Businesses Discouraged From Filing for Bankruptcy: 910 Applications in 2011, 30% Less Than in 2010.
22 November 2012
Read by 1699 persons
Since 2004, cases of judicial recovery or liquidation have rarely exceeded 700 cases per year. Of all cases accepted by the courts, 60% are subject to a continuation plan instead of liquidation or sale.
This is unprecedented in a Moroccan court. Employees and creditors of a company in judicial liquidation occupied the courtroom, brandishing banners and chanting slogans urging the judge and trustee to deliver justice. The company in question had "taken advantage" of the legal procedures for handling business difficulties long ago, and still drags on with its share of disagreements and bad surprises. Without taking on the same appearance, similar cases do exist. "By agreeing to place the company in recovery, the judge and the trustee often realize that they will have to deal, beyond the legal aspects, with very sensitive socio-economic considerations and opposing claims," notes business lawyer Abdelali El Quessar.
Indeed, according to professionals, the judicial recovery system, which came into force in 1997, has most often been exploited by unscrupulous administrators to get rid of unprofitable businesses and escape their creditors, plunging their employees into precariousness. Having experienced numerous such cases and drawing inspiration from advances in jurisprudence, judges have ended up locking this path by conditioning it to draconian prerequisites to exclusively help companies that are truly facing difficulties and therefore deserve to benefit from the recovery procedure. Much to the chagrin of the schemers. "Out of 8 requests made by my clients, only one was accepted," points out a local business lawyer. Even more telling are the official figures; since 2004, the number of companies placed in recovery or judicial liquidation has never exceeded 1,000 per year, compared to an average of 1,500 previously. Better yet, with the exception of the years 2005 and 2008, the eight commercial courts of the Kingdom have rarely accepted the opening of more than 700 recovery or liquidation procedures per year. On the same downward trend, in 2009 only 660 were recorded.
Although convinced that the economic situation is unfavorable and that it can act as a catalyst for foreseeable falls of weakened companies, the judges continue to offer unwavering resistance while increasingly holding company executives responsible through the judgments handed down. "For example, between 2004 and 2006, requests to open judicial recovery proceedings fell by 50% nationwide after judgments in two cases involving well-known businessmen in Casablanca, one of whom was struck by commercial default," recalls Houcine Khalifa, president of the Agadir Commercial Court.
Recovery can be initiated by a creditor's summons
Having understood the trend, companies are increasingly less likely to use the procedure. In 2010, according to the Ministry of Justice, 1,305 companies requested to benefit from this system, compared to only 910 in 2011, a 30% drop in applications.
For specialists in collective procedures (the term used to describe the handling of business difficulties), this observation is the result of several measures. First, a company that places itself under the protection of the courts must now systematically conduct a technical and financial expertise in due form to determine the nature and extent of the difficulties it faces. Also, the order of magnitude of overdue receivables that can trigger judicial recovery has significantly evolved compared to the past. In addition, business leaders are increasingly aware of the risks they run, since their entire liability is engaged, particularly in the event of proven mismanagement, as stipulated in the articles of Title V, Book V of the Commercial Code (see box). Without losing sight of the fact that "Moroccan judges, unlike French judges, use a 'capital' approach to assess whether a company deserves the recovery process or not, and do not pay much attention to the 'cash flow' approach," nuances Mr. Khalifa.
In procedural terms, judicial recovery is not only left to the initiative of debtors; it can also be initiated by a creditor's summons, regardless of the nature of their claim. Or at the request of the public prosecutor, particularly in the event of non-execution of financial commitments made under a friendly agreement provided for in the prevention of difficulties.
Once the collective procedure is initiated, the competent commercial court judge appoints a trustee who legally has a renewable 4-month period to decide on the future of the company. At the end of his mission, three scenarios are possible: the trustee can propose either a recovery plan guaranteeing the continuation of the activity, or a sale to third parties, or he can order judicial liquidation. As a general rule, and as practice suggests, 30% of companies see their fate definitively sealed after 4 months of expertise, while more than 60% benefit from a continuation plan. "Sale cases are very rare because it is very difficult to sell a company in difficulty with often heavy liabilities that discourage potential buyers," notes Mr. El Quessar.
