The Costly Road

Finally, shareholders may decide to bring the business activities of the corporation to an end but to keep it as an “empty” shell with virtually no assets and no liabilities, instead of liquidating the corporation.

Obviously, the tax consequences of each of the available options are a determining factor and need to be very carefully considered.

The voluntary winding-up of a French corporation first requires that the corporation be dissolved (Sections 1 and 2). It is then mandatory for a liquidator to be appointed (Sections 3 and 4) in order to proceed with the winding-up (Section 5).

When Can/Must a Corporation Be Dissolved?

The dissolution of a French corporation may be pronounced for the following reasons, applicable to all forms of corporations:

• The end of the statutory term (99 years maximum unless renewed);
• The fulfillment or extinction of the corporate object;
• The corporate contract being declared void;
• A decision by the shareholders before the end of the statutory term;
• A court-ordered dissolution following a reasoned request from one of the shareholders, in particular because of the non-execution of obligations by one of the shareholders or because of a disagreement between the shareholders blocking the operations of the corporation;
• A court-ordered dissolution where all the shares of the corporation have been held by one shareholder for over a year (except in the case of soci't's par actions simplifi'es and SARLs as these corporations may exist with a single shareholder);
• A court-ordered liquidation (liquidation judiciaire) or the sale of all of the assets of the corporation (jugement arr'tant un plan de cession) as part of bankruptcy proceedings; and
• Any other reason provided for in the articles of association of the corporation.

The dissolution of a corporation may also be pronounced as a criminal sanction (Article 131-99 of the Criminal Code) where the corporation has been created or used to commit a criminal offence further to provisions of the Commercial Code specifically applicable to the form of the corporation (soci't' anonyme, soci't's ' responsabilit' limit'e, etc.). This applies, for instance, to:

• The reduction of the share capital to an amount below the minimum legally required (for soci't' anonyme and soci't's ' responsabilit' limit'e); and

A number of shareholders that does not conform to statutory provisions (for soci't' anonyme and soci't's ' responsabilit' limit'e), where the net assets of the corporation have fallen below half of the share capital and the shareholders have not taken appropriate steps within the following 2 financial years (for soci't' anonyme, soci't's ' responsabilit' limit'e and soci't's par actions simplifi'es).

Procedure for Dissolution

The technical procedure through which a corporation may be dissolved depends on the reason for the dissolution: A decision by the shareholders is required for an anticipatory dissolution; this is usually the procedure followed by distressed corporations.

A court decision is required where:

• The corporation is dissolved because the corporate contract becomes void;
• One of the shareholders applies for dissolution;
• All the shares of the corporation have been unlawfully held by a single shareholder for over a year (except for soci't's par actions simplifi'es and SARLs, which may be operated with a single shareholder);
• There is a liquidation judiciaire or a sale of all of the assets of the corporation in accordance with a court-ordered reorganization plan further to a bankruptcy judgment; and
• The dissolution is automatic upon expiry of the statutory term or fulfillment or extinction of its corporate object.

Where the corporation is dissolved for any other reason, provided for in the articles of association of the corporation, then the dissolution will either be automatic or will require a decision by the shareholders. In any event, the dissolution of the corporation must be advertised in a legal gazette and notified to the Commercial and Companies Registry.

Where the shareholders have voted for the dissolution of the corporation:

• The decision becomes irrevocable as soon as it has been made, even if all the shareholders, at a later stage, wish to revoke the decision through a second vote;
• The dissolution decision has effects: 1) as among the shareholders, as soon as the decision is taken; and 2) with regard to third parties, once the decision is published; and
• The corporation is deemed to be in winding-up (en liquidation) and the appointment of a liquidator is mandatory.

Winding-up of the Corporation

Where the corporation is solvent, the dissolution opens the winding-up procedure, which is governed by the Civil Code and the Commercial Code. In respect of these legal provisions, some are mandatory (Articles L 237-1 to L 237-13 and Articles L 237-4 and L 247-5 of the Commercial Code) Others (Articles L 237-14 to L 237-31 of the Commercial Code) apply only where there are no provisions governing these matters in the articles of association, even in the case of provisions existing in the articles of association, a court decision, following a request from the creditors of the corporation or from shareholders, orders it so.

Therefore, winding-up is normally governed both by the provisions of the Civil and Commercial law and by the corporation's articles of association.

