The reformed Belgian Restructuring Law: new tools for distressed M&A in Belgium

May 2024 | SPOTLIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

May 2024 Issue

On 1 September 2023, a significant reform of Book XX of the Code of Economic Law entered into effect, implementing Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, as well as introducing some new tools for companies in distress.

This reformed legislation provides companies in distress with a broader range of tailored restructuring tools to safeguard their business and some much needed tweaks that facilitate distressed transfers of businesses.

Partial transfer of employees: the ‘post-Plessers’ era

Over the past few years there have been a lot of discussions on the possibility of transferring only some of the employees of a business within the framework of a judicial reorganisation by transfer under judicial control, thus deviating from the principle that all employees follow the business in a going concern scenario.

The European Court of Justice (ECJ) ruled in the so-called ‘Plessers’ case that Belgian law was in breach of European Directive 2001/23/EC by allowing ‘cherry-picking’ of personnel outside the framework of a liquidation or bankruptcy.

This discussion has now been clarified in Belgian law, such that a transfer under judicial control will inevitably result in the liquidation of part of the business that remains behind after the transfer. With this amendment, Belgian law aligns with European legislation and resolves the uncertainty for distressed transfers of part of a business and its personnel within the framework of a judicial reorganisation by transfer under judicial control.

This modification is a welcome change to the legislation. Most distressed deals in practice call for a social restructuring. Without such tools, potential candidates are often better off waiting until the distressed company is declared bankrupt before buying the business, which puts a lot of stress on the business and often results in the sale of individual assets instead of the business as a going concern. Of course, anti-abuse procedures remain in place as the transfer will still need to be motivated on the basis of technical, organisational and economic reasons.

Arrival of ‘pre-pack’

An entirely new tool is the long awaited ‘pre-pack’ or ‘silent bankruptcy’. The Belgian legislator has been attempting to introduce this procedure, but various proceedings before the ECJ made it unclear what form a ‘pre-pack’ could take to be compliant with European legislation.

‘Pre-pack’ proceedings exist in multiple legislations and in various forms. In essence, they allow a distressed M&A deal to be negotiated with a company on the verge of bankruptcy or which already meets the criteria for bankruptcy, which is then executed immediately after the opening of bankruptcy proceedings.

The Belgian legislator decided to opt for a ‘silent bankruptcy’ which provides managers of the distressed company with a lot of freedom, but with a focus on anti-abuse monitoring. The procedure allows a company in distress that meets the criteria for bankruptcy to file for bankruptcy but to ask the court to delay the commencement of bankruptcy for a maximum period of 30 days to allow the distressed company to prepare for a full or partial sale of its assets and activities. The distressed company will need to demonstrate that this procedure will likely result in a higher purchase price and a better situation for employees than a bankruptcy or liquidation.

The court will appoint a liquidation expert to monitor the proceedings and the negotiations. This individual will in principle also be appointed as trustee in the subsequent bankruptcy. During the ‘silent bankruptcy’, managers of the distressed company will remain in full control. The liquidator expert in principle cannot intervene in the negotiations and merely has a right to obtain information, unless the court grants additional powers.

However, if there are indications that the objective of the ‘silent bankruptcy’ can no longer be realistically achieved, or certain candidates are being given an unfair advantage to the detriment of other stakeholders’ rights (such as employees and creditors), the expert can ask the court to pull the plug on the process and request the commencement of formal bankruptcy.

The procedure takes place confidentially, meaning that the court’s decision is not published. This allows management to avoid the pressure that often follows publicity around a distressed company.

It remains to be seen how useful the ‘silent bankruptcy’ will be in practice. The fact that the conditions for bankruptcy already need to be met before requesting a ‘silent bankruptcy’ implies that the financial situation of the company has already reached a point where continuing is no longer an option. In such circumstances, the market is usually already aware of the company’s situation and it likely already faces pressure from stakeholders.

As, contrary to a judicial reorganisation, the distressed company does not have the benefit of any protection against creditors within the framework of a ‘silent bankruptcy’, third parties could still proceed with enforcement measures or ask the court to force the company into bankruptcy. This could severely impact ongoing negotiations.

Although management does retain control over the negotiations (contrary to a judicial reorganisation where the court-appointed agent is in charge of the sale process), the transfer itself will take place under the control of the trustee after the formal opening of the bankruptcy process, following normal bankruptcy rules.

The main advantage of a ‘silent bankruptcy’ is that the trustee was already involved in the process and thus can act quickly. However, there is no obligation to proceed with the pre-packaged deal, meaning that a third party that was not part of earlier negotiations could still make an offer.

Conclusion

The reform of Belgian insolvency law creates more legal certainty and gives more options to stakeholders in distressed M&A transactions. This can only be welcomed given the fact that the number of distressed transactions is rapidly rising in the current unstable economic climate.

It remains to be seen how these tools will be used in practice as they leave the door open for creative solutions. However, the key for distressed companies is to plan well ahead and prepare for various scenarios. Every situation is different, and although there are many tools available, not all of them work in all circumstances.

Virginie Frémat is a partner and Pieter Dieltjens is a senior associate at CMS DeBacker. Ms Frémat can be contacted on +32 496 61 91 52 or by email: virginie.fremat@cms-db.com. Mr Dieltjens can be contacted on +32 3 206 01 48 or by email: pieter.dieltjens@cms-db.com.

Virginie Frémat and Pieter Dieltjens

CMS DeBacker