Receivership; termination; use of trademark; setting-off of related claims

International contracts

Background: A French distributor and a foreign manufacturer located in the European Union have maintained a constant and regular stream of business for several years. Notwithstanding the absence of writing, there is a verbal contract between the parties that includes the right to use the foreign company’s trademark as a corporate name and for the purposes of the business.

The distributor is declared in receivership in France. Only a judicial representative is appointed, since this is a simplified procedure where it is not mandatory to also appoint a judicial administrator.

The foreign company declares its claim. After the initiating of the procedure, the French company made an advance payment to the foreign company.

I. Termination of the ongoing contract by the foreign company in the event the French distributor is in receivership

The contract is “ongoing” on the day of the opening judgment of the insolvency proceedings if it is both in existence, i.e. it was agreed before the judgment of receivership, and that it has not fully exhausted its effects on that date.

The purpose of the termination of such a contract by the foreign counterparty was to obtain the termination of the collaboration between the parties and the discontinuation of use of the foreign trademark.

Article L.622-13 of the French Commercial Code lays down the rules for termination of a contract during receivership proceedings.

Given the absence of administrator in the proceedings, the power to decide whether or not to continue an ongoing contract lies with the debtor itself (the French company), after consulting the judicial representative, pursuant to articles L.622-13 and L.627-2 of the Commercial Code. This means that the applicable principles are the same as when there is a receiver regarding the automatic termination of the contract after a formal notice, or if the debtor no longer has the necessary funds to pursue the contract, and an intervention by the supervisory judge is possible, which we will examine.

The foreign company must send a letter of formal notice on the continuation of the contract to the debtor company and must send a copy simultaneously to the judicial representative for their opinion (article R.627-1 of the Commercial Code).

Articles L.622-13 and R.627-1 then regulate the automatic termination of the contract, which will occur at the end of a period of 30 days if the debtor does not formulate a response.

This period in principle may be extended at the request of the debtor by the supervisory judge.

If, at the end of a period of 15 days after receipt of the letter of formal notice, the judicial representative has not issued an opinion, the debtor’s co-contractor may refer the matter to the supervisory judge within one month. In the event that the judicial representative gives an opinion, but the debtor company does not share this position, the latter may also refer the matter to the supervisory judge within the same period. It is therefore up to the supervisory judge to rule on the termination of the contract in this case, the objective being not to wait until the expiry of the legal period of 30 days.

However, it is necessary in this case that the foreign company does not maintain its business relations with the debtor company from the formal notice since this could be qualified as tacit renewal of commitments (Court of Cassation 11/04/2012 n ° 10-20.505).

According to the Court of Cassation, the supervisory judge does not have to be seized to pronounce the automatic termination of a contract following a formal notice at the expiry of the 30-day period (Cass.18/03/2003 n ° 00-12.693). However, they can note the said termination so that it is no longer contestable (article R.622-13 of the Commercial Code).

A nuance must nevertheless be made in the present case since there is no administrator in the proceedings but only a judicial representative whereas the Court ruled in a case where a judicial administrator had been appointed in the judgment mentioned.

It therefore seems prudent in such a situation to refer the matter to the supervisory judge as a security measure in order to avoid any subsequent dispute and, at the same time, to contact the French debtor company in order to take note of the termination.

Termination entails the cessation of use of the trademark but it is preferable to mention this expressly in the application.

II. Payment by offsetting related claims: exception to the principle of prohibition of payment.

The “declaration of claim” is the action by which the creditors of a debtor subject to insolvency proceedings express to the judicial representative their willingness to participate (article L.622-24 of the Commercial Code).

The principle is the prohibition of payment of previous claims after the opening judgment of such proceedings, in this case a judicial reorganisation. An exception is made for the payment by offsetting of related debts (article L.621-7 of the Commercial Code).

The main interest is to offset claims that were prior to the insolvency proceedings with subsequent claims that do not benefit from the preferential payment provided for in article L622-17 of the Commercial Code.

The Court of Cassation authorises compensation for related debts (19/03/1991 n ° 89-17.083). This solution is mentioned in article L.622-7 of the Commercial Code. However, the set-off cannot be made in the presence of an undeclared claim (Court of Cassation 03/05/2011 n ° 10-16.758).

The question then arises as to what the conditions are for applying this exception to the principle of prohibition of payments.

First of all, the claims must be certain and reciprocal, that is to say proven in principle, and concern two persons simultaneously and personally creditor and debtors of each other.

Then, they must be related. It is therefore necessary to have unity of the source of the claims, an interdependent link which can be materialised by claims resulting from the performance or non-performance of the same contract (Court of Cassation 18/12/2012 n°11-17.872) or a single contractual set (Court of Cassation 9 May 1995).

Once it is determined that the claims are indeed related, set-off must be invoked, by way of action or exception. If a payment is made but the set-off is not invoked by the creditor, it will not apply.

In the present case, the French company, having paid a sum to the foreign company when it was not required to do so, did not request enforcement of the principle of set-off of related debts.

In a case of set-off of related debts, the conditions of set-off provided for by the Civil Code are then set aside (Court of Cassation 28/04/2009 n ° 08-14.756).

It should be noted that the Court of Cassation has recently retained the possibility of payment by legal compensation after the opening judgment when it comes to “privileged” or “deserving” subsequent claims (Court of Cassation 01/07/2020 n°18-25.487).

For this legal set-off to take place, the claims must be subsequent to the opening judgment and they must meet the conditions of articles 1347 to 1348-2 of the Civil Code (i.e. they must be reciprocal, cash, fungible and payable). It is therefore not necessary for the claims to be due before the opening judgment or to be related in order to be subject to statutory set-off.