For the purpose of carrying out the winding-up, the corporation retains its legal personality until the end of winding-up proceedings (which must normally be completed within 3 years), but only for that purpose. Accordingly, the corporation may not change its corporate form and cannot undertake any new activity. Likewise, the shareholders may only make decisions relating to the winding-up of the corporation. However, a corporation in liquidation may be merged with another corporation.

The Liquidator

The liquidator may be a shareholder, a director or a third party (including an employee of the corporation). The appointment of the liquidator will result in the immediate ending of the duties of the administrative and management bodies of the corporation.

His task is to realize the corporation's assets and use the proceeds to pay off the corporation's debts and liabilities. In this respect, the winding-up requires all liabilities to be settled. However, creditors holding term-debts (cr'anciers ' terme) can only require immediate payment of these debts if the liquidation results in a reduction in the guarantees they hold (for instance in the sale of a mortgaged building). The rule also applies to bondholders, unless the liquidation is a result of an anticipatory dissolution not caused by a merger or a hiving off. In such cases, a general assembly of bondholders may require and the liquidated corporation may impose the repayment of the bonds.

In practice, where immediate repayment of term-debts is not possible (for instance, because the creditor insists on the payment of interest), then the liquidator must put the corresponding funds into an escrow account and repay the debt according to the terms and conditions normally applicable.

Any surplus (boni de liquidation) is then distributed among shareholders in proportion to their respective shareholdings. The decision to distribute the available funds must be published in the same legal gazette where the appointment of the liquidator was previously advertised. The funds must be deposited in a bank account opened in the name of the corporation in liquidation. Before making any such distribution, however, the liquidator must pay all direct contributions due to the tax authorities failing which the liquidator becomes personally liable to the tax authorities. If possible, it is also recommended in practice that a clearance letter be obtained from the tax authorities before bringing the winding-up proceedings to a close.

If, at any time, the liquidator finds that the proceeds of the realization process together with the amount of the existing liquid assets will not suffice to satisfy the debts and liabilities of the corporation, and if the shareholder(s) refuse to make any further or necessary contributions to meet the corporation's debts, or if no agreement can be reached with the creditors by which they agree to reduce their claims, then the liquidator must file a petition to open bankruptcy proceedings with the local court.

The powers of the liquidator are normally determined either by the articles of association or by the shareholders in the decision appointing the liquidator. Where this is not the case or where the liquidator is court-appointed, his powers are determined by the Commercial Code.

Specific Issues When Deciding on Winding-up Creditors' Rights

Under winding-up proceedings:

• There is no stay of proceedings; thus the creditors may institute proceedings against the corporation and may pursue current proceedings;
• There is no formal procedure for the declaration of receivables within specified time periods as is the case in a bankruptcy procedure, nor is there a procedure for the acceptance of such receivables by the liquidator; and
• In relation to future creditors (ie, creditors whose receivables are not duly payable as at the date of the commencement of winding-up), the winding-up does not trigger the immediate payment of their receivables (subject to any clauses to the contrary in the agreement with the creditor), and interest continues to accrue upon any such receivables.

Contractual / Statutory Guarantees

Rights of action remain actionable against the corporation in winding-up since there is no stay of proceedings. Thus third parties claiming contractual guarantees (eg. on grounds of product liability) can initiate proceedings for the enforcement of their guarantees. Alternatively they may seek to negotiate a settlement with the liquidator. They do not need, however, to prove a sum representing an estimated amount of damages as is the case in bankruptcy or liquidation proceedings.

Issues Relating to Corporate Status

The terms of loan agreements and financial leases of the corporation subject to a winding up decision need to be verified in order to determine whether the institution of winding-up proceedings may trigger early repayment, including any penalties that may apply, as may often be the case.

Likewise, the warranties and letters of comfort granted by another corporation in the same group or a shareholder need to be verified before initiating the winding up procedure, so as to ensure that the contemplated process does not trigger the obligation of the other group corporation/shareholder towards the beneficiary. The particular conditions for the triggering of the obligations should also be looked at closely (eg, is any payment to be made upon first demand or is it subject to proof or the claim being substantiated).

Tax Consequences

Generally speaking, the liquidation of a corporation normally entails:

• The application of a 1% registration duty on the net assets of the corporation;
• The application of corporate income tax to the capital gains made by the liquidated corporation upon the sale of its assets; and
• The application of corporate income tax at the shareholder level on liquidation dividends.

Specific tax issues may also arise in the context of a liquidation, relating notably to VAT and carry-back receivables.

