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SILENT BANKRUPTCY

Jan 22, 2025

When a company is no longer able to pay its short-term debts and is no longer considered creditworthy, the company must file for bankruptcy within a month. In traditional bankruptcy, once the filing is made the court will pronounce the bankruptcy immediately and a bankruptcy notice will be published in the Belgian Official Gazette. A receiver will be appointed, as well as a supervisory judge to oversee the procedure.

Since the introduction of Articles XX.97/1 to XX.97/6, which has applied as from1 September 2023, the Belgian Code of Economic Law (“BCEL”) allows a company in bankruptcy to prepare for bankruptcy quietly, i.e. without publicity.

A silent bankruptcy (also known as “pre-pack”, to use the Anglo-Saxon expression) is initiated by filing a petition in which the debtor demonstrates that this method of reorganization will (1) facilitate the liquidation of the company whereby the highest possible payout to the joint creditors is achieved and (2) preserve employment as much as possible. The chambers will then consider this request within three working days. If the request is granted, the company court will appoint a provisional receiver and a provisional supervisory judge for a maximum period of thirty (30) days, extendable by up to 30 days. They will, in principle, also act as receiver and supervisory judge in the event the company is effectively declared bankrupt. During the proceedings no suspension is granted, and it remains possible for a creditor to still sue the company in bankruptcy. The enterprise itself may also still file for bankruptcy during the preparatory phase.

The provisional receiver represents the interests of the creditors and must examine the feasibility of the scheme proposed by the debtor. In doing so, he or she should check in particular whether a proposed business transfer would be made to related parties and, if that is the case, inform the provisional bankruptcy judge.

The advantage compared to traditional bankruptcy is that the debtor retains control which permits the debtor to prepare the transfer of part or all of assets or activities within a short period of time prior to the bankruptcy declaration. The transfer is only effective once the bankruptcy is declared. This procedure can maximize the proceeds available for the creditors by allowing the transfer of assets to take place on a going concern basis.

 

There are also other significant advantages of the Silent Bankruptcy procedure:

• Although it will be a point of focus for the supervision by the provisional receiver and the provisional supervisory judge, it is not excluded that a transfer may be made to a party “related” to the existing shareholders or directors.
• The chance that the agreed transfer is reversed at the request of the receiver in the bankruptcy is limited, since the preparation took place under his supervision and that of the supervisory judge. Because of the way the receiver’s fee is calculated, he also has an incentive to achieve an asset transfer that meets the conditions of the ‘pre-pack’ after his formal appointment.
• The Supreme Court, in a judgment of 19 January 2006, defined the concept of de facto liquidation, where the directors of a company actually proceed to liquidation in disregard of the rules of priority among creditors. The risk of liability for this is virtually eliminated by silent bankruptcy.
• The obligation to request and transfer tax and social security certificates to the transferee, under penalty of joint and several liability for the debts of the transferor, does not come into play in bankruptcy.

• Under Belgian law, where an economic entity is transferred to a new employer as a ‘going concern’ Collective Bargaining Agreement n° 32bis (CBA32bis) applies. But in a Silent bankruptcy the effects of CBA 32bis are limited; the transferee can freely choose whom to employ. Continuing employee’s seniority and any applicable sectorial CBAs will be transferred.

 

The silent bankruptcy procedure also brings certain new questions and concerns to the surface:

• Apart from a few high-profile cases, silent bankruptcy is currently proving unpopular. In the district of Flemish Brabant and Dutch-speaking Brussels, where the Dutch-speaking company courts of Brussels and Leuven have jurisdiction, only eight silent bankruptcies have been pronounced to date. Cases before French-speaking courts appear to be more frequent.
• There is no firm guarantee that the agreed transfer will be effectively carried out by the receiver after the bankruptcy judgment. Indeed, the receiver is not obliged to do so. A prudent liquidator who judges that the agreed transfer is sub-optimal may still consult the market and may possibly transfer the assets to a third-party.
• The supervising bankruptcy judge, who often has a business background, has considerable influence on the analysis of the price of the agreed transfer in practice notwithstanding his legally limited role.
• Finally, provisional receivers consider that their powers are too limited to adequately protect the interests of creditors. In addition, there is no clear mechanism for verification of the agreed transfer by a judicial authority which, in practice, is regulated on the basis of article XX.142 of the CEL governing the urgent transfer of assets subject to rapid depreciation.

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The ‘enterprise mediator’ previously referred to in the Code of Economic Law is now referred to as a ‘reorganization practitioner’: but the ‘reorganization practitioner’ may still play a role as a mediator.

In a contribution from early 2023, we explained the distinction between an “accredited mediator” (médiateur agréé) appointed jointly by parties to resolve a particular dispute and an “enterprise mediator” (médiateur d’entreprises), who (at that time) was designated by Article XX.36 of the Code of Economic Law and appointed at the unilateral request of a company in difficulty.

Article XX.36 of the Code of Economic Law was repealed by Article 44 of the Law of 7 June 2023 which came into force on 1 September 2023. As we shall see below, the role of the company mediator is now taken on by a ‘reorganization practitioner’.

Reorganization practitioners have specific experience in insolvency law which makes them particularly valuable in the process of restructuring companies in difficulty, as provided for by Book XX of the Code of Economic Law. Strictly speaking, they are judicial representatives who, while contributing (subject to a minimum of formal constraints) to the recovery of a company in difficulty can, at the same time, bring about a resolution of individual disputes.

