The Business Continuity Act of 31 January 2009 (the "Act") creates a variety of flexible tools to promote business recovery. This update focuses on the new judicial (i.e., court-supervised) reorganisation proceedings (as opposed to out-of-court workouts and court-supervised sales of the business).
Simplified access to proceedings
Under the Act, the legislature opted for a very low threshold for court-supervised reorganisation proceedings. Such proceedings, which may only be requested by the debtor, are opened by means of a petition explaining why the continuity of the debtor's business is threatened. The petition must be accompanied by a limited number of documents which allow the court to form an opinion on the debtor's financial situation. In order to further lower the threshold, the Act provides that certain of the requested documents can be submitted within 14 days of filing the initial petition.
The sole requirement to request a court-supervised reorganisation is that the continuity of the debtor's business must be threatened, in the short term or in the long run. If that condition is met and the required documents are filed, the court must open reorganisation proceedings.
Consequences of filing a petition for court-supervised reorganisation: stay
From the time the petition is filed until the court's judgment, (i) the debtor cannot be declared bankrupt or involuntarily dissolved and (ii) no foreclosure measures can be taken on the debtor's movable or immovable property.
The court must render a judgment within 18 days from the filing of the petition. The judgment will determine the original period of suspension of payments, which cannot exceed 6 months. The original period of suspension may be extended an unlimited number of times, as long as the total period of suspension does not exceed twelve months (or eighteen months in very exceptional circumstances).
Flexibility of court-supervised reorganisation proceedings
The opening of court-supervised reorganisation proceedings, and the resulting suspension of payments, has important effects on the ability of creditors to (i) take enforcement or preventive measures against the debtor's assets, (ii) terminate agreements entered into with the debtor, and (iii) set off their claims with the debtor. The consequences of a court-supervised reorganisation for creditors will be described in more detail in an upcoming update.
The purpose of a suspension of payments is to enable the debtor to realise one of the scenarios provided for by the Act, namely:
- a mutual agreement with at least two creditors;
- a restructuring plan approved by the meeting of creditors; or
- a transfer under court supervision of its business or a part thereof to one or more third parties.
The debtor may combine these options (for all or some of its activities) or switch from one option to another.
An agreement concluded by the company with the creditors after the opening of the proceedings is subject to the same rules as an out-of-court mutual agreement, with the only difference being that it is concluded under judicial supervision. Both types of agreements are protected and recognised in the event of the debtor's subsequent bankruptcy provided the agreement involves at least two creditors (for more information, see our update of 15 April 2009: "Business Continuity: Out-of-Court Workouts to Promote Financial Recovery").
The restructuring can be split into two periods: a stay, during which time the debtor drafts a restructuring plan, and the implementation of the restructuring plan:
- The restructuring plan must consist of a descriptive part and a substantive part. The descriptive part sets out the debtor's (financial) situation, the difficulties it is facing and the proposed remedies. The substantive part describes the measures proposed with regard to the debtor's creditors. If relevant, the plan should also indicate any proposed dismissals of employees. The plan can provide for the voluntary transfer of some or all of the debtor's business. Unless the preferred creditors consent, their rights cannot be reduced, except that payments of their claims can be suspended for a period of up to 24 months - extendable under certain limited circumstances by 12 months - without prejudice to the rights of these creditors to receive interest on their claims.
- The restructuring plan must be approved by (i) a majority of creditors (ii) representing at least 50% of the total outstanding debt (principal amount), with abstentions not being taken into account.
- If approved by the debtor's creditors, the court will officially approve the plan within 14 days unless it is contrary to public policy or does not respect the formal requirements of the Act. Confirmation of the plan closes the restructuring proceedings and renders the plan binding on all creditors. Confirmation can be revoked if the debtor does not respect the plan. The period for implementation of the plan is limited to a maximum of 5 years as from its official confirmation.
The third scenario, a court-supervised sale of all or part of the debtor's business can be either the debtor's first choice when filing for reorganisation or the debtor's last resort (failing a mutual agreement or reorganisation plan). The transfer can also be mandatory, at the request of other parties than the debtor.
This third option will be described in more detail in an upcoming update.