Belgian insolvency and debt restructuring legislation has evolved tremendously in the past 10 years. Initially, the Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings mentioned only three types of insolvency proceedings in Annex A and three types of liquidators in Annex C for Belgium.
In Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the Insolvency Regulation), there are no less than eight types of insolvency proceedings listed in Annex A and six types of insolvency practitioners in Annex B for Belgium.
In 2014, the European Commission has adopted the Recommendation of the European Commission on a new approach to business failure and insolvency1 (the Commission Recommendation)2 because several member states were reviewing their national insolvency laws with a view to improving the corporate rescue frameworks available and to giving a second chance to bankrupt entrepreneurs.
Because of the insolvency law initiatives being taken in different member states, the European Commission, therefore, considered it opportune to encourage coherence in these initiatives – and in any future ones – to strengthen the functioning of the internal market. The objective is to shift the focus away from liquidation and aim at encouraging viable businesses to restructure at an early stage.
This article contains an overview of the existing Belgian legislation on corporate debt restructuring and insolvency proceedings, tested against the Commission Recommendation.
Belgian debt restructuring proceedings
Five years before the Commission Recommendation was issued, the Belgian parliament had already adopted the Act on Business Continuity,3 which came into force on 1 April 2009.
The rationale behind the Act on Business Continuity is to allow for the rescue of all or part of the business of the financially distressed company, either by rescuing the company itself or by transferring the viable business activities of the company to a third party. The Act on Business Continuity provides several debt restructuring scenarios, some being out-of-court, but the majority of them involves the court’s supervision.
The fact that several scenarios are available and that the majority of them are under the court’s supervision are probably the two most important differences between the Act on Business Continuity and the Commission Recommendation. The Commission Recommendation proposes to create an informal system for the debtor to try to conclude a debt restructuring plan and to limit court formalities to the extent that those procedures are necessary and proportionate to safeguard the interests of creditors and other parties affected by the debtor’s restructuring plan.4
Out-of-court debt restructuring proceedings
In an out-of-court debt restructuring scenario, the Act on Business Continuity gives the debtor three possibilities: (i) to conclude amicable agreements with two or more of its creditors; (ii) to have a company-mediator appointed; or (iii) both, i.e., conclude amicable agreements and have a company-mediator appointed.
Amicable agreement with two or more creditors
Concluding an amicable agreement is already possible at a very early stage. An amicable agreement can be concluded as soon as this is necessary for restoring the debtor’s financial situation or reorganising the debtor’s business. The agreement can be concluded with all creditors, but has to be concluded with at least two of them.5 The parties determine the contents of the amicable agreement freely – but it cannot bind third parties.6
The reason for creditors to conclude such agreement with their debtor lies in the fact that the agreement enjoys protection from certain clawback rules. More specifically, protection is offered to payments that can be disputed in a bankruptcy if such payments took place in the suspected period (ie, a period of up to six months between cessation of payment and the bankruptcy).7
There is no judicial intervention when the agreement is being concluded, but to enjoy the protection from it, the amicable agreement must be filed with the court’s clerk. The confidentiality of the amicable agreement is guaranteed since third parties can only take note of the filing and of the contents of the agreement if the debtor gives its express consent to their disclosure.8
The amicable agreement satisfies in any event the requisites in the Commission Recommendation that (i) the debtor should be able to restructure at an early stage, as soon as it is apparent that there is a likelihood of insolvency;9 (ii) the debtor should keep control over the day-to-day operation of his or her business;10 and (iii) the debtor should be able to enter a process for restructuring his or her business without the need to formally open court proceedings.11
Appointing a company mediator
Upon the debtor’s request – and only on his or her request – may the president of the court appoint a company mediator to facilitate the reorganisation of the company.12 Although this appointment is made by the court, it concerns no judicial procedure.
The appointment of the company mediator by the court confers certain authority on the mediator in his or her intervention. Combined with his or her neutrality and expertise, the company mediator can act as an intermediary between the creditors and the debtor.
The Act on Business Continuity thus satisfies the requisite of the Commission Recommendation that the appointment of a mediator by the court should not be compulsory, but rather be made on a case-by-case basis where the court considers such appointment necessary to assist the debtor and creditors in the successful conducting of negotiations on a restructuring plan.13
Reorganisation proceedings under court supervision
The debtor can also opt for company reorganisation under the court’s supervision. The aim of such judicial reorganisation procedure is to preserve the continuity of all or part of the company or of the viable business activities.
