Deep dive into the new Belgian Restructuring Law

This procedure will now become more flexible by allowing an agreement to be reached with just one creditor, rather than the previous requirement of at least two. Furthermore, some formal conditions, such as the indivisibility and confidentiality clauses in the amicable settlement, no longer need to be satisfied. The settlement agreement may also from now not only be filed in the language of the court (Dutch, French or German) but also in an international business language (English).

Judicial review of out-of-court settlements has been strengthened. The court will decline the homologation if it is evident that the debtor has no viable economic prospects, or if implementing the settlement would clearly harm the rights of third parties to the debtor's assets. It remains to be seen how future case law will interpret these criteria.

Additionally, under the New Belgian Restructuring Law, amicable settlements are only protected against certain specific avoidance actions in the event of bankruptcy if they have been previously homologated by the court.

The first notable change is the introduction of a fully "private" (or confidential) procedure of judicial reorganisation to quickly obtain an agreement with creditors on all or part of the debts in the form of an amicable settlement or a (collective) reorganisation plan (procédure de réorganisation judiciaire privée/besloten gerechtelijke reorganisatie). The start of a regular judicial reorganisation procedure is published in the Belgian Official Gazette and appears in the Central Business Register which may cause certain companies to delay such a step. To address this issue, the New Belgian Restructuring Law introduces two new judicial reorganisation procedures: i) the private amicable agreement and ii) the private collective agreement. Those procedures are strictly confidential and may be initiated by the debtor or by a creditor or a shareholder if the company faces imminent insolvency. Neither the court's decision to initiate the proceedings nor the court's approval of any agreement will be made public.

Upon the initiation of the procedure, a must be designated by the court. The restructuring practitioner exercises a judicial control function. He or she assists the debtor in negotiations with creditors and ensures that consulted creditors are properly informed about the financial and economic situation of the distressed company.

The debtor chooses which creditors to involve. Unlike the “regular” public judicial reorganisation procedure, the private judicial reorganisation procedure does not trigger an automatic and general stay of individual enforcement actions. The restructuring practitioner may, however, request the court to impose a stay to (some of the) involved creditors for a maximum period of four months.

It remains to be seen whether these new procedures will be successful. The private nature is undeniably a significant advantage.

Belgian law knows three forms of public judicial reorganisation: i) the judicial amicable agreement, ii) the collective agreement, and iii) the transfer under judicial authority. Each of these three forms is adjusted under the New Belgian Restructuring Law. 

Public Collective Agreement Procedure

The Directive provides a minimum framework for the content, voting and homologation of collective restructuring plans inspired from the English scheme of arrangement and US Chapter 11 procedure which largely differs from the former collective agreement procedure.

Belgium decided to only implement these changes for the reorganisation plans of large companies.

Restructuring plans for SMEs: no changes

For SME’s the collective agreement procedure remains more or less the same. The adoption of the plan is subject to the vote of all creditors together, regardless of the nature and extent of their claims. The reorganisation plan is deemed approved if the majority of creditors, who also represent half of all outstanding principal amounts, vote in its favor. The court's ratification makes the plan binding on all suspended creditors. SME’s may however choose to opt-in for the large companies’ regime.

Restructuring plan for large companies: voting per classes

Large companies are companies, associations, or foundations that exceed one or more of the following criteria for two consecutive financial years: (i) an annual average of 250 employees, (ii) an annual turnover excluding VAT of 40,000,000.00 euros and/or (iii) a balance sheet total of 20,000,000.00 euros. The New Belgian Restructuring Law provides for a new complex regulation based on classification and voting per class of creditors. Different classes of creditors must be provided where creditors or shareholders have different rights. At least secured and unsecured creditors must be treated in separate classes. Under the new regime, secured creditors will only be included in the class of secured creditors for an amount equal to the value they would receive from their security in a bankruptcy or liquidation in accordance with the normal ranking of liquidation priorities.

In principle, the creditors representing more than half of all outstanding principal amounts and interests must vote in favor of the plan within each class. Dissenting minority creditors will be bound by the plan (cram-down) provided the court considers that the plan meets the creditors’ best interest test and even if unanimity of creditors is contractually required (such as in the LMA loan agreements). This is a major change for secured creditors who used to benefit from a veto right on measures affecting their rights under the old regime. In addition, the court can override the negative vote of one or more classes of creditors and impose the plan upon the dissenting creditors (cross-class cram down) under well-defined circumstances when the plan is in favor of the creditors (absolute priority rule).

Public Amicable Agreement Procedure

The New Belgian Restructuring law innovates allowing that an amicable settlement can be concluded with one creditor instead of at least two. Furthermore, the court can impose a (binding) payment plan on creditors with whom an amicable settlement could not be concluded.

Transfer under Judicial Authority Procedure

The transfer under judicial authority continues to allow a transfer of the business without obliging the transferee to take over all employees as far as this reduced number does not lead to discrimination of employee representatives in the employee representative bodies and as far as technical, organisational and economic reasons support the reduced number of employees. The court may refuse the transfer if those reasons are not sufficiently explained.

The remaining employees will be dismissed by the bankruptcy trustee. Seniority of the employees, employment and salary conditions must be respected by the transferee except if a deviating agreement can be fund with the employees.

