Effect of EU preventive restructuring directive on Belgian insolvency framework
On 31 January 2009 the Belgian Business Continuity Act (BCA) was passed into law. The BCA’s objective is to protect companies in financial difficulty from their creditors so that a reorganisation process can take place and bankruptcy can be avoided. The BCA has been updated and, as of 1 May 2019, it has been included in Book XX of the Code of Economic Law (for further details please see “Changes to insolvency regime proposed“).
This article focuses on the potential effect that the recently adopted EU Directive 2019/1023/EU on preventive restructuring frameworks, the discharge of debt and disqualifications and measures to increase the efficiency of procedures concerning restructuring, insolvency and the discharge of debt will have on Book XX.
In June 2019 the EU Council adopted EU Directive 2019/1023/EU (and amended EU Directive 2017/1132/EU).
EU Directive 2019/1023/EU aims to ensure that:
- viable enterprises and entrepreneurs in financial difficulty have access to effective national preventive restructuring frameworks which will enable them to continue operating;
- honest insolvent or over-indebted entrepreneurs can benefit from a full discharge of debt after a reasonable period;
- and the effectiveness of procedures concerning restructuring, insolvency and the discharge of debt are improved.
EU member states must transpose EU Directive 2019/1023/EU into national law by 17 July 2021, with some exceptions made for certain provisions.
The directive sets out minimum standards that EU member states must implement in principle. However, the directive’s wording makes it clear that members states enjoy a high level of flexibility regarding implementation. Therefore, the directive will not result in a uniform legal framework throughout the European Union.
Directive’s effect on Book XX
The draft of EU Directive 2019/1023/EU was taken into consideration during the preparation of Book XX of the Code of Economic Law. Book XX’s preparatory works indicated that, in general, it complied with the draft version of the directive, so its introduction in Belgium should not have meant major legislative changes.
However, given, among other things, the changes to the directive that the European Parliament made on 28 March 2019, the following changes to Book XX may be required.
Debtor in possession
Book XX provides that the board of a company in financial difficulty remains in charge in principle (ie, the so-called ‘debtor in possession’ principle). Article 5 of EU Directive 2019/1023/EU also includes this principle.
However, Article 5(3) of the directive stipulates that EU member states must provide for the appointment of a restructuring practitioner to assist debtors and creditors in negotiating and drafting a reorganisation plan, at least where:
- a general stay of individual enforcement actions is granted and the judicial or administrative authority decides that such a practitioner is necessary for safeguarding the parties’ interests;
- a restructuring plan must be confirmed by a judicial or administrative authority by means of a cross-class cramdown or haircut; and
- requested by the debtor or a majority of the creditors, provided that, in the latter case, the cost of the practitioner is borne by the creditor.
At present, Book XX provides only for the mandatory appointment of a “practitioner in the field of restructuring” if the debtor’s assets, activities and staff are transferred to a third party.
EU Directive 2019/1023/EU will probably force the Belgian legislature to broaden the scope of such appointments.
Duration of moratorium
Article 6(6) of EU Directive 2019/1023/EU provides that the initial duration of a stay of individual enforcement actions is limited to a maximum of four months. Paragraphs 7 and 8 of the same article allow the moratorium to be extended provided that it does not exceed 12 months.
Article XX.59 of the Code of Economic Law provides a moratorium that can be considerably longer, referring to an initial 12-month moratorium with the option of an additional six months in exceptional circumstances or an additional six months in the case of a transfer of assets under court supervision (Article XX.85 of the Code of Economic Law).
Suspension of enforcement during the moratorium
The current Belgian legal framework provides that creditors which hold specific securities (eg, a pledge on claims) can enforce their security even after the debtor has received court protection.
It seems that this will no longer be possible after EU Directive 2019/1023/EU’s implementation.
Article 6(2) of the directive provides that EU member states must ensure that a stay of individual enforcement actions covers all types of claim, including secured and preferential claims. The directive makes only a limited number of exceptions to that general rule possible if:
- the exclusion is duly justified;
- enforcement is unlikely to jeopardise the restructuring of the business; or
- the stay would unfairly prejudice the creditors of those claims. Workers’ claims also fall under the exception.
Suspension and termination of ongoing contracts
Under Belgian law, the general framework regarding the suspension and termination of ongoing contracts applies, even if a contractual party has received protection against its creditors. If outstanding claims are unpaid and some formalities are respected, a creditor can, in principle, refuse to continue its agreement with its counterpart.
Article 7(4) of EU Directive 2019/1023/EU explicitly stipulates that EU member states must provide for rules preventing creditors from withholding performance or terminating essential contracts for debts that came into existence prior to the stay, solely by virtue of the fact that they were not paid by the debtor.
This provision will have an important effect on the economic power that creditors performing a contract that is essential to the continuation of the debtor’s activities hold over the latter.
Cramdown of creditors and acceptance of reorganisation plans
Under the current Belgian legal framework, a reorganisation plan must be accepted by a double majority of ordinary or non-secured creditors, both by headcount and the amount of debt that the creditors hold (Article XX.78 of the Code of Economic Law).
In practice, debtors often gather proxies prior to voting to be more or less certain that the plan will receive the required (double) majority.
EU Directive 2019/1023/EU provides for a more complex system and requires in principle that a majority in every voting category is reached (Articles 9(6) and 11).
Further, the directive stipulates that if there are dissenting creditors, the courts can check if the restructuring plan satisfies the best-interest-of-creditors test. The current Belgian legal framework does not allow the courts to scrutinise the reorganisation plan in such a way (Book XX.79, Section 3 of the Code of Economic Law).
It seems that numerous changes will be required to align Book XX of the Code of Economic Law with EU Directive 2019/1023/EU. The preparatory works to Book XX appear to have been a bit too optimistic in that regard.
If the legislature has to make changes to Book XX, it might also consider fixing issues resulting from the European Court of Justice’s judgment in Plessers (for further details please see “Will ECJ decision on Belgian insolvency proceedings lead to increased redundancies?“).
The European Court of Justice’s (“ECJ”) Plessers judgment seemed to cause a serious threat for the applicability of the Belgian reorganisation procedure by transfer under judicial supervision, and the right of the interested buyer of the debtor’s activities to choose which particular employees it would take over. But, in the end, it has turned out to be “much ado about nothing”.Read on
On 16 September 2021, the Antwerp Court of Appeal ruled on the liability of the directors of a company that did not respect the so-called ‘alarm bell procedure’.Read on