For example, a reorganization practitioner could act at the request of a franchisee who has a dispute with his franchisor, and at the same time is confronted with a revocation of his bank loans due to disappointing turnover figures and liquidity shortages. In this case, once appointed and strengthened by an “official/judicial” mandate, the enterprise mediator (now reorganization practitioner) will strive, respecting all confidentiality, to get everyone on the same page in the short term and can, hopefully, save the company from collapse. In that context they may approach the bank and other stakeholders, possibly including the staff, as well as suppliers and also make contact with the franchisor and mediate “classically” (as an accredited mediator does).

Appointment of an enterprise mediator (now reorganization practitioner) at a very early stage, (i.e. before resorting to private or collective judicial reorganization procedures), can be a very efficient preventive tool. However, this tool remains relatively unknown and unloved, despite the regular and active information campaigns of the courts, via social media, seminars and also via their website. (For an application to appoint a reorganization practitioner see the forms available (in FR and NL) from the Brussels Enterprise Court). (In Dutch a brochure about the appointment of a reorganization practitioner is available here .)

By an Act of 7 June 2023 implementing the Restructuring Directive (1), which entered into force on 1 September 2023, the Belgian legislator considered that the role of a “reorganization practitioner” (“praticien de la réorganisation”) defined in the Restructuring Directive should be included in the Code of Economic Law (Book XX).

The definition of a ‘reorganization practitioner’ as a legal representative appointed by the insolvency court and set forth in Book I, Chapter 14, Article I.23 7°/01 of the Code of Economic Law is almost identical to that included in the Directive.  In particular, the reorganization practitioner is to:

• assist the debtor or creditors in the preparation or negotiation of a reorganization plan;
• supervise the debtor’s activities during the negotiation of a reorganization plan, and report to the court;
• exercise partial control of the debtor’s assets or assets without dispossession, before or during the negotiations for a judicial reorganization.

As you may notice, this definition refers to tasks that were previously performed by ‘judicial representatives’ (“gerechtsmandatarissen” or “mandataires judiciaires” and before that by so called ‘commissioners for deferment [of debts]’ (“commissarissen inzake opschorting” or “commissaires au sursis”). They are all replaced by the reorganization practitioner.

Notably, however, the definition does not refer to another core task of the reorganization practitioner, namely his role as an enterprise mediator. Moreover, the definitions in the Code of Economic Law Book I, Chapter 14, might (wrongly) give the impression that enterprise mediation is no longer part of business reorganization … Until, that is, one comes across Section 3 of Book XX, Chapter 2 (Art. XX.29/2), which is entitled ‘Enterprise mediation’ (“Ondernemingsbemiddeling“ / “Médiation d’entreprise“ ).

Article XX.29/2 clarifies that at the request of the debtor, the Chamber for Enterprises in Difficulty can appoint a reorganization practitioner (read: enterprise mediator) to facilitate the recovery of the company. Furthermore, the article states that both the terms of the reorganization practitioner’s mediation tasks (… “sa mission de médiation” … “de opdracht van de bemiddeling”) and the reports of the reorganization practitioner (read: enterprise mediator) are confidential.

Finally, note that, apart from appointment on the basis of Article XX.29/2 of the Code of Economic Law, in certain urgent cases (where, for example, the Chamber for Enterprises in difficulty is unable to sit), the President of the Enterprise Court may make a provisional ruling on all applications falling within the competence of his/her Court, on the basis of Article 584 of the Judicial Code.

Conclusions: Due to the designation of ‘reorganization practitioners’ coupled with the deletion of the Article that explicitly referred to ‘enterprise mediators’ in the current Code of Economic Law: it will not be surprising if both companies and legal advisors have lost track of the continuing role for ‘enterprise mediation’ as it impacts companies in difficulty. Even if referred to by another name, the role of the enterprise mediator continues to exist, whether assisting as a restructuring expert in pre-insolvency tasks or, at a later stage, acting to assist the debtor with a reorganization plan, supervising business activities, including (on occasion) partial control of assets.

Accordingly, it would be preferable for the legislator, in recognition of the mediation tasks clearly assigned to the reorganization practitioner in Article XX.29/2 of the Code of Economic Law, to find room for a clearer reference to the qualities of an enterprise mediator that a reorganization practitioner needs to fulfil. One possibility might be to revise Art. XX.20/1. (Code of Economic Law, Book XX, Title I Chapter 14, Section 2) to recognize enterprise mediation as one of the capabilities that a reorganization practitioner needs to offer.

(1) Directive (EU) 2019/1023: Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency).

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Are unilateral sanctions for breach of contract desirable in franchising?

Franchise networks are striving to multiply their successes, rather than their failures!

Nevertheless, difficulties can sometimes arise between a franchisor and franchisee.  Constructive solutions are urgently needed in such cases. Regarding constructive solutions, there is abundant literature on the need for effective communication and consultation between parties; and for mediation mechanisms both within and outside the franchise network.

In the event of contractual breach, and after Book 5 of the Civil Code having come into force (on January 1, 2023), parties to a franchise contract have a number of “unilateral sanctions” at their disposal.

The classic remedies (with one exception) are clearly listed in article 5.83 of the Civil Code, which states (our informal translation): ‘Unless otherwise agreed by the parties, the creditor has the following sanctions in the event of non-performance attributable to the debtor:

1° the right to performance in kind of the obligation ;

2° the right to compensation for damages;

3° the right to have the contract rescinded;

4° the right to reduce the price;

5° the right to suspend performance of the creditor’s own obligation’.

