A debt-to-equity swap in France is a restructuring mechanism that converts outstanding creditor claims into equity stakes in the debtor company. It is available primarily within formal insolvency and pre-insolvency proceedings governed by the French Commercial Code. For creditors and distressed companies alike, understanding how this tool works - and where it fits within the broader French insolvency framework - is essential before committing to a restructuring strategy.
France has one of the most sophisticated restructuring regimes in continental Europe. The legal architecture, substantially reformed by the ordonnance of September 2021 transposing the EU Restructuring Directive, gives courts and practitioners flexible tools to impose or negotiate equity conversions. This guide covers the legal basis, eligible proceedings, procedural steps, creditor rights, shareholder protections, costs, and common pitfalls.
French insolvency law distinguishes between prevention procedures and collective insolvency proceedings. A debt-to-equity swap in France can arise in either category, though the mechanics differ significantly.
Prevention procedures include the mandat ad hoc and the conciliation. Both are confidential, court-supervised negotiations between the debtor and selected creditors. A conciliation agreement (accord de conciliation) can include a debt-to-equity swap as one of its terms, converting part or all of a creditor';s claim into shares. Because conciliation is confidential and consensual, no creditor can be forced to convert - every party must agree.
Once a company enters formal collective proceedings, the picture changes. The sauvegarde (safeguard), the redressement judiciaire (judicial reorganisation), and the sauvegarde financière accélérée (accelerated financial safeguard, or SFA) all permit equity conversions through a plan adopted by creditor committees and confirmed by the court. The SFA, introduced specifically for financial creditors, is the fastest route and can be completed in weeks rather than months.
The cram-down mechanism introduced by the recent reform is particularly significant. Under the current regime, a court can confirm a restructuring plan - including a debt-to-equity swap - over the objection of dissenting creditor classes, provided certain cross-class cram-down conditions are met. This brings French law closer to US Chapter 11 practice and gives debtors and majority creditors meaningful leverage over holdouts.
The primary statutory source is the French Commercial Code (Code de commerce), Books VI and VIII. Articles L.626-1 and following govern the sauvegarde plan; Articles L.631-1 and following govern the redressement judiciaire. The ordonnance n° 2021-1193 of 15 September 2021 substantially rewrote the creditor committee and cram-down provisions, implementing Directive 2019/1023 on preventive restructuring frameworks.
The competent court is the Tribunal de commerce (commercial court) for commercial companies, or the Tribunal judiciaire for other entities. Large or complex cases may be assigned to specialised commercial courts in Paris, Lyon, Marseille, or Bordeaux, which have dedicated insolvency chambers with significant expertise.
The mandataire judiciaire (judicial administrator) and the administrateur judiciaire (court-appointed administrator) play central roles. The administrator supervises the debtor';s management, facilitates negotiations with creditor committees, and presents the restructuring plan to the court. The mandataire represents creditor interests and verifies claims. Both are regulated professionals subject to oversight by the Conseil national des administrateurs judiciaires et mandataires judiciaires (CNAJMJ).
Creditor committees - now called "classes of affected parties" under the reformed regime - vote on the plan. Financial creditors (banks, bondholders) form one class; trade creditors another. Shareholders may form a separate class if their interests are affected. A class approves a plan if two-thirds of the total value of claims within that class vote in favour.
The procedural path depends on whether the conversion occurs in a consensual or court-supervised context.
In a conciliation, the debtor and creditors negotiate freely. If a debt-to-equity swap is agreed, the conciliation agreement is drafted, signed by all parties, and either acknowledged (constaté) or approved (homologué) by the president of the commercial court. Homologation gives the agreement binding force against third parties and triggers certain protections for new-money providers. The conversion itself requires a capital increase, which must comply with French company law - specifically the rules in the Code de commerce on share issuance and shareholder pre-emption rights.
In a sauvegarde or redressement judiciaire, the process is more structured. The administrator prepares a draft plan that may include a debt-to-equity swap. The plan is submitted to the classes of affected parties. Each class votes; a two-thirds majority by value is required for approval. If at least one class approves the plan (other than a class of shareholders), the court may confirm it under the cross-class cram-down rules, overriding dissenting classes, provided the plan satisfies the "best interest of creditors" test and the "relative priority rule."