Opening of a judicial reorganisation procedure
In principle, the debtor initiates the judicial reorganisation procedure,14 but it need not have ceased paying its debts. In addition, the fact that the debtor meets the conditions for bankruptcy adjudication does not preclude it from filing for restructuring.
For the application seeking a judicial reorganisation procedure to be admissible, certain information and a series of documents must accompany the application, which is filed with the court.15
Pending the court’s ruling on the application, the company cannot be declared bankrupt, and no realisation of assets can be pursued.16
If the required information and documents have been provided, hence satisfying the condition for the application’s admissibility, the court will open the judicial reorganisation procedure if it ascertains that the continuity of a debtor’s business is threatened in the short or long term.
This is in line with the requisite of the Commission Recommendation that misuse of the procedure should be prevented by requiring that the financial difficulties of the debtor must be likely to lead to its insolvency.17 When opening the judicial reorganisation procedure, and contrary to the Commission Recommendation,18 the Belgian court will not verify whether the restructuring plan or other proposed measures are capable of preventing the insolvency of the debtor and capable of ensuring the viability of the business. However, the Act on Business Continuity allows for this verification to take place during the procedure and when, if appropriate, it can give rise to the rejection of an extension of the judicial reorganisation procedure or to a withdrawal of the judicial reorganisation procedure.
Access to the judicial reorganisation procedure is, in other words, very flexible. The opening of a judicial reorganisation procedure in practice is permitted in the majority of the cases – except for cases of abuse of the procedure.
Debtor remains in possession of business and the possibility to appoint a mediator or supervisor
The principle of the Act on Business Continuity is that the debtor remains in possession of its assets and continues to run the company.
Also, the debtor or a third party with standing can seek the court to appoint a judicial representative to assist the debtor in the judicial reorganisation19 – if this is necessary to attain the objectives of the judicial reorganisation procedure. This judicial representative would, in other words, fulfil the role of a mediator.
Upon the request of any person with standing or of the public prosecutor, and if the debtor commits a manifest and serious shortcoming, the court can appoint a judicial representative and task him or her with a specifically defined assignment.20 The judicial representative would, in this capacity, fulfil the limited role of supervisor.
Finally, and if the debtor has committed a manifest and serious mistake or shows evidence of manifest bad faith, the court can appoint a temporary director for the period of the suspension who is tasked with managing the company.21 The temporary director in this scenario would fulfil the role of supervisor.
In one hypothesis, there is the mandatory appointment of a judicial representative, namely in the event of a judicial reorganisation by way of a transfer of business under the court’s supervision.22 This judicial representative would fulfil only a specific role in the context of the transfer.
The possibility provided by the Act on Business Continuity to appoint a judicial representative or temporary director satisfies the Commission Recommendation’s requisite that the appointment of a mediator or a supervisor by the court should not be compulsory, but rather be made on a case-by-case basis where it considers such appointment necessary: (i) in the case of a mediator, in order to assist the debtor and creditors in the successful conducting of negotiations on a restructuring plan; or (ii) in the case of a supervisor, in order to oversee the activity of the debtor and creditors and take the necessary measures to safeguard the legitimate interests of one or more creditors or another party with standing.23
Moratorium granted to the debtor
The Commission Recommendation contains the basic principle that the debtors should have the right to seek a court to grant a temporary stay of individual enforcement actions lodged by creditors, including secured and preferential creditors, who may otherwise hamper the prospects of a restructuring plan, and that such stay should not interfere with the performance of ongoing contracts. This basic principle is also reflected in the Belgian Act on Business Continuity, but with some differences.
If the debtor applies for judicial reorganisation, the court will grant a moratorium to the debtor for a period of up to six months. The moratorium may be extended, but the total period may not exceed one year. However, in exceptional circumstances, the period can be extended by another six months to a total of 18 months. These periods are longer than those suggested by the Commission Recommendation,24 but statistics show that the actual period granted is four months, which is in line with the period suggested in the Commission Recommendation.25
During the moratorium, the debtor is granted protection against creditors whose claim existed before the judgment opening the judicial reorganisation procedure. This means the moratorium does not protect the debtor against new claims. During the moratorium:
- no bankruptcy proceedings may be opened in respect of the debtor,26 and the debtor is no longer obliged to file for bankruptcy by himself or herself;27 28
- no means of enforcement (in relation to both moveable and immoveable assets) may be used or pursued;29 and
- no assets may be seized.30
The prohibition on enforcement excludes the enforcement of actual security interests (e.g., a pledge or mortgage) or creditors benefiting from a statutory lien, except for: (i) a specific pledge over claims;31 and (ii) security interests over bank accounts or financial instruments (including shares) that were created under the Act of 15 December 2004 on financial collateral.32
The moratorium granted does not terminate per se ongoing contracts. If certain conditions are satisfied, the Act on Business Continuity does not prevent the debtor’s co-contracting party from terminating a contract if the debtor does not comply with its contractual obligations.