• The most obvious and undoubtedly fairest sanction is the exception for non-performance, the cornerstone of any two-sided (‘synallagmatic’) contract. If the franchisee fails to pay its invoices, the franchisor is entitled to suspend its services until payment is received, and vice versa.
• The right of a franchisee, who is dissatisfied with the franchisor’s services, to take legal action and claim a right to a price reduction (reduction of royalties, for example) also springs to mind. Moreover, the franchisee can apply such a reduction unilaterally by sending a written notification, provided that he or she justifies the reduction and ensures that it is proportional to the difference between the value of the service received and that agreed at the time the contract was concluded. If a franchisor fails to meet his marketing commitments, he may be obliged to reimburse the unspent budget to the franchisee.
• When a contractual breach worsens, either party retains the right to demand specific performance of the franchise agreement, or its termination, provided that the breach by the person who owes the obligation (the “obligor”) is “sufficiently serious”. Termination may result from (1) a court decision, (2) the application of an express resolutory clause, or (3) a notice sent by the obligee (to whom the obligation is owed) to the obligor. In the last two cases, immediate and unilateral action is possible without waiting for a court judgment, by sending a detailed letter for example. A franchisee who violates a non-competition clause is exposed to this severe sanction, as is a franchisor who is unable to supply its network notwithstanding its exclusive supply clause.
• In the event of termination of the franchise agreement, it goes without saying that the judge will also order compensation for damages suffered.

However, a more important question arises, which is whether these contractual sanctions (which can be combined as long as they are not contradictory), are really appropriate in the franchising context?

Is there a risk of irreversible unilateral decisions being taken too hastily, without waiting for review by a judge?

Certain limitations and restrictions exist that moderate the use of “unilateral sanctions”. A party must respect the specific conditions permitting use of unilateral sanctions (regarding termination, see art. 5.93 of the Civil Code) and must send a prior formal notice to the other party.

After a unilateral right has been exercised, an after the event (‘a posteriori’) judicial review remains possible, to verify that the right in question was not abused. Note that a notification by which an obligee invokes termination of a contract is ineffective if the conditions for termination (resolution/ beëindiging) are not fulfilled or if the termination is abusive (art. 5.94 of the Civil Code). Moreover, this article may lead to an exchange of termination notices between the parties, necessitating rapid judicial intervention.

CONCLUSION

The possibility for a disgruntled franchisee to unilaterally reduce royalties or withdraw could jeopardize the continuity of a franchise network, with detrimental effects on the entire network (both the franchisor and franchisees included). Therefore moderating, or even excluding some of these unilateral sanctions from the franchise contract may seem justified. A decision to do so should be motivated in a balanced way so as to remain within the limits of the ‘grey clauses’ provisions of article VI.91/5 of the Code of Economic Law and be in conformity with the requirements of article 5.73 of the Civil Code, which imposes the requirement of good faith in the performance of contracts and prohibits abuse of rights.

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GDPR in practice (N°2): GDPR disputes in Belgium: the voluntary nature of Mediation

21 August 2024

If you’re facing a data protection problem in Belgium and you assess that it requires intervention from the Belgian Data Protection Authority (the “APD/GBA”), one available option (rather than lodging a complaint) is to request a mediation procedure. To be admissible, a mediation request must be written in French, Dutch or German, identify the data controller and the personal data processing that is the subject of the request. The application must be dated and signed.

Procedure

Generally, if the problem concerns the exercise of your data subject rights, you should first have unsuccessfully tried to exercise them by contacting the data controller directly. (The GDPR permits one month for the data controller’s response before you can follow-up with the APD/GBA.) You should demonstrate your interest in the mediation procedure taking place and that there are no parallel proceedings. (APD/GBA may be unable to accept mediation where parallel police or judicial proceedings are ongoing.) An online form for making a mediation request is available on the APD/GBA website.[1]

Limits of the mediation process

APD/GBA has recognised both the limits of the mediation process and the extent of its own powers in a Decision published on 24 July 2024 which is summarised below.[2]

Facts

The case arose from a neighbour dispute concerning the installation and use of surveillance cameras by Mr and Mrs Y (“Defendant”). The Complainants, X1 and X2, complained that the cameras also surveyed their garden as well as the driveway and entrance to their property.

Issues

Defendant failed to engage on two occasions with letters from the APD/GBA (one sent by registered mail) inviting them to participate in mediation proceedings. X1 and X2 therefore reformulated their request for mediation as a complaint.

Law on Cameras

The Law [on Cameras] of 21 March 2007, as amended in 2018, regulates the installation and use of CCTV and surveillance cameras. It designates the police as the body primarily competent for supervision.

Decision

The APD/GBA’s Litigation Chamber noted that the voluntary nature of mediation, which may lead to an amicable settlement of a dispute, remains at the strictest discretion of each of the parties. A party may not be forced into an ‘amicable agreement’. Neither may a refusal to engage in mediation proceedings be held against a data controller or its subcontractor. (Decision para. 37.)

Whilst emphasising the voluntary nature of mediation, a data controller may not simply ignore communications received from a data protection authority (“DPA”). When the data controller receives letters from the DPA on two occasions – once by registered mail – asking it to communicate its position on an invitation to a mediation procedure, it must reply. Although the data controller is required to reply to the DPA, the content of its reply nevertheless remains within the data controller’s complete discretion. (Decision para. 38.)

