The crisis has exposed the limitations of French bankruptcy law. The main criticism is that, when designing modern French bankruptcy law as from 1985, French lawmakers have never really tried to use the lessons learned from Law and Economics. French law has never perceived bankruptcy law as an extension of the negotiations of the parties and ignores the fact that shareholders’ interests can conflict with those of failing companies and that certain creditors have become the new residual owners of the company and are therefore in their capacity entitled to exercise their control over the fate of the company. Despite the finance 'boom', it is still difficult to distinguish the shareholder’s fate from that of the company, even in an insolvency situation. Various reforms in bankruptcy law have thus led to an automatic wealth transfer from creditors to shareholders, which is unjustified given the binding agreements they have entered into upfront. Furthermore, such treatment is all the more unjustified that shareholders and creditors are merely financial investors who have different risk/reward profile. The current situation reveals some deficiencies within French bankruptcy law, which is ultimately more 'pro-shareholder' than 'pro-debtor.' The law in its current state brings about a destruction in enterprise value as a result of: longer negotiations between shareholders and creditors, unsound compromises leading to an insufficient reduction in the level of debt in companies emerging from bankruptcy proceedings, forum shopping, and many hold out / free rider issues etc. which cannot be resolved.
The evolution of French corporate finance capital markets should lead French lawmakers to question the attractiveness of French bankruptcy law. Greater attention to the order of loss absorption between creditors and shareholders in France would allow the emergence of a Debtor in Possession (DIP) financing market as well as the development of bond markets.
Sophie Vermeille is Chairman and co-founder of the Institute Rules for Growth / Droit et Croissance, a French Think Tank. She is a French qualified lawyer in restructuring and corporate law at DLA Piper in Paris and previously worked at Freshfields Bruckhaus Deringer, Weil, Gotshal & Manges and Clifford Chance. She is also a Lecturer at Sciences Po Paris, HEC Paris II and Paris II University (Panthéon Assas) and a researcher in the law and economics department of Paris II University, where she is about to finish a Ph.D. on economics of insolvency law. She holds a Master degree in Business Law from Paris II University and a Master degree from King’s College London.
Sophie Vermeille has closely worked with the French government in order to promote an overhaul of French insolvency law.
She has published numerous articles demonstrating the insufficiency of French law, particularly with respect to insolvency. Some of them are available in English on ssrn (www.ssrn.com).