Restructuring and insolvency law in Belgium

Book XX of the Belgian Code of Economic Law is the primary piece of legislation governing insolvency and restructuring proceedings in Belgium. It is a consolidation of all the rules in respect of pre-insolvency, restructuring and bankruptcy proceedings.

Restructuring proceedings

An enterprise can request the opening of a judicial reorganisation if it can demonstrate that its continuity is at risk or will be at risk even if the conditions for bankruptcy are met at the time of filing the request.

If the debtor is a legal entity, the continuity of its business is deemed to be threatened in any event when the losses have reduced the net assets to less than half of the capital.

The request to open a procedure for judicial reorganisation by transfer under judicial authority is also possible, under certain conditions, for the public prosecutor, a creditor of the debtor or any third party with an interest in acquiring all or part of the business.

Together with the request for opening the judicial reorganisation, a number of documents will need to be presented to the Court such as a description of the proposed measures, an overview of all the debts, a business plan that demonstrates that the company will be able to pay its new debts during the suspension period etc.

Insolvency proceedings

Bankruptcy may be filed by the debtor, and in exceptional cases, third parties can summon a company into bankruptcy. One or more creditors can file a petition for bankruptcy of the debtor in order to stop the accumulation of debts. The public prosecutor’s office can also file a petition for bankruptcy.

Together with the declaration of bankruptcy a number of documents will need to be presented to the Court such as the balance sheet showing the due debts and the assets, the indication of whether any personnel is employed, a list of customers and suppliers etc.
 

The two conditions for a declaration of bankruptcy are: 

• persistent failure to pay its debts
• considerable deterioration in creditworthiness.

It is generally assumed that this is the case if it is certain that the company is no longer able to pay its debts that are due, certain and payable; and its creditors, suppliers or banks no longer have the confidence to grant credit. It is not required to be unable to pay all its debts, a substantial part is sufficient.

Restructuring proceedings

In Belgium there are three types of judicial reorganisation: 

Amicable settlement 

Reached with two or more creditors that is subsequently homologated

Collective agreement 

Whereby the debtor presents a collective agreement with a proposition of measures to safeguard the continuity of the company (e.g. reduction of debts by up to 80%, repayment plan etc.), which needs to be approved by the majority of the creditors representing more than 50% of the total debt of the company.

Transfer under judicial authority 

Whereby the Court appoints a court representative who is responsible for organising and realising the (partial or full) sale of the business. This is often used to sell the healthy parts of a business and to leave behind the unhealthy parts, after which the company with the remaining assets is often liquidated. The management of the company remains in charge of the day-to-day business, but the court representative has exclusive power in respect of the sale process.

Aside from judicial reorganisation, a company in difficulty can also opt for out-of-court amicable settlement with two or more creditors.

As from the time of deposit of the request for the opening of a judicial reorganisation, the company is granted the benefit of suspension of payment of debts originating from before the opening of the procedure. The initial suspension period is a maximum of 6 months, but it is possible to ask the Court to extend this up to 18 months. The payment of new debts originating from after the opening of the procedure is not suspended. If the company fails to pay its new debts, the Court can decide to terminate the judicial reorganisation.

The company cannot be declared bankrupt as long as it is involved in a judicial reorganisation, and the directors also cannot be held liable for late filing for bankruptcy during this period (unless the judicial reorganisation was opened for the sole purpose of avoiding having to file for bankruptcy).
During the judicial reorganisation proceedings, the directors remain in charge of managing the company and will continue to carry out its day-to-day activities.

Insolvency proceedings

The purpose of bankruptcy proceedings is to place the debtor’s assets under the authority of a trustee who is charged with managing and liquidating the assets of the company and distributing the proceeds among the creditors. Once bankruptcy proceedings are initiated the directors will no longer have any powers.

Ordinary and extraordinary claims

In judicial reorganisation procedures, a distinction should be made between ordinary and extraordinary claims in the suspension. Depending on the classification as an ordinary or extraordinary claim in the suspension, the debtor has less or more freedom to reduce a claim in a reorganisation plan. The extraordinary claims in the suspension cover all claims secured by collateral.