Comments

The Decision emphasises that Article 31 GDPR requires the data controller (and its data processor) to cooperate with the DPA in the performance of its tasks, when requested to do so.

Pursuant to its corrective powers the APD/GBA formally warned the Defendant that, pursuant to Article 31 of the GDPR, it was required to cooperate in future and that there is an obligation to follow-up within the period of one month provided in Articles 12.3 and 12.4 GDPR when a data-subject exercises any of the rights referred to in Articles 15 to 22 of the GDPR. (Rights of access, to rectification, to erasure (to be forgotten), restriction of processing, data portability, to object to processing including profiling, not to be subject to automatic decision making.)

Nevertheless, in the particular case under consideration, the APD/GBA’s Litigation Chamber found, in accordance with its rules of procedure, that it was entitled to dismiss the complaint without further action, because (amongst other things) the complaint was itself ancillary to a wider dispute which needed to be debated before the judicial authorities.

The right of the Defendant, Mr and Mrs Y, to appeal the findings set forth in the Decision within 30 days after notification (and the procedures available for doing so), was expressly drawn to their attention in Part III of the Decision.

 

[1] https://www.dataprotectionauthority.be/citizen/actions/request-a-mediation .

[2] Chambre Contentieuse Décision 98/2024 du 24 juillet 2024 N° de Dossier : DOS-2023-00957.

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GDPR in practice (N°1): New tools for settling data protection disputes?

05 August 2024

The EU Commission launched its second (four yearly) evaluation report on the General Data Protection Regulation (“GDPR”) on 25 July. Ahead of its second evaluation[1], the EU Commission requested the EU Agency for Fundamental Rights (“FRA”) to report on the challenges, experience and practices identified by Data Protection Authorities (“DPAs”) when implementing the GDPR.

FRA Report

The FRA’s Report[2] is based on responses to a questionnaire based around DPA tasks as listed in Article 57 GDPR.

The questionnaire covered nine areas:

1. Institutional capacity of DPAs	2. Modern technological challenges	3. Independence of DPAs
4. Raising public awareness	5. Investigatory powers of DPAs	6. Sanctioning GDPR violations
7. Cooperation between EU DPAs and the GDPR consistency mechanism	8. Cooperation with other national regulators	9. Protection of personal data and competing fundamental rights

Financial Challenges

A large majority of DPA interviewees emphasised that inadequate financial and human resources are a major obstacle to DPA’s independence and to carrying out the tasks mandated by the GDPR. (FRA Report at pp. 5-7, see GDPR recitals 120, 121 and Articles 52 and 57.)

Dealing with complaints under GDPR

The volume of complaints has become a challenge, even where DPAs have developed practices such as prioritisation, grouping, templates, automation or standard replies, to deal with them more efficiently. The FRA suggests DPAs could exchange information about best practices and the European Data Protection Board (“EDPB”) could offer guidance on implementing criteria and safeguards to ensure each complaint is properly addressed. (FRA Report at pp. 8-9 and FRA Opinion 3 at p.9.)

Using mediation to solve data protection disputes

Belgian law establishes the option of settling data protection complaints through mediation. In 2022, the Belgian DPA (“APD/GBA”) received 177 requests for mediation and handled (and closed) 139 mediation cases. Mediation requests related mainly to data protection issues that concern commercial practices, including – direct marketing; cameras and image processing; as well as data protection in the sphere of professional services.

Amicable settlements | A useful tool for resolving data protection disputes?

Article 5 of the proposal for a procedural regulation enhancing enforcement of the GDPR introduces the option of resolving complaints through amicable settlements. However, a joint opinion of the EDPB and the European Data Protection Supervisor raised doubts that the suggested provisions were clear and comprehensive enough. (FRA Report at p.39 and EDPB – EDPS joint opinion 01/2023 of 19 September 2023[3].)

The European Parliament has subsequently suggested clarifications to the rules governing amicable settlements in its negotiating position on the proposed regulation.[4]

[1] An interim report was made in 2020, two years after GDPR entered into effect

[2] GDPR in practice – Experiences of data protection authorities, 11 June 2024, available here.

[3] EDPB-EDPS Joint Opinion 01/2023, available here. The European Parliament suggested clarifications to the rules regarding amicable settlements in its negotiating position regarding the proposed regulation,.

[4] See the EP Press Release here.

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“Silent bankruptcy” – Unpublicised preparation for a business failure – A new and efficient tool in the restructuring toolbox?

 Jan 22, 2024

INADEQUACY OF JUDICIAL REORGANISATION (“PGR/PRJ”) PROCEDURES – (procedure gerechtelijke reorganisatie {PGR} / procédure réorganisation judiciaire {PRJ})

Successive crises have resharpened businesses’ focus on how to achieve rapid and efficient corporate restructuring. So-called ‘asset deals’ (trade sales/carve-outs), in which a business activity or certain assets are transferred from a distressed company to a healthy one, are one essential tool in this toolbox.

Whatever a business’s continuity or discontinuity scenario, the restoration of all material (and certainly the most valuable) assets and resources to economic productivity is expected as soon as possible. Yet even champions of traditional judicial reorganization have to acknowledge that the available procedures (amicable and collective agreements, transfer under judicial authority) are sub-optimal at times and expensive in any event.

