Recognising insolvency, and counting the days

Menuiserie Lasserre owes €180,000 to suppliers, all past due, and holds €40,000 in the bank plus €120,000 of customer receivables falling due in four months. Its director believes he has a cash squeeze. He is legally insolvent, and a forty-five-day clock has started. Before reading on: why do receivables due in four months not count?

A definition in one line

Article L631-1 of the Commercial Code defines cessation of payments plainly: a debtor unable to meet liabilities that have fallen due out of available assets is in cessation of payments. Two notions carry the whole rule, and neither of them is intuitive.

The comparison is therefore made at a precise moment, not against a forecast. A business with a full order book may be in cessation of payments; a structurally loss-making business none of whose debts has yet fallen due is not there yet.

The practical consequence often surprises. A profitable business whose customers pay at a hundred and twenty days and whose suppliers are paid at thirty can find itself in cessation of payments without ever having lost money: it is the mismatch of dates, not the result, that establishes the state.

It also explains why the definition rewards early monitoring rather than optimism. Nothing in it turns on whether the business is viable; it turns on two lists of figures, both of which the director already holds and neither of which needs an accountant to compile.

The exception for agreed extensions

The same article leaves a door open. A debtor who establishes that credit reserves or moratoriums granted by creditors allow them to meet due liabilities out of available assets is not in cessation of payments.

The word that matters is « establishes ». A verbal understanding with a supplier cannot be demonstrated before a court; a written and dated moratorium can. Negotiating extensions out of court is therefore useful, but only where it leaves a trace.

A professional assessment

The text specifies that the condition is assessed, where relevant, only against assets committed to the professional activity. The personal estate of a sole trader therefore does not enter the balance, however comfortable it may be.

That precision protects as much as it constrains. It stops a private estate from masking a business at the end of its rope, and equally stops anyone counting on that estate to push the filing back by a few months.

Forty-five days to file

Once the state is established, the director has forty-five days to file a declaration with the court. The commercial court or the economic activities court has jurisdiction for a commercial or craft activity; the judicial court or the economic activities court for an independent profession or a farm.

• List the debts actually fallen due, rather than the whole balance-sheet liability.
• List what can be drawn on today: cash, discountable instruments, an undrawn authorised overdraft.
• Compare the two figures at a date, not against a forecast of collections.
• Put in writing any moratorium obtained from a creditor, failing which it cannot be established.
• Date the state of cessation of payments: it is what starts the forty-five days running, and the court sets that date, sometimes earlier than the director's own finding.

That exercise is done far better before a crisis than during one. A director keeping the schedule of debts and collections up to date sees the date coming; one reconstructing it under pressure often discovers that the deadline has already started to run.

A director who has deliberately delayed, while knowing the financial position of the business well enough, faces a ban on managing pronounced by the court. The penalty does not target failure, it targets silence about it.