On 13 July 2017, the Belgian parliament adopted an Act compiling the existing Belgian insolvency legislation into one insolvency code (the “Insolvency Code“). The Insolvency Code will become law as from its ratification by the King and publication in the Belgian State Gazette, both of which being no more than administrative formalities. The Insolvency Code will apply to any insolvency proceeding opened on or after 1 May 2018.
The vast majority of the changes resulting from the Insolvency Code are technical in nature. And the most publicized proposal, the introduction of a “silent” or “pre-pack” bankruptcy, was abandoned at the last minute.
There are however a number of changes that received less public attention but that are set to alter both restructuring practice in Belgium generally and the rights of secured creditors in a judicial reorganisation (gerechtelijke reorganisatie / réorganisation judiciaire) specifically.
Strengthening of out-of-court arrangements
Under the existing law, a debtor may enter into an out-of-court arrangement (minnelijk akkoord / accord amiable) with two or more of its creditors. Subject to completion of certain formalities, the out-of-court arrangement and payments made in execution thereof are to a certain extent protected from the pre-bankruptcy hardening period (verdachte periode / période suspecte) in a subsequent bankruptcy. But importantly any new security that may be granted by the debtor in the framework of the out-of-court arrangement is not so protected. Perhaps also due to this reason, out-of-court arrangements never achieved the popularity that the legislator intended.
The Insolvency Code strengthens the out-of-court arrangement by, among others, expanding the protection from the pre-bankruptcy hardening period to new security that may be granted by the debtor in the framework of the out-of-court arrangement. In addition, the Insolvency Code stresses that creditors participating in the out-of-court arrangements shall not incur liability on the sole basis that the out-of-court arrangement is not successful in reorganising the debtor.
The formalities for obtaining the above protection are tightened, be it only slightly. Indeed, the out-of-court arrangement must not only mention but also justify its usefulness in the reorganisation of the debtor’s enterprise. In addition, the out-of-court arrangement must contain confidentiality and indivisibility provisions. It must now be filed with the electronic insolvency register but will (as before) remain confidential.
The (relatively limited) cost of compliance with the above formalities will often be outweighed by the (very real) value to creditors of receiving unchallengeable security. As such, it is to be expected that out-of-court arrangements will play a more important role in pre-insolvency restructurings.
Changes to the rights of secured creditors in judicial reorganisation
A second area where the Insolvency Code brings about substantive change is the treatment of secured creditors in a judicial reorganisation through collective agreement (gerechtelijke reorganisatie door een collectief akkoord / réorganisation judiciaire par un accord collectif).
The judicial reorganisation through collective agreement is by far the most popular form of pre-bankruptcy moratorium in Belgium. It permits a debtor to restructure its indebtedness (including forced write-offs of debt) subject to a double majority vote among the creditors. Secured or “extraordinary” creditors are largely immunised and their claims can only be written-off subject to their consent.
Limitation of immunity of secured creditors to the value of their security
Under the existing law, there has been a debate as to whether creditors which are only secured over part of the assets of the debtor (and/or registered only up to a certain secured amount) are to be considered as secured or “extraordinary” creditors for the entire amount of their claims or only for the value of their security. In the first interpretation, the entire amount of their claims is immune from forced write-off. In the second interpretation, a part of their claims corresponding to the value of their security is immune but the remainder is not.
The Insolvency Code adopts the second view. Specifically, secured creditors will only be “extraordinary” (and hence immune to forced write-off) for part of their claims corresponding to (i) in case of a registered security, the secured amount, (ii) in case of a pledge over receivables, the book value of the receivables and (iii) in any other case, the going concern realisation value of the secured assets.
Given the above, lenders may be inclined to take more complete security and to reduce the use of (mortgage or floating charge) mandates when originating loans. Also, lenders are recommended to monitor struggling debtors even more closely and to make sure any mandates are timely converted prior to the opening of a judicial reorganisation.
Extension of suspension of secured creditors’ rights
Although secured creditors cannot be subject to forced write-off without their consent, their rights can be suspended (ie forced debt rescheduling) without their consent for a period of 24 months on condition that interest is paid as per the requirements of the contract.
Under the existing law, the period of 24 months commenced on the date of filing of the debtor’s request to open judicial reorganisation proceedings. The Insolvency Code postpones commencement of the period to the date on which the court ratifies the collective agreement. In practice, this extends the period by between three and, in extreme cases, eighteen months.
New security created during the judicial reorganisation proceedings
Under both the current law and the Insolvency Code, creditors may receive new security during the judicial reorganisation proceedings either in agreement with the debtor or through exercise of pre-existing mandates. Such new security will not be counted in determining the “extraordinary” nature of the creditor’s claims (as per above) but will be useful in a subsequent bankruptcy.
The Insolvency Code innovates by to a certain extent protecting the new security from the pre-bankruptcy hardening period (verdachte periode / période suspecte) in a subsequent bankruptcy. This may in practice encourage lenders to convert their mandates into actual security.
Enforcement of receivables pledges
Secured creditors are, subject to certain exceptions, not allowed to enforce their security during the judicial reorganisation proceedings. One of the exceptions is the pledge over specific receivables, which can freely be enforced by the pledgee.
Under the existing law, there is an argument that the above exception is to be interpreted rather restrictively as catching only a pledge of one or more identified present receivables. The Insolvency Code, although not crystal clear, aims to confirm that general pledges of present and future receivables can also be freely enforced.
Given that banks often include such general pledges of present and future receivables in their general terms and conditions, the above change is likely to significantly strengthen their position in a judicial reorganisation.
In sum, the Insolvency Code encourages partially secured creditors to convert their mandates and complete their security package (i) through an out-of-court arrangement to altogether avoid a court-supervised insolvency process, (ii) prior to judicial reorganisation to avoid forced write-offs and eventually (iii) during a judicial reorganisation in anticipation of bankruptcy.