Court supervised restructuring in Belgium

July 2014 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING

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The Belgian legal system provides different instruments to companies experiencing financial difficulties. In general, restructuring can take place with or without the court’s intervention. However, there is no general, complete legal framework for out-of-court restructuring in Belgium.

The Belgian legal system provides a specific court-supervised restructuring procedure during which the company is protected against its creditors’ claims. However, as this procedure historically has a bad reputation and is generally perceived as a precursor to bankruptcy, companies tend to attempt to solve their financial difficulties out of court. This can lead to a significant loss of time.

Notwithstanding its bad reputation, if applied in a timely and correct manner, the Belgian court-supervised procedures offer good opportunities for companies to safeguard their financial positions and business.

Regulatory framework

The Business Continuity Act of 31 January 2009 was amended by the Act of 27 May 2013 (BCA). The amendment extended creditor protection and slightly restricted the freedom of the restructuring companies.

Legal provisions regarding securities, netting, and mortgages, etc., as provided for in the Belgian Bankruptcy Act of 8 August 1997 and in separate legislation, can also come into play in the context of the restructuring procedure.

Content of a restructuring concept

The BCA’s main objective is to protect the company in need of financial restructuring and to allow it to reorganise itself. In general, the BCA provides two different approaches to restructuring: (i) collecting information and taking conservatory measures; and (ii) the actual reorganisation.

The first part of the BCA requires information regarding companies in financial difficulties to be kept at the registry office of the Commercial Court (e.g., information regarding attachments, social security and tax debts, pending proceedings, claims by third parties, etc.) and that a division of the Commercial Court (the Chambers of Commercial Enquiry) reviews the information and follows it up as required. The Chambers can invite the directors of a company to explain the situation and can suggest specific measures.

The BCA also includes conservatory measures. The reorganising company can, for example, request the court to appoint a mediator to facilitate the discussions between the company and its creditors or relevant third parties (e.g., employees). If serious mistakes committed by the company’s directors threaten its continuity, the President of the Commercial Court can, at the request of any interested party, appoint a provisional administrator.

Finally, Article 15 of the BCA makes it possible to file out-of-court arrangements entered into with at least two of the company’s creditors with the Commercial Court. The content of such agreements must remain secret and, if the company becomes insolvent, they can in principle not be challenged by the bankruptcy receiver.

The second part of the BCA aims to offer companies court protection. If a company claims that the continuity of its business is threatened, it can file a request with the court to be protected from its creditors.

Protection is granted if the company’s continuity is threatened and the request, supported by specific documents, has been filed. As a result, the company is protected from its creditors, who can no longer attach its assets or commence bankruptcy proceedings based on claims that existed prior to the request for protection.

In most cases, the courts limit the initial protection period to three months. If the company requires more time, it must apply for a prolongation, which can be granted for up to 24 months. During the reorganisation process, the company’s management team continues to run the business and must implement one of three options, as described below.

First, the company can opt for an amicable, binding agreement with some of its creditors about the reimbursement of their claims.

Second, the company can submit a reorganisation plan, proposing inter alia a reimbursement schedule for all of its creditors, aiming to preserve and continue its activities. In the framework of this plan, the company can propose to pay its debts in part only or, to convert claims into capital, although this option is almost never used in practice. Companies often group their creditors into categories, and offer different levels of payment to each category, although some special secured claims cannot be reduced.

The reorganisation plan must also contain an overview of the measures the company will implement to redress its situation, profitability, solvency and social situation. If the reorganisation plan is accepted by the majority of the regular and unsecured creditors, who together hold a majority of the company’s debt, and if all the procedural requirements have been met, the court will accept it and declare it binding on all of the creditors, even those who voted against it or did not participate in the vote.

When dividing its creditors into categories, the company must ensure that it does not unfairly discriminate against any of them, as this would be a breach of the Belgian Constitution. Furthermore, in principle, at least 15 percent of every debt must be paid. In practice, companies tend to offer the lowest payments to their ‘weakest’ creditors – that is, those with the least economic power or creditors that are not essential to the company’s survival.

Third, if a collective agreement fails, an attempt to sell all or part of the business should be considered. This option aims to transfer some or all of the company’s activities as a going concern to a third party, together with the required employees and assets (e.g., buildings). Only the price paid for these assets can, in principle, be used to partially repay some of the creditors.

Financing and securities

Notwithstanding the BCA protection, creditors can undertake certain measures against the debtor.

First, BCA protection does not protect companies from the recovery of debts incurred after the BCA protection came into effect, meaning that debtors can enforce ‘new claims’.

Second, during the reorganisation process, creditors can suspend the delivery of goods and services until the company pays its outstanding debt ‘voluntarily’. Provided that the general principles of contract law are respected, creditors can terminate contracts with companies under BCA protection and recover goods that have not been paid for.

Third, compensation between mutual claims is possible when these claims are connected, or if certain conditions are met, on the basis of a specific netting agreement entered into prior to the reorganisation process. In addition, a construction sub-contractor with a claim on a court-protected main contractor, can, pending the court protection, rely on its direct claim vis-à-vis the principal of the works.

The debt reduction in the reorganisation plan may improve the company’s financial status, but the company may still require additional funding, either from its shareholders or from third parties. In that regard, it is important to point out that the BCA protection only applies to the debtor concerned and, in principle, not to the co-debtors or guarantors of old or new loans.

Alexander Hansebout is a partner and Bart Heynickx is an associate at ALTIUS. Mr Hansebout can be contacted on +32 2426 1414 or by email: alexander.hansebout@altius.com. Mr Heynickx can be contacted on +32 2426 1414 or by email: bart.heynickx@altius.com.

Alexander Hansebout and Bart Heynickx

ALTIUS