Moreover, if the conditions necessary for a successful PGR/PRJ are not rapidly met, it is like dancing on a slack tightrope. The longer cessation of payments continues during the so called ‘suspect period’ (Verdachte Periode / Période Suspecte), and the more imminent that bankruptcy itself has therefore become, the greater the risks of criticism and potentially of liability claims against the directors by the creditors and the suppliers, including the banks, staff and, last but not least, the receiver.

 

VOLUNTARY BANKRUPTCY

When a company is no longer able to pay its short-term debts and is no longer considered creditworthy, the company must file for (voluntary) bankruptcy within a month. In conventional voluntary bankruptcy, once the filing is made the court will pronounce the bankruptcy immediately and a bankruptcy notice will be published in the Belgian Official Gazette. A receiver will be appointed as will a supervisory judge to oversee the procedure and the company’s management loses its authority over the business.

 

THE NEW ‘SILENT’ BANKRUPTCY

However, the introduction on 1 September 2023 of Articles XX.97/1 to XX.97/6 of the Belgian Code of Economic Law (“CEL”), allows a distressed company to prepare for a reorganization quietly, away from the pressure of publicity.

A Silent Bankruptcy (the term ‘pre-pack’ from Anglo-Saxon practice is sometimes used) is initiated by filing a petition in which the debtor demonstrates that using this method of reorganization will: (1) facilitate a liquidation of the company that achieves the highest possible payout to the joint creditors; and (2) preserves employment as much as possible. The competent enterprise court’s chamber for companies in difficulty will consider the request within three working days. If the request is granted, the enterprise court will nominate a provisional receiver and a provisional supervisory judge for a period of up to thirty (30) days. In principle, they will also act as the receiver and supervisory judge when the bankruptcy is declared. (The initial period can be extended by a further 30 days.) During the ensuing preparatory phase of the reorganization, no suspension of liabilities is granted, and it remains possible for a creditor to apply for a declaration of bankruptcy. (The debtor business can itself still file for {voluntary} bankruptcy during this phase.)

Compared to conventional voluntary bankruptcy proceedings, the advantage of a Silent Bankruptcy is that the debtor remains in control, with the provisional receiver required to facilitate the preparation of an asset sale in the impending bankruptcy by assessing whether the arrangements the debtor proposes are achievable.  A Silent Bankruptcy therefore allows the debtor to prepare the transfer of part or all of assets or activities within a short period of time prior to the declaration of bankruptcy. The transfer is only effective once the bankruptcy is declared. This procedure can maximise the proceeds available for the creditors by allowing the asset transfer to take place on a going concern basis.

Other significant advantages of the Silent Bankruptcy procedure:

• The acquisition could be made by a party ‘related’ to the existing shareholders or directors.
• The chance that the agreed transfer is reversed at the request of the provisional receiver in bankruptcy is limited, as the preparation phase takes place in full transparency, under his or her supervision, and that of the supervisory judge. Because of the way the receiver’s fee is calculated, the provisional receiver continues to be incentivized to achieve a workable result after being appointed.
• In a judgment of 19 January 2006, the Belgian Supreme Court, defined the concept of a de facto liquidation, where the directors of a company proceed with the liquidation of the company in disregard of the priority rules among creditors. Any risk of liability for such disregard is essentially eliminated by following the Silent Bankruptcy procedure.
• The obligation to request and transfer tax and social security certificates to the transferee of a business, under penalty of joint and several liability for the debts of the transferor, does not come in a play in bankruptcy.
• Under Belgian law, where an economic entity is transferred to a new employer as a ‘going concern’ Collective Bargaining Agreement n° 32bis (CBA32bis) applies. But in a Silent bankruptcy the effects of CBA 32bis are limited; the transferee can freely choose whom to employ. Continuing employee’s seniority and any applicable sectorial CBAs will be transferred.

 

CONSEQUENCES OF A ‘SILENT BANKRUPTCY’ AFTER THE ACTUAL BANKRUPTCY

When the legislator decided to introduce Silent Bankruptcy into the Code of Economic Law by inserting articles XX.97/1 et seq., it answered a clear demand from insolvency practitioners. However, the manner in which the new rules were introduced has been the subject of criticism.

As already mentioned, when the proposal for a Silent Bankruptcy is accepted, and a proposed receiver and a proposed bankruptcy judge are appointed, that is only a preparatory phase for the actual bankruptcy that follows. The process involves preparing a “transition of all or part of the assets and activities”. We will refer to that transition as an “Arrangement” below.

The legislator introduced the Economic Code provisions on Silent Bankruptcy without amending the other provisions of the bankruptcy law to take account of this new reality. So, the law does not specify exactly how the Arrangement concluded during the Silent Bankruptcy, and prior to the actual bankruptcy, should be effectively implemented. Indeed, in principle, once appointed, a receiver has to wait until the first official report on the verification of claims, which is generally drawn up about a month after bankruptcy, before proceeding to the actual liquidation (sale) of the assets.

Under Article XX.142 of the Code of Economic Law, a derogation from this principle can be made, on petition, with the authorization of the supervising judge in case the assets are “subject to speedy decay or depreciation”. It is expected that provisional receivers will invoke this exception.

It also remains to be seen how creditors, who are in principle allowed to file their claims at least 30 days after bankruptcy, and who may or may not have priority claims in relation to the transferred assets, will react when faced with a ‘silent’ Arrangement.

