Insolvencies and Insolvency Regulation in France

Bachelor Thesis, 2009

57 Pages, Grade: 1,7


Table of Contents

1. Introduction

2. Bankruptcy Regulation – Aims and Characteristics
2.1 An Introduction to Western Bankruptcy Regimes
2.2 Bankruptcy Regulation in France
2.2.1 An Overview – The Post 1985 Situation
2.2.2 Early Reforms
2.2.3 The Reforms of 2006 and 2009
2.2.4 Review and Criticism
2.3 Comparing French and US Insolvency Regimes

3. Hypotheses
3.1 Hypothesis 1: The ratio of successfully organized companies rose in the course of the bankruptcy reforms.
3.2 Hypothesis 2: Equity returns of insolvency-struck companies are comparably lower previous to insolvency.
3.3 Hypothesis 3: Profitability of successfully reorganized companies is comparably higher than that of liquidated firms.

4. Data
4.1 The Initial Data Collection Process
4.2 Presentation and Interpretation of Data - Computation of Descriptive Statistics
4.2.1 Preliminary Assessment of the Quality of Gathered Data
4.2.2 Historical Development of the Occurrence of Bankruptcy Events
4.2.3 Successful Reorganization vs. Liquidation
4.2.4 Equity Returns
4.2.5 Firm Profitability

5. Summary and Conclusion

Appendix – Insolvent Company List


Index of Tables

Table I: The Characteristics of US and French Bankruptcy Regimes

Table II: Bankruptcy Procedures of formerly listed French companies by Year, from the main Dataset of this Paper

Table III: Bankruptcies in France by Year, Bankruptcy Development and GDP

Table IV: Overall Bankruptcy Procedures in France by Year and Outcome

Table V: Descriptive Statistics of yearly Log-Returns for listed French Companies in the Core Dataset, grouped by Status and Time Frame 1985-2009

Table VI: Descriptive Statistics of yearly Data on Profitability (EBITDA / Total Assets) of listed French Companies in the Core Dataset, grouped by Status and Time Frame 1985-2009

Table VII: Insolvent Company List

Index of Figures

Figure I: Bankruptcies of formerly listed French Companies by Sector 1990-2009

Figure II: Overall Bankruptcies and GDP Growth in France 1993-2008

Figure III: Overall Bankruptcy Procedures in France by Year and Outcome 2000-2008

Figure IV: Bankruptcies of formerly listed French Companies by Year and Outcome 2000-2008

List of Abbreviations

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1. Introduction

This thesis aims at delivering a documentation as complete as possible of bankruptcy events of formerly listed French companies over the time period from 1990 to 2009. The generated dataset is analyzed with regard to changes in the French insolvency framework.

To put this analysis into context, Section 2 gives an introduction to western insolvency regulation and portrays the French insolvency law framework with a special focus on reform efforts over the past two decades. The section concludes by comparing French and US regulations.

While Section 3 briefly states the three hypotheses which will be investigated in course of the analysis, Section 4 is concerned with the main dataset of this paper. At first, the data collection process is described, followed by an assessment of data quality. Subsequently, descriptive statistics corresponding to the dataset are computed and interpreted.

The analysis concludes that hints for a positive impact of the French reforms exist in the analyzed data and furthermore that equity returns and profitability of insolvency struck companies are considerably lower than corresponding figures of “healthy” companies over different time frames.

Section 5 completes the paper, summing up the results and reviewing the reformation efforts in their context.

2. Bankruptcy Regulation – Aims and Characteristics

2.1 An Introduction to Western Bankruptcy Regimes

Modern western bankruptcy laws reach as far back as to the 13th and 14th century. They emerged from the mayor trading centers in northern Italy (Venice, Florence, Pisa, Genoa) and quickly expanded to other European cities such as Marseilles, Lyon, Barcelona and Lübeck as the need for creditor protection and reliable outcomes in the case of financial distress of a trading partner rose with expanding economic activity and complexity. In an environment where great information asymmetries were a daily occurrence and financing was often based on personal relationships, the sudden dry up of a business’ or individual’s cash position was not an extraordinary event and could strike troubled and operationally healthy businesses to the same extent.

Rules were stated and enforced by commercial courts, which the merchants themselves installed. If necessary, decisions of the courts could be enforced by governmental agencies.

