Legal suspension of enforcement measures – temporary relief for companies in financial difficulty – postponed but not resolved

In the context of the COVID-19 pandemic, many measures have already been taken to support the economy as much as possible during these turbulent times. It is already clear that the impact will be enormous and that the cash buffer built up by some companies will not be enough to survive this crisis. Measures such as deferrals on paying tax and social debts, temporary unemployment due to economic reasons and the Belgian State’s guarantee scheme for bank loans will not suffice for some. It is expected that many companies will seek protection against their creditors through a judicial reorganisation as provided for in Title V of Book XX of the Belgian Code of Economic Law (‘Wetboek Economisch Recht’) (“WER”).

To avoid putting too much strain on the business courts, the Royal Decree N° 15 on the temporary suspension of enforcement measures and other measures in favour of undertakings during the COVID-19 crisis has been introduced. This Royal Decree (“RD”) provides for a legal suspension, until 17 May 2020, of (i) the compulsory collection and execution of debts and (ii) the obligation of the board of directors to file for bankruptcy if the bankruptcy conditions are met. Furthermore, it also provides protection for creditors if the debtor defaults after the suspension period. Note that the above measures only apply to companies that were not in a situation of cessation of payment as of 18 March 2020.

(i) Legal suspension of protective and enforcement measures

All enforcement measures will be suspended until 17 May 2020 for all undertakings falling within the scope of Book XX WER. Thus, with the exception of immovable goods, including seagoing and inland vessels, no protective or enforcement attachment can be made and no enforcement measures on the debtor’s assets for the company’s debts can be initiated or continued.

Apart from exceptional cases, a company cannot be declared bankrupt or legally dissolved by writ of summons. Nor can the transfer under judicial authority of all or part of its activities be ordered. However, this is still possible when it is done on the initiative of the public prosecutor, the interim administrator appointed by the president of the company court or with the consent of the debtor. In addition, the payment terms already approved in reorganisation plans as referred to in Article XX.82 WER are extended for the duration of the suspension. Furthermore, agreements entered into before the entry into force of this measure cannot be unilaterally or judicially dissolved in the event of non-payment, although this does not apply to employment contracts.

It should be noted that the scheme does not affect the obligation to pay due debts or the contractual penalties provided for under general law. Accordingly, it will still be possible for the parties to invoke, inter alia, the exception of non-performance, set-off or lien. However, in the current circumstances a judge will be more inclined to classify the invocation of such exceptions as an abuse of rights.

The above measures essentially grant automatic protection to all companies similar to that granted to companies undergoing judicial reorganisation. An important difference is that the protection under the RD is broader than the protection provided for in Book XX WER, since it applies not only to debts that already existed when the suspension period started, but also to new debts arising during the suspension period.

Nevertheless, protection has been built in for creditors. Any interested party may, by summons, request the President of the competent company court to rule that an undertaking does not fall within the scope of the suspension referred to above or to lift the suspension in whole or in part by means of a reasoned decision. This claim is filed and tried as in interim proceedings. When taking a decision, the President will take into account a number of factors, such as the potential impact on the company’s turnover or activities as a result of the COVID-19 crisis, recourse to temporary unemployment due to economic reasons and a government order to close down the company, as well as the interests of the applicant. This judicial review protects creditors against companies abusing these measures to defer payment when they are still able to pay their debts in spite of the COVID-19 crisis or because they should have filed for bankruptcy before the crisis began.

(ii) Legal suspension of obligation to file for bankruptcy

Article XX.102 WER provides for an obligation for directors to file a bankruptcy petition within one month after the bankruptcy conditions have been met. This occurs when the company is definitively no longer able to pay its debts that are certain and due and can no longer apply to its creditors, suppliers or banks for credit. If the deadline is missed, the directors risk being held liable for any additional debts arising as a result of the late declaration.

To provide companies further relief and give them time to find appropriate solutions in this uncertain and constantly changing economic and legal framework, the obligation of the board of directors to report bankruptcy in accordance with Article XX.102 WER has also been suspended until 17 May 2020 if the bankruptcy conditions are the result of the COVID-19 crisis and its consequences. This is in line with legal measures in other countries such as Germany and France. However, directors can still voluntarily close the books during the suspension period.

(iii) ‘Suspicious period’ not applicable to new credit

Article XX.112 WER provides for the option of declaring certain acts performed during the so-called ‘suspicious period’ unenforceable. Although it is normally assumed that the cessation of payment took place on the day bankruptcy is declared, the time of cessation of payment can be brought forward. The receiver can request that certain acts performed during the ‘suspicious period’ are declared unenforceable. This discourages lenders from granting credit to distressed companies because the securities they have provided may be declared unenforceable in a subsequent bankruptcy.

However, the RD explicitly provides that this provision does not apply to new credit and the related securities or payments provided during the suspension period. The purpose of this provision is to stimulate the granting of credit to companies. It also alleviates the potential liability of those granting the credit. The mere fact that new credit has not effectively enabled the continuity of the debtor is no ground for the liability of those granting the credit.

Conclusion

Although this measure gives courts and businesses some breathing space, it’s not clear whether it will benefit them in the long term. After all, there is no provision for a gradual relaxation of the suspension that would restore companies’ rights once the economy gets back on track. This leaves open the real possibility that, without additional measures, the business courts will still be inundated at the beginning of May with applications for judicial reorganisations or bankruptcies. Companies would be better advised to take the necessary precautions and make the necessary preparations if it is already clear that their continuity will be at risk after the suspension period has expired.

CMS keeps a close eye on the new legislation and options for companies in difficulty. If you need help, you can contact one of our specialists.

We will also further explain the above during our webinar on 27 April 2020.