Belgium introduces pre-pack reorganisation (Corporate Finance Lab)
Publication date: 24/03/2021
The COVID-19 pandemic has put the rescue of struggling but viable businesses front of the agenda. The initial response of the Belgian government and legislator was a moratorium on enforcement measures and bankruptcy petitions. Such moratorium can however not be a structural solution in the long term, and expired on 31 January 2021.
The attention then shifted to the improvement of the existing legal framework. Fortunately, Belgium already benefits from a pre-bankruptcy moratorium procedure designed to rescue struggling businesses (the “judicial reorganisation”). Although this procedure is well designed, it does suffer one key drawback: its public nature. In light of cultural and other factors, the opening of such public procedure often leads to a loss of confidence from suppliers and customers and triggers further loss of value.
In this context, on 11 March 2021, the Belgian Chamber of Representatives approved a law modifying the Belgian insolvency code (the “Pre-Pack Law“). The Pre-Pack Law will shortly be published in the Belgian State Gazette and enter into effect. The Pre-Pack Law will introduce, among other measures, a non-public pre-pack reorganisation. The key features of this pre-pack reorganisation are as follows:
- The pre-pack reorganisation is not a new procedure. Rather, it takes the form of a court-authorised and court-supervised preparatory negotiation phase (the “Pre-Pack Phase“). If successful, the process will be converted into a regular public judicial reorganisation procedure (the “Judicial Reorg Phase“).
- In the Pre-Pack Phase, a judicial officer will be appointed by the court to participate in the negotiations with the (key) creditors.
- The Judicial Reorg Phase will then have the objective of either an amicable agreement approved by and binding on two or more individual creditors, or a collective agreement approved by a majority creditor vote and binding on all dissenting creditors.
As always with new legislation, the Pre-Pack Law raises a number of questions. We have tried to respond to some of the most important ones.
What is the added value of the (non-public) Pre-Pack Phase if a (public) Judicial Reorg Phase remains mandatory?
Because an agreement with key creditors will already have been found in the Pre-Pack Phase, the Judicial Reorg Phase can be carried out on an expedited timetable. In addition, suppliers and customers may be more comfortable in such situation and value destruction avoided (or at least reduced).
How is the judicial officer appointed? Can he or she be replaced? What about fees and costs?
The judicial officer is appointed by the court based on expertise and depending on the specific requirements of the situation. The debtor may propose a specific individual as judicial officer but there is no obligation for the court to accept such proposal. In any case, the judicial officer will act independently from the debtor. As such, he or she will not only take into account the interests of the debtor but also those of the creditors.
The debtor may unilaterally terminate the process, but does not have the right to unilaterally replace the judicial officer.
The debtor will bear the fees and costs of the judicial officer.
What is the role of the judicial officer? Does the debtor remain in possession?
The debtor (board of directors) will retain all management powers in relation to the business, but will need to hand over certain powers in relation to the reorganisation process. For example, the judicial officer will receive the following powers and duties:
- he or she will decide which creditors to include in the negotiations;
- he or she will “participate in the negotiations”;
- he or she will safeguard the due information of the creditors;
- he or she will issue a report to the delegated judge appointed by the court to supervise the process; and
- he or she will, upon termination of the Pre-Pack Phase, request the court to move to the Judicial Reorg Phase.
How debtors and judicial officers will interact in relation to the reorganisation process, and where control over the negotiations will ultimately lie, remains to be seen. For example, what if debtor and judicial officer take a completely different view to the negotiations?
From the debtor perspective, this (partial) loss of control is a potential disadvantage compared to standard judicial reorganisation proceedings. Indeed, in a standard judicial reorganisation process, the debtor stays fully in control of the process (subject to limited exceptions).
Does the debtor benefit from a moratorium during the Pre-Pack Phase?
In principle, no. The judicial officer can however petition the court for payment terms and a suspension of enforcement measures from specified creditors. The court will decide on such petition. The duration of the payment terms may not exceed four months.
What about the obligation to file for bankruptcy within one month of case of cessation of payments?
The obligation for the debtor (board of directors) to file for bankruptcy within one month of cessation remains applicable during the Pre-Pack Phase but is suspended in the Judicial Reorg Phase.
Are contractual provisions that provide for a termination of contract by reason of opening a pre-pack reorganisation enforceable?
This is not clear. Contractual provisions that provide for a termination of contract by reason of the opening of a judicial reorganisation (Judicial Reorg Phase) are not enforceable. Although it would be sensible to have a similar rule in relation to the opening of the Pre-Pack Phase, there is no express provision in the Pre-Pack Law confirming this.
What are some of the key considerations for a debtor?
The initiative to open a pre-pack reorganisation is exclusively with the debtor (board of directors). The debtor will hence need to decide whether it will file for this procedure, or rather put in place an informal negotiation with key creditors followed by a standard judicial reorganisation procedure once an in principle agreement has been found.
This will be a question of weighing the advantages of the pre-pack reorganisation (eg court validated process, possibility to obtain payment terms) against the disadvantages (eg fees and costs of the judicial officer, partial loss of control of the reorganisation process). Much will depend on the concrete circumstances of the situation.
What are some of the key considerations for a lender?
Lenders do not have the initiative in relation to the opening of the pre-pack reorganisation. They may however challenge any request for payment terms and suspension of enforcement measures. In addition, they should consider any means to upgrade themselves to the status of secured creditor before the opening of the Judicial Reorg Phase. Indeed, creditors who benefit from security at the time of the opening of the Judicial Reorg Phase cannot be affected by the reorganisation plan save individual consent (and save payment terms for a period of no more than 24-36 months). In practice, lenders are likely to convert their mortgage mandates (if they have not already done so).
Lenders should further note that new financing provided by them during the Pre-Pack Phase will not benefit from any special priority in the Judicial Reorg Phase and/or a potential subsequent bankruptcy.
When does the Pre-Pack Law enter into effect?
The Pre-Pack Law will enter into effect on the date of its publication in the Belgian State Gazette (expected shortly), but will cease to apply on 30 June 2021. The expiry date may be postponed by royal decree, and hopefully it will. Still, this – highly unusual – sunset mechanism could give rise to unintended issues. For example: what if a debtor is still in Pre-Pack Phase at the time of expiry of the Pre-Pack Law?
How does all of this interact with the EU preventive restructuring frameworks directive?
The existing judicial reorganisation process and the new pre-pack reorganisation are in line with the objectives of the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks. They are however not fully compliant with this Directive, and the Belgian insolvency code will hence need to be further amended in the near future.
In light of the many options which the Directive leaves to national legislators, the nature and extent of these further amendments to the Belgian insolvency code remains to be seen. However it may be, it seems already inevitable that the Belgian legislator will not be ready by the original implementation deadline of 17 July 2021.
To be continued…
It is unlikely that the Pre-Pack Law will be the magic bullet that will offer a solution for every situation of financial distress. The objectives of the Pre-Pack Law are however commendable, and it will no doubt constitute a useful additional tool in the restructuring toolbox.