A new business continuity Act in Belgium marks an overall change in how the Government is handling companies in financial distress. Paul van der Putten reports

As in other countries, the current economic and financial crisis has already taken its toll on Belgium. The number of bankruptcies has reached record heights. Unemployment is rising and forecasts for 2009 are pessimistic.

In this context, on 31 January, 2009 the Belgian Parliament adopted a new Act on Business Continuity, completed by a Royal Decree of 27 March, 2009. It came into force on 1 April, 2009.

This new Act replaces the former and unsuccessful judicial composition procedure with a more effective and flexible restructuring instrument. The majority of the (few) applications filed under the old Act on judicial composition resulted in bankruptcy instead of recovery. The failure of the old Act was due to the rigid and complex nature of the proceedings, the lack of flexibility and economics in its approach, the high costs of the procedure and the unattractive employment law provisions in case of transfer of a business. Also, the Belgian courts and business community did not have a culture of rescuing companies facing difficulties and were more inclined to put an end to their activities with a view to limiting the collateral damage to the creditors.

The philosophy behind the new Act is, on the contrary, to allow the rescue of all or part of the activity of the financially distressed company. Inspiration was sought inter alia in the US Chapter 11 and similar legislation in other European Union (EU) countries. The new Act provides flexible tools to facilitate business recovery. This flexibility is reflected, for example, by the uncomplicated access to proceedings; the fact that being in a state of bankruptcy does not in itself rule out the option of opening or continuing reorganisation proceedings; and the availability of several restructuring scenarios. The new rules aim at rescuing as much as possible of any economic activity and the employment connected to it, either by revitalising the company itself, or by rescuing only the activity by means of a transfer of business. Whereas the focus in the past was on the protection of the creditors, it has now shifted to the protection of the debtor and, in particular, the protection of the continuity of its activity and of the employment of its personnel.

The core achievement of the Act is to make available several restructuring scenarios, some being out-of-court, others involving the court's supervision.

In an out-of-court scenario, the Act provides the possibility for the debtor to conclude amicable settlements with (some of) its creditors.

A reason for the failure of such out-of-court settlements in the past was that the creditors who continued to deal with the debtor after it had ceased making payments were at risk of having their transactions set aside under the 'suspect period rules'. According to such rules, payments made by the debtor during the suspect period (i.e. a period of time up to six months between cessation of payment and bankruptcy) under certain conditions are deemed ineffective and certain transactions performed during the suspect period may be set aside by the court.

Under the new rules, if the debtor files a copy of the settlement agreement with the court registry, such agreements as well as any transactions performed under it cannot be set aside under the rules of the 'suspect period' in the event the reorganisation fails and the debtor is nevertheless adjudged bankrupt.

Another advantage of the 'registration' of the settlement agreement is that the existence (as well as the content) of the amicable settlement must remain confidential and cannot be disclosed to a third party without the debtor's approval.

In spite of the above, however, the impact of the amicable settlement is rather small now that such settlement agreements are not binding on third parties and cannot affect their rights.

For this reason, the debtor can also opt for a reorganisation under the court's supervision. The aim of such judicial reorganisation is to maintain the continuity of all or part of the debtor or of its activities. The judicial reorganisation involves a moratorium granted to the debtor. During this moratorium period, the debtor will have three options: enter into an amicable settlement with its creditors, submit a restructuring plan to all its creditors or transfer all or part of its business to a third party.

During the judicial reorganisation, the debtor may switch from the court-assisted voluntary agreement with creditors to either a collective agreement with creditors or to the transfer of all or part of the activities under judicial supervision.

The debtor can initiate the judicial reorganisation procedure as soon as the continuity of the debtor is threatened in the short or the long term. The fact that the debtor meets the conditions to be adjudged bankrupt does not prevent it from filing for restructuring.

If the debtor applies for a judicial reorganisation, the court will grant a moratorium to the debtor for a period of up to six months. The moratorium may be extended, but the total period may not exceed one year. However, in exceptional circumstances, the period can be extended by another six months to a total of 18 months.

