Belgium is finally about to transpose Directive 2019/2023 on preventive restructuring frameworks and regulated pre-pack proceedings are now accessible.
European and Belgian legislative developments
Insolvency law has experienced significant activity in recent years, both at European level and at Belgian level, in favour of a paradigm shift of restructuring through pre-pack proceedings instead of liquidation.
The EU regulation 2015/848 on insolvency proceedings (link Here) first settled conflicts of law in insolvency matters, such as internal jurisdiction, applicable law, interaction between insolvency proceedings opened in different member states.
Directive 2019/2023 on “preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency)” (link Here) aimed to do the following:
- maximise the continuity of insolvent entities thanks to preventive restructuring frameworks;
- allow a fresh start; and
- make insolvency proceedings more professional and more efficient.
On 7 December 2022, the European Commission published a draft directive harmonizing certain aspects of insolvency law to further financial and economic integration in the EU.-
In Belgium, after two major changes to the insolvency law in 2009 and 2017, the long-awaited bill implementing Restructuring Directive 2019/1023 was finally voted in Parliament on 25 May 2023 and will probably come into force on 1 September 2023. This Bill has yet to be published in the Belgian State Gazette.
Gradual introduction of pre-pack proceedings in belgium
Following the European trend, Belgian insolvency law has also evolved considerably over the past 15 years, aimed at giving maximum priority to ensuring the continuity of activities rather than shutting them down in the event of bankruptcy.
In this context, in 2017 the Belgian legislator considered introducing a pre-pack procedure into the Belgian insolvency proceedings arsenal. The pre-pack procedure means that an entity facing financial difficulties can prepare a sale of its business, without its financial difficulties becoming public or known to its stakeholders, with the purpose of increasing the value of the business. This project was eventually shelved due to both the Smallsteps case and trade union opposition.
With the difficulties arising from COVID-19 weakening the financial health of entities, the Belgian legislator introduced a “kind” of pre-pack proceedings that enabled the debtor to discreetly prepare for judicial reorganisation proceedings under the supervision of a judicial administrator.
The purpose of this procedure was to confidentially test the possibility of an amicable or collective arrangement with the debtor’s most important creditors "in the shadow" of formal insolvency proceedings. This occurs during a court-supervised preparatory negotiation phase. If the negotiations in this pre-pack phase are successful, the procedure is then introduced into the existing judicial reorganisation proceedings aimed at obtaining either an amicable agreement with two or more creditors, or a collective reorganisation agreement.
This procedure was therefore limited to agreements reached with creditors and did not directly allow for the transfer of business activities.
New tool available for entities: private preparation for bankruptcy
With the directive transposition, genuine pre-pack proceedings called “Private preparation for bankruptcy” (Préparation privée d’une faillite/Besloten voorbereiding van het faillissement) will be introduced into Belgium law.
The preparatory work of the bill explains that the pre-pack proceeding is “an opportunity for a company not to lose its total value which is more valuable being in a going concern than in a piece-by-piece sale”.
The debtor may ask the Court to declare bankruptcy, but before the bankruptcy is declared, the transfer of all or part of its assets and activities has to be prepared. The debtor must, however, demonstrate that the discreet preparation of the bankruptcy will give the creditors the opportunity to be reimbursed at a higher amount, and maximise job retention.
The Court will appoint, for a maximum of 30 days (and extendable to 30 more days if necessary), one or more liquidation experts (who will be confirmed as bankruptcy trustees if the bankruptcy is declared), and also a supervisory judge. It