It is noteworthy that insolvency at this time and also for the upcoming centuries was generally considered a criminal offense, often penalized with prison sentences.

The so called Napoleonic Code of 1808, which was employed throughout whole Western Europe at that time, delivers a good example for rigid and repressive handling of insolvent borrowers throughout the 19th century. In 1866 prison sentences for bankruptcy were abandoned in France, followed by England in 1889.

In general, two major alternatives emerged, applicable when a debtor ran into difficulties resuming its payments: The restructuring of the business and its underlying debt or the liquidation of the debtor’s assets to at least partly satisfy creditors’ claims. The intention behind the restructuring option at that time lay in the potential to maximize recovery rates, by helping an in itself healthy but cash stripped business, which could at least earn its cost of capital, to remain in operation and generate cash flows for the benefit of creditors.

However, the objectives behind restructuring procedures today often comprise further aims in different countries, most prominently the continuation of the business to the benefit of other stakeholders, such as employees and suppliers.

Sgard (2006) analyzed 51 European Bankruptcy frameworks throughout the 19th and early 20th century and their role in the crafting of modern European regulations. He argues that broad, interlinked evolutions of bankruptcy laws across the whole continent and their time-shifted patterns of implementation lay the groundwork for today’s national frameworks, rather than country-specific features.

At present, the described partitioning of formal bankruptcy procedures can be observed in almost any western state, though the different regulations vary to large extents and are subject to reforms occurring at high frequency. The multitude in regulations may be explained by a state’s varying priorities in the protection of creditors, debtors and other stakeholders, as well as by different approaches on how to maximize the efficiency and effectiveness of bankruptcy.

According to Kaiser (1996) the efficiency of a bankruptcy regime can be measured by how effectively it minimizes costs associated with bankruptcy. Costs can be differentiated by their character - direct or indirect. Direct costs comprise administrational and judicial fees which are directly connected to the state of financial distress, while indirect costs cover the area of lost sales due to image damages, occupation of management’s time and agency costs, arising from information asymmetries. Both cost types naturally increase with a delay of the insolvency process and therefore it is important that the legal framework can resolve the situation in a timely manner while providing regulation which minimizes the emergence of these costs itself.

Direct costs can be reduced by streamlining the process and concentrating decision making power. A way to tackle indirect costs is to focus on the source of agency problems resulting from information asymmetries. This can be done for example by implementing certain reporting requirements or installing impartial administrators which concentrate decision making power. To ensure that the process is completed in a timely manner, it is also essential to provide the party in control of the firm - often a court appointed administrator - with corresponding incentives.

The following paragraphs depict how legal frameworks in France and the US try to implement these goals and how reformation efforts in France over the past two decades might have affected the effectiveness of the regulation.

2.2 Bankruptcy Regulation in France

2.2.1 An Overview – The Post 1985 Situation

Typically for western insolvency regimes, the French regulation of 1985 provides different procedures for liquidation and reorganization of distressed firms, which were explicitly introduced for the first time by a major reform in 1967.

Though, the 1985 framework was subject to modifications over the following two decades it will be illustrated here, as the updated versions build on it to a large extent and it is therefore helpful for the illustration of the overall reform process.

The French bankruptcy regime is special in several ways:

Firstly, the focus heavily lies on increasing the chances for continuation of the firm to preserve employment, even if this compromises creditor’s interests and may result in a net loss of welfare. The law explicitly states the aims of insolvency proceedings in the following order: Keep the firm in operation, secure employment and thirdly, satisfy the creditor’s claims. This in mind, it can be argued that the French regulation is relatively creditor unfriendly. Davydenko and Franks (2005) come to this finding by analyzing a country’s bankruptcy regulation’s impact on recovery rates. They find recovery rates in France to be significantly lower than in Germany or the UK while – surprisingly – loan spreads in the three countries are very similar. They also conclude that banks try to circumvent negative impacts of national insolvency regulation on their business by adaption of loan contracts. An example for this is the common practice of French banks to heavily rely on guarantees and receivables as collateral, because these asset classes cannot be diluted in a bankruptcy process to satisfy state’s (e.g. judicial fees) or employee’s claims.

