Judicial liquidation: can the business continue trading?

Faced with judicial liquidation proceedings (liquidation judiciaire), company directors often find themselves in a situation of absolute urgency. The crucial question that then arises is whether it is still possible to maintain a business activity, even temporarily, in order to preserve jobs or complete contracts in progress. This issue concerns small craft businesses as much as larger commercial companies. We will examine under what precise conditions a company in judicial liquidation may continue trading and what the practical implications of such continuation are.

The fundamental principles of judicial liquidation

Definition and objectives of the procedure

Judicial liquidation is a collective insolvency procedure intended to bring a definitive end to the business of a company that is in cessation of payments (cessation des paiements) and whose recovery is manifestly impossible. This procedure is characterised by the realisation of the company's assets to pay the creditors in the order of their priorities. The opening conditions and the effects of the judgment are detailed in our article on how judicial liquidation proceeds.

The main objective is therefore not the continuation of the business, but the settlement of liabilities through the liquidation of all the company's assets. However, the law provides for notable exceptions to this general principle.

The divestment of the director

As soon as the judicial liquidation judgment is delivered, the director automatically loses all powers of management and representation of the company. This divestment (dessaisissement) transfers all prerogatives to the judicial liquidator appointed by the court.

Concrete case: Pierre runs a joinery SARL (French limited liability company) employing 12 staff. Following persistent financial difficulties, the commercial court orders judicial liquidation on 15 March. From that date, Pierre can no longer:

• Sign new contracts on behalf of the company
• Incur expenditure or collect receipts
• Take decisions concerning staff
• Access the company's bank accounts

Only the liquidator now holds these powers, strictly within the framework of the liquidation mission.

Continuation of the business: an exception to the general principle

The legal conditions for continuation

Contrary to a widespread belief, judicial liquidation does not systematically entail the immediate cessation of all activity. The French Commercial Code expressly provides for the possibility of a continuation of the business under certain strict conditions.

This continuation may be authorised only if it is of evident benefit to the collective proceedings, in particular:

• To facilitate the sale of the business by maintaining the value of the assets
• To allow the completion of ongoing contracts generating revenue
• To preserve jobs pending a buyer
• To avoid the depreciation of stock or equipment

The application for authorisation to the court

The judicial liquidator must seek authorisation from the commercial court before any continuation of the business. This application must be reasoned and demonstrate the economic usefulness of temporarily continuing operations.

Practical example: Sophie runs a well-known restaurant in the town centre. Despite a judicial liquidation ordered in February, several potential buyers show interest. The liquidator asks the court for authorisation to maintain the business for 3 months in order to:

• Retain the full on-licence (licence IV) and the commercial premises
• Maintain the loyal clientele and the reputation
• Allow prospective buyers to assess the real potential of the establishment

The court grants this authorisation because it significantly increases the chances of a sale at a favourable price.

Duration and terms of continuation

Continuation of the business in judicial liquidation is by nature temporary and exceptional. Its duration cannot exceed a few months, the time needed to:

• Complete a sale of the business
• Finish orders in progress
• Organise economic redundancies in proper conditions

The liquidator must report regularly to the court on how the situation is developing and on whether it is appropriate to maintain the continuation.

The central role of the judicial liquidator

Powers and responsibilities of the liquidator

Once authorised to continue the business, the judicial liquidator assumes full responsibility for operational management. The liquidator has the same powers as an ordinary director, but within a legal framework specific to collective proceedings.

The liquidator's main prerogatives include:

• The day-to-day management of the company (orders, deliveries, invoicing)
• The possible hiring of temporary staff
• Negotiation with suppliers and customers
• Representation of the company in all legal acts

Specific financial constraints

The liquidator must ensure that the continuation of the business does not generate new losses liable to increase the liabilities. The liquidator must keep separate accounts for operations after the liquidation judgment.

Concrete case: Marc, liquidator of a printing company, obtains authorisation to continue the business in order to perform a €50,000 contract with the town council. He must:

• Open a specific bank account for this continuation
• Keep accounts separate from the liquidation operations
• Ensure that the contract revenue comfortably covers the costs incurred
• Pay any profit into the creditors' estate

If costs exceed revenue, Marc must immediately end the continuation and inform the court.

Protection of third-party contracting parties

Post-judgment creditors whose claims arise from the continuation of the business enjoy a payment priority. Their claims are regarded as claims against the estate (créances de masse) and must be paid as a priority from the revenue of the continuation.

This protection encourages suppliers and service providers to continue their business relationships despite the judicial liquidation.

The different forms of continuation

Continuation with a view to a sale of the business

The sale of the business is the most frequent reason for continuing the business in judicial liquidation. The aim is to keep the production facilities operational in order to attract potential buyers.

