Commercial Debt Recovery in France


Dear Mr. Smith:

I have reviewed with interest your company’s French commercial debt collection problem.

I first wish to summarize some of the observations which I provided during our telephone conversation yesterday concerning the £ UK 40,000.00 owed by a French debtor.

Seller’s Lien on the Equipment Sold

If your company provided the purchaser in a timely manner with general terms and conditions of sale wherein it retained title to the equipment pending payment, your company may have retained a degree of protection in the event the debtor solvency becomes an issue.

Danger of Fraud

There is a certain level of fraud in this particular sector of French industry which may be important with respect to your accounts receivable.

Debt Recovery Procedures

For creditors, such as your company, we generally follow the following collection procedures:
If the solvency of the debtor is not known, it is often useful to order a credit report from a leading French credit reporting firm which may provides a recommended credit exposure.

If the debtor is not obviously judgment proof, we have three options:

1. seek to freeze by judicial order assets of the debtor (issue discussed bellow under the caption “Ex Parte Liens on Assets in France”), or

2. send a official registered demand letter in French from a French attorney to the debtor (“mise en demeure“), which starts the accrual of statutory interest on the debt, may get the debtor’s attention, and may lead to payment or a rescheduling of the debt and/or

3. bring legal action for payment of the debt.

Ex Parte Liens on Assets in France

In the United States and in a number of other countries, it is relatively difficult for a creditor to use an unpaid invoice to obtain with relative ease a lien on its client assets by way of a judicial proceeding in which the debtor/client does not receive prior notice. However, in France, the situation is different and at times more friendly to creditors.

If a purchaser of goods or services has not paid its bills or protested them in an appropriately specific manner setting forth reasons for non payment, it may be possible to obtain a judicial order to place lien on the debtor’s French assets having a value equal to the debt owed.

The ex parte lien process is straight forward, not complicated, not too costly and at time may be effective, depending on the tenacity of the debtor and its legal counsel.

Here are the principal steps:

1. The seller has delivered the goods or services.

2. The buyer has not challenged in a timely manner in writing to fact that the debt is owing.

3. The seller (usually by its legal counsel) sends by registered mail, return receipt, an official payment demand letter to the debtor (“mise en demeure“).

4. Approximately 15 days have already elapsed since delivery of the demand letter and no there is no response denying the debt has been received, the seller’s counsel files an ex parte lien request with the French Tribunal asserting the relevant facts and asking for an order authorizing a bailiff seize designated bank accounts, trade receivables, certain office equipment, real property and other assets.

5. Within two weeks, the Court may issue an order authorizing French bailiff to seize assets, such as a bank account.

6. If the seized assets are a credit balance in a bank account, the bank will freeze that amount until the French Tribunal decides who is entitled to the assets. Naturally, this may put the debtor under pressure to settle.

7. Finally, with respect to its claim, the seller/creditor promptly brings an action on the merits for payment of the debt and both parties are eventually scheduled to be heard on the merits by the Tribunal.
From the debtor’s point of view, if it believes or is prepared to allege that it has valid defenses (justification for non-payment), the expedited solution will not succeed.

In the event that liability is denied, the creditor would have no choice other than to abandon its claim or to implement the point 7 above proceedings and be prepared to be involved in litigation on the merits with the attendant costs and delays.

Between commercial companies, in France the claim would be heard by a Commercial Court. (For information on that subject see: French Commercial Litigation.)

Finally, it should be noted that, if the debtor goes into bankruptcy (the French equivalent of either Chapter 7 or 11 under the Unites States Bankruptcy Act) before the creditor obtains an executory judgment on the merits, the assets subject to the lien will be available to satisfy the claims of all the unsecured creditors. Under such circumstances, the seller/creditor will have gained no advantage by having placed the lien.

Thus, before proceeding to place a lien, the seller or its legal counsel usually runs a credit check on the debtor to gain at least a less-than-perfect understanding as to the degree of solvency of the debtor.

The Non-Conforming Goods Defense

Every exporter is familiar with the debtor defense that the goods received were not in conformity and therefore a trial on the merits in a distant land must be conducted before payment can be order by a Court. France has its fair share of importers which abuse this defense.

However, if the buyer does not raise this defense in a timely manner, the buyer may be deemed to have waived its right to use this defense. This timing issue is critical. it should be noted that the time in which the buyer must give notice of “rejection” under French case law, Article 2-602(1) of the American Uniform Commercial Code and the Articles 38 and 39 (1) of the Vienna Convention on Contracts for the International Sale of Goods are approximately the same. If an action is brought before a French Tribunal and French law is applied, it is highly likely that the French Tribunal will apply the Vienna Convention, if the other foreign party is not from a country which has ratified the Vienna Convention.

If:

  1. the amount of the debt is significant,
  2. payment is over due, and
  3. the non-conforming goods defense has not yet been raised,

it is often useful to consult with legal counsel before sending a threatening fax or letter, as such counsel may be able to guide the exporter is a manner which will could properly document the absence of a timely rejection.

Costs of Litigation in France

To litigate a commercial debt claim in France which goes all the way to a trial on the merits generally cost significantly less than a similar proceeding in the United States because there will be no depositions, no witnesses at trial and the trial may only last 30 – 45 minutes. (For information on that subject see: French Commercial Litigation.) But, since a trial on the merits invariably involves several rounds of exchanges of briefs and the unavoidable procedural hearings, litigating claims of less than $ 30,000 may not be may not be cost-justified.

French Bankruptcy

A French company in difficulty can seek protection from creditors.

A creditor must file a proof of claim within the prescribed time period or lose all rights to have its claim recognized. A proof of claim should be filed by the Creditor’s French legal counsel.

If the company is clearly insolvent, the commercial court will order its liquidation. However, The French system provides for a Chapter 11 type proceeding. The adoption of a workout plan is subject to the Judge’s approval. The French judge has the power to approve a 10 year workout plan without the creditors’ approval but cannot order creditors to agree to a partial cancellation of their claims. The voting of classes of creditors to approve a plan, as under the American system, does not exist under French law. A copy of part of the French workout law is available (click here). As a practical matter, as in the United States, big unsecured creditors are often pressured to agree to a partial cancellation of their claims in the hope of being paid the balance over perhaps 10 years.

N.B.: If the French French “administrator” (trustee in the insolvency proceeding) sends a certified letter to a creditor proposing that it agree to a partial cancellation of its claims, the proposal become binding unless on the creditor unless rejected by certified mail within 30 days as provided in Article L. 262-5 of the Commercial Code (click here). Since the letter will be in French, it is important to understand its significance in a timely manner.

Please call me, if you have any questions.

Sincerely yours,

Jonathon Wise Polier
Avocat aux Barreaux de Paris et de New York
Attorney-at-Law (Paris & New York)