The creditor-adverse environment in France is also reflected by the LLSV scores for creditor rights by La Porta et al. (1998) that is zero for France, three for Germany and four for the UK on a scale ranging from zero to four, four indicating greatest creditor-friendliness. The framework takes into account, among other aspects, qualitative characteristics of the national regulation such as the existing of supra-priority financing (explained below) or the powers of different parties involved in the bankruptcy procedure.

The second special aspect of the French regulation is that the authority of the court during reorganization procedures is exceptionally strong. For example, it has the power to order and design debt restructuring and officially takes over most of the rights of the company’s former management. This ensures great capacity to act and can significantly speed up the bankruptcy process as lengthy negotiations between debtors and creditors are averted. However, this also implies that the state should have the necessary expertise to make economically sound decisions especially in uncertain times.

Thirdly, the options of liquidation (liquidation judiciaire) and reorganization (redressement judiciaire) are complemented by a third option, the conciliation agreement (réglement amiable), which offers a framework for cooperative and confidential reorganization of debts. Later reforms even introduced a fourth option, which will be discussed below in some detail. The different procedures available under the 1985 framework will be outlined throughout the following passages.

The mentioned conciliation agreement (réglement amiable) is an option to secure the firm’s survival outside of official bankruptcy, which is unique among western country’s insolvency frameworks. The process is designed to only be initiated by firms which are not yet in cessation of payments but experience adverse financial circumstances that could lead to bankruptcy in the near future. Its focus lies on the reorganization of debts through cooperative negotiation with the main creditors. One of the main features is its confidentiality, avoiding adverse effects of official bankruptcy such as indirect costs resulting from the damage to the firm’s image, the dry up of financing or the jeopardizing of existing or new contracts with customers or suppliers. The court appoints a conciliator which is usually an expert for this type of negotiations while the firm’s management retains full control over business operations, as the conciliator’s recommendations are non-binding. However, reached agreements, are compulsory. The conciliator’s main function in the process is to lower reorganization costs through the removal of information asymmetries and the mediation of arising conflicts of interest.

In contrast to the French judicial reorganization procedure, the réglement amiable allows the creditors to retain a great deal of power throughout the process, as their conformity is needed to accomplish any reorganization agreement. Therefore, creditors have an incentive to positively contribute to the firm’s survival efforts even if this means concessions regarding the net present value (NPV) of underlying loan contracts through stretching of payments or readjusted interest rates.

Nevertheless, the procedure holds a fundamental weakness, as pointed out by Kaiser (1996). Since negotiations can, due to feasibility, only be held with a limited number of creditors, agreements over the restructuring of debt contracts are obviously only effective for the participating creditors. Should the firm, regardless of successful negotiations, move into formal bankruptcy later on, creditors who partook in the process enter the formal procedure with their reduced claims only. This might be a reason why this option, despite its obvious benefits for both parties, has been rarely used in practice.

If a firm is in cessation of payments due to financial difficulty (and only if this is the case), it is normally moved into a judicial arrangement (redressement judiciaire), the official restructuring procedure. It can be initiated by either creditors or the debtor, whereas the latter has strict reporting requirements when it observes evidence of the firm sliding towards financial difficulty. Failing to do so may result in severe criminal prosecution. The intent behind these rigorous requirements might be to ensure exposure of possible bankruptcy candidates early to augment the chances of successful reorganization. To this extent, such measures are also unique in the range of western bankruptcy regimes.

The judicial arrangement is divided into two phases. The first phase serves the purpose of an observation period and can last up to 18 months. During this time frame a sound plan of reorganization has to be prepared, which includes the restructuring of debts and the operational business. Debt restructuring usually happens with regard to contract maturity, overall repayment or interest rates; in practice, creditors have to decide either to accept a relatively large write-off and cash in a small sum immediately or to opt for full, but considerably delayed repayment.

The most power throughout the procedure is transferred away from the company’s management to a court appointed administrator and the role of the creditors is diminished as they are only represented by a single creditor’s representative, who’s only right is to provide non binding proposals. Furthermore, an automatic stay on assets is imposed on all creditors’ claims (which includes the suspension of interest accrual) while supra-priority financing is also made available. This means that providers of new credit during the reorganization process are treated with superior seniority, should the firm finally slide into liquidation. This, of course adversely affects the position of the other creditors.