Debts dating from before the judicial reorganisation proceedings are subject to a suspension of payment. On the other hand, the debts that have arisen in the course of the judicial reorganisation procedure must be paid and thus do not fall under the suspension.

Debts in the estate and debts of the estate

In the event of bankruptcy, a distinction will be made between debts in the estate on the one hand, i.e. debts that arose before the opening of bankruptcy proceedings, and debts of the estate on the other hand, i.e. debts that are related to costs made by the trustee for the well-management of the bankruptcy or that are related to services that were beneficial to the bankruptcy estate; the latter must be paid immediately and these creditors take priority over all other creditors.

The creditors in the estate are divided into two categories:

• Ordinary creditors
•  Preferential creditors, with either a special privilege on certain goods or a general privilege.

Their category determines the order in which creditors are paid. Ordinary creditors are paid after preferential creditors. The order of payment between several preferential creditors will depend on the type of privilege: creditors with a special privilege will be paid before those with a general privilege.

There is no legal obligation to enter into restructuring proceedings (judicial reorganisation proceedings), but the directors do have a general duty of care towards the company. Often restructuring proceedings are the best solution to try to avoid a bankruptcy.

The board of directors is responsible for verifying whether the conditions for bankruptcy are fulfilled and to file for bankruptcy. The directors are legally obliged to file for bankruptcy within 1 month after the above-mentioned conditions are fulfilled. However, a judicial reorganisation can still be filed even if the bankruptcy conditions are fulfilled. During the judicial reorganisation there is no obligation to file for bankruptcy.

As mentioned above, there is no legal obligation to enter into restructuring proceedings (judicial reorganisation proceedings). Directors do have a general duty of care towards the company, its shareholders and its creditors. They will need to be actively involved in the company and take any decision a normal and diligent director would take in the same circumstances. Often, initiating restructuring proceedings are the best solution to try to avoid a bankruptcy. During a judicial reorganisation, the directors remain in charge of the management of the company.

As mentioned above, the board of directors is responsible for verifying whether the conditions for bankruptcy are fulfilled, and if this is the case, to file for bankruptcy. Even if the bankruptcy conditions are not met, the board of directors need to be careful with keeping a structural loss-making company active, as this could be qualified as wrongful trading. As from the opening of the bankruptcy, the trustee will take over control of the company and sell the assets of the company and divide the proceeds between the creditors.

In the case that the company is declared bankrupt the directors can be held liable: 

• for a part or all of the debts of the bankruptcy if it can be demonstrated that they made a gross error that contributed to the bankruptcy
• for a part or all of the debts of the bankruptcy if the directors did not file for bankruptcy although it was clear that there was no reasonable prospect of continuing the activities and avoiding a bankruptcy (wrongful trading)
• for certain social and tax debts if the directors during the last 5 years prior to the bankruptcy were involved in at least two other bankruptcies in which there were unpaid social and tax debts.

The board of directors is only responsible for verifying whether the conditions for bankruptcy are fulfilled and if so to file for bankruptcy. Once the bankruptcy proceedings are initiated, the directors will no longer be responsible for the day-to-day activities of the company. A trustee will take over control over the company, sell the assets of the company and divide the proceeds between the creditors.

As mentioned above, the board of directors remains in function during restructuring proceedings. However, in case of judicial reorganisation through transfer under judicial authority, a judicial officer (gerechtelijk mandataris) will be responsible for the sale process.

The general assembly of shareholders can also decide to liquidate the company. In respect of bankruptcy proceedings and judicial reorganisation, the shareholders take a more passive role. If they have doubts about the competence of the board of directors, they may however request the appointment of an administrator who could be requested to assume the role of director during the proceedings. 

Shareholders are not actively involved in the restructuring/insolvency proceedings. However, they do play an active role in the previous stage through the so-called “alarm bell procedure” or “net asset test”. 