However, during the moratorium the debtor can decide to not perform its obligations under the relevant contracts (other than employment contracts) – even if it is not stipulated contractually – if not performing them is to serve the purpose of the reorganisation plan or of the transfer of the enterprise.
This, therefore, allows the debtor to free itself from contracts whose further performance can hinder the success of the debtor’s reorganisation.
Possible restructuring scenarios
During the moratorium granted, the debtor can try to achieve one or a combination of these three objectives:
- enter into an amicable agreement with its creditors;
- submit a restructuring plan to all its creditors; or
- transfer all or part of its business to a third party.
Judicial reorganisation procedure with a view to reaching an amicable agreement
The debtor can negotiate an amicable agreement with at least two of its creditors during the moratorium and under the court’s supervision. This restructuring tool is similar to the out-of-court amicable agreement discussed above, but has one difference: under a judicial reorganisation, the amicable agreement will be submitted to the court.
Judicial reorganisation procedure with a view to reaching a collective agreement
The second type of judicial reorganisation is a traditional reorganisation plan: during the moratorium, the debtor must draw up a reorganisation plan containing a description of the restructuring and a description of each creditor’s rights after the restructuring would have taken place. This restructuring can consist of different measures, such as a debt write-off, change in payment terms, interest waivers or the conversion of debt into equity. As a rule, the maximum haircut given to creditors may not exceed 85 per cent of the value of the unpaid claim or claims.
Creditors who have a claim that is secured by a mortgage, specific preferential right (eg, a pledge), or a right of ownership (eg, retention of title) benefit from a stronger protection.
This reorganisation plan must be approved by a majority of the creditors. No distinction is made between secured and unsecured creditors for the purpose of this vote. If the reorganisation plan is approved and is considered to have satisfied the conditions of the Act on Business Continuity and of public order, the court will officially approve the reorganisation plan. However, the court does not verify whether the reorganisation plan has any prospect of preventing the debtor from becoming insolvent and whether the plan ensures the viability of the debtor’s business.33 If the plan is officially approved, it binds all creditors, and the moratorium ends. The execution phase of the plan has a five-year deadline.34
This restructuring tool corresponds the most to the basic principles of the Commission Recommendation.35 However, there is one essential difference, and that is how the restructuring plan is voted. The Commission Recommendation states that a restructuring plan should be adopted by the majority of the number of creditors’ claims in each class, whereas the Belgian Act on Business Continuity requires that a majority be attained, without making any distinction between the type or class of the creditors. If there is any potential abuse (with respect to the voting) that arises from this, the courts can refuse to approve the plan.36
Also, in terms of new financing, Belgian legislation is not as wide as the Commission Recommendation’s suggestions. New financing does not form part of the reorganisation plan under Belgian legislation, and the only relevant provision on this states that new financing can be considered as estate debts in a subsequent liquidation or bankruptcy.37
Judicial reorganisation by way of transfer of business under the court’s supervision
This judicial reorganisation option relates to the entire or partial transfer of the debtor’s business activities to a third party, which is conceived as a liquidation scheme. Such transfer can be ordered at the debtor’s request or even, in certain circumstances, at the request of any party having standing (including the public prosecutor). The court will then appoint a judicial representative to manage the sale and transfer of the assets in the name and on behalf of the debtor.38
The main objective of this judicial representative’s task is to enable the continuation of the economic business activity, but nevertheless, without losing sight of the creditors’ rights.
After the proceeds are distributed to the creditors, the judicial reorganisation procedure will be closed.
The Commission Recommendation does not provide for a restructuring mechanism that involves the transfer of the debtor’s business to a third party.
Procedures aiming at the voluntary as well as the forced liquidation of the legal entity and its business activities
There are two types of liquidation procedures under Belgian law: bankruptcy and voluntary or judicial liquidation.
Opening of a bankruptcy
The merchant39 that ceased to pay in a persistent way its debts as they become due and that is no longer in a position to obtain credit has a legal duty to file for bankruptcy. Failing to fulfil this duty within a period of one month after cessation of payments occurs40 can lead to criminal sanctions41 as well as civil liability.
Besides the merchant (debtor) itself, any of its creditors, the public prosecutor, or any other party with standing can also initiate the bankruptcy proceedings.
