Insolvency and corporate restructuring is a hot topic in times of crisis. A delicate balance needs to be found between protecting creditors' legitimate interests on the one hand and ensuring continuity of undertakings on the other. Up to now, the legal measures to which undertakings in distress could resort in Belgium, and in particular the rules on judicial composition, can on the whole be construed as being a failure. Indeed, all too often the recovery attempts have been unsuccessful and have ended up in the bankruptcy of the companies concerned. The Belgian legislator has realised that new measures are necessary and has adopted a new Act of January 31 2009 on the Continuity of Undertakings, which replaces the existing law on judicial composition.
Precautionary mechanisms for creditor protection
Reservation of title clause
An agreement for the sale of goods can contain a reservation of title clause. Pursuant to such clause, the seller remains the owner of the goods and the buyer is considered to be a mere holder until the price is fully paid. If the buyer does not pay the price, or in the case of the buyer's bankruptcy, the seller has the right to take back the goods if: (i) the goods were sold under a reservation of title clause; (ii) the reservation of title clause was agreed upon in writing at the latest at the moment of delivery of the goods; (iii) the goods are still physically in the possession of the buyer; and (iv) the goods have not become immovable by incorporation or processed with other goods.
Pledge – general
A commercial pledge agreement is an agreement by which a debtor delivers an object to his creditor to secure his debt. The pledge can relate to a tangible or intangible movable object and is established from the moment the creditor (or a third party on whom parties agree) obtains the possession of the object. The pledgee loses his security when the debtor pays his debt or if he loses possession of the pledged object. The pledgor remains the owner of the dispossessed object. In the event of non-payment of the debt, the pledgee can ask the court for permission to sell the object, or he can require that the object be assigned to him as payment for the debt.
A civil pledge is more formal because the privilege, acquired by the concluding of a pledge agreement, is only obtained by the creditor through the entering into an authentic or registered private contract.
Pledge over financial collateral
The Belgian Act on Financial Collateral, adopted in 2004, simplified the rules applicable to the pledging of financial collateral such as: financial instruments and cash on accounts. The pledge must be agreed in writing and the financial collateral must be delivered to the pledgee. The pledgee can execute without notification of the pledgor or court authorisation in case of non-payment of the debt: that is, he can sell the assets and satisfy his claim against the pledgor or, in the case of a pledge on cash on accounts, exercise his rights through compensation. Parties can also agree that the pledgee has the right to appropriate the assets in case of default.
In the event the final collateral consists of receivables, a notification to the original debtor of the pledgor is necessary. From the moment notification is made, the original debtor can no longer be released through payment of his debt to the pledgor (his original creditor).
When the financial collateral consists of shares (a pledge on shares) it is important to note that the voting rights attached to these shares in principle remain with the pledgor, unless the parties have agreed otherwise. A pledge on registered shares of a Belgian undertaking must be recorded in the share register of the undertaking concerned. Dematerialised shares are recorded on a special account, to be opened with a financial institution, in the name of the pledgee or of a third party, appointed by the parties.
Floating charge
A floating charge is a security interest over the assets of an undertaking that are used by the undertaking for its business activities. The physical possession of the assets is however not transferred to the creditor (contrary to a more traditional commercial pledge over individual assets). It should be noted that a floating charge can only be granted as security for a loan and can only be granted in favour of credit institutions that are licensed in one of the member states of the European Community or by certain other types of financial institutes.
The creditor needs to seize the assets in the case of non-payment by the debtor before he can ask permission from the court to sell the said assets. Before the court authorises the sale, it will first need to validate the seizure. The beneficiary of a floating charge benefits from a privileged ranking on the proceeds obtained from the sale.
Warrant
Warrants are trade papers issued in duplicate that represent the disposal power over the assets. They consist of two counterparts. The first is called the warrant and represents the pledge. The second is called the ceel and represents the disposal power over the assets, but burdened with a pledge right. Only the person who has possession of both can freely dispose of the assets.
Mortgage and irrevocable mortgage proxy
The mechanisms described above are only applicable on movable assets. A mortgage is a security right on an immovable asset. Such security needs to be established through a notarial deed. Through the registration of the mortgage with the mortgage registration office, the mortgage becomes enforceable against third parties and its rank is specifically determined. This ranking is essential in the event of the bankruptcy of the debtor. However, a registration duty amounting to 1% of the secured amount is due.
