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NEW “BUSINESS CONTINUITY ACT”

March 2009 - Corporate & Commercial. Legal Developments by Cruyplants Eloy Wagemans & Partners .

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Parliament has adopted a new Act, the “Business Continuity Act” to replace the existing act on “General Arrangements” (Gerechtelijk Akkoord/Concordat Judiciaire). General Arrangements used to be the Belgian equivalent of Chapter 11 in the U.S., and similar concepts in most other jurisdictions, aiming at the temporary protection of companies from their creditors to allow them to restructure and obtain a new lease of life. General Arrangements, introduced in 1946 and modernised in 1997 have never been a big hit. In 2006 91 have been registered compared to 7692 bankruptcies. They are often considered as the waiting room for straightforward bankruptcy.

The judicial re-organisation can also result in a “general arrangement” between the debtor business and its creditors. This general arrangement is at the core of the new Business Continuity Act and at the same time it is the part that is most reminiscent of the 1997 Act. The general arrangement, to be proposed by the debtor, may contain any measures useful for restructuring. These measures need to be reasonably justified, especially when they distinguish between different categories of creditors.The new Act undertakes another attempt at modernisation and simplification. Instead of a single mould for all, it offers failing businesses a wider range of possible restructuring plans with a varying degree of court involvement, from an amicable agreement to a court ordered transfer of the business. All these plans may be accessed under less stringent conditions. It should also be less burdensome in terms of paperwork and less costly since the new Act abolishes the need for a so-called “suspension commissioner”. Under the 1997 Act it was required to appoint to this function an external auditor or accountant and it is widely believed that the costs of appointing this commissioner held back many smaller businesses from applying for a General Arrangement. Finally, the new Act is also more flexible in giving increased freedom to the debtor and his creditors to work out solutions and in allowing for solutions that concern only part(s) of the business.

The Act allows a business in difficulty to come to an “amicable” agreement with one, some or all of its creditors to obtain additional credit or any other facilities that allow it to improve its financial situation. This agreement is not binding on third parties but if it stipulates that it has been entered into for the purpose of improving the financial situation of the business and if it is filed with the commercial court it will not be open to challenge under the bankruptcy law in case of bankruptcy, even if entered into during the six month “suspect” period prior to bankruptcy. Third parties will not have access to the agreement except with the authorisation of the company or business.

In principle the amicable agreement is entered into without court interference but if this is not possible, a request may be submitted for judicial reorganisation aimed at obtaining an amicable agreement with some of its creditors. This will normally increase the pressure on the other creditors since they will face the possibility of the court stepping in and imposing payment delays or conditions.

The aim of the judicial reorganisation, which is at the core of the new Act, is to safeguard the continuity of the business or parts of it, independently of the fate of the legal entity or natural person owning the business. The judicial reorganisation is initiated by a request filed with the court by the debtor business. This request contains notably a description of the difficulties the business experiences, a list of the creditors, the amount of each debt and, if possible, a proposal for either (1) an amicable settlement under court supervision as referred to above, (2) a judicial reorganisation to be approved by the creditors, or (3) the transfer to third parties of all or parts of the business. In the latter case the parts of the business need to be structured in such a way that allows them to operate as a going concern. The proposal can be changed during the proceedings.

As already mentioned, the judicial re-organisation can result in an “amicable”, i.e., voluntary agreement that will be binding only on the parties to the agreement. The amicable agreement will normally grant a grace period to the debtor for the re-imbursement of its debt.

The judicial re-organisation can also result in a “general arrangement” between the debtor business and its creditors. This general arrangement is at the core of the new Business Continuity Act and at the same time it is the part that is most reminiscent of the 1997 Act. The general arrangement, to be proposed by the debtor, may contain any measures useful for restructuring. These measures need to be reasonably justified, especially when they distinguish between different categories of creditors.

The so-called “Privileged” creditors, i.e., creditors with a statutory security (mortgage, lien, charge) may be required to forego the exercise of their rights for a maximum term of 18 months, unless they voluntarily consent to further concessions. A novelty of the new Act is that the tax authorities are no longer considered to be a statutory privileged creditor.

Another novelty is the maximum duration of the term during which the re-organisation needs to be carried out. The term is now five years from the approval of the plan, as compared to the previous term of two years.

The plan will be approved and binding on all creditors if accepted by a majority of the voting creditors holding at least 50% of the debt.

Finally, the judicial re-organisation can result in the transfer of all or part of the business. This can be the case either when authorised or approved by the debtor in its application for judicial reorganisation or, in case of failure of the judicial reorganisation, on request of the public prosecutor or of any interested third party. In these latter cases, the debtor can be obliged to transfer its business. A court attorney can also be charged with finding a purchaser for the business. This forced transfer comes very near to plain bankruptcy followed by a sale of the business on a going-concern basis. The Act contains specific provisions with regard to the transfer of employees and the liability for outstanding claims from employees, preceding the date of the opening of the proceedings. The terms of employment should in principle remain the same, except if different conditions are agreed between the employer/acquirer and the individual employees or their representatives.

Luc Van Caneghem

luc.vancaneghem@cew-law.be

www.cew-law.be