Ending the Winding-up

The winding-up may only be ended where all debts and liabilities have been settled. The announcement of the closure of the winding-up (by a decision of either the shareholders or the court) leads to the legal personality of the corporation coming to an end. However, this only becomes effective as regards third parties where the decision has been the subject of publication and the corporation struck off from the Commercial and Corporations Register.

The end of the winding-up also leads to the cessation of the functions of the liquidator, who as a result can no longer represent the corporation. He must, within a year from the end of the liquidation, deposit at the Caisse des D'p'ts et Consignations all amounts granted to creditors or shareholders which have not been claimed.

Timing Issues

In terms of timing, the institution and implementation of winding-up proceedings will depend upon the time necessary to implement dismissal procedures, the success of the negotiations with third parties and the time taken in practice in order to realize the corporation's assets and settle its liabilities. Dismissal procedures in France may take between 6 and 12 months depending on the relationship with employees, strikes, litigation etc. In any event, the Workers Committee (if any) of the corporation must be informed and consulted before the decision to dismiss the employees is made.

Except where they are transferred to a parent company or other corporations within the group, the existence of unliquidated claims against the corporation will in practice lengthen the procedure since the termination of the liquidation of the corporation cannot be ordered prior to the settlement of all outstanding liabilities. French law provides for a maximum time period of 3 years for the duration of the winding-up proceedings. However, in practice, this period can be extended.

Storage of Books and Records

As a general rule, accounting books and records must be kept for a period of 10 years as from the date of the last entry in the books. This obligation applies to a liquidated corporation especially because, as mentioned above, creditors of the corporation can still bring a suit after the end of liquidation proceedings. In practice, however, this may be problematic for a liquidated corporation, which no longer has any funds to finance the storage of this documentation. Unless the by-laws or the winding-up decision provide otherwise, the liquidator should, in our opinion, be responsible for keeping the corporation a maximum period of 6 months to remedy the situation.

The voluntary winding-up (liquidation volontaire) of a corporation is one of the many, though expensive, options available to shareholders wishing to withdraw from a corporation facing financial difficulties.

Other options include the sale of their stake or of the corporation itself, possibly following a restructuring. The corporation may be sold as a whole or, where these exist, through the divestment of one or more branches of activity. The transaction may then be effected through various share deals for the different subsidiaries, or through the sale of assets, subsequent to which the corporation will still have to be wound up. A lease of business (location g'rance) followed by the sale of the business may also be an option.

Where the corporation is experiencing financial difficulties, the management may try to negotiate payment deadlines with the creditors through a r'glement amiable procedure, ie, the French equivalent to a workout or a corporate voluntary arrangement. The shareholders may also decide to stop financing the corporation and let it go into bankruptcy (redressement or liquidation judiciaire), which is a risky step in terms of the image and reputation for the shareholders. It is even more so from the legal standpoint, as several very specific liabilities are imposed on the statutory and shadow management in case of bankruptcy procedures in France.

Finally, shareholders may decide to bring the business activities of the corporation to an end but to keep it as an “empty” shell with virtually no assets and no liabilities, instead of liquidating the corporation.

Obviously, the tax consequences of each of the available options are a determining factor and need to be very carefully considered.

The voluntary winding-up of a French corporation first requires that the corporation be dissolved (Sections 1 and 2). It is then mandatory for a liquidator to be appointed (Sections 3 and 4) in order to proceed with the winding-up (Section 5).

When Can/Must a Corporation Be Dissolved?

The dissolution of a French corporation may be pronounced for the following reasons, applicable to all forms of corporations:

• The end of the statutory term (99 years maximum unless renewed);
• The fulfillment or extinction of the corporate object;
• The corporate contract being declared void;
• A decision by the shareholders before the end of the statutory term;
• A court-ordered dissolution following a reasoned request from one of the shareholders, in particular because of the non-execution of obligations by one of the shareholders or because of a disagreement between the shareholders blocking the operations of the corporation;
• A court-ordered dissolution where all the shares of the corporation have been held by one shareholder for over a year (except in the case of soci't's par actions simplifi'es and SARLs as these corporations may exist with a single shareholder);
• A court-ordered liquidation (liquidation judiciaire) or the sale of all of the assets of the corporation (jugement arr'tant un plan de cession) as part of bankruptcy proceedings; and
• Any other reason provided for in the articles of association of the corporation.

