopardize a business that could have been saved.

Our team dedicated to companies in difficulty and restructuring supports managers, companies, shareholders and creditors in the diagnosis of difficulties, amicable negotiations and safeguard, recovery or judicial liquidation procedures.

Key takeaways

A cash flow problem does not necessarily mean that a company must file for bankruptcy. French law offers several tools to anticipate, negotiate, and restructure.

The starting point is to determine precisely whether or not the company is insolvent. This analysis determines access to an ad hoc mandate, conciliation, safeguard proceedings, or judicial reorganization.

The earlier the company acts, the more solutions it retains.

This article presents the general rules applicable as of the date of its update. It does not replace a legal and financial analysis tailored to the specific situation of the company.

Article written by Morgan Jamet, partner at the law firm Arst Avocats