Companies that have benefited from a continuation plan are placed under the control of an administrator appointed by the court. The latter will ensure that the various facets of the company in difficulty are "brought up to standard." The legislator gives them a period of up to 10 years to complete their mission. On average, the duration of these plans does not exceed 7 years. Beyond that, and in the absence of a better alternative, more than half of the companies are liquidated.
Towards a reform of a 15-year-old legal system
According to professionals, the context and practices have had to evolve during the 15 years the law has been in force, without the adaptation of the texts following suit.
Certainly, for 3 years or more, judges have reluctantly accepted appeals made by the company itself by exercising their discretionary power, a way of filling any gaps in the legal system. Nevertheless, reform is necessary to formally secure the framework, better protect creditors and employees, while trying to maintain the company's activity when its situation allows it. This is exactly the spirit of the draft law, already in the adoption process since June 2011, which is intended to amend Book V of the Commercial Code.
Indeed, its flagship proposals relate in particular to the application filing formalities, which are becoming more detailed. It is also a question of recording commercial default on the criminal record and on the trade register of any defaulting manager, to further involve their responsibility and deter malicious actors (see box). Without omitting the proposals that deal with ways to improve management and control during the recovery phase, and those aimed at establishing more transparency with creditors, who often challenge the distribution of proceeds from sales by invoking collusion between the trustee and the company head or other creditors.
On the other hand, the training of judges is crucial because it involves a highly specialized area of knowledge; if they do not master it, the system cannot, in any case, claim to properly handle business difficulties.
The liability of managers is fully engaged
The legislation on collective procedures subjects managers to a repressive regime. The provisions of Title V, Book V of the Commercial Code set out the sanctions against managers who have committed management errors. Article 702 specifies that managers can be de jure or de facto, remunerated or not. Sanctions can be patrimonial and penal. The latter are observed in the case of fraudulent bankruptcy (Article 721). This offense is punishable by imprisonment from 1 to 5 years, in addition to a fine ranging from 10,000 to 100,000 DH. This sentence is doubled when it comes to a company making a public appeal for savings. "When the manager's fault is proven, it entails their commercial liability. They will therefore be ordered to pay the debts of the bankrupt company jointly and severally," we learn from the Casablanca Commercial Court.
Naoufel Darif.
Lavieeco.com
Published November 21, 2012.
Posted online November 22, 2012.
This is unprecedented in a Moroccan court. Employees and creditors of a company in judicial liquidation occupied the courtroom, brandishing banners and chanting slogans urging the judge and trustee to deliver justice. The company in question had "taken advantage" of the legal procedures for handling business difficulties long ago, and still drags on with its share of disagreements and bad surprises. Without taking on the same appearance, similar cases do exist. "By agreeing to place the company in recovery, the judge and the trustee often realize that they will have to deal, beyond the legal aspects, with very sensitive socio-economic considerations and opposing claims," notes business lawyer Abdelali El Quessar.
Indeed, according to professionals, the judicial recovery system, which came into force in 1997, has most often been exploited by unscrupulous administrators to get rid of unprofitable businesses and escape their creditors, plunging their employees into precariousness. Having experienced numerous such cases and drawing inspiration from advances in jurisprudence, judges have ended up locking this path by conditioning it to draconian prerequisites to exclusively help companies that are truly facing difficulties and therefore deserve to benefit from the recovery procedure. Much to the chagrin of the schemers. "Out of 8 requests made by my clients, only one was accepted," points out a local business lawyer. Even more telling are the official figures; since 2004, the number of companies placed in recovery or judicial liquidation has never exceeded 1,000 per year, compared to an average of 1,500 previously. Better yet, with the exception of the years 2005 and 2008, the eight commercial courts of the Kingdom have rarely accepted the opening of more than 700 recovery or liquidation procedures per year. On the same downward trend, in 2009 only 660 were recorded.
Although convinced that the economic situation is unfavorable and that it can act as a catalyst for foreseeable falls of weakened companies, the judges continue to offer unwavering resistance while increasingly holding company executives responsible through the judgments handed down. "For example, between 2004 and 2006, requests to open judicial recovery proceedings fell by 50% nationwide after judgments in two cases involving well-known businessmen in Casablanca, one of whom was struck by commercial default," recalls Houcine Khalifa, president of the Agadir Commercial Court.
