Belgium has modified its law on business reorganizations that involve distressed companies. The new law of January 31, 2009, on the continuity of companies came into force on April 1, 2009, replacing an unpopular and rigid law on judicial composition proceedings that dated to 1997.
This new law simplifies the rules and procedures for reorganizing distressed companies by providing a variety of new flexible out-of-court and in-court options designed to facilitate business recovery.
From an M & A perspective, the new law also allows a liability-free transfer of assets of the distressed company without the latter having to file for bankruptcy.
Further, the new law removes a number of tax obstacles that often proved prohibitive for restructuring operations.
Under the new law, the Chairman of the Commercial Court, at the request of a distressed company, may appoint a neutral mediator to help the company restructure its liabilities and negotiate with its creditors. Because these negotiations are conducted by the mediator on a confidential basis, the company can avoid negative publicity that might further damage its creditworthiness.
The new law also allows a distressed company to negotiate an amicable settlement with at least two or more of its creditors without entering into a court-supervised reorganization.
The main benefit to creditors of such an agreement is that settlement payments remain enforceable vis-à-vis all creditors even if the distressed company later files for bankruptcy. To secure this benefit, however, the settlement agreement must be filed with the Commercial Court, and the parties must expressly indicate that the settlement’s objective is to improve the financial position of the debtor or to reorganize its business. This is a significant change from the previous 1997 law.
The new law provides the following new court-supervised reorganization options to help distressed companies as soon as their continuity is jeopardized:
- A court-assisted voluntary settlement agreement with two or more creditors. This agreement has the same effect as the out-of-court settlement described earlier, but is supervised by (rather than just filed with) the Commercial Court.
- A collective agreement with creditors on a reorganization plan. Under this option, the distressed company needs to prove that the continuity of its business is threatened and to prepare a reorganization plan. This plan must be approved by a majority of the creditors representing at least half of the outstanding claims, under the supervision of the court.
- A transfer of all or part of the company under court supervision.
These options are open to companies as soon as their continuity is in jeopardy.
When filing a request for court-supervised reorganization, the distressed company must specify which option it is requesting. However, the new law makes it possible to switch from one option to another as the company’s situation evolves, which was impossible under the previous rigid system.
A key new feature of the new court-supervised reorganization procedure is that the debtors remain in control of their business during its restructuring. Under the previous 1997 law, management of the distressed business was assigned to court-appointed administrators.
As soon as the court-supervised reorganization is initiated, the distressed company is given a six-month reprieve during which it cannot be declared bankrupt and no enforcement measures can be taken against it. The court may extend this period twice with each extension lasting an additional six months, bringing the maximum period of reprieve to 18 months.
Once the distressed business reaches a collective agreement with its creditors, the court will set a binding repayment schedule. So long as the distressed company satisfies the terms of this schedule, creditors may not take enforcement action. Repayment schedules may not exceed five years from the date that the collective agreement is approved by the court.
The court can, however, revoke the plan for certain serious reasons—for example, if the company has provided false information to the court or to the creditors, or if the company is not in compliance with the conditions of the plan.
Transfer of Business
The new law explicitly allows for a transfer of (part of) the business or the assets/activities of the distressed company and provides two procedures to do so.
Under the first procedure, the transfer of the business is ordered by the Commercial Court, after the debtor agrees and after the employees are consulted.
Under the second procedure, the transfer can be ordered by the Commercial Court without the agreement of the debtor. This forced transfer can be requested by the public prosecutor, a creditor or any party who can show a legitimate interest in acquiring the business. This forced transfer can be ordered only if one of the following conditions is satisfied:
- The distressed company is in a state of virtual bankruptcy without having filed for court-supervised reorganization.
- The Commercial Court rejects the requested court-supervised reorganization.
- The creditors refuse the plan for court-supervised reorganization proposed by the distressed company.
- The Commercial Court refuses to ratify the reorganization plan.
When the Commercial Court orders such a forced transfer, it also appoints a judicial agent who is in charge of completing the transfer.
The Tax Perspective
The new law amends a number of tax provisions. Notably, it exempts from taxation the profits made by the debtor within the framework of a court-supervised reorganization. Such profits can, for example, include the price received for a transfer of business/assets, and/or the advantage received if a creditor waives a debt.
This may allow for a merger or acquisition transaction driven by tax planning considerations. For instance, a creditor who waives a debt as part of a transaction under the new law may be able to deduct the amount waived from its own taxes (under certain conditions), while the debtor is not taxed on the proceeds.
It has long been clear that the 1997 reorganization law and its subsequent modifications did not provide a practical framework for the reorganization of distressed companies. The new law introduces a less rigid system that is similar to Chapter 11 in the United States, which offers various practical tools to distressed businesses to facilitate financial recovery.
Since their implementation on April 1, 2009, the reorganization measures provided by the new law have been very successful. A number of companies facing financial difficulties have already applied for court-supervised reorganization under the new rules. This clearly shows that the new rules meet the needs created by the current difficult economic conditions.
From an M&A perspective, the new law will also certainly create new opportunities for potential acquirers of distressed company assets. This is particularly true given that acquirers can obtain a transfer of assets liability-free without having to wait for the actual bankruptcy of the distressed company.