An irrevocable mortgage proxy establishes an irrevocable right to effectively proceed with the registration of a mortgage on an immovable property in the event of the default of the debtor. A third party is appointed by the debtor with the power to create an effective mortgage at the demand of the creditor. The advantage of a mortgage proxy is that it is much cheaper to establish, as the registration will be made at a fixed fee of €25 ($39).
In Belgium, one often finds a combination of both: an effective mortgage for a low amount to achieve a beneficial ranking and an irrevocable mortgage proxy for the remainder of the debt to benefit from the lower fixed registration duties.
Netting
When two persons are debtors of one another, they can compensate their reciprocal claims for the smallest amount. The person who has the largest debt pays his creditor the difference that remains after compensation of the two debts. In Belgium, there are three forms of netting: conventional netting, statutory netting and judicial netting.
Conventional netting is an agreement between the parties by which they decide on the conditions for the compensation of their claims.
Statutory netting takes place de iure, even without parties' knowledge, when: (i) there are reciprocal claims; (ii) between the same persons; (iii) with replaceable assets as object; (iv) that are due; and (v) of which the existence and the amount is certain. The netting will be enforceable towards the other creditors when these conditions are met before bankruptcy.
Judicial netting is netting authorised by the judge. The basis of it is not a contract (conventional netting) or a law (statutory netting) but a court judgment.
When the undertaking is faced with an insolvency procedure, such as bankruptcy or judicial reorganisation, compensation of the debts and claims of the debtor are no longer enforceable towards the creditors, unless the claims are closely connected and came into being before the opening of the insolvency procedure.
Since the adoption of the Belgian Act on Financial Collateral, it is generally accepted that conventional netting can still be exercised after the opening of an insolvency procedure if: (i) the claims exist at the moment of the opening of the insolvency procedure; and (ii) the agreement was entered into before the opening of the insolvency procedure.
Mechanisms for non-payment
Exceptio non adimpleti contractus
If a party does not perform its obligations under a reciprocal agreement, the other party can refuse to fulfill its own obligations until the first party performs.
Right of lien
A right of lien authorises a creditor to refuse the delivery of an object that belongs to the debtor as long as his claim regarding that object is not satisfied. This requires the existence of a claim that is due, the physical possession of the object and a connection between the claim and the retained object.
Conservatory seizure
The conservatory seizure or attachment can be described as an official deed of a bailiff through which specific assets are placed under the control of the judicial authorities and kept safe for the creditor in case of continuous non-payment. As a result, the debtor loses the right to freely dispose of the assets. In most cases, an authorisation of the court is necessary, but there are exceptions.
Executive seizure
If the debtor persists in the non-payment and the creditor obtains an enforceable judgment against him, he can use this title to execute: that is, sell the assets seized and use the proceeds to receive compensation for the claim.
The new Act of January 31 2009 on the Continuity of Undertakings
Aim of the Act – reasons for the reform
In the past, there have been two important acts in Belgium regarding undertakings in distress: (i) the Act on the Judicial Composition, whose intention was to help undertakings recover during difficult times; and (ii) the Act on Bankruptcy, which regulates the liquidation of undertakings that clearly had no chance of recovery. Unfortunately, the first Act has proved to be unsuccessful: only 741 applications for judicial composition with creditors were filed between 2001 and the first quarter of 2008. Moreover, the overall majority of the filings resulted in bankruptcy.
There are several reasons for this lack of success: the fact that in most cases the filings for judicial composition were made too late (when chances of recovery were becoming too slim), the complexity and duration of the procedure, the high costs and the negative connotations (judicial composition often being seen as precursory to bankruptcy).
The new Act, whose main purpose remains to save undertakings in distress, intends to solve these different problems. It contains a variety of possible solutions for undertakings in distress and tries to address the numerous problems encountered by these undertakings. Even the name of the Act (Act on the Continuity of Undertakings) was chosen carefully in order to give it a more positive image.
Preventative measures
The new act contains three types of preventative measures, as follows.
