‘Open gate’ approach for receiving protection from your creditors

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Bart Heynickx

Counsel

The Belgian insolvency framework provides for specific (court-supervised) restructuring proceedings, during which a company (or debtor) is protected against its creditors' claims so that it can reorganise its business.

Such easy access is beneficial for debtors. However, creditors still retain some options for claiming payment of their debts.

Easy access and protection

For debtors, one of the frameworks' major advantages is its 'open-gate' approach. In essence, this approach means that court protection is granted if the company's continuity is threatened and the debtor files a request (supported by specific documents) in this regard.

As a result, companies neither have to prove that their continuity is threatened, nor that a reorganisation would improve their situation. Indeed, even de facto bankrupt companies have successfully applied for protection under this framework.

However, the courts' largesse is not unlimited: most grant protection orders only for three months. If a company requires more time, then it must apply to the court for an extension.

In principle, during the reorganisation process, the company's management continues to run the company. The company’s creditors can no longer attach the company’s assets or commence bankruptcy proceedings.

The company's management must implement either:

  • an amicable agreement with some of its creditors; or
  • a collective agreement with all of its creditors; or
  • a (partial) sale of assets as a going concern.

For these options, the company can opt for an amicable, binding agreement with some of its creditors regarding the reimbursement of their claims.

Alternatively, the company can submit a reorganisation plan, proposing, among other things, a reimbursement schedule for all of its creditors, which is intended to preserve and continue its activities. In the framework of this plan, the company can propose to pay only some of its debts. Companies often group their creditors into categories and offer different levels of payment to each category, although some claims cannot be reduced.

The reorganisation plan must also contain an overview of the measures that the company will implement to redress its profitability, solvency and economic and employment situation. If the reorganisation plan is accepted by the majority of the regular and unsecured creditors, who together hold a majority of the company's debt, and if all the procedural requirements have been met, then the court will accept the plan and declare it binding on all of the creditors, even those who voted against it or did not participate in the vote.

In general, only if a collective agreement fails then will the third option of an attempt to sell all or part of the business be considered. This option is intended to transfer the company's activities (or some of them) as a going concern to a third party, together with the required employees and assets (e.g. buildings). Only the price paid for these assets can, in principle, be used to (partially) repay (some of) the creditors.

Options for creditors

Even after court protection, some options remain open to creditors.

First, the companies are not protected from the recovery of debts incurred after the framework’s protection comes into force, meaning that debtors can enforce new claims.

Second, during the reorganisation process, creditors can suspend the delivery of goods and services until the company pays its outstanding debt. Creditors can also terminate (e.g. for cause) contracts with companies under the framework’s protection.

Third, compensation between mutual claims is possible when these claims are connected or, if certain conditions have been met, based on a specific agreement that the parties entered into before the reorganisation process.

In addition, if a creditor fears that the debtor company's managers are incompetent or have committed serious errors, then the appointment of a court-administrator can be requested.

Finally, it is important to point out that the protection under the framework applies only to the debtor concerned and, in principle, not to any co-debtors or guarantors of old or new loans.

Conclusion

Court protection can be an efficient mechanism for a company to safeguard its business from its creditors for a restructuring process. Often, however, these attempts fail and an insolvency specialist is appointed.

For creditors on the other hand, it is important for creditors to take the necessary steps to safeguard their position and limit their exposure.

Creditors, on the other hand, need to act swiftly and assess their remaining options.

For further information on this topic please contact Bart Heynickx at ALTIUS by telephone (+32 2 426 1414) or email (bart.heynickx@altius.com). 

The above information is merely intended as comment on relevant issues of Belgian law and is not intended as legal advice. Before taking action or relying on the comments and the information given, please seek specific advice on the matters that are of concern to you.

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