During the second phase - if it is reached - the reorganization plan is normally executed. This can also comprise a sale of a troubled firm (plan de cession). Here, again, the French bias towards the interests of specific stakeholder groups - especially employees - clearly comes to sight, as the court has to respect the constraint to choose the bidder with the highest prospects for sustainable future employment. The successful bidder has to obligate himself to pursue full pre-distress employment and continue contracts with existing firms which are viable to the business, while the counterparties of these contracts are also obligated to resume their contract fulfillments, besides possible financial risks. Under the 1985 regulation the court had the right to fully write off secured loans of the troubled firm in the event of a sale. This changed with a small reform in 1994 which strengthened creditor’s rights. Secured debt could no longer be written off.

When reorganization, however, is not deemed a feasible option in the first place or the court comes to this conclusion through its considerations during the observation period, the firm will be moved into official liquidation (liquidation judiciaire), which is the French counterpart to the US Chapter 7 proceedings.

2.2.2 Early Reforms

The French framework went through numerous reforms over the last two decades. Their fundamental characters will be portrayed throughout the following paragraphs, focusing on how the introduced changes could have affected bankruptcy costs, procedure efficiency and the ratio of reorganization versus liquidation.

In 1994 a first update was introduced to the 1985 regulation as creditors, which saw their rights severely impaired, exerted increasing pressure on the legislature. The main feature of the revisal was - as mentioned above - the abatement of the direction that a potential buyer of a troubled company could write-off secured debts. This option was often exploited by companies who designed artificial takeovers to erase the company’s liabilities.

Other changes included the obligation on state owned companies which receive payments from private companies, to immediately report a cessation of payments to the commercial court. In summary, the main purpose of this relatively small amendment was to streamline the procedure and to close loopholes for misconduct, thereby reducing agency costs.

Through the mid 1990ies public disquiet emerged on the impression of a fundamental malfunctioning of the French business-law framework. The conduct of private and state representing individuals (such as commercial court judges) was thinly monitored and cronyism was no exception. An illustrating example is the case of two insolvency practitioners who were involved in the vanishing of 200 million Francs (around 30 million Euros) in 1997 through a corporate restructuring process, which became known as the Sauvan-Goulletquer scandal, named after the involved individuals.

The French legislature reacted through protracted reformation efforts to the business and especially insolvency law in the years from 1998 to 2002, which have to be seen in the context of larger reforms to the whole judiciary system. Changes stretched from broad overhauls of the entire commercial court system to mandatory training measures for insolvency practitioners and substantially strengthened observatory functions of the state. New remuneration standards for insolvency practitioners and administrators were introduced as well. The actions were mainly focused on creating more transparency and preventing misconduct and fraud by transferring more power from practitioners to commercial courts, thereby reducing direct and indirect bankruptcy costs. The overall logic of the specific bankruptcy procedures, however, remained unchanged.

2.2.3 The Reforms of 2006 and 2009

While the previously mentioned modifications focused on streamlining the overall process and fixing obvious shortcomings of the judiciary system itself, which abetted fraud and misconduct, the reform of 2006 introduced major procedural changes which were updated yet again in early 2009.

Through the first half of the present decade the ratio of bankruptcies ending in liquidation was at historical highs, way above 90 percent, in conjunction with rising overall bankruptcy events (this figure rose from 38.129 in the year 2000 to 43.231 in 2005, source: Institut National de la Statistique et des Etudes Économiques, INSEE). Data on the number of bankruptcies and the proportion of companies being liquidated versus successfully reorganized will be presented and thoroughly discussed in Section 4 of this paper.

The overall development led to rising discontent with the system and critics deemed it as still too ineffective, missing its key objective that was to preserve companies from liquidation and thereby protect employment.

A new reformation act, called the “Law of the Safeguard of Companies” (Loi de Sauvegarde des Entreprises), which came into effect on January 1, 2006 introduced profound changes regarding the different procedures dating back to the 1985 reform and even introduced a completely new option oriented towards the US Chapter 11 procedure. The subsequent passage illustrates these changes by procedure.