During the moratorium period, the debtor is granted protection against its creditors. The creditors can thus not enforce judgments against the debtor and no bankruptcy proceedings can be opened in respect of the debtor. The creditors will, however, be able to effect set-off, enforce securities over financial collateral and enforce pledges on receivables. The moratorium does not affect the ongoing contracts, but the debtor can decide, even if it is not provided contractually, not to meet its obligations under the relevant contracts (other than employment contracts) during the moratorium if it is necessary for the purposes of the reorganisation plan or for the transfer of the enterprise.

The Act provides for three types of judicial reorganisation:

Amicable settlement with some of the creditors under judicial supervision

The debtor can negotiate an amicable settlement during the moratorium period and under the court's supervision with two or more of its creditors. The settlement will only bind the parties to the agreement. Once agreed upon, the amicable settlement will be presented to the court and the moratorium will end. The amicable settlement as presented to the court is protected against certain effects of the suspect period in the same way as the ordinary amicable settlement.

Collective agreement

The second type of judicial reorganisation is a traditional reorganisation plan which, under the Act, is an improved version of the former judicial composition arrangement. The procedure is two-phased with a suspension phase and an execution phase. During the suspension phase the debtor must draw up a reorganisation plan. This plan needs to be approved by a majority of the creditors representing more than half of the principal amount of the claims involved. If the plan is approved and is deemed in agreement with public order, the court will sanction the reorganisation plan. The plan the becomes binding for all creditors and the moratorium ends. The execution phase of the plan has a maximum duration of five years.

Transfer of (part of the) activities under judicial authority

The third judicial reorganisation option relates to the global or partial transfer of the debtor's activities to a third party, conceived as a liquidation scheme.

Such transfer may be ordered at the debtor's request or even, in certain circumstances, at the request of any interested party (including the public prosecutor).

The court will then appoint a representative to manage the sale and transfer of the assets. The main objective of this representative will be to enable the continuation of the economic activity, without, nevertheless, losing sight of the creditors' rights. In case of several comparable offers, the bidder who maintains the most jobs will be preferred.

Upon completion of the sale, the creditors are entitled to exercise their rights on the sale proceeds, after which the judicial reorganisation procedure will be closed. The possibly remaining part of the company can then be submitted to either bankruptcy or a voluntary winding-up.

This third option is expected to become more popular, mainly as a result of the new regulation on the transfer of employees, increasing the buyer's options substantially. In principle, as was the case in the past, the employment contracts are automatically transferred to the buyer. However, the buyer is now entitled to decide on the number of employees to be transferred and even to renegotiate the individual and collective terms of employment. In case the buyer decides not to keep on all employees, he must motivate such selection on the basis of economical, technical and organisational arguments, excluding any form of prohibited discrimination. Moreover, the buyer must now be properly informed in writing of any obligations towards the employees who are transferred as well as of any claims these employees may have against the debtor. Only those obligations communicated in writing will be binding on the buyer. Another option securing the buyer's rights is to submit the transfer of rights and obligations of the employees for approval to the labour court. In case such approval is granted, the buyer cannot be bound by any other obligations than those provided for in the approval. One must bear in mind, however, that the aforementioned regulation on the transfer of employees may be amended by means of a new collective labour agreement between the trade unions and the employers' organisation.

As always, practice will show whether this new piece of legislation will meet the high expectations proclaimed so far. A change of culture of the courts and the lawyers in Belgium will be required to ensure its success.

Insolvency and M&A lawyers in Belgium welcome this new tool not only because it provides them with a new way to assist their clients facing financial difficulties, but also because it is expected to boost the volume of restructuring work and to open up opportunities for takeovers of distressed companies.

While the new rules may be good news for the companies facing financial difficulties and for potential acquirers of their business, they will also impact creditors, whose rights might be frozen on the basis of the Act. It might, therefore, also have an impact on the way creditors, such as banks, will deal with their debtors and what type of securities they will require before they decide to lend money.

Paul van der Putten is an insolvency partner at Stibbe in Brussels.