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.