The dissolution of a corporation may also be pronounced as a criminal sanction (Article 131-99 of the Criminal Code) where the corporation has been created or used to commit a criminal offence further to provisions of the Commercial Code specifically applicable to the form of the corporation (soci't' anonyme, soci't's ' responsabilit' limit'e, etc.). This applies, for instance, to:

• The reduction of the share capital to an amount below the minimum legally required (for soci't' anonyme and soci't's ' responsabilit' limit'e); and

A number of shareholders that does not conform to statutory provisions (for soci't' anonyme and soci't's ' responsabilit' limit'e), where the net assets of the corporation have fallen below half of the share capital and the shareholders have not taken appropriate steps within the following 2 financial years (for soci't' anonyme, soci't's ' responsabilit' limit'e and soci't's par actions simplifi'es).

Procedure for Dissolution

The technical procedure through which a corporation may be dissolved depends on the reason for the dissolution: A decision by the shareholders is required for an anticipatory dissolution; this is usually the procedure followed by distressed corporations.

A court decision is required where:

• The corporation is dissolved because the corporate contract becomes void;
• One of the shareholders applies for dissolution;
• All the shares of the corporation have been unlawfully held by a single shareholder for over a year (except for soci't's par actions simplifi'es and SARLs, which may be operated with a single shareholder);
• There is a liquidation judiciaire or a sale of all of the assets of the corporation in accordance with a court-ordered reorganization plan further to a bankruptcy judgment; and
• The dissolution is automatic upon expiry of the statutory term or fulfillment or extinction of its corporate object.

Where the corporation is dissolved for any other reason, provided for in the articles of association of the corporation, then the dissolution will either be automatic or will require a decision by the shareholders. In any event, the dissolution of the corporation must be advertised in a legal gazette and notified to the Commercial and Companies Registry.

Where the shareholders have voted for the dissolution of the corporation:

• The decision becomes irrevocable as soon as it has been made, even if all the shareholders, at a later stage, wish to revoke the decision through a second vote;
• The dissolution decision has effects: 1) as among the shareholders, as soon as the decision is taken; and 2) with regard to third parties, once the decision is published; and
• The corporation is deemed to be in winding-up (en liquidation) and the appointment of a liquidator is mandatory.

Winding-up of the Corporation

Where the corporation is solvent, the dissolution opens the winding-up procedure, which is governed by the Civil Code and the Commercial Code. In respect of these legal provisions, some are mandatory (Articles L 237-1 to L 237-13 and Articles L 237-4 and L 247-5 of the Commercial Code) Others (Articles L 237-14 to L 237-31 of the Commercial Code) apply only where there are no provisions governing these matters in the articles of association, even in the case of provisions existing in the articles of association, a court decision, following a request from the creditors of the corporation or from shareholders, orders it so.

Therefore, winding-up is normally governed both by the provisions of the Civil and Commercial law and by the corporation's articles of association.

For the purpose of carrying out the winding-up, the corporation retains its legal personality until the end of winding-up proceedings (which must normally be completed within 3 years), but only for that purpose. Accordingly, the corporation may not change its corporate form and cannot undertake any new activity. Likewise, the shareholders may only make decisions relating to the winding-up of the corporation. However, a corporation in liquidation may be merged with another corporation.

The Liquidator

The liquidator may be a shareholder, a director or a third party (including an employee of the corporation). The appointment of the liquidator will result in the immediate ending of the duties of the administrative and management bodies of the corporation.

His task is to realize the corporation's assets and use the proceeds to pay off the corporation's debts and liabilities. In this respect, the winding-up requires all liabilities to be settled. However, creditors holding term-debts (cr'anciers ' terme) can only require immediate payment of these debts if the liquidation results in a reduction in the guarantees they hold (for instance in the sale of a mortgaged building). The rule also applies to bondholders, unless the liquidation is a result of an anticipatory dissolution not caused by a merger or a hiving off. In such cases, a general assembly of bondholders may require and the liquidated corporation may impose the repayment of the bonds.

In practice, where immediate repayment of term-debts is not possible (for instance, because the creditor insists on the payment of interest), then the liquidator must put the corresponding funds into an escrow account and repay the debt according to the terms and conditions normally applicable.

Any surplus (boni de liquidation) is then distributed among shareholders in proportion to their respective shareholdings. The decision to distribute the available funds must be published in the same legal gazette where the appointment of the liquidator was previously advertised. The funds must be deposited in a bank account opened in the name of the corporation in liquidation. Before making any such distribution, however, the liquidator must pay all direct contributions due to the tax authorities failing which the liquidator becomes personally liable to the tax authorities. If possible, it is also recommended in practice that a clearance letter be obtained from the tax authorities before bringing the winding-up proceedings to a close.

