Reform of the insolvency law - Part 2 - Judicial Reorganisation Proceedings become more stringent

Following the example of our previous contribution (Part I) on changes to insolvency law as a whole, this contribution explains the most significant changes in judicial reorganisation proceedings. 

In general, the main principles of the Continuity of Enterprises Act (WCO) are retained.

The debtor, who meets the conditions, can still opt for

• (i) judicial reorganisation by means of an amicable agreement,
• (ii) judicial reorganisation by means of a collective agreement or
• (iii) judicial reorganisation by means of a transfer under judicial authority.

However, the legislator has specified and clarified a number of points, in order to address existing sticking points and gaps in the Continuity of Enterprises Law. So, judicial reorganisation proceedings are becoming stricter.

1. The petition and the documents to be deposited

From now on, the legislator requires the statement of assets and liabilities which the debtor is to attach to the petition on deposit, to be drawn up with the assistance of an external accounting practitioner; whereas previously the statement of assets and liabilities needed only to be drawn up under the "supervision" of the external accounting practitioner.

The role of the external accounting practitioner has become more important. According to the legislator, the practitioner must strengthen the court’s confidence in the figures submitted. This means that the assistance which he provides is not simply a task of compilation, but rather a "sui generis" task, which may be regarded as a task of objective assessment, in which, amongst others, the practitioner explains the main objective assessments he has performed and declares that he has no remarks to make or, where the case arises, explains any anomalies in the company’s figures. However, his assistance may not overly burden the company.

A debtor, which is an unincorporated organisation or a legal person for which the partners have unlimited liability, must also deposit together with the petition a list of partners and proof that they have been informed about the proceedings.

If the debtor requests suspension of the execution of a seizure of real estate, it must also attach a copy of the judicial officer’s writs to the petition. 

2. Consequences (effect) of depositing the petition

The existing arrangement continues to exist, but one of the most striking changes of the Insolvency Law is the restriction of the suspensory effect of deposit of the petition and possible seizure proceeding(s) in which the debtor is involved.

Thus, a public sale (after seizure) can take place if the sale day is already fixed and falls within a 2-month period from deposit of the petition. However, the court can order the suspension of the sale, provided the debtor requests this in the petition. This petition does not have any suspensory effect. So, although it was previously possible to deposit a petition for judicial reorganisation the day before the sale, and thereby obtain the suspension of an impending sale, the new regulation limits the suspensory effect in order to avoid abuse. 

The request for judicial reorganisation has also no suspensive effect, if the debtor applied to commence judicial reorganisation proceedings more than 6 months beforehand, unless the court decides otherwise giving reasons. 

3. Consequences of the opening of judicial reorganisation proceedings

3.1 Securities

The principles regarding the protection of the debtor against his creditors remain the same except for a number of specifications.

The law now expressly states that the debtor may issue a legal or contractual security during the suspension period. The suspension will also have no repercussions for the pledge if a pledge agreement was concluded between the pledgee creditor and the debtor, which relates specifically to the current or future debt claims of the debtor.

So, for example, a pledge of a bank will not be affected by the suspension, if it relates to the debt claims of the debtor – which are of a fluctuating nature – in respect of his clients in the context of the commercial activities. A pledge on a commercial fund, a farm or on a totality of assets which includes debt claims, is not a pledge which specifically relates to (future) debt claims. 

3.2 Concerning fiscal and social security claims 

Since the birth of the Continuity of Enterprises Law, the tax authorities and the department of social security (RSZ) have pretty much done everything to obtain a "privileged" position in judicial reorganisation proceedings. Following conflicting rulings by the Cassation Court and the Constitutional Court, the legislator puts an end to the different views in the jurisprudence.   Legislator postulates that levies of fiscal and social security law, and contributions or debts in the main sum in a liquidation or bankruptcy subsequent to a judicial reorganisation proceeding should be regarded as debts of the insolvency assets.

In a liquidation or bankruptcy, debts of the insolvency assets are paid as a priority and are not subject to concurrence. However, this does not apply to the ancillary payments of social security and tax debts.

With this provision, the legislator creates a peculiar twist in the debate, because, in rulings of March 2015, the Cassation Court had decided that these debt claims do not constitute debts of the insolvency assets in a subsequent bankruptcy. Even more strikingly, in the first bill the legislator followed the jurisprudence of the Cassation Court, but in the end decided otherwise concerning this.