- Gathering of information: the services of the Commercial Court gather information that could be construed as an indication that undertakings are faced with serious difficulties (for example, information from the tax and social security authorities regarding arrears and information on seizures). They can call the representatives of the undertaking for a hearing with a view to discussing the possible problems at an early stage and assess what measures can be taken. They can also transfer the file to the public prosecutor when in their opinion the undertaking is effectively already in a state of bankruptcy.
- Undertaking mediator: undertakings can request the Commercial Court to appoint an undertaking mediator, who will assist them in finding a solution to their problems.
- Court-appointed administrator: interested third parties (such as creditors) can request the Commercial Court to designate a court appointed administrator when obvious and serious faults of the debtor or his representatives endanger the continuity of the undertaking. The Commercial Court determines the tasks of the court-appointed administrator.
Amicable agreement
The new Act promotes the conclusion of amicable agreements between undertakings in distress and their creditors. It is important to note that if the undertaking would shortly thereafter still become bankrupt, the payments made to these creditors, in the absence of fraud, even within a period of six months before the bankruptcy, remain enforceable towards all creditors. The conditions are that the amicable agreement must: (i) be concluded with at least two creditors; (ii) state that it is concluded with a view to redressing the financial situation of the undertaking or the reorganisation of the undertaking; and (iii) be filed with the clerk's office of the Commercial Court.
Judicial reorganisation
Undertakings in distress can request the Commercial Court a suspension of their payment obligations in order to apply one of the following reorganisation measures, which can be combined in the following ways.
- Concluding an amicable agreement with two or more creditors. This agreement has the same effect as the amicable agreement mentioned above, but is supervised by the court.
- Obtaining a collective agreement from the creditors for a reorganisation plan. The debtor must file a draft reorganisation plan with the Commercial Court, and submit it to the creditors. It will be adopted and binding upon all of the creditors if it is approved by the majority of the creditors, who must represent more than 50% of the aggregate amount of the claims.
- The transfer of the whole or a part of the undertaking to one or more third parties. The transfer occurs under the authority of the Commercial Court. The Commercial Court can grant the suspension of the payment obligations for a maximum of six months. At the request of the debtor, an extension to maximum 12 months is possible. In extraordinary circumstances, a second extension of six months maximum can be granted. During the suspension period, the debtor cannot be declared bankrupt, nor dissolved by court decision. No forced execution on, or confiscation of, his movable or immovable assets is possible. Under the former Act, all of the creditors had to file a formal declaration of their claims. Under the new Act, it is the debtor who has to notify each creditor of the amount of the claim and the possible privileges. Creditors only have to react if they do not agree with this information.
Forced transfer
The transfer of the whole or a part of the undertaking normally takes place with the approval of the debtor, but can also be forced upon him by the Commercial Court when: (i) the debtor is in a state of bankruptcy without having filed for a procedure of judicial reorganisation; (ii) the court rejected the proposed judicial reorganisation; (iii) the creditors do not approve the plan for judicial reorganisation proposed by the creditor; (iv) the Court refuses to ratify the plan for judicial reorganisation.
A forced transfer can be claimed by the public prosecutor, a creditor or anyone with a legitimate interest in acquiring all or a part of the enterprise. The court appoints an administrator for the organisation of the transfer in the case of a forced transfer.
Conclusion
The new Act on the Continuity of Undertakings has clearly remedied some of the more important objections to the judicial composition process and should lead to the effective recovery of some undertakings in distress. However, it is essential that managers be made aware of the tools offered by the new Act and that they resort to such measures at an early enough stage, when recovery is still a viable option.
| Author biographies |
Peter De Ryck, partner
Lydian
Peter De Ryck is a partner in Lydian's corporate and finance department. He graduated in 1996 with a law degree from the University of Brussels (VUB). He then obtained a diploma in European law at the University of Brussels (ULB) and followed postgraduate programmes in company law (KUB) and business administration (EHSAL). His practice focuses on corporate law and M&A. Peter is recommended by numerous legal directories, which qualify him as being "a man of his word" (IFLR1000) and "an excellent attorney" (Legal500).
Joëlle Vermeulen, associate
Lydian
Joëlle Vermeulen is an associate in Lydian's corporate and finance department. She obtained her law degree in 2008 at the Catholic University of Leuven (KUL). Joëlle's areas of expertise are general corporate law, corporate housekeeping and corporate litigation. |