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Belvedere Shows Risks as French Insolvency Law Falls Short

Krzysztof Trylinski brought a five-year battle for control of Belvedere SA to an end in March 2013 with a deal that handed control of the French vodka-maker to bondholders. “The war is over,” the chairman said.

France is seeking to shorten restructuring disputes after more than 63,000 companies filed for insolvency last year, the most since 2009, according to data compiled by Altares SAS, a French information provider. Creditor advisers say the plans, which come into force on July 1, aren’t sufficient to allow lenders to take control of ailing businesses.

“This reform doesn’t go far enough,” said Arnaud Joubert, a Paris-based restructuring adviser at Rothschild speaking before a conference today in the French capital on the new rules. “The most important element that’s missing in this reform is the possibility to remove a company’s shareholder when he is acting unreasonably.”

The measures include encouraging the use of a court-appointed mediator and giving lenders the right to submit an alternative restructuring plan. Two proposals, allowing lenders to eject controlling shareholders and order a valuation of a borrower before restructuring talks, weren’t included in the final version of the rules, according to Patrick d’Herouville, the Paris-based head of value preservation at BNP Paribas, who also spoke at the conference organized by research group Droit et Croissance.

Ownership Rights

“In France, the shareholder is king in order to uphold ownership rights,” said d’Herouville. “Creditors also have rights with regard to the ownership of their debt and these are not taken into account as much.”

It takes an average of 1.9 years to resolve an insolvency process in France, compared with 1.5 years in the U.S. and one year in the U.K., according to data compiled by the World Bank as of June 2013. Creditors recover an average of 48 percent of their claims in France, 82 percent in the U.S. and 89 percent in the U.K., the data show.

“When you look at the time between the first difficulties of these companies and when the creditors take over, you’re looking at three years or more,” Mathieu Guillemin, a Paris-based managing director at Oaktree Capital Group LLC, said at the conference. “In the meantime, the company can lose ground and its key managers, so the value for creditors is reduced.”

Sophisticated Tools

This year’s reforms, passed by French lawmakers last month, do provide more sophisticated tools to restructure companies’ debt, said Laurent Assaya, a restructuring and distressed mergers and acquisition specialist at law firm Jones Day based in Paris. “If a company has to sell assets, this option will now be considered in mediation and conciliation proceedings before it files for liquidation.”

Belvedere’s Trylinski handed an 87 percent stake in the maker of Sobieski vodka to creditors in last year’s restructuring deal. The Beaune, France-based company sought court help after breaching terms of its debt, triggering years of legal battles in courts across France, the U.K. and Poland.

The spirits company sought protection using “Sauvegarde” rules introduced two years earlier. The procedures gave businesses time to reorganize provided they are solvent and deemed incapable of overcoming their difficulties. The rules were amended in 2010 with the introduction of a faster version of these proceedings.

The new measures create a third form of Sauvegarde which may confuse foreign investors, according to BNP Paribas’ d’Herouville. “It’s complicated in comparison with jurisdictions like the U.S. and the U.K. where things go fast and well and where the regimes have been stable.”

Colossal Lag

Vivarte SAS, a French retailer, chose last month to start a time-limited mediation process known as “conciliation” to help restructure 2.8 billion euros ($3.9 billion) of debt. Directories company Solocal Group plans to use the accelerated Sauvegarde mechanism to make all its lenders accept a debt extension request, it said last week.

“In France we are catching up on a colossal lag,” Helene Bourbouloux, a French judicial administrator, said at the conference. “I am sorry that it should take a reform every two years, but if we have to have another one next year, we will.”

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