Finally, while, in principle, the provisional receiver of the Silent Bankruptcy will also always be appointed as receiver in the subsequent bankruptcy, there remains the – perhaps rather theoretical – possibility that the enterprise court could deliver a “reasoned dissenting decision” and appoint a different receiver (see the CEL Article XX.97/5). Could the new receiver, who was not involved in the Silent Bankruptcy, be entitled not to execute agreements concluded before bankruptcy was concluded on the basis of CEL Article XX.139? Is the (replaced) provisional receiver a party to the Arrangement? Is there a binding Arrangement at all?

To conclude, it is currently impossible to offer one hundred percent certainty that an Arrangement drafted during the Silent Bankruptcy phase will be effectively implemented after the actual bankruptcy is declared.

We do expect that case law and legal doctrine will come up with answers fairly quickly, although it would perhaps have been better if the legislator had built in a mechanism for confirmation of the Arrangement when the actual bankruptcy was pronounced by the court. Nevertheless, the Silent Bankruptcy procedure has been received enthusiastically by the majority of insolvency practitioners. We expect that, notwithstanding the outstanding questions, the transfer of assets in the context of a Silent Bankruptcy will certainly be an interesting procedural option to consider in the future.

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Franchise networks and the protection of personal data

Although it came into force on 25 May 2018, compliance with the GDPR still remains a challenge for many businesses, particularly franchise networks. Such commercial collaboration between companies inherently involves the processing of personal data to which the GDPR applies, be it customer, staff, or supplier data.

Customers’ personal data is of significant commercial value to both franchisor and franchisee and is often collected on a large scale. Customer data may include contact details, payment and payment card data, geolocation information, purchasing trends, etc … . In combination with analytics, statistical software or algorithms, customer data can be used, amongst other things, to establish personalized loyalty programs, to better identify customer interests and to develop new products.

Such processing of customer data offers clear benefits, but it is not without risk in terms of GDPR compliance.

First and foremost, national supervisory authorities can sanction breaches of the most important provisions of the GDPR with administrative fines, the highest of which can be up to 20 million euros or up to 4% of total worldwide annual turnover, whichever is greater. The Belgian Data Protection Authority (the “APD/GBA”) has already imposed fines of between 30,000 euros (Decision 77/2023) and 100,000 euros (Decision 56/2021). In addition to the risk of significant monetary penalties, failure to comply with data protection and privacy rules can tarnish the reputation of the entire franchise network.

 

Franchise networks: the role of each party with regard to the GDPR

The first step to GDPR compliance is to identify the data controller: the data controller has responsibility for compliance and must demonstrate that its activities comply with the GDPR (articles 5.2[1] and 24[2] of the GDPR).[3]  Identifying the controller (or joint controllers) is therefore crucial in a franchise network, where there are generally many players. In practice we have noticed a great deal of confusion on this subject.

How do you identify the data controller or joint data controllers involved in a franchise network? According to the GDPR, the controller is the person (whether a legal entity, natural person or any other entity) who determines the purposes and means of the processing (article 4.7 of the GDPR). Two or more persons may be considered to be joint controllers when the purposes and means of processing have been decided jointly and at the same time. The processor is the party who will process the data on behalf of and on the instructions of the controller (article 4.8 of the GDPR).

There is therefore no ready-made answer to identifying the data controller(s) that is appropriate to all franchise networks. The concept of data controller is a functional one, and the GDPR requires the data controller(s) to be identified on the basis of factual elements. It is therefore not possible to assert that all franchisors are data controllers, and all franchisees are data processors (or vice versa).

Nor is it possible to impose the role of ‘controller’ by contract when the criteria are not actually met by the person designated as controller. The parties must therefore carry out a case-by-case analysis.

The first criterion is to ask: who has decision-making power or influence over data processing?  In other words, who initiated the data processing? Why is the data being processed?

Example 1: A distribution network is planning to develop new products or services. To do this, it would like to have statistics on the customers for its brand(s). It provides all its franchisees with a questionnaire to be completed by their customers, with instructions on the information to be collected. Each franchisee then carries out the survey and sends the statistical results to the network head (franchisor). The data processing involved in this case is the collection of personal data and the production of statistical evaluations using the data collected. The statistical results may be presented as pseudo-anonymised or anonymised data. In such cases, although the franchisor has only received statistical data and no personal data as such, it is still responsible for the processing carried out to perform the analyses. In fact, it was the franchisor who determined the purpose and means of this processing and instructed its franchisees what processing was to be carried out. The fact that the franchisor does not have access to the underlying personal data is not decisive regarding its responsibility as the data controller. [4]

The second criterion concerns the purpose of the decision-making power: who determines the purposes and means of the processing? The purposes and means refer respectively to the “why” and the “how” of the processing operation.[5] There is also a hierarchy between purposes and means: determining the purpose automatically qualifies the person or entity concerned as a data controller. The processor does, however, have some operational flexibility in choosing how to implement the data processing.

However, third, the processor’s room for manoeuvre is not unlimited. Designation as a ‘data controller’ can also result when a party determines essential elements of the data processing. In general, the purpose, the categories of data and the storage period are considered to be essential elements of the processing. Non-essential elements include the choice of software, hardware and specific security measures.