Two major changes were made to the original conciliation procedure (réglement amiable). Firstly, the accessibility of supra-priority-finance, previously only provided under the reorganization option, was made available to improve the supply of liquidity. Secondly, the accessibility of the procedure was altered by allowing firms to enter it by only showing potential difficulties (versus current difficulties in the old design) and by also making it available to firms that are already in cessation of payments for up to 45 days.

The creditors’ role was strengthened in the judicial arrangement (redressement judiciaire), as receivables, which had not been yet filed with the receiver, were no more deemed unrecoverable under the new law.

Some minor changes were introduced to the liquidation procedure to speed up the process. Among them was a new simplified option for small firms, which do not hold real estate, to be liquidated more quickly to the benefit of creditors.

However, the core of the new reform was the introduction of the completely new safeguard procedure (procedure de sauvegarde). It has been designed to allow firms that are not yet insolvent but anticipate financial difficulties to stop the situation from worsening and, if possible, turn the business around or heighten the chances of successful reorganization in later bankruptcy proceedings. The designated outcome is a safeguard plan, which details how the firm will restructure its assets and operations and how debt is to be rescheduled. In its essence it resembles the US Chapter 11 option, as it allows the management of the insolvent firm to retain most of its power and promotes cooperation between debtors and creditors. The main difference to the conciliation proceedings is that an automatic stay on assets is imposed throughout an observation period lasting up to 18 months, removing the main barrier to fruitful negotiations during conciliation. It is therefore a compromise between the conciliation agreement (réglement amiable) and the judicial arrangement (redressement judiciaire). Creditors, as in the US, are represented by two creditor committees, one for the financial institutions and one for the firm’s suppliers. This is, however, only applicable for larger corporations.

In summary, the aim of the reform was to heighten the chances of a successful reorganization or turnaround by introducing new options and allowing for earlier precautionary measures. By strengthening creditor’s and debtor’s rights through the new sauvegarde procedure, negotiations and cooperation should allow for solutions where state appointed administrators had previously failed.

The 2006 reform was recently revised by an ordinance in December 2008 that came into force on February 15, 2009. Its aim was to remove obvious flaws, many of which surfaced during the prominent safeguard procedure of the Eurotunnel Group. Among the most important changes were relaxed entry conditions, a new option for management to suggest an insolvency practitioner to attend the process, simplified voting rules for the two creditor committees and new special rules for bondholders and private equity investors. In a nutshell, the adjustment should foster the usage of the procedure by further strengthening creditor’s and debtor’s rights, thereby making it more attractive.

2.2.4 Review and Criticism

Kaiser (1996) evaluates the 1985 framework by pointing out that by giving commercial court representatives broad powers while simultaneously removing debt and equity holders from the restructuring process, reorganization costs resulting from information asymmetries and conflicts of interest can be effectively minimized, offering an advantage over the US Chapter 11 proceedings. However, as the percentage of successful reorganizations remained low, these benefits did not seem to materialize. As a reason for this he asserts that the three stated aims (maintain the firm in operation, preserve employment, satisfy debtor’s claims) stand in conflict to one another, as under the proposition to maintain current employment levels and contracts, an otherwise viable firm cannot cut its cost of operation sufficiently to survive. He concludes that the French regulation fails because it is “trying to achieve too much”. The reforms of 2005 and 2009 did not resolve this problem of conflicting restructuring aims but tried to overcome issues arising from the barring of creditors during the restructuring process.

Moreover, the new safeguard procedure creates further problems common to the US Chapter 11 proceedings, as it quasi-promotes rent-seeking by management, due to granting it extensive power in the process, as pointed out by Weber (2005). For example, management could use its authority to try to extract as much value out of the struggling company as possible for individual benefit (e.g. by altering the remuneration structure) in the prospect of a possible liquidation.

Cavalier (2006) argues that under the 1985 framework the need for a cessation of payments, which has to happen before a company is able to enter restructuring proceedings, does not give consideration to the case where a firm is still able to satisfy its payments but anticipates severe financial trouble in the near future. The inability of companies in the described situation to enter bankruptcy proceedings at an early stage therefore compromises its chances of being successfully restructured. This issue is specifically addressed by the new safeguard procedure, as it is designed to be employed at an early stage of corporate difficulties.