Upon the opening of a bankruptcy, the right to administer and dispose the debtor’s business and assets passes to the insolvency receiver42 who is appointed by the court. The receiver performs his or her duties in the context of the bankruptcy under the general supervision of a supervisory judge.43
If all or part of the debtor’s business is transferred, the transferee will not be held liable for the tax and social debts that were due before the bankruptcy was opened.
All creditors, whether they are secured or unsecured, who wish to assert claims against the debtor need to participate in the bankruptcy proceedings and file a proof of their debt claim.44 Any individual enforcement action that was brought against the debtor by any of its creditors before the bankruptcy was opened is automatically stayed.45
After the bankruptcy proceedings are opened, the accrual of interest on the sums of all claims, other than those of creditors with special preferences, is suspended.46
Contracts between the debtor and a creditor that are still valid at the time of the bankruptcy do not terminate automatically as a result of bankruptcy, unless otherwise agreed upon between the parties. The receiver must decide in due time whether to continue performing the valid contracts. The counterparty can demand the receiver to decide on whether to perform the contract. If the receiver gives no decision on it within two weeks from the date of the counterparty’s demand, the contract is considered terminated.47
After the receiver has realised proceeds from the disposition of all of the debtor’s assets, the receiver must distribute the sale proceeds among the creditors while complying strictly with the ranking order of preference, which is governed by statute and case law.
In short, this ranking order of preference for the distribution of the sale proceeds from a bankruptcy is as follows:
- claims that have arisen during the liquidation and the costs of the liquidation (including the fees of the receiver, the amount of which is set by Royal Decree);
- claims that are secured by separate security interest: to be paid out from the proceeds from the sale of the assets that are covered by the security;
- general preference claims: to be paid out from the proceeds from the bankrupt estate (these preference claims are limited by statute and must be paid according to the order determined by statute); and
- unsecured claims, with any dividend.
The voluntary liquidation of a company is voted by a qualified majority of the company’s shareholders, usually held in the presence of a civil law notary. Mentioned in the notarial deed is the appointment of one or more liquidators whose mission is to dispose the debtor’s assets so that the proceeds from their sale can settle the creditors’ claims. This type of liquidation – which creates a concursus creditorum, such as a bankruptcy does – is still often chosen as an alternative to court-supervised bankruptcy proceedings of a financially distressed company, but on condition that such choice (ie, that the company goes into voluntary liquidation) is supported by the debtor’s most important creditors. The court’s intervention in a voluntary liquidation is limited to confirming the appointment of the liquidators and, later on at the time of the liquidation’s closing, checking and approving the proceeds distribution plan.
As in most European countries, a company can also be dissolved without pursuing liquidation proceedings in an easy and quick way on the condition, inter alia, that there are no outstanding debts.
A judicial liquidation begins typically when a court issues a winding-up order after a debtor’s creditor, a shareholder of the debtor or the public prosecutor has a writ of summons served on the debtor, seeking the court order. If the court grants the order, it appoints a liquidator who becomes solely authorised to represent the company in liquidation. Once the liquidator enters into the picture, the powers of the directors end automatically.
Most of the causes that trigger the start of such type of proceedings relate to problems between shareholders or to the impairment of the company’s net equity capital as a consequence of accumulated losses.
Five years before the Commission Recommendation was issued, the Belgian legislator had already started reforming its laws on corporate debt restructuring with a view to providing flexible legal tools to facilitate business recovery.
Although not directly inspired by the Commission Recommendation, the conclusion is that Belgian debt restructuring law is directly or indirectly in line with the Commission Recommendation on many points.
Contrary to the Commission Recommendation, Belgian law provides for not one but various in-court and out-of-court debt restructuring possibilities whereby the judicial reorganisation procedure with a view to the parties reaching a collective agreement is the one that corresponds the most with the basic principles of the Commission Recommendation. The most important differences consist in the fact that this Belgian procedure takes place completely under the court’s supervision, whereas the Commission Recommendation restricts the involvement of the court to where it is necessary and proportionate with a view to safeguarding the rights of creditors and other interested parties affected by the debtor’s restructuring plan. In addition, with regard to the debtor’s restructuring plan, Belgian legislation does not require a vote that is based on the separate classes into which creditors are divided.
In the meantime, however, Belgian legislation on this subject matter is not standing still. After an interim amendment to the Act on Business Continuity in 2013, the current Minister of Justice has announced the further reform of Belgian insolvency law.
The insolvency file will be modernised by introducing an electronic file. To this end, a Central Insolvency Register will be set up (the legal basis of which was already adopted by Parliament on 17 November 2016).
