The Business Continuity Act of 31 January 2009 (the “Act”) creates a variety of flexible tools to promote business recovery and turnaround. In addition to an updated judicial reorganization procedure (i.e., a reorganization overseen by the court), the Act also introduces several interesting options for out-of-court workouts and preventive measures to promote business recovery.

Out-of-court agreements

One of the most noteworthy measures introduced by the Act is the new statutory protection afforded out-of-court agreements. The possibility for the debtor to agree on specific payment conditions is not new. When a debtor finds itself in financial difficulty, its creditors usually prefer to agree on debt reduction or rescheduling rather than non-negotiable proposals arising out of an involuntary (i.e., court-ordered) reorganization. Indeed, a mutual agreement presents several advantages compared to a reorganization under judicial supervision. Firstly, the parties can freely determine who will enter into the agreement and the content thereof. Secondly, the mutual agreement can be kept confidential thereby avoiding adverse reactions from the body of creditors, while a reorganization overseen by the court will generate undesirable publicity that often undermines the success of the procedure. Finally, an out-of-court agreement allows the parties to avoid the expense of a reorganization under judicial supervision.

There are however some disadvantages to out-of-court agreements. In addition to the fact that such an arrangement does not involve and is not binding on all creditors, a mutual agreement may offer less legal certainty. The fact that out-of-court agreements may be rescinded in the context of subsequent bankruptcy proceedings constitutes yet another disadvantage of this option.

This last disadvantage has been done away with under the Act. Indeed, the Act ensures the enforceability of out-of-court agreements in the event of subsequent bankruptcy proceedings against the debtor. As a result of the new statutory protection afforded such agreements, payment arrangements (e.g. installments, settling, etc.) cannot be undone in the event of subsequent bankruptcy. This protection applies to payments on due debts made during the so-called claw-back period (i.e., up to six months prior to the opening of bankruptcy) as well as to payments of due debts and other contracts for (valuable) consideration made or concluded after the debtor’s suspension of payments but before the adjudication in bankruptcy. However, the Act does not protect fraudulent agreements or other questionable arrangements made during the claw-back period (such as the provision of additional security or collateral for a pre-existing debt).

The following conditions must be fulfilled in order to benefit from the protection of the Act:

(i) The mutual agreement must extend to at least two creditors. In this way, the legislature hopes to avoid debtors giving preference to one specific creditor.

(ii) The mutual agreement must state that it is intended to ensure the reorganization or recovery of the debtor's business.

(iii) The mutual agreement must be filed with the clerk’s office of the competent court. The content and existence of an agreement filed with the court will remain confidential (i.e., third parties cannot access it), unless the debtor expressly agrees otherwise. The confidentiality of the agreement does not detract from the debtor’s statutory and contractual obligations to adequately consult and inform its employees and their representatives.

It should be noted that the Act does not contain any provisions on the content of the recovery plan, thus giving the parties complete freedom in this regard. Therefore, the possibility of abuse cannot be excluded. Creditors or suppliers could put pressure on the debtor in order to obtain certain benefits, to the detriment of other creditors who are not privy to and thus unaware of the plan. The courts can and should exercise proper supervision in this regard (e.g., determine if the parties intended to ensure reorganization or recovery, if there was a fraudulent conveyance, etc.).

When the debtor’s proposals for a mutual agreement are not accepted, the debtor can seek judicial protection (in the first place, a stay of enforcement and of bankruptcy) in order to negotiate agreements through a reorganization overseen by the court. In that case, the court's role will be confined to officially confirming the mutual agreement in a decision and closing the reorganization. In that case, the clerk’s office will ensure publication in the Belgian State Gazette of the decisions confirming the opening and close of the reorganization. Any interested party can consult the reorganization file at the clerk’s office.

Company mediator

A company mediator can facilitate the negotiation of an agreement with creditors. In addition, the mediator can help prevent rescission of the agreement in the event of subsequent bankruptcy. A mediator can be appointed at the debtor’s request, as a preventive measure to promote the debtor’s recovery. In this regard, the request can even be made orally. The debtor or mediator can terminate the latter’s assignment at any time, in which case the president of the competent court must be informed of the decision in writing. The Act does not provide any details as to who may serve as a company mediator or who should bear the mediator’s expenses, although logic dictates that the mediator should be independent of the debtor and that the debtor should bear the mediator’s costs.

Conclusion

Judging from similar legislation in other countries, the out-of-court workouts introduced by the Act should promote business recovery. The Act gives substantial (maybe too much) leeway to the debtor and at least two creditors to try and reach a negotiated solution that allows for the debtor's financial recovery. The Act also affords noteworthy protection to this type of mutual agreement, which can be concluded without (preventive) judicial supervision or intervention. Finally, a company mediator can help to facilitate the conclusion of an out-of-court agreement with creditors.