What if your French contractor goes bankrupt?

Insolvency status has always existed. Nowadays an increasing number of businesses are becoming bankrupt due notably to the current economic crisis.

An unfortunate, but recurrent example is the case of a British citizen who has a house built by a French company. A contract will be entered into in full accordance with French legal requirements. All the French authorisations will be granted (ex planning permission, etc.).

If the company then runs into financial difficulties, it can declare itself bankrupt. The company director makes an official declaration to the Court to be placed in receivership.

As soon as the Court opens the insolvency proceedings, the company director may loose his/her power to manage the company because the Courts often appoint a receiver to take over the management of the company. A creditors’ representative will also be appointed.

From this moment on, the director is strictly prohibited from paying his/her creditors.

Often, the most important thing for the future home-owner is to have his/her house completed. The home-owner may find that he/she has paid more than the actual work completed.

It is important to note that the commencement of insolvency proceedings does not automatically terminate the contracts concluded by the insolvent entrepreneur with his/her clients. In other words, the future owner is not entitled to ask another company to finish the work because of the insolvency declaration.

In order to sort this situation out, future owners have to do two things:

Step 1 – Contact the receiver by recorded delivery letter to ask whether the latter is going to pursue the contract, i.e. the contract will remain valid and the entrepreneur must complete the work. Under French Law, the receiver must reply within one month. If he/she does not reply, then he/she is purported to have refused the contract continuation.

If the receiver decides to continue the contract, the original contractual provisions will apply. For instance, the entrepreneur cannot use his/her insolvency as an excuse to try to increase the price. The work will be completed by the insolvent entrepreneur.

If the receiver refuses to pursue the contract, the contract is automatically terminated, and the client is free to contact another company to finish the work. In this case, the client may have overpaid for the work actually completed. He/she will be a dissatisfied creditor. This is where step 2 is important:

Step 2 – Each creditor has to make an official declaration of his/her debt to the institutions of the insolvency procedure. Although the insolvent entrepreneur often cannot pay the creditors immediately, any assets/cash left at the end of the proceedings will be divided between the creditors. Only the creditors who have made the official declaration can hope to have a share.

It is possible that the person appointed by the Court to assess the different declarations refuses to take into account part or all of a creditor’s claim. An appeal procedure is possible in certain circumstances. There is often a short time limit for appeals.

Care must be taken when drafting the declaration because it will serve as the basis for any future discussion between the creditor, the insolvency institutions and the debtor.

As a precautionary measure, it is advisable to initiate step 1 and step 2 simultaneously.

The biggest difficulty with this system is that each step is encased within time limits. The receiver has to be put into formal notice within a month and the debt declaration must be issued within 2 months of the commencement of proceedings being published in the official press.

When living abroad it is often difficult to find out the exact date of publication.

Furthermore, those proceedings, difficulties and formalities have to be faced no matter what size the insolvent company is. Indeed, the size of the company is not a criterion for basic French insolvency law to apply. For example, this legislation would also apply if a builder doing a small repair job on your existing property, such as plumbing, goes into bankruptcy.

In conclusion, French legislation does not deprive the creditors of their rights and prerogatives as soon as their debtor is declared bankrupt, provided that the creditors respect a very strict two-stage procedure. It is obviously advisable to seek the advice of a French solicitor.

Michel Attal, Attorney-at-Law, Bright Jones, www.brightjones.com.