The policy document mentions moreover the possibility of a ‘quiet bankruptcy’ that makes it possible for a company to prepare for an actual bankruptcy in a discreet way (‘pre-pack’).
To give bankrupt entrepreneurs a second chance, the policy document also suggests measures that must encourage entrepreneurship and make a new start for them possible.
The out-of-court amicable agreement will also be made more attractive by offering the parties the possibility to seek the court to declare the amicable agreement homologated and enforceable.
There will also be an entirely coherent set of rules on liability of directors that entails the concept of ‘wrongful trading’.
These new measures are all in line with the Commission Recommendation. It is thus very likely that the restructuring and insolvency landscape in Belgium will continue to evolve.
- Commission Recommendation of 12 March 2014 on a new approach to business failure and insolvency (2014/135/EU), Official Journal of the European Union, 14 March 2014, L 74/65.
- On 22 November 2016, the European Commission adopted its legislative proposal on preventive restructuring, insolvency and second chance. The legislative proposal takes the form of a Directive, so it has binding effects, compared with the Commission Recommendation. The proposal aims to give a binding effect to the principles that apply to the key subject areas already identified in the Commission Recommendation.
- Act of 31 January 2009 on Business Continuity, published in the Belgian Official Journal (Moniteur Belge/Belgisch Staatsblad) of 9 February 2009.
- See recital 16 and article 7 of the Recommendation of the European Commission (2014/135/EU).
- Article 15, paragraph 1, Act on Business Continuity.
- Article 15, paragraph 2, Act on Business Continuity.
- Article 15, paragraph 3, Act on Business Continuity.
- Article 15, paragraph 4, Act on Business Continuity.
- Recital 16 and Article 6a of the Recommendation of the European Commission (2014/135/EU).
- Article 6b of the Recommendation of the European Commission (2014/135/EU).
- Article 8 of the Recommendation of the European Commission (2014/135/EU).
- Article 13, paragraph 1, Act on Business Continuity.
- Article 9a of the Recommendation of the European Commission (2014/135/EU).
- If certain conditions are satisfied, the debtor’s creditors, any party interested in acquiring the activities, or the public prosecutor can have a writ of summons served on the debtor, seeking to start a judicial reorganisation procedure with a view to having all or part of the debtor’s business activities transferred.
- Article 17, Act on Business Continuity.
- Article 22, Act on Business Continuity.
- Recital 16 of the Recommendation of the European Commission (2014/135/EU).
- Recital 16 of the Recommendation of the European Commission (2014/135/EU).
- Article 27, Act on Business Continuity.
- Article 28, section 1, Act on Business Continuity.
- Article 28, section 2, Act on Business Continuity.
- See section on ‘Possible restructuring scenarios’, infra.
- Article 9 of the Recommendation of the European Commission (2014/135/EU).
- A period of four months with the possibility to renew this upon evidence of progress in the negotiations on a restructuring plan, up to a maximum of 12 months. See article 13 of the Recommendation of the European Commission (2014/135/EU).
- M Vanmeenen, ‘In de ban van continuïteit’ [Immersed in continuity], TBH 2015/6, page 506.
- Article 30, Act on Business Continuity.
- Article 9 Bankruptcy Act.
- Cf article 12 of the Recommendation of the European Commission (2014/135/EU).
- Article 30, Act on Business Continuity.
- Article 31, Act on Business Continuity.
- Article 32, Act on Business Continuity.
- This Act implements Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, Official Journal L 168, 27/06/2002 P. 0043 – 0050.
- This is contrary to article 23 of the Recommendation of the European Commission (2014/135/EU).
- Article 52, Act on Business Continuity.
- See also M Vanmeenen, ‘In de ban van continuïteit’ [Immersed in continuity], TBH 2015/6, page 514 and following.
- M Vanmeenen, ‘In de ban van continuïteit’ [Immersed in continuity], TBH 2015/6, page 520.
- Article 37, Act on Business Continuity.
- Article 60, Act on Business Continuity.
- Articles 2 and 9, Bankruptcy Act. If the merchant (debtor) is a company, this duty rests on the board of directors.
- The judge rules on this freely. However, the cessation of payment must be sustainable. This is usually perceived from a dynamic point of view.
- Article 489bis, paragraph 4 of the Criminal Code.
- Article 16, Bankruptcy Act.
- Article 11, Bankruptcy Act.
- Articles 62 ff, Bankruptcy Act.
- Article 24, Bankruptcy Act.
- Article 23, Bankruptcy Act.
- Article 46, section 1, Bankruptcy Act.