The new restructuring directive and its implementation in belgian law

On June 20^th, 2019 the EU issued a new Directive on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (hereafter referred to as ‘The Directive’), in its first attempt to harmonize substantive rules on insolvency law within the Union.

The main goal of this Directive is to create an effective preventive restructuring framework, which enables debtors to restructure at an early stage and within a short time frame in order to avoid insolvency. Furthermore, the Directive wants to allow honest insolvent or over-indebted entrepreneurs to have a second chance by creating the possibility for entrepreneurs to benefit from a full discharge of debt after a reasonable amount of time.

The Directive needed to be implemented in Belgian Law by the 17^st of July 2021, however, Belgium gladly made use of the possibility foreseen in the Directive to benefit from an extension of the implementation period by a maximum of one year, as did many other Member States.

In this article we point out some of the most important changes the new Directive will (or is most likely to bring) to Belgian insolvency law.

Preventive restructuring regime

Member States are required to make sure that debtors who are likely to become insolvent have access to a preventive restructuring framework that enables them to restructure, with a view to preventing insolvency, hereby ensuring the continuity of their business.

Only limited changes to the already existing prevention mechanism are expected in Belgium, including the implementation of an early-warning mechanism where debtors will be alerted (preferably in an electronic way) when their economic situation is worsening, as well as the possibility to arrange an out-of-court amicable agreement outside the framework of a formal reorganisation procedure with one or more creditors.

Restructuring Plans

Creditor classes

One of the most anticipated changes to be introduced in Belgian law is the Directive’s requirement to separate creditors in classes (according to their rights and the seniority of their claims and interests) during the vote on the restructuring plan. In order to ensure that rights that are substantially similar are also treated in the same way and that restructuring plans can be approved without unfairly affecting the rights of all affected parties, the Directive states that affected parties should be treated in separate categories according to criteria under national law.

Today in Belgium all creditors – secured, unsecured and affiliated – vote together on the plan and the majorities are calculated without taking into account the often very different rights, securities and claims that these different creditors hold. This indeed facilitates the oppression of minority creditors, which the Directive want to eradicate.

It is expected that under the new Belgian Law the general rule to categorize the creditors and shareholders will be based on (i) the rights they would have in a liquidation of the debtor’s assets and (ii) the reorganisation plan. Extraordinary creditors and ordinary creditors will in any case need to be classified into different categories and the Belgian legislator is expected to make use of the Directive’s possibility to limit the class formation for SME’s.

Cross-class cram down

The plan will only be approved if there is a majority in every class. The plan is deemed to be approved by a class when its creditors or equity holders, representing half of all principal amounts and interests owed, vote in favour.

If the plan is not approved in one or more categories, it can nevertheless be submitted to the court for homologation and imposed on the disapproving categories when the plan satisfies the requirements for homologation (including the ‘best-interests-of-creditors test’, infra) and certain specific conditions are met. This is the so-called cross-class cram down which enables debtors to force a class of non-consenting creditor to be bound by the plan and will be introduced into Belgian law.

The Belgian legislator has opted for the absolute priority rule. This rule should guarantee creditors the order of priority that would apply in the event of bankruptcy or forced liquidation and ensure that a category receives its fair share of the reorganisation value. The reverse absolute priority rule ensures that no class of affected parties receives or retains more than the full amount of its claims or interests under the plan.

Contrary to the best-interests-of-creditors test (which has as a benchmark the liquidation value), the absolute priority rule has as a benchmark ‘the reorganisation value’ as contained in the reorganisation plan. Reference is made to the discounted cash flow method to determine the reorganisation value, but no fixed mechanism will be imposed, which will undoubtedly lead to uncertainty and discussion.

Homologation  

Once the plan is approved by the creditors it needs to be confirmed by the court. Following the implementation of the Directive, the courts will be given a more important role in this regard, as the Directive provides for a number of new homologation criteria, such as the ‘best interest of creditors test’. This test ensures that creditors under the restructuring plan get at least what they could get in a hypothetical bankruptcy or liquidation. As stated, this test has as a benchmark the liquidation value. As the determination of that liquidation value is extremely difficult and uncertain, it is - again -  to be expected that this test will give rise to discussion and litigation.

An important novelty that will be introduced into Belgian law in that regard is also that, at the request of any interested party, the court may refuse to sanction the restructuring plan if the plan does not offer a reasonable prospect of averting the liquidation or bankruptcy of the debtor or of ensuring the viability of the company.

Protection for new financing

The Directive also obliges the Member States to ensure that new financing and interim financing are adequately protected in the framework of restructuring proceedings. As a minimum, in the case of any subsequent insolvency of the debtor Member States should ensure that new financing and interim financing cannot be declared void and such financiers cannot incur civil, administrative or criminal liability, on the ground that such financing is detrimental to the general body of creditors. They can also be entitled to receive payment with priority. Member States are nevertheless allowed to make that protection subject to ex ante control by the courts during the homologation of the plan. It is the latter that will now also be introduced into Belgian law.  

