The tax authorities are not always preferred creditors

In its judgement of 18 February 2016, the Constitutional Court has once again made some important decisions regarding the position of the tax authorities in their capacity of public creditor in the context of a reorganisation in compliance with the Continuity of Enterprises Act.

According to the Court, the tax authorities are ordinary creditors, and they cannot improve their position during the suspension by taking a mortgage registration.

1. The reasons leading to this judgement

Since the entry into force of the law of 31 January 2009 regarding the continuity of enterprises (hereinafter “LCE”), the tax authorities have tried, on multiple occasions, to improve their position in the procedure of judicial reorganisation by undertaking creative attempts to “promote” themselves to extraordinary creditors.

However, this is in conflict with the spirit as well as the purpose of the LCE, regarding to which the legislator has clearly imposed its will to treat both public and private creditors equally. 

The Court of Appeal in Brussels has submitted a preliminary question to the Constitutional Court whether the tax authorities, by registering their legal mortgage during the period of protection against creditors, violated the constitutional equality principle.

2. Continuity of Enterprises and attachment during the suspension of claims

Pursuant to Article 31 of the LCE, no conservatory or executory seizure can be levied during the suspension on claims in the suspension (in other words claims that date back to before the opening of the suspension). Although, seizures levied before the opening of the procedure maintain their conservatory character, but the court can grant releases, to the extent that this does not cause a significant disadvantage for the creditor.

Enterprises in difficulties are legally protected against any form of execution, bankruptcy and seizure of claims in the suspension

The purpose of the LCE is to grant enterprises in difficulties judicial protection against any form of execution, bankruptcy and seizure of claims in the suspension. 

The aim of that period of protection (i.e. period of suspension) is to allow the enterprise in difficulties to reorganise itself in order to maintain its continuity.

3. The facts

In the present case, the tax authorities had registered their legal mortgage on the part of the real estate of the enterprise in difficulties, after the opening of the procedure of judicial reorganisation. The tax authorities relied on the legal argument that the right of the tax authorities to proceed to register a mortgage cannot be mistaken for a seizure. According to the tax authorities, the reserved right of the mortgage registration results from the VAT code and from the Income Tax Code. Hence, the tax authorities believed that Article 31 LCE does not target the legal mortgages of the tax administration. Because the LCE does not say a single word about a possible prohibition of registration of a legal mortgage by the tax authorities, it seemed evident for the tax authorities to levy conservatory attachments during the period of suspension.

This course of action causes an unequal treatment of the creditors during the procedure of judicial reorganisation. In that way, the tax authorities obtain a favourable position compared to other creditors, which manifestly interferes with the fundamental principles of the LCE.

Not surprisingly, this has been confirmed by the Court.

4. Argumentation of the Constitutional Court

The Constitutional Court judged that, since Article 31 LCE does not prohibit the tax authorities to file a mortgage registration during the period of the suspension in order to be acknowledged as a preferred creditor, this impairs, in a disproportionate fashion, the rights of the other creditors. Their situation will be directly affected by the existence of such a prerogative of the tax authorities, and conflicts, according to the Constitutional Court, with the desire of the legislator to protect the equality between creditors.

Technically speaking, the legal mortgage is no seizure. But the seizure on a real estate does not constitute a prerogative, whereas a mortgage leads to a right in rem being granted, which results in the grade of preferred creditor as of the registration. If the tax authorities file a mortgage registration during the suspension, they will not become a preferred creditor. However, they will have that grade at the end of the suspension, and in case of concurrence, the other creditors who cannot dispose of this prerogative, will only be paid if the tax authorities are fully paid. The Constitutional Court argues that such a situation does not respond to the will of the legislator.

5. Conclusion

With this judgement, the tax authorities lose yet another one of their many backdoors that they are always looking for in order to assert their superior position within the LCE. 

For enterprises in difficulties, and their ordinary creditors, this implies the confirmation that the public creditor has to be equally treated, which should allow for a smoother reorganisation.