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The ad hoc mediator

par Isabelle Didier

The ad hoc mediator: an efficient solution

Is it advisable to cut off a business in distress, to reorganize it under court supervision or, even worse, to liquidate the company, thus eliminating it from our economic environment in the hope of avoiding viral insolvency? The response is obviously NO.
For every company reorganized under court supervision or liquidated in bankruptcy (the first type of procedure being often, in France, a mere administrative precursor to liquidation), a wealth of creativity and value is destroyed, while subcontractors and private individuals are thrown into precarious situations.

A promising solution for preserving the business's future

It is not unusual to see a company unable to meet its financial obligations in a timely fashion, particularly in the present environment, with many businesses are weakened by the crisis in Asia, the bursting of the technology bubble, the slowdown of markets such as construction, or other strategic or financial considerations. It is less important to know how many companies filed for bankruptcy in 2000 or 2002 than to determine how many of them might have been saved if a voluntary procedure including an ad hoc mediator had been initiated in a timely manner.

This approach does not require a lot of effort. The simple process is based more on common sense and responsiveness than on lengthy and complicated legal proceedings.

The business in distress has a reasonable chance of being saved when the company's head is not in a state of denial and does not let pride get in the way. There are, however, some pre-requisites:
- the enterprise must be a for-profit business, a small enterprise, or a private business with a distinct legal personality (Article 37 of the Law of 1984);
- its difficulties must be of a nature to threaten its operations, without the business legally declaring that it is unable to meet its payment obligations;
- it must request expressly, through its legal representative, the designation of an ad hoc mediator by the Tribunal of Commerce.

The ad hoc mediator: an independent confidence re-builder

When management becomes unable to pay the company's debts, relationships with suppliers and other creditors deteriorate. The enterprise may not be able to procure the supplies that it needs to manufacture its products, leading to an even more precarious financial situation. It is therefore essential to restore suppliers' confidence and to explain that it is not in their best interest to let the business in distress file for bankruptcy if they want to recover all or part of what they are owed.

But how is it possible to convince creditors that the situation may be improved precisely when they are not being paid on time?

The mediation of a third party is often a very desirable solution, with two major advantages. First, the parties in conflict will not have to meet, thus avoiding the risk of a nasty confrontation. Second, the mediator may restore an atmosphere of confidence that is often seriously lacking.

The Chief Judge of the Tribunal of Commerce defines the ad hoc mediator's mission. It is to facilitate the business's continuing operations and to seek an agreement with its creditors (Article 36 of the Law of 1984). It should be noted, however, that while the company's legal representative has sole authority to initiate a voluntary mediation procedure, the ad hoc mediator does not have to pander to the debtor's demands.

The ad hoc mediator is a go-between, an "arbitrator" designated by the Chief Judge of the Tribunal of Commerce, who establishes the mediator's mission (Article 35 of the Law of 1984). His duty is to reconcile two objectives that may appear incompatible but which are in fact very complementary. The mediator must first ensure the survival of the business, and then ensure that all creditors are paid.

At first glance, the creditors and the company may seem to have irreconcilable interests. However, if the company in distress is reorganized under court supervision or liquidated, the creditors, which are often unsecured, will not only never recover their funds, but will also lose a client.

This is why the ad hoc mediator has been given specific tools to reach his objectives. He may ask the tribunal to suspend all demands for payment against the company temporarily if he believes that such a suspension will facilitate the conclusion of an agreement. By approving the request, the tribunal may help the mediator reach an agreement. A temporary suspension of all demands for payment against the company is a powerful tool to confront the most recalcitrant creditors.

This procedure has several advantages in that the creditors will not be able to: - terminate a contract for lack of payment;
- sue the debtor to request a monetary payment; or
- seize any real property or other assets belonging to the debtor.

Demonstrating ad hoc mediation's advantages to the most reluctant creditors

Creditors sometimes refuse to grant a delay to the company in distress, either out of bad faith or because their own situation is equally precarious. To deal with these situations, the law specifies procedures to convince the most recalcitrant of creditors.

From a practical point of view, the creditors' reluctance takes the form of a refusal to extend the suspension of all demands for payment. Several cases are possible: - either the creditors refuse to accept the voluntary agreement (case 1);
- or a majority (<70%) of the creditors accept the agreement (case 2);
- or all creditors accept the agreement (case 3).

Case 1. If a majority of creditors refuse the agreement, the mediator will have to use all his moral and legal persuasion tools. As mentioned earlier, to maximize his chances of concluding a voluntary agreement, the mediator may submit a request for temporary suspension of all demands for payment to the Tribunal.

Case 2. If the main creditors have agreed to participate in the voluntary agreement, the mediator will ask the Chief Judge of the Tribunal of Commerce to confirm the agreement. This confirmation will ensure continued suspension of all demands for payment that is binding on all parties to the agreement.

To guarantee that all creditors are treated equitably, a delay not to exceed two years may be imposed on creditors who refuse to participate in the agreement (Article 36 of the Law of 1984 and Article 1244-1 of the Civil Code).

Case 3. The Chief Judge of the Tribunal of Commerce will automatically confirm the agreement if and when agreement has been reached with all creditors. The Tribunal's confirmation will prohibit all lawsuits or individual demands to obtain payment of a debt against the debtor's real property or other assets.

As we can see, the law endowed the ad hoc mediator with legal weapons to organize a voluntary agreement and to ensure its enforceability. Under this approach, the company's past is not an obstacle to its survival anymore, and the business can focus on the future.

However, any subsequent default on a payment by the business in distress will cause the voluntary agreement to terminate ipso jure. The company will be liable for all debt due and payable at that time, without any abatement.

We strongly recommend that foreign creditors, investment funds, parent companies with French operations, suppliers and other parties consider this solution. Its suggestion by significant creditors may incite the head of a company, who is often in a state of denial, to face reality and react in a constructive manner. With the help of an ad hoc mediator, creditors will regain control of their destiny, reminiscent of the control they had when they extended credit to the enterprise now in trouble.

Based on experience, ad hoc mediation is an extremely flexible approach that is quick to implement. It is an attractive alternative to normal court proceedings, which are generally rigid and slow. And time is precisely what the business in trouble does not have!

Mediation is increasingly popular, with a 20% growth between 2000 and 2001. Unfortunately, few business leaders know of the procedure's existence and only 898 businesses in 2000 and 1,085 in 2001 did benefit from an ad hoc mediator.

Confronted with a situation that is never pleasant, it is important for all to face up to reality and call for help before the court system takes the matter into its own hands…

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