Private judicial reorganisation procedures

Lowering the barriers of entry 

As a result of the requirements of the Directive, a new procedure will have to be introduced, providing a legal framework for debtors to negotiate an amicable settlement or a reorganisation plan without being associated with negative publicity.

It is true that the high barriers of entry to the ordinary reorganisation procedure, the complexity the suspension entails and the reputational damage resulting from the opening of the procedure,  result in the procedure being underused. After all, the opening of the procedure, through its publication in the Belgian Official Gazette, means that the financial and/or economic problems of the company become public knowledge and that the suspension is required in order to negotiate a solution. The secrecy of the procedure as well as the extension of the right of initiative to creditors and capital holders (albeit indirectly through the appointment of a restructuring expert) are intended to meet this initiative problem.

Private and confidential

A new chapter will therefore have to be introduced in Book XX Code of Economic Law, to create the possibility of a private and strictly confidential judicial reorganisation, building further on the Act of 21 March 2021 that created the possibility of a more rapid reorganisation. The purpose of this is to allow the debtor to quickly obtain an agreement from all or (contrary to the public procedure) part of his creditors and/or capital holders, in the form of an amicable or collective agreement.

Appointment of a restructuring expert

The private procedure requires the appointment of a restructuring expert to exclude any risk of creditors being manipulated, both in terms of the information provided to them and the way in which their vote is obtained. The restructuring expert's role is to assist the debtor in negotiations with the creditors and, in particular, to ensure that the creditors consulted are correctly informed about the financial and economic situation of the company in difficulty.

Role of practitioners  

The new Directive also introduces a new actor, the practitioner in the field of restructuring, who will supervise the activity of a debtor or partially take over control of a debtor's daily operations and assist the debtor or the creditors in negotiating a reorganisation plan.

To avoid unnecessary costs and to encourage debtors to apply for preventive restructuring at an early stage of their financial difficulties, they should, in principle, be left in control of their assets and the day-to-day operation of their business. Nevertheless, Member States should be able to determine that the appointment of a practitioner in the field of restructuring is always necessary in certain circumstances, such as where:

• the debtor benefits from a general stay of individual enforcement actions;
• the restructuring plan needs to be confirmed by means of a cross-class cram-down;
• the restructuring plan includes measures affecting the rights of workers;
• the debtor or its management have acted in a criminal, fraudulent, or detrimental manner in business relations;
• it is requested by a majority of creditors provided that the creditors cover the costs and fees of the practitioner.

The appointment of the practitioner will thus not be mandatory, but should be decided  on a case-by-case basis depending on the circumstances of the case and/or on the debtor's specific needs. 

What is interesting (and welcoming) is a focus on both the eligibility and suitability of such practitioners. Specifically with regard to cases with cross-border elements, the Directive states that the appointment of the practitioner should take into account the practitioner's ability to comply with the obligations, under the 2015 Insolvency Regulation (EU), to communicate and cooperate with insolvency practitioners and judicial and administrative authorities from other Member States, as well as have the human and administrative resources to deal with potentially complex cases.

Focus is also put on their accountability and oversight. According to the Directive they should be subject to oversight and regulatory mechanisms which should include effective measures regarding the accountability of practitioners who have failed in their duties, such as: a reduction in a practitioner's fee; the exclusion from the list or pool of practitioners who can be appointed in insolvency cases; and, where appropriate, disciplinary, administrative or criminal sanctions

Finally, the Directive explicitly provides that Member States can decide that practitioners are chosen by the debtor, by creditors or by a creditors' committee from a list or a pool that is pre-approved by a judicial or administrative authority. The transposition would be an excellent opportunity for the Belgian legislator to compile a national list of practitioners (in lieu of the current territorial list), as well as to enshrine the creditors' right of choice regarding the person to be appointed.

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The new Directive will thus bring about many important changes to the Belgian Insolvency landscape of which both creditors and companies in distress need to be aware.

The DLA Piper Restructuring team is the only top-tier team on the Belgian market who represents all different stakeholders, either as the court-appointed insolvency practitioner or counsel to investors, creditors and debtors. Our broad practical experience in taking over the management of companies under our judicial mandates benefits our clients when having to make strategic decisions on the future of their company

Please let us know if you wish to receive more information on this matter or if we can assist you in any way.

Charlotte Sas (Senior Lead Lawyer/Bankruptcy Trustee at the Brussels Dutch Speaking Court of Enterprises)

Elke Van Hooghten (Lawyer)

This article is brought to you by NautaDutilh. DLA PIPER UK LLP