Current Belgian restructuring framework: overview and key changes
Last year, the EU Restructuring Directive (2019/1023) was transposed into Belgian law through the Belgian Act of 7 June 20231 This major reform of Belgium’s preventative restructuring framework entered into force on 1 September 2023 and provides advanced insolvency rules and procedures tailored to the needs of the current restructuring market.
This article was written by Bart De Bock, counsel litigation and restructuring at A&O Shearman and Stéphanie Nachsem, associate litigation and restructuring at A&O Shearman
Belgian insolvency laws offer debtors a variety of restructuring options, both in-court and out-of-court, including:
out-of-court amicable agreement;
public/private judicial reorganisation proceedings through amicable agreement;
public/private judicial reorganisation proceedings through collective agreement;
transfer under judicial authority; and
bankruptcy, including the new pre-packaged bankruptcy proceedings.
Since 1 September 2023, private reorganisation proceedings are alternatives to public reorganisation proceedings. Private reorganisation proceedings allow the debtor to seek an amicable agreement or a collective agreement with its creditors without the (negative) publicity and stigma of public reorganisation proceedings, therefore facilitating confidential negotiations with the relevant stakeholders. In private reorganisation proceedings, hearings are conducted behind closed doors, decisions are not published and access to the reorganisation file is limited to the involved creditors. The downside is that the debtor does not enjoy an automatic stay on enforcement measures, although this can be granted on a case-by-case basis for certain creditors. Private reorganisation proceedings are currently not automatically recognized across the EU, which might impede cross-border restructurings.
Separate regimes of judicial reorganization by collective agreement exist for small and medium-sized enterprises (SMEs), and large companies. The main differences between the two regimes are limited to the voting procedure and the measures to protect dissenting creditors:
for SMEs: a double majority (in terms of the number of creditors and the amount of debt) is required for a restructuring plan to be approved.
for large companies: the vote takes place in classes. In principle, a restructuring plan is adopted if every class has voted in favour of the restructuring plan, i.e. if a simple majority (50% in debts or interests) is obtained within each class. If one or more classes vote against the plan, the court can still decide to sanction the restructuring plan if the conditions for a ‘cross-class cram down’ mechanism are met.
As of 1 September 2023, transfer under judicial authority no longer constitutes a judicial reorganisation proceeding as such, but rather a liquidation. These proceedings aim to ensure an efficient liquidation of the legal entity (or, for a physical person, the business’ assets) while preserving the value of the business, for the benefit of the creditors and, if possible, the employees. Upon the request of the public prosecutor, a creditor or any interested third party, the court may also order a forced transfer. After the completion of the court-ordered transfer, the court will order the liquidation or bankruptcy of the debtor (depending on whether the conditions for bankruptcy are met).
Belgian law allows insolvent companies to confidentially prepare for bankruptcy (‘pre-packaged bankruptcy’ or ‘silent bankruptcy’). The purpose of this new procedure is to avoid the negative publicity that results from a (public) bankruptcy and facilitate a transfer of assets or activities as a going concern.
During a limited period in time, the debtor negotiates confidentially and under limited court supervision a transfer of assets or activities to third parties. If these negotiations are successful, a public bankruptcy procedure is opened after which the transfer can be effected (very) shortly thereafter. This procedure can only be initiated if a debtor demonstrates that (i) the preparation of the total or partial sale of activities or assets before bankruptcy will facilitate the smooth liquidation of the estate, and (ii) is in the interest of creditors and employees. If the court grants the debtor’s request, a “prospective” bankruptcy trustee is appointed for maximum 30 days (with possible extension to a total of 60 days).
Directors’ liability: key considerations and best practices
Directors are responsible for the proper fulfilment of their mandate, both towards the company and third parties, such as creditors. This responsibility extends not only to formally appointed directors but also to de facto or shadow directors. In groups of companies, a parent or sister company may be considered a de facto or shadow director of another company within the same group if it directly intervenes in the management decisions of the other company.
In situations of financial distress, enhanced directors’ liabilities apply. For example, directors are required to file for bankruptcy within 1 month after company has ceased paying its debts (ie, the company has stopped paying debts as they fall due and it no longer has access to credit). The obligation to file for bankruptcy is suspended if the company files for judicial reorganization, allowing it to restructure its business under court supervision to avoid bankruptcy.
Directors in companies in financial distress should adhere to the following ‘best practices’:
Monitor liquidity and solvency: directors should carefully monitor the liquidity and solvency situation of the company. In particular, directors must consider cash flow forecasts and net assets. If net assets of the company have dropped below 50%, 25% or minimum level of share capital, directors must convene shareholders' meeting within two months.
Increase board meetings: directors should increase the frequency of (formal) board meetings to follow-up on company’s financial position and update on possible remediation/restructuring measures to alleviate the company’s distress.
Record board meetings: minutes of board meetings should be carefully drafted and should keep track of the elements that have been taken into consideration to justify decisions in light of the corporate interest of the company.
Act in the company’s best interest: directors should act in the best interest of the company and, in case of group companies, consider interests of each company separately. In cases of financial distress, the shareholders’ interests are subordinate to the creditors’ interests.
Oversee intra-group transactions: directors should take particular care when approving intra-group transactions which may have a (detrimental) impact on the company's financial situation.
Disclose potential conflict of interest: directors should be cautious about conflict of interest situations. When in doubt, they disclose potential conflicts quickly.
Ensure stakeholder communication: directors should ensure proper communication with stakeholders, while considering an individual director’s duty of confidentiality. A particular focus is placed on communication with the company’s auditor.
- Seek advice: directors should seek internal or external (independent) advice when in doubt.
Conclusion
The Belgian Act of 7 June 2023 represents a significant overhaul of the Belgian insolvency laws, aligning them with the EU Restructuring Directive and addressing the needs of the modern restructuring market. By providing a range of restructuring options and introducing private proceedings and confidential preparation for bankruptcy, the new framework aims to facilitate smoother and more efficient insolvency proceedings. Directors must remain vigilant and adhere to best practices to navigate financial distress situations effectively, ensuring they act in the best interest of the company and its stakeholders.