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:
- An acquisition may not 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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