In a nutshell, the reforms tried to alter the restructuring environment to increase the chances of successful reorganization. Cavalier (2006) expresses doubts that the reforms will have a positive effect on the share of successful restructurings as he sees a major problem in the prominent role of the state and its lack of business expertise in the most frequently used judicial arrangement (redressement judiciaire).

It is interesting to see if the modifications to the French law indeed had an impact on the number of successful restructurings and their share compared to overall bankruptcy procedures. This question will be discussed later on in Section 4 of this paper.

2.3 Comparing French and US Insolvency Regimes

The US regulation is naturally the most prominent among all western insolvency frameworks. In contrast to the French law, it only allows for two key options described in the following chapters of the US bankruptcy code:

Chapter 7 – Regulating the liquidation of companies.

Chapter 11 – A framework for reorganization, comparable to the French safeguard procedure (procedure de sauvegarde).

Both procedures are available to businesses as well as to individuals, though Chapter 11 is mostly used by corporations. During Chapter 7 proceedings a state appointed trustee is responsible for the preliminary continuation of the business and the sale of all the company’s assets or parts of the company as a whole for the benefit of the creditors. Consequently, the state takes over major control rights with the intent of an efficient and fast liquidation. The procedure is very similar to the French liquidation judiciaire.

Either creditors or the debtor are allowed to file for Chapter 11 proceedings. The initiation of formal bankruptcy instantly invokes a stay on creditor’s debt collection rights and on lawsuits dealing with such affairs. At the same time, creditors are welcomed to grant additional supra-priority finance. They are also encouraged to form creditor committees (one for secured and one for unsecured creditors) to simplify negotiations and speed up the process.

The court initially checks for so called preference payments, meaning transactions shortly before the bankruptcy declaration, made by the management of the company. If such payments are detected and deemed fraudulent by the court, the amount will be added to the bankruptcy capital. This measure is designed to prevent the excessive outflow of funds shortly prior to or during bankruptcy proceedings to protect potentially viable core business models from further cash stripping.

The debtor maintains control over the insolvent company, which often implies that most of the pre-insolvency management is retained. It is also his exclusive right to file a reorganization plan during a 120 days period after the initiation of the proceedings. The strong empowerment of the debtor is to secure an effective role in negotiations with creditors so that these are “forced” to participate in the process instead of pushing for quick liquidation, which might offer them superior asset recovery prospects.

The reorganization plan has to include a feasible business, financing and debt repayment plan, which in practice often includes the issuance of new debt or equity to creditors or the arrangement of debt-equity swaps. In contrast to the French reorganization procedure (redressement judiciaire), where the court has the right to design and impose the measures of the reorganization plan, in the US at least one creditor committee is required to approve the measures by a two-thirds majority in debt value. Chapter 11 is resembled by the French safeguard option by this and most other aspects.

The Chapter 11 procedure was reformed in 1994 to return some power to creditors. Major changes included the option to appeal, should the court extend the exclusivity period (for the debtor to file a reorganization plan) and the right to more timely responses from court when claiming relief from the automatic stay. Table 1 summarizes key aspects of the French and US regulations and allows for direct comparison.

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Table I: The Characteristics of US and French Bankruptcy Regimes

The table compares US and French insolvency regimes and the different procedures available by major aspects and also documents changes, introduced by the French reforms during the 1985-2009 period (most prominently the reform of 2005). The term “Main Intent” describes the government’s central ambition when designing the framework. The line “Control Rights” addresses which party has most decisional power during bankruptcy proceedings. The line “State’s Role” describes the role of the government or government courts during the procedure. The expression “Initiation Right” describes which party is eligible to initiate insolvency proceedings. The term “Automatic Stay” denotes if an automatic stay on assets during the specific procedure is available to debtors, meaning that creditors cannot satisfy claims regarding debt or interest payments. The LLSV Score is an instrument, introduced by La Porta et al. (1997), to rate the creditor friendliness of a national business law framework, which ranks from zero to four, four implying highest creditor friendliness.