Saving jobs is a key legal criterion when the court compares the offer of multiple candidates acquirors. We see in practise more often a tailormade approach, where e.g. a core team is offered continued employment and only in a next phase (e.g. 6 months following bankruptcy) more employees are offered employment following the bankruptcy. Indeed 6 months after the bankruptcy, seniority should not be respected anymore.  

With termination of the employment contracts without having to comply with the “Renault Act” on collective dismissals. The European Court of Justice created some uncertainty by ruling in several decisions (Smallsteps, Plessers and Heiploeg) that the Belgian insolvency regime infringes EU Council Directive 2001/23/EC regarding the safeguarding of employees’ rights in the event of business transfers. The New Belgian Restructuring Law excludes the application of the Belgian CCT 32bis which means that the transferee may choose which of the transferred (part of the) business and employees he will take over, as long as appropriate selection criteria is applied (technical, organizational and economic). The new restructuring regime will likely breathe new life into the transfer under judicial authority.

The silent bankruptcy allows insolvent companies to discreetly prepare for the transfer of assets and activities under court supervision before formal bankruptcy proceeding is opened. It is similar to a pre-pack bankruptcy procedure.

The “private” (or confidential) bankruptcy preparation procedure (‘préparation privée d’une faillite/besloten voorbereiding van het faillissement’) can only be initiated by the debtor. In its petition, the debtor must demonstrate that the confidential pre-bankruptcy proceedings will (i) facilitate the liquidation of the company while achieving the highest possible distribution to the joint creditors, and (ii) preserve jobs to the extent possible.

If the court grants the debtor’s request, a liquidation expert (vereffeningsdeskundige/praticien de la liquidation) is appointed for a maximum of 30 days (with possible extension to a total of 60 days). Following the confidential preparation procedure, formal bankruptcy proceedings are opened during which in general the appointed liquidation expert will act as bankruptcy trustee to finalise the negotiated transfer, if any. The legislator aims to avoid the situation of the traditional bankruptcy, which is immediately declared and published (with all the negative consequences of such publicity) and also limit some abuse of self-assignment.

According to the most recent case law of the European Court of Justice, the transferee will not be obliged to take over all employees if the agreement is reached in the framework of such pre-pack agreements.

Although possible under the old insolvency regime, debt-to-equity swaps were not very common in Belgium as the capital increase must be approved by the general meeting of shareholders. Under the New Belgian Restructuring Act, the shareholders will be allocated within a class and they may be affected by the collective plan even if they dissent or even if the class they are in votes against the plan provided, among other, the plan does not deviate from the normal ranking of liquidation priorities (which should not be an issue because the shareholders are last in the normal ranking of liquidation priorities). Under the new regime, any interested party may ask the court to order the shareholders’ meetings to take the decisions necessary for the plan. Although the measures are not detailed in the law, it seems that a debt-to-equity swap might be such a measure. 

A reorganisation leading to a debt reduction will automatically give rise to an extraordinary profit subject to corporate income tax in the hands of a Belgian corporate debtor. In order not to jeopardize a successful judicial reorganisation due to adverse (cash) tax consequences triggered by such debt waiver, a specific tax exemption has been introduced applicable to said debt waiver gain in the hands of the debtor (art. 48/1 ITC 1992; art. 27/1 RD/ITC 1992). In addition, a Belgian corporate creditor waiving its debt claim benefits from more relaxed conditions for the tax deductibility of the impairment on its receivable (art. 48, para. 2, ITC).

Both above beneficial tax regimes originally only applied in the context of a public judicial reorganisation. In 2021, the scope of the beneficial tax deduction for creditors was extended to the out-of-court settlement, whereas the exemption for debtors remained strictly limited to procedures of public judicial reorganisation. The latter meant that debtors experiencing financial difficulties remained subject to the difficult choice between the confidential nature of out-of-court proceedings (with potential cash tax cost) or the tax exemption of the debt reduction (implying the publicity of the procedure).

As indicated above, the New Belgian Restructuring Law results in a drastic change in the forms and number of insolvency proceedings with the introduction of 2 new private judicial reorganisation procedures. Currently, Belgian tax law has not (yet) been adapted to the new provisions in the Code of Economic Law, creating some uncertainty on the application of the special tax regimes to the new private restructuring procedures. On the side of creditors, the special tax deduction rules appear to only apply to the extrajudicial amicable settlement, the public judicial amicable agreement and the public judicial collective agreement for SMEs, but not to the public collective settlements for large enterprises and not for the new “private” judicial reorganisation procedures by collective agreement or by amicable settlement, meaning that the deductibility of the impairments in these cases will be subject to the ordinary (stricter) rules.

Although a very strict reading of the law may create some uncertainty on the exact scope, it is reasonable to conclude that the debtor’s tax exemption regime should be applicable to all judicial reorganisations (amicable and collective, public and private). This means that debtors should also benefit from the exemption under the new private judicial procedures which would certainly be a welcome development. The exemption regime (currently) remains non-applicable to out-of-court settlement agreements even if homologated by the court. 

A legislative change could be expected to align the scope of the special tax regimes to the new procedures.