The management board is obliged to convene the general meeting of shareholders under certain circumstances depending on the legal form of the company (alarm bell procedure):

• in the case of a public limited company, the general meeting needs to be convened when the net assets fall below half, or one quarter of the capital
• in the case of a private company or a cooperative company, the general meeting needs to be convened: 
  • when the net assets are at risk of becoming or have become negative (balance sheet test), or 
  • when it determines that it is no longer certain that the company will be able to pay its debts for at least another 12 months as and when they fall due (liquidity test). 

In this respect, the board of directors will explain in a special report the measures it proposes to take to safeguard the continuity of the company. The shareholders will then decide on either the dissolution of the company or to support the measures announced in the agenda of the general meeting to safeguard the continuity of the company. It should be noted that the final decision to enter into restructuring proceedings remains with the board of directors.

Aside from insolvency proceedings there are two alternative ways to liquidate a company:

Solvent liquidation

If the conditions for bankruptcy are not met, the company can still be liquidated voluntarily. This is an option to consider if the activities of the company are for instance manifestly loss-making and no solution can be found within a reasonable period of time.

In accordance with Belgian law, there are two ways to liquidate a company:

Normal procedure 

Whereby the process is divided in three steps: 

• decision of the general shareholders to dissolve the company and appointment of a liquidator to be approved by the Enterprise Court
• liquidation period (period during which the liquidator will make a statement of the company’s assets and liabilities, cease the commercial activities, collect receivables and pay off the debts of the company)
• closing of the liquidation. 

Simplified procedure 

Whereby no liquidator is appointed and the dissolution, liquidation and closing of the liquidation all take place the same day. This procedure can be followed if, prior to the dissolution, all debts of the company are settled or consigned.  

Deficitary liquidation

A deficitary liquidation in which the debts exceed the benefits is possible if a majority of the creditors show confidence in this liquidation. When a normal liquidation process (i.e. with the appointment of a liquidator) is followed, it is therefore possible that a deficit remains at the end of the liquidation. In such a case, the creditors can file for bankruptcy if they believe that the bankruptcy conditions have been met.

A unit within the business court, the Investigation Unit for Companies in Difficulty (dienst opsporing ondernemingen in moeilijkheden), is responsible for conducting an investigation of companies in difficulty. There are multiple indicators that trigger an investigation by the unit such as seizures, outstanding social or tax debts, untimely deposit of annual accounts etc. In these circumstances, the unit will receive a notification and will conduct an investigation. Often, the unit asks the director(s) of the company to provide information about the financial status of the company and will invite the director(s) to an interview with the president of the business court, during which the director(s) will need to answer to specific questions and explain whether or not the continuity of the company is at risk. The president will then draft a report and will decide either to stop the investigation or to advise the public prosecutor to take further actions.

There are no official statistics available in Belgium in respect of the success rate of restructuring/insolvency proceedings.

Judicial reorganisations can be an effective way to restructure a company, either by reaching agreements with its creditors to restructure the debts of the company or by selling part or the whole of the company. However, it is no magic solution. 

Restructuring of debts (e.g. by decreasing the amounts of the debts by a certain percentage and repaying the debts over several years) often creates a chain reaction whereby the creditors of the debtor also suffer financial difficulties. Moreover, it is also only postponement of execution if the company is facing structural problems which cannot be solved with a restructuring of the business. Many of these types of companies that go through a judicial reorganisation are often still declared bankrupt in the end. 

A judicial reorganisation by transfer under judicial control does significantly facilitate the process of restructuring the company as the purchaser of a part or the whole of the business can, under certain circumstances, cherry-pick the personnel it wants to take over. However, it remains to be seen whether this will still be possible in the future since the European Court of Justice decided in a judgement of 16 May 2019 (Plessers case) that this option of cherry-picking is in breach of European Directive 2001/23. For now, Belgian law has not been amended yet and cherry-picking of personnel is still possible, although employees that suffer damages as a result thereof could try to hold the Belgian State liable for implementing legislation that is in breach of European Directive 2001/23.