The relative priority rule requires that dissenting classes receive treatment at least as favourable as more junior classes. In practice, this means that if shareholders retain any value, all creditor classes must be paid in full or consent to lesser treatment. This rule is a significant departure from the absolute priority rule used in some other jurisdictions and creates room for negotiated outcomes that preserve some shareholder value.
Once the plan is confirmed, the capital increase implementing the debt-to-equity swap must be registered with the Registre du commerce et des sociétés (RCS). New shares are issued to converting creditors; their claims are extinguished pro tanto. The company';s articles of association (statuts) are amended accordingly, and the new shareholding structure is published.
A non-obvious requirement that frequently surprises foreign creditors: French company law requires that existing shareholders have pre-emption rights over new share issuances unless those rights are waived. In a restructuring context, the court-confirmed plan can override shareholder pre-emption rights, but only if the plan expressly provides for this and the procedural requirements are met. Failing to address this point in the plan drafting stage can delay or complicate the conversion.
Creditors converting debt to equity acquire shares in the reorganised company. Their position as shareholders is governed by French company law - the Code de commerce for sociétés anonymes (SA) and sociétés par actions simplifiées (SAS), or the relevant provisions for other entity types. Creditors should carefully review the company';s articles of association before agreeing to convert, as SAS articles in particular can contain significant restrictions on share transfers, governance rights, and exit mechanisms.
Minority shareholder protections remain relevant even in insolvency. Under the reformed regime, shareholders form a class of affected parties if the plan modifies their rights - for example, by diluting them through a debt-to-equity swap. If the shareholder class rejects the plan, the court may still confirm it under the cram-down rules, but only if shareholders receive treatment consistent with what they would receive on a hypothetical liquidation. In practice, if the company is insolvent, shareholders receive nothing on liquidation, so the cram-down can effectively wipe out existing equity.
Creditors who do not wish to convert retain their claims as restructured under the plan - typically with extended maturities or reduced principal. A common mistake among creditor groups is failing to coordinate their voting strategy across classes. Because the two-thirds threshold is calculated by value, a single large creditor can determine the outcome of a class vote. Creditors holding smaller positions should form ad hoc committees early in the process to aggregate voting power and negotiate collectively.
For debtors, the key risk is loss of control. A debt-to-equity swap that converts a significant portion of debt can transfer majority ownership to creditors. Founders and existing shareholders should model the post-conversion cap table carefully before agreeing to any conversion ratio. In practice, founders should consider negotiating management incentive plans or warrants (bons de souscription d';actions) as part of the restructuring package to retain economic upside.
If you are navigating a restructuring that involves a potential debt-to-equity swap, early legal advice is critical. Contact info@vlolawfirm.com - we can help structure the setup correctly the first time.
The conversion ratio - how many shares a creditor receives per euro of debt converted - is a central negotiating point. French law does not prescribe a formula, but the ratio must reflect a fair valuation of the company. In practice, an independent expert (expert indépendant) is often appointed, either by agreement or by the court, to provide a valuation opinion.
Valuation in distressed situations is inherently uncertain. Common approaches include discounted cash flow analysis, comparable transaction multiples, and liquidation value. The choice of methodology significantly affects the conversion ratio and therefore the post-conversion ownership split. Creditors typically argue for a lower enterprise value (giving them more shares per euro of debt), while existing shareholders argue for a higher value (preserving more of their stake).
A practical scenario: a French manufacturing company with EUR 50 million in bank debt and EUR 10 million in trade payables enters sauvegarde. The banks, holding the majority of financial debt, negotiate a plan under which 60% of their debt is converted to equity at a valuation implying a 40% recovery on the converted portion. Trade creditors are paid in full over three years. The existing shareholders are diluted from 100% to 15%. The plan is approved by the bank class (two-thirds by value) and confirmed by the court over the objection of the shareholder class, which receives 15% consistent with the liquidation analysis.