3. Hypotheses

Against the background of changing insolvency laws and with a dataset at hand, covering corporate insolvencies of the past twenty years, it is appealing to search for impacts of the changing regulation as well as for other trends and developments. The dataset also allows comparing the equity returns and profitability data of companies, which become insolvent at some point in time and those that stay in business over the whole period of the analysis. Specifically, the following hypotheses will be discussed:

3.1 Hypothesis 1: The ratio of successfully organized companies rose in the course of the bankruptcy reforms.

One of the stated major intents of the French reforms (especially the 2005 Loi de Sauvegarde reform), was to alter a company’s chance of survival during bankruptcy proceedings. The introduced measures range from a completely new procedure made available to improved availability of supra-finance and measures to detect and tackle financial difficulties at an early stage. By exploring available data from 1990 to 2009 this paper tries to find proof for improved conditions and reform impacts.

3.2 Hypothesis 2: Equity returns of insolvency-struck companies are comparably lower previous to insolvency.

It can be assumed that capital markets incorporate available information on corporate financial distress according to the efficient-market-hypothesis formulated by Fama (1970). It is not the intent of this paper to discuss the efficiency of markets. However, it is interesting to investigate if and, if yes, how early and on average to what extent capital markets “anticipate” a corporate collapse. For this purpose, logged equity returns of insolvency struck companies are compared to those of “healthy” firms over a time frame ranging from 1985 to 2009.

3.3 Hypothesis 3: Profitability of successfully reorganized companies is comparably higher than that of liquidated firms.

Firm profitability should logically be negatively correlated with the risk of corporate failure. To study this relationship, the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) / Total Assets ratio was computed for different subsamples of insolvency-struck and non-insolvent firms, also over a period from 1985 to 2009.

4. Data

4.1 The Initial Data Collection Process

The core dataset of this paper documents 181 insolvencies of formerly listed French companies between 1990 and 2009. The focus on listed companies was simply made for the reason of good data accessibility. Data collection was conducted as follows:

To initially accumulate a broad source of raw data, all French company names contained in the financial databases of Thomson Datastream (2.469 firms) and BvDEP Osiris (1.565 firms) were extracted together with company-related data such as ISIN, industrial sector and financial information, if available. Both company lists were then merged into one dataset and duplicates were erased. As the Osiris database also contained some unlisted firms, these had to be filtered out (183 names). The merged list, containing 2.504 names, could now be pre-filtered by the extracted company information to find evidence for mergers, takeovers and company insolvency (e.g. when firms were delisted or deemed inactive by the databases).

In about 1.600 cases a manual check for insolvency was conducted, precisely if:

- The company was deemed inactive by the databases.
- No definite information was available in the database.
- An active firm’s stock price lost more than 75 percent in value year over year.
- A merger or acquisition took place, as mergers or takeovers frequently occur when a company is in judicial restructuring and gets absorbed by a competitor or supplier. Therefore, Mergers and Acquisitions (M&A) at the time of delisting do not rule out insolvency.

Manual checks were performed by searching the LexisNexis database for press releases, stock-exchange-bulletins, or newspaper reports on a company’s insolvency or merger. LexisNexis - owned and operated by the Reed-Elsevier Group - is a provider of business, finance, legal and press information and features around five billion articles.

In order to enhance the precision of the check, two supplementary online databases were consulted in some cases: and the French provider

After the completion of the initial check for bankruptcy, the following additional data was gathered via LexisNexis for each insolvency identified:

- The type of insolvency procedure (e.g. redressement judiciaire).
- The date of its initiation.
- The end date of bankruptcy proceedings or the initiation of a subsequent procedure (e.g. a redressement judiciaire is frequently followed by a liquidation judiciaire).
- The process’ final outcome.

In a third step, further data was sourced from Thomson Datastream. The Total Return Index and the financial parameters EBITDA and Total Assets were extracted for every of the 2.504 firms, if available. The Total Return Index follows a firm’s stock price, adjusted for dividends and events such as stock-splits to reflect the total return an investor would have realized, investing in a company’s stock .

The final dataset contains information on 181 insolvencies, whereas a corporate failure was ruled out in 2.161 cases. For 108 firms, the information available was not considered sufficient to rule out or confirm bankruptcy. The full listing of insolvent companies is provided in the appendix.

To complement the self-generated dataset, statistics on bankruptcies and Gross Domestic Product (GDP) were collected from the French agency INSEE. They were used for comparison and validation and proofed explicitly helpful in gaining additional insight on the ratio of successful restructurings.