If, at any time, the liquidator finds that the proceeds of the realization process together with the amount of the existing liquid assets will not suffice to satisfy the debts and liabilities of the corporation, and if the shareholder(s) refuse to make any further or necessary contributions to meet the corporation's debts, or if no agreement can be reached with the creditors by which they agree to reduce their claims, then the liquidator must file a petition to open bankruptcy proceedings with the local court.

The powers of the liquidator are normally determined either by the articles of association or by the shareholders in the decision appointing the liquidator. Where this is not the case or where the liquidator is court-appointed, his powers are determined by the Commercial Code.

Specific Issues When Deciding on Winding-up Creditors' Rights

Under winding-up proceedings:

• There is no stay of proceedings; thus the creditors may institute proceedings against the corporation and may pursue current proceedings;
• There is no formal procedure for the declaration of receivables within specified time periods as is the case in a bankruptcy procedure, nor is there a procedure for the acceptance of such receivables by the liquidator; and
• In relation to future creditors (ie, creditors whose receivables are not duly payable as at the date of the commencement of winding-up), the winding-up does not trigger the immediate payment of their receivables (subject to any clauses to the contrary in the agreement with the creditor), and interest continues to accrue upon any such receivables.

Contractual / Statutory Guarantees

Rights of action remain actionable against the corporation in winding-up since there is no stay of proceedings. Thus third parties claiming contractual guarantees (eg. on grounds of product liability) can initiate proceedings for the enforcement of their guarantees. Alternatively they may seek to negotiate a settlement with the liquidator. They do not need, however, to prove a sum representing an estimated amount of damages as is the case in bankruptcy or liquidation proceedings.

Issues Relating to Corporate Status

The terms of loan agreements and financial leases of the corporation subject to a winding up decision need to be verified in order to determine whether the institution of winding-up proceedings may trigger early repayment, including any penalties that may apply, as may often be the case.

Likewise, the warranties and letters of comfort granted by another corporation in the same group or a shareholder need to be verified before initiating the winding up procedure, so as to ensure that the contemplated process does not trigger the obligation of the other group corporation/shareholder towards the beneficiary. The particular conditions for the triggering of the obligations should also be looked at closely (eg, is any payment to be made upon first demand or is it subject to proof or the claim being substantiated).

Tax Consequences

Generally speaking, the liquidation of a corporation normally entails:

• The application of a 1% registration duty on the net assets of the corporation;
• The application of corporate income tax to the capital gains made by the liquidated corporation upon the sale of its assets; and
• The application of corporate income tax at the shareholder level on liquidation dividends.

Specific tax issues may also arise in the context of a liquidation, relating notably to VAT and carry-back receivables.

Ending the Winding-up

The winding-up may only be ended where all debts and liabilities have been settled. The announcement of the closure of the winding-up (by a decision of either the shareholders or the court) leads to the legal personality of the corporation coming to an end. However, this only becomes effective as regards third parties where the decision has been the subject of publication and the corporation struck off from the Commercial and Corporations Register.

The end of the winding-up also leads to the cessation of the functions of the liquidator, who as a result can no longer represent the corporation. He must, within a year from the end of the liquidation, deposit at the Caisse des D'p'ts et Consignations all amounts granted to creditors or shareholders which have not been claimed.

Timing Issues

In terms of timing, the institution and implementation of winding-up proceedings will depend upon the time necessary to implement dismissal procedures, the success of the negotiations with third parties and the time taken in practice in order to realize the corporation's assets and settle its liabilities. Dismissal procedures in France may take between 6 and 12 months depending on the relationship with employees, strikes, litigation etc. In any event, the Workers Committee (if any) of the corporation must be informed and consulted before the decision to dismiss the employees is made.

Except where they are transferred to a parent company or other corporations within the group, the existence of unliquidated claims against the corporation will in practice lengthen the procedure since the termination of the liquidation of the corporation cannot be ordered prior to the settlement of all outstanding liabilities. French law provides for a maximum time period of 3 years for the duration of the winding-up proceedings. However, in practice, this period can be extended.

Storage of Books and Records

As a general rule, accounting books and records must be kept for a period of 10 years as from the date of the last entry in the books. This obligation applies to a liquidated corporation especially because, as mentioned above, creditors of the corporation can still bring a suit after the end of liquidation proceedings. In practice, however, this may be problematic for a liquidated corporation, which no longer has any funds to finance the storage of this documentation. Unless the by-laws or the winding-up decision provide otherwise, the liquidator should, in our opinion, be responsible for keeping the corporation a maximum period of 6 months to remedy the situation.