A second scenario: a French technology startup in conciliation agrees with its two main venture debt lenders to convert their entire outstanding loans into preference shares. The conciliation agreement is homologated by the court. The conversion is structured as a capital increase with cancellation of shareholder pre-emption rights, approved by an extraordinary general meeting of shareholders convened simultaneously. The new preference shares carry liquidation preference and anti-dilution protections negotiated directly between the lenders and the company.
Many underestimate the time required to complete the corporate law steps after the plan is confirmed. Convening shareholder meetings, obtaining notarial certification where required, and registering the capital increase at the RCS can add several weeks to the timeline even after the court has approved the plan. Building this into the restructuring timetable is essential.
The overall cost of a debt-to-equity swap in France depends on the complexity of the restructuring, the number of creditor classes, and whether the process is consensual or litigated.
Professional fees - legal counsel, financial advisers, and independent valuers - typically represent the largest cost component. For a mid-market restructuring, combined professional fees across all parties often run into the mid-to-high six figures in EUR. Court-appointed administrators and mandataires judiciaires charge fees regulated by decree, calculated on the basis of the company';s assets and liabilities; these are generally moderate relative to total deal size but should be budgeted.
Timelines vary significantly by procedure:
The tax treatment of a debt-to-equity swap in France is complex and requires specific advice. In general, the cancellation of debt in exchange for shares may generate taxable income for the debtor company (profit from debt forgiveness, or abandon de créance). However, specific exemptions and deferral mechanisms exist under the Code général des impôts for restructurings carried out within formal insolvency proceedings. Creditors converting debt to equity may also face tax consequences depending on whether the converted debt was held at par or at a discount.
A common mistake is treating the tax analysis as secondary to the legal and financial structuring. In practice, the tax consequences can materially affect the economics of the swap for both parties and should be modelled before the conversion ratio is finalised.
What happens if a creditor refuses to participate in a debt-to-equity swap in France?
A creditor who refuses to convert can be crammed down if the plan meets the statutory requirements - specifically, if the plan is approved by at least one class of affected parties (other than shareholders), satisfies the best interest of creditors test, and complies with the relative priority rule. In that case, the court can confirm the plan and bind the dissenting creditor to its terms. However, the dissenting creditor retains the right to challenge the plan before the court of appeal on procedural or substantive grounds. In a consensual conciliation, no cram-down is available, and a refusing creditor simply remains outside the agreement with its original claim intact.
How long does a debt-to-equity swap typically take to complete in France, and what does it cost?
The timeline depends heavily on the procedure chosen. A conciliation-based swap can be completed in two to four months if negotiations proceed smoothly. A sauvegarde or redressement judiciaire plan typically takes six to twelve months from the opening of proceedings to court confirmation, plus several additional weeks for corporate registration steps. An accelerated financial safeguard can compress the court phase to under three months. Professional fees for a mid-market transaction typically start from the mid-six figures in EUR across all parties combined, with court-appointed officer fees added on top. Tax adviser fees should also be budgeted separately.
Can foreign creditors participate in a French debt-to-equity swap, and are there any restrictions?
Foreign creditors can participate without restriction as a general matter. French insolvency law does not discriminate between domestic and foreign creditors in terms of voting rights or plan participation. However, foreign creditors should be aware of several practical points. First, proceedings and court documents are conducted in French, requiring translation and local counsel. Second, the resulting shares will be in a French company governed by French company law, which may differ significantly from the creditor';s home jurisdiction. Third, cross-border recognition of the French plan in the creditor';s home jurisdiction may be relevant if the creditor holds security over assets located outside France.
A debt-to-equity swap in France is a powerful restructuring tool, but one that requires careful navigation of both insolvency law and corporate law. The reformed French framework gives majority creditors and courts significant leverage to implement conversions, including over dissenting parties. Existing shareholders face real dilution risk, and the relative priority rule shapes the negotiating dynamics throughout.
VLO Law Firms advises international clients on bankruptcy and restructuring matters in France. We can assist with structuring debt-to-equity swaps, advising creditor committees, reviewing plan terms, and managing the corporate registration steps. To request a consultation, contact: info@vlolawfirm.com