Flexibilisation of judicial reorganisation: a useful tool or a vain attempt to support enterprises in times of crisis?

Flexibilisation of judicial reorganisation: a useful tool or a vain attempt to support enterprises in times of crisis? Background: the moratorium

Given the COVID-19 crisis, enterprises are in economically challenging times. Many previously healthy businesses saw their revenues fall significantly, and consequently found themselves in financial dire straits. The Belgian legislator initially sought to address this by introducing a moratorium, which protected enterprises from bankruptcy and seizure. This moratorium was used during both the first lockdown (April-June 2020) and the second (December 2020- January 2021).

Over the past months, the moratorium was increasingly criticised. It was viewed as a rather blunt instrument to protect enterprises, as it did not differentiate between each enterprise it protected. This meant that so-called ‘zombie’ enterprises also enjoyed protection brought by the moratorium. In addition, it entailed the risk that protected enterprises’ creditors would run into problems, as they were denied enforcement opportunities against insolvent debtors. The Belgian legislator therefore decided not to extend the moratorium beyond 31 January 2021.

As of 1 February 2021, enterprises may again be forced into bankruptcy and be subject to forced execution on assets. The government needs to act fast.

Moratorium alternative: flexibilisation of legislation on judicial reorganisation

Since the COVID-19 crisis’ economic impact will likely be felt for years to come, the Belgian legislator felt compelled to come up with an alternative to the moratorium. A new package of support measures was promulgated, including the flexibilisation of legislation on judicial reorganisation. The main objective was to facilitate the access to the procedure, especially for small and medium-sized enterprises.

The Belgian legislator sees the existing judicial reorganisation procedure as a viable alternative to the moratorium, because it aims to protect enterprises with temporary financial difficulties with a period of payment suspension. During this period, the enterprise in question cannot be dissolved, liquidated or declared bankrupt, nor can creditors levy execution. In other words, judicial reorganisation offers enterprises breathing room so that they can attempt to avoid bankruptcy and restructure activities.

Concrete changes of legislation on judicial reorganisation

In its current form, the judicial reorganisation procedure has downsides. The main flaw is the public exposure attached to a judicial reorganisation procedure. Creditors need to be informed, which means that the difficulties that an enterprise is dealing with are on public display. Needless to say, this is detrimental to the enterprise’s reputation and significantly decreases the procedure’s success. The Belgian legislator is attempting to address this issue to make the procedure more attractive.

Currently, the legislative process to change legislation on judicial reorganisation is ongoing. An initial legislative proposal was already submitted on 10 June 2020. Meanwhile, the draft bill has been amended several times. On 4 March 2021, a draft bill was adopted by the Commission Economy. The draft bill is likely to be formally adopted by the end of the month.

The most significant amendments on judicial reorganisation are as follows:

1. The procedure becomes more accessible

The formal requirements in applying for judicial reorganisation are adapted so that small and medium-sized enterprises can also access the procedure.

An enterprise no longer needs to submit all the required (financial) documents at the time of application. It may do so up to two days before hearing. If the enterprise fails to submit the required documents, it has the opportunity to justify why certain elements necessary for the application are missing. The inadmissibility of petition sanction, when certain documents are missing upon filing, is abolished.

Given that an enterprise in distress is already protected upon a petition filing for judicial reorganisation, this flexibilisation aims at urging enterprises to file a petition and thus obtain protection while collecting the necessary documents. Under the current rules, an enterprise in distress first needed to prepare all necessary documents (with the help of external advisors) before filing the petition, thus delaying the protection provided by said filing.

With this change, the government wants the filing of a petition for judicial reorganisation to become the alternative to a moratorium.

2. New tool: the preliminary agreement   

To respond to the criticised public nature of judicial reorganisation, the Belgian legislator has made it possible for an enterprise in distress to initiate a restructuring privately.

An enterprise can unilaterally ask the court to appoint a court agent (‘gerechtsmandataris / mandataire de justice’) to facilitate discussions with creditors, in order to reach an amicable agreement or draw up a reorganisation plan. The enterprise is still required to demonstrate that its continuity is threatened.  This procedure does not provide a protection period for the enterprise.

The enterprise in distress provides the court agent with a list of its creditors and any other documents necessary to reach an amicable settlement or agree to a reorganisation plan. The court agent then informs the creditors, and can decide to initiate negotiations with one or more of them at an initial stage and involve other creditors at a later stage.

The court agent can ask the president of the court to grant the enterprise in distress payment terms and conditions (including the suspension of recovery procedures) of all or part of its debts during the preliminary phase, even if the debt was established in an authentic instrument or judgment. However, note that the obligation to pay debts remains in place; it is merely a question of suspending the execution. The duration of these terms and conditions is limited to four months. The president of the court can take into account certain interests of creditors so that no chain reaction is caused. Consider, for example, a supplier who would get into financial trouble because of the suspension. Creditors can also oppose these facilities. The president of the court can terminate the granted terms and conditions at any time.

If an amicable agreement is reached or a reorganisation plan is drawn up, the court agent can request the president of the court to transfer the case to the court for initiating "regular" judicial reorganisation.  Upon the president of the court’s decision to refer the case to the court, the enterprise in distress benefits from judicial reorganisation protection. For the homologation of an amicable agreement, the hearing should be scheduled within maximum one month after the procedure’s opening. For the vote on a reorganisation plan, the voting hearing should be scheduled within maximum 3 months after opening the judicial reorganisation procedure.

Since this new preliminary agreement tool limits public exposure and the runtime of a full judicial reorganisation procedure, the negative publicity impact on the enterprise in distress is restricted. This could be a step forward for the judicial reorganisation’s popularity.

Conclusion

The COVID-19 crisis is more than a health crisis. Lockdown has put immense pressure on the economy and businesses. The Belgian legislator has attempted to deal with this by first introducing a moratorium on bankruptcy and now by changing legislation on judicial reorganisation. It is questionable whether the proposed changes will be an adequate solution and sufficient when facing the growing economic crisis. Flexibilisation regarding the timeframe to provide certain documents could provide a short protection period. However, the necessary documents still need to be provided. If an enterprise fails to provide these documents, one can question whether such an enterprise still has a real chance of turning things around.

However, with its public scope removed and a shortened official judicial reorganisation procedure, the new preliminary agreements tool might lower the (mental) threshold to apply for judicial reorganisation and increase its success rate. Time will tell.  

Please find the entire article regarding the relaxed legislation on the judicial reorganisation procedure by visiting this page.

Contacts

If you have any questions concerning the items in this newsflash, please get in touch with your usual Deloitte Legal - Lawyers contact at our office in Belgium or:

For general inquiries, please contact:

bedeloittelegal@deloitte.com, + 32 2 800 70 00

Be sure to visit us at our website: http://www.deloittelegal.be

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