Recovery can be initiated by a creditor's summons
Having understood the trend, companies are increasingly less likely to use the procedure. In 2010, according to the Ministry of Justice, 1,305 companies requested to benefit from this system, compared to only 910 in 2011, a 30% drop in applications.
For specialists in collective procedures (the term used to describe the handling of business difficulties), this observation is the result of several measures. First, a company that places itself under the protection of the courts must now systematically conduct a technical and financial expertise in due form to determine the nature and extent of the difficulties it faces. Also, the order of magnitude of overdue receivables that can trigger judicial recovery has significantly evolved compared to the past. In addition, business leaders are increasingly aware of the risks they run, since their entire liability is engaged, particularly in the event of proven mismanagement, as stipulated in the articles of Title V, Book V of the Commercial Code (see box). Without losing sight of the fact that "Moroccan judges, unlike French judges, use a 'capital' approach to assess whether a company deserves the recovery process or not, and do not pay much attention to the 'cash flow' approach," nuances Mr. Khalifa.
In procedural terms, judicial recovery is not only left to the initiative of debtors; it can also be initiated by a creditor's summons, regardless of the nature of their claim. Or at the request of the public prosecutor, particularly in the event of non-execution of financial commitments made under a friendly agreement provided for in the prevention of difficulties.
Once the collective procedure is initiated, the competent commercial court judge appoints a trustee who legally has a renewable 4-month period to decide on the future of the company. At the end of his mission, three scenarios are possible: the trustee can propose either a recovery plan guaranteeing the continuation of the activity, or a sale to third parties, or he can order judicial liquidation. As a general rule, and as practice suggests, 30% of companies see their fate definitively sealed after 4 months of expertise, while more than 60% benefit from a continuation plan. "Sale cases are very rare because it is very difficult to sell a company in difficulty with often heavy liabilities that discourage potential buyers," notes Mr. El Quessar.
Companies that have benefited from a continuation plan are placed under the control of an administrator appointed by the court. The latter will ensure that the various facets of the company in difficulty are "brought up to standard." The legislator gives them a period of up to 10 years to complete their mission. On average, the duration of these plans does not exceed 7 years. Beyond that, and in the absence of a better alternative, more than half of the companies are liquidated.
Towards a reform of a 15-year-old legal system
According to professionals, the context and practices have had to evolve during the 15 years the law has been in force, without the adaptation of the texts following suit.
Certainly, for 3 years or more, judges have reluctantly accepted appeals made by the company itself by exercising their discretionary power, a way of filling any gaps in the legal system. Nevertheless, reform is necessary to formally secure the framework, better protect creditors and employees, while trying to maintain the company's activity when its situation allows it. This is exactly the spirit of the draft law, already in the adoption process since June 2011, which is intended to amend Book V of the Commercial Code.
Indeed, its flagship proposals relate in particular to the application filing formalities, which are becoming more detailed. It is also a question of recording commercial default on the criminal record and on the trade register of any defaulting manager, to further involve their responsibility and deter malicious actors (see box). Without omitting the proposals that deal with ways to improve management and control during the recovery phase, and those aimed at establishing more transparency with creditors, who often challenge the distribution of proceeds from sales by invoking collusion between the trustee and the company head or other creditors.
On the other hand, the training of judges is crucial because it involves a highly specialized area of knowledge; if they do not master it, the system cannot, in any case, claim to properly handle business difficulties.
The liability of managers is fully engaged
The legislation on collective procedures subjects managers to a repressive regime. The provisions of Title V, Book V of the Commercial Code set out the sanctions against managers who have committed management errors. Article 702 specifies that managers can be de jure or de facto, remunerated or not. Sanctions can be patrimonial and penal. The latter are observed in the case of fraudulent bankruptcy (Article 721). This offense is punishable by imprisonment from 1 to 5 years, in addition to a fine ranging from 10,000 to 100,000 DH. This sentence is doubled when it comes to a company making a public appeal for savings. "When the manager's fault is proven, it entails their commercial liability. They will therefore be ordered to pay the debts of the bankrupt company jointly and severally," we learn from the Casablanca Commercial Court.
Naoufel Darif.
Lavieeco.com
Published November 21, 2012.
Posted online November 22, 2012.