4.2 Presentation and Interpretation of Data - Computation of Descriptive Statistics

4.2.1 Preliminary Assessment of the Quality of Gathered Data

When looking at the self-generated insolvency dataset, it is striking that the number of identified insolvencies from 1990 to 1995 is distinctively lower compared to the following years. This could have multiple reasons. Firstly, the number of IPOs in the second decade and especially around 1997-2000 – the New Economy bubble - was assumed to be much higher than during the preceding decade. This is also reflected in the fact that more than ten percent of the identified insolvent companies were in the software and computer services sector. This figure amounts to almost 29 percent when adding the technology, media and electronics sectors. Figure I gives an overview of the sectors where identified companies were previously active. Another reason could simply be the improving availability of data on corporate insolvencies over time. As this question cannot be answered with certainty, conjectures based on that data about the trend of insolvency figures over this time period should be made with precaution. In this context it is also worth mentioning that no insolvency of a publicly quoted French company could be identified in the year 1994.

In eight cases no data could be retrieved on the outcome of an insolvency procedure and in seven cases the outcome was not yet certain because the procedure was still open at the time of data collection.

Considering these points, it becomes clear that this compilation of insolvencies can naturally not claim to be complete or entirely free of inaccuracy, though great carefulness was employed in the generation process to deliver a thorough presentation.

Table II provides a synopsis on the identified insolvencies contained in the main dataset.

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Figure I: Bankruptcies of formerly listed French Companies by Sector 1990-2009

Source of Data: Thomson Datastream / Worldscope, LexisNexis, BvDEP Osiris, and (September 2009).

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Table II: Bankruptcy Procedures of formerly listed French companies by Year, from the main Dataset of this Paper

The table gives an overview of the identified insolvencies in the main dataset of this paper by year. The second column lists the number of all corporate insolvencies per year. The column “Instant Liquidations” comprehends all insolvency procedures where the company was liquidated immediately by order of a commercial court without introducing an observation period to assess the viability of the business. In contrast, “Initial Reorganizations” describes the number of cases where a restructuring attempt was ordered. This column is divided by the two official reorganization procedures available: The judicial arrangement (redressement judiciaire) and the safeguard procedure (procedure de sauvegarde), which was introduced in 2005. The column “Reorganization Outcome” denotes the occurrence of the different possible outcomes of a restructuring procedure. In some cases, no information was available or the reorganization was still in progress at the point of data assessment so that no conclusion could be made. This is especially true for the years 2008 and 2009. The column also states the “Success Rate” (business continuations divided by reorganization procedures initiated that year), where takeovers and mergers which preserve the core business of the company also count as a continuation. If the firm was fragmentary liquidated, meaning that whole business units were taken over, this was counted as liquidation because the business was not taken over as a whole entity and thus the liquidation aspects can be seen as dominating. The expression “Continuation Rate” states the number of continuations divided by all bankruptcy procedures initiated that year, differentiating between counting M&A as a successful reorganization or not. The term “Totally Liquidated” comprehends the total number of French businesses finally liquidated.

Data originates from Thomson Datastream / Worldscope, LexisNexis, BvDEP Osiris, and databases (September 2009).

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Figure II: Overall Bankruptcies and GDP Growth in France 1993-2008

Source of Data: INSEE (March, May 2009),

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Table III: Bankruptcies in France by Year, Bankruptcy Development and GDP

The table lists the overall number of corporate collapses in France from 1993 to 2008, the development of this figure and yearly real GDP growth rates. GDP is calculated by volume, the base year is 2000.

Data was taken from INSEE (March, May 2009),


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Insolvencies and Insolvency Regulation in France
LMU Munich  (Institute for Finance & Banking)
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The thesis includes a detailed and complete list of all bankruptcies of formerly listed French companies up until 2009.
Bankruptcy Regulation, French Bankruptcies, Französische Insolvenzen, Insolvenzrecht, Bankruptcy Regimes, Loi de Sauvegarde des Entreprises, Sauvegarde, réglement amiable, redressement judiciaire, procedure de sauvegarde, insolvabilité, French Insolvencies
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MSc Thomas Hoehl (Author), 2009, Insolvencies and Insolvency Regulation in France, Munich, GRIN Verlag,


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