3.3 Change of proceeding

The principles relating to change the proceeding remain intact, but the new legislation makes it clear that the debtor may change its proceeding in any direction and at any time. 

In other words, the debtor can change a judicial reorganisation proceeding by means of an amicable settlement into a judicial reorganisation proceeding by means of a collective agreement or in a judicial reorganisation proceeding by means of a transfer under judicial authority, or vice versa, without following any order, such as this was until now.

4. The judicial amicable settlement 

The aim is still the same, namely to conclude an agreement with all, two or more, creditors. And, where there is one sole creditor, with all of the creditors means with one creditor. The amicable settlement is ratified and declared enforceable by the court. From now onratification is granted not for one or other debt claim, but for the whole. The court can perform the marginal testing against public law of the settlement reached, in the sense that anything that would violate the fundamental principles of the Rule of Law must not be ratified. Also, the decision which terminates the proceedings is to be published. 

The consequences of the amicable settlement benefit a natural person who provided personal surety for the debtor free of charge (guarantee without consideration) and whose request was granted.

5. The judicial collective agreement

5.1 Amendment of definitions of “extraordinary suspended debt claim” and "creditor-owner"

The definition of "extraordinary suspended debt claims" changes compared to the definition laid down in the Continuity of Enterprises Act.

The law makes it clear that debt claims suspended at the time of the opening of judicial reorganisation proceedings which are secured by securities in rem, and debt claims of creditor-owners, are only extraordinary

• (i) for the amount inscribed or registered on the opening day of judicial reorganisation proceedings, or
• (ii) – if no inscription or registration is performed –  these are extraordinary for the going concern value of the good or
• (ii) if the security relates to specific pledged debt claims, the book value. (The latter limitation outlined applies only to the development and voting of the reorganisation plan.)

If a creditor has several debt claims against the debtor, and the amount of the total debt claim is higher than the amount for which inscription or registration was performed, he may himself determine the debt claim or the part of the debt claim which shall enjoy the status of extraordinary debt claim. If the creditor fails to choose, the ordinary and extraordinary debt claims are to be divided proportionally. If the creditor and the debtor fail to agree concerning the going concern value, the court may decide to determine this, and, where applicable, appoint an expert.

The definition of "creditor-owner" is also adapted. A creditor-owner is a creditor who, on the opening date of insolvency proceedings, owns goods in the hands of the debtor as security for his debt claim. A creditor-owner can be, among others, a person who has stipulated a retention of tittle or is benefiting from a fiduciary transfer. Both must be regarded as a pledgee creditor and are a suspended extraordinary creditor. 

5.2 Notification and response of creditors are speeded up

Henceforth, the suspended creditors must be individually notified of the judicial reorganisation proceedings within a period of 8 days instead 14 days as usually stipulated in the old law. On the other hand, creditors wishing to dispute the amountor capacity of their debt claim in court must do this at latest 1 month before the date of the hearing at which the reorganisation plan will be voted. This means that creditors will also have to react more quickly. 

5.3 Reorganisation plan

From now on, the law specifies that the minimum amount that creditors receive must be no less than 20% of the amount of the debt claim in the main sum, instead of 15%. The reorganisation plan may also provide a measure for waiving interest, increases, fines and costs or for rescheduling payment of these, as well as priority charging of payments to the main sum of the debt claim.

The reorganisation plan cannot provide

• (i) a reduction or cancellation of suspended debt claims arising from work performed excluding tax or social security contributions or debts;
• (ii) a reduction of maintenance debts, or of debts of the debtor resulting from the obligation to make good damage caused by his fault which is linked to the death or physical injury of a person and
• (iii) a reduction or cancellation of criminal fines.

6. Transfer under judicial authority

The old arrangement provided no opportunity for the bidder to take over certain current agreements essential to the continuity of the company. The absence of this kind of arrangement hampered the transfer of companies in continuity.

To remedy this, the new law allows the bidder to indicate one or more current agreements which he wishes to take over in full if his offer is accepted, subject to an obligation for the bidder to take over the entire outstanding debts.

This possibility is excluded for intuitu personae agreements. Nor does this disadvantage creditors, as outstanding debts are not allowed to form part of the price offered.

Regarding the court representative, the new law specifies the rules relating to sales and fees.