Example 2: In a franchise network, the franchisor provides its franchisees with access to a database tool designed to collect and store data on the brand’s customers. Although the database is hosted on the franchisor’s servers, each franchisee enters his or her customers’ data in the database for his or her own purposes, and independently chooses how long to keep, access, rectify and delete customer data. A franchisee may not access or use the data of other franchisees. The franchisor cannot access the data entered by the franchisees. In such a case, the franchisor is a subcontractor for all the franchisees, since it has merely provided non-essential resources, i.e. an IT tool whose use is left to the choice of the franchisees, while each franchisee is a data controller independently responsible for the use made of the database. The determining factor in this case is the independence of the franchisees in choosing the purpose, types of data and characteristics of the data processing.

The same party may have two different roles: A franchisee may process data on behalf of the franchisor, as a processor, and may also, outside the instructions of the franchisor and for its own purposes, process data as a controller. However, a party cannot accumulate different roles for the same set of processing operations.

Example 3: In example 1 (above), the franchisees are processors for data analysis. However, this data could also have been collected by the franchisees, from their customers, with a view to developing new services or products, and therefore for purposes other than analysis, such as setting up their own loyalty scheme. In this case, each franchisee would be responsible for the processing linked to their own loyalty scheme.

The criteria set out must also be analysed in the light of other factors, such as the negotiating power of each party, the degree of independence of franchisees, the content of the contractual obligations in the franchise agreement, etc.

To sum up, in order to protect the data of the entire network, a prudent franchisor will carry out an analysis of the data flows circulating within its network (while taking into account future projects) and, taking into account the complexity of the allocation of responsibilities as illustrated above, it will be in the franchisor’s interest to put in place the necessary measures to comply with the GDPR. If not, the entire network will be navigating blind and will be at risk with regard to GDPR compliance.

 

Some points of attention and recommendations related to franchise networks.

Written agreements between controllers and processors

In the case of contracts with processors, Article 28 of the GDPR requires both the controller and the processor to sign a written agreement relating to the processing. The purpose of this agreement is to define the obligations and rights of each party, and also to contain certain information that is set out in Article 28 of the GDPR.

As we have already seen, certain parties may fulfil different roles for different purposes. This obligation can therefore prove difficult to implement and to comply with, given the multiplicity of players and actions pursued in a franchise network.

Given the contractual relationship between them, a franchisor, when it is responsible for processing – and also out of concern for the reputation of its network – should ensure that its franchisees comply with GDPR requirements. To do this, it is strongly recommended that the franchise agreement sets out the reciprocal obligations of the franchisee and the franchisor. In practice, guidelines are included in a separate appendix to the franchise agreement, but all too often the respective roles of each party are not sufficiently specified. Where a franchisee acts as a data processor, in the event of a breach of the GDPR, the simple existence of a general compliance clause is not enough to relieve the franchisor of its responsibilities as data controller: the franchisor still has to implement the clause, effectively monitor the actions of its processors and take the necessary safeguard measures.

GDPR-compliant support from the franchisor

A franchise contract generally requires the franchisor to assist its franchisees by providing technical tools. The franchisor may offer its franchisees GDPR-compliant IT tools (respecting the data minimisation principle, for example), and also compliance tools (model data protection documentation, audit, risk impact analysis, procedure for responding to requests from data subjects, register of processing activities, etc.).

The franchisor could also offer its franchisees the services of a Data Protection Officer (DPO) as a form of assistance. However, the services of an internal DPO (i.e. a member or employee of the franchisor) offered to franchisees could prove problematic. A DPO must be able to act independently and therefore without any conflict of interest with the duties he or she carries out for the franchisor. To ensure that franchisees receive the most appropriate advice, free from any conflict of interest, we suggest calling on the services of an external DPO.

Respect for the rights of the people concerned

Under the GDPR, data subjects have a number of rights that they must exercise by addressing the data controller (right of access, right of rectification, right of erasure, right to restriction, right to portability, right to object, right to object to profiling – Articles 15 to 22 of the GDPR). Processors are obliged to assist the data controller to respond to data subjects.

In a franchise network, customers are likely to exercise their rights directly through franchisees, often without the franchisor’s knowledge. It will therefore be up to the franchisor to set up procedures with its franchisees, so that requests made by customers – relating to processing for which the franchisor is responsible – are forwarded to it in good time.

The controller also has a duty to provide data subjects with information (Articles 13 and 14 of the GDPR) and to facilitate the exercise of data subjects’ rights (Article 12.2 of the GDPR). These duties include the obligation to clearly inform data subjects of the identity of the controller, so that they can exercise their rights effectively. As franchisees are generally in direct contact with customers, the franchisor could then require them to provide customers with the information required by the GDPR.  The franchisor will also ensure that it communicates information through its website(s) and by any other appropriate means.

The importance of valid or invalid consent?

It may happen that the franchisor and its franchisees share the same customer database and that this database is used for direct marketing purposes by the franchisor and/or the franchisee.

In practice, direct marketing is generally based on either customer consent or legitimate business interest.[6] Although there is no primacy between the legal bases permitted by the GDPR, many companies rely on consent to carry out advertising campaigns.

Consequently, all parties in a franchise network should be careful about how they process customer data for direct marketing purposes, particularly when they rely on customer consents. Indeed, if a franchisor/franchisee does not comply with the rules regarding informed consent to collect data, the consent cannot be considered valid and a franchisor/franchisee using such data would be likely to be in breach of the GDPR.  As a reminder, consent must be informed, free, specific and unambiguous, and be illustrated by a clear positive act. The data controller must also be able to demonstrate the validity of the data subject’s consent.