This form has several advantages:

• Maximum value for the company's assets
• Preservation of jobs through the takeover
• Maintenance of business relationships with customers and suppliers
• Retention of know-how and clientele

Detailed example: Julien runs a road haulage company with 8 lorries and 15 drivers. Placed in judicial liquidation in April, the company attracts the interest of two competitors. The liquidator obtains authorisation to maintain the business for 4 months because:

• The transport licences are at risk of being lost if the business stops
• The customer contracts represent significant value
• The experienced drivers are an asset for buyers

Thanks to this continuation, the company is finally sold for €180,000, three times the liquidation value of the lorries alone. On the buyer's rights and the risks attached to acquiring assets in this context, see our analysis of auction sales in judicial liquidation.

Continuation to complete contracts

Certain contracts in the course of performance may justify a temporary continuation, in particular where abandoning them would result in significant penalties or a loss of value of the services already performed.

Continuation for a gradual wind-down

In certain sectors, an abrupt liquidation may prove particularly damaging. Continuation then makes it possible to organise a gradual cessation of the business in better conditions.

The limits and risks of continuation

Strict financial constraints

Continuation of the business in judicial liquidation imposes drastic budgetary constraints. The liquidator may incur only expenditure strictly necessary for the authorised activity and must constantly check the financial balance of the operations.

Any operating deficit during the continuation may engage the personal liability of the liquidator if he or she continued the business when the losses were foreseeable.

The impact on employees

Employees keep their employment contract during the continuation of the business, but their situation remains precarious. The liquidator may make the necessary dismissals, in accordance with the collective proceedings.

Concrete situation: In Pierre's joinery company mentioned above, the liquidator authorises the continuation for 2 months in order to finish the sites in progress. Of the 12 employees:

• 6 joiners are kept on to complete the works
• 4 employees (administrative, sales) are dismissed immediately
• 2 apprentices have their contract suspended

This arrangement makes it possible to minimise costs while preserving the skills essential to completing the contracts.

The risks for directors

Although divested of their powers, directors may face liability claims if the liquidation results from characterised management failings. Continuation of the business does not alter this exposure to risk. Personal liability, the sanctions incurred and the consequences for the director's assets are discussed separately in our article on the consequences of judicial liquidation for the director.

Alternatives to continuation in liquidation

Sale before liquidation

Rather than waiting for judicial liquidation, it may be preferable to consider a sale of the business as soon as safeguard proceedings (sauvegarde) or judicial reorganisation proceedings (redressement judiciaire) are opened. This anticipation generally makes it possible to obtain better terms for the takeover.

Judicial administration

In companies of significant size, the court may appoint a court-appointed administrator (administrateur judiciaire) alongside the liquidator. This measure facilitates operational management during the period of continuation.

Prior voluntary liquidation

For small businesses, a voluntary liquidation (liquidation amiable) may be a more flexible alternative to the judicial procedure, allowing the director to retain his or her prerogatives to organise the cessation of the business.

Practical case: Marie has run a hairdressing salon on her own for 10 years. Faced with financial difficulties, she may choose between:

• Judicial liquidation with complete divestment
• Voluntary liquidation by closing her salon voluntarily and negotiating with her creditors

The second option allows her to control the timetable and preserve her relationships with her clientele in the event of a future reopening in another form.

Practical aspects and strategic advice

Preparing for liquidation in advance

To improve the chances of a successful continuation of the business, directors have an interest in anticipating the procedure by:

• Identifying the most valuable contracts to be preserved
• Negotiating with the main creditors before the proceedings are opened
• Actively seeking potential buyers
• Preparing a solid file justifying the benefit of continuation

The importance of the choice of liquidator

The judicial liquidator plays a decisive role in the success of any continuation. The liquidator's sector knowledge and knowledge of the market can make the difference between a loss-making liquidation and an advantageous sale.

Communication with stakeholders

Transparent communication with employees, customers and suppliers greatly facilitates the continuation of the business. The liquidator must reassure business partners while remaining realistic about future prospects.

Summary and practical recommendations

Judicial liquidation does not necessarily mean the immediate cessation of all business activity. Under certain strict conditions, a temporary continuation remains possible and may even prove beneficial for all those concerned.

Key points to remember:

• Continuation of the business requires the express authorisation of the commercial court on a reasoned application by the liquidator
• This continuation must be of evident economic benefit to the collective proceedings, in particular with a view to a sale of the business
• The judicial liquidator assumes full responsibility for management during this period and must maintain financial balance
• The duration of continuation remains limited in time and subject to regular review by the court
• Post-judgment creditors enjoy a payment priority over the revenue generated by the continuation

In this complex situation, the assistance of a lawyer who focuses on business law is essential to assess the available options and improve the chances of preserving the business or jobs. As each case has its own particular features, only a tailored analysis can identify the strategy best suited to the economic and human issues at stake.