Recognising that it may be burdensome and impractical to attempt to obtain consent from each and every customer, using a legal basis other than consent for processing of personal data may often be more efficient.[7]

Clearly, compliance with the GDPR can be a challenging exercise in a franchise network. It is therefore important for each franchise network to have a good understanding of the data flows within the network, to regularly update its contractual arrangements and above all, to set up a system for issuing warnings, receiving joint complaints and monitoring and evaluating the actions of franchisees. The sanctions imposed by the ADP/GBA and the risks of damage to the network’s reputation will encourage franchisors to keep the subject under review and to maintain their efforts to raise awareness of this important area.

***

[1] The data controller should be able to demonstrate compliance with the fundamental principles of data protection. 

[2] The data controller should implement appropriate technical and organisational measures to ensure and should be able to demonstrate that processing is performed in accordance with GDPR.

[3] On the respective roles of controller and processor, see in particular the EDPS guide: Guidelines 07/2020 on the concepts of controller and processor in the GDPR, version 2.0, adopted on 7 July 2021, available at edpb_guidelines_202007_controllerprocessor_final_en.pdf (europa.eu).

[4] CJEU, Wirtschaftsakademie judgment, C-210/16, ECLI:EU:C:2018:388, § 38; CJEU, Jehovah’s witnesses judgment, C-25/17, ECLI:EU:C:2018:551, § 69.

[5] Av. Gen. Bot in Wirtschaftsakademie, C-210/16, ECLI:EU:C:2017:796, § 46.

[6] For information on direct marketing and the legal bases that may be accepted, see Legal bases for your direct marketing processing operations | Data Protection Authority (autoriteprotectiondonnees.be)

[7] It will be recalled that asking for the consent of existing customers for the purpose of sending direct marketing e-mails is not required under certain conditions. These include that the email address was obtained direct from the customer in the context of a sale of a product or service and that the marketing concerns a similar product or service. This is the so-called ‘soft opt-in’ and it is an exception to the principle of prior consent for sending marketing emails. The APD/GBA has explained the limits of the soft opt-in in its Decision 117/2022 of 26 July 2022 which is available in Dutch.

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What procedures can be used to collect your claims in Belgium ?

In Belgium, the legal framework provides creditors with several options to address situations where a debtor fails to meet their financial obligations. There are three separate ways in which a debt can be recovered in the event of non-payment by the debtor. Two of these methods involve legal proceedings, while the third relies on a bailiff (“huissier de justice”) to collect the debt. The three collection methods are each dealt with below.

1. The classic legal procedure (art. 700 Judicial Code)

The first collection mechanism involves a classic legal procedure. The law does not establish any explicit conditions for the application of this procedure, although due account should be taken of the court that will be competent.

A case will be usually introduced by a summons to appear (“citation”) but the parties can voluntarily appear before the court. The case will then be decided by a judge. The court’s judgment may be executed by a bailiff. The parties retain the right to appeal against the court’s judgment unless the claim is lower than 2.500 EUR. The losing party must pay a fixed amount as compensation for the costs of the proceedings (“indemnité de procedure”). This lump sum is compensation for the costs and fees of the lawyer acting for the successful party.

In addition, one can claim the statutory interest according to the law of 2 August 2002 on combating late payment in commercial transactions, implementing Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000. This specific interest amounts 10,5 % for the 1^st semester of 2023 and 12 % for the 2^nd semester 2023. Be aware the standard legal interest applicable in other situations amounts 5,25 % in 2023.

2. The summary order for payment procedure (art. 1338-1344 Judicial Code)

The second alternative is the procedure for a summary order for payment. This proceeding is quicker than the classic legal procedure and is designed for the recovery of certain, small monetary claims. The debt in question must be documented in writing. Claims up to € 1,860 are eligible except that Business to Business (“B2B”) claims are not subject to this ceiling. The procedure for a summary order for payment may only be used against debtors who have their address or residence in Belgium.

The law requires a creditor to send the debtor a formal demand requesting payment within a 15-day time-frame. The demand can be served on the debtor by a bailiff or it can be sent by registered letter (with acknowledgment for receipt). The debtor can pay the debt, contest it, or may perhaps opt not to take any action.

If the debtor does not pay within 15 days from the expiry of the payment deadline, the claim for payment is filed through an application to the appropriate court. In its judgment the court can accept or reject the claim, grant grace periods or it can accept only a part of the claim.

3. Collection of undisputed monetary debts (art. 1394/20-1394/27 Judicial Code)

In addition to the legal proceedings, there is an efficient out-of-court procedure to recover debts between enterprises. In order for this method to be applicable, it is required that the amount of money owed is fixed, due and undisputed. A potential downside of using this mechanism is that the interest and any amount provided for in a damages clause are limited to 10% of the principal amount.

When using the undisputed debts procedure, a lawyer will engage the services of a bailiff to execute the debt collection process. The bailiff will send a formal demand for payment to the debtor, giving one month to pay. In the event that the debtor fails pay, the creditor can make a request for a summary statement (“procès-verbal” or “PV“) of non-dispute to be issued. The PV of ‘non-dispute’ can be issued at the earliest eight (8) days after the expiry of the payment deadline. A magistrate may subsequently declare the PV enforceable. The bailiff can use such a declaration to begin compulsory enforcement procedures for collection of the debt.

Last but not least some strict rules are applicable since September 1^st 2023 to consumer debt collection pursuant to the law of 4 May 2023 which can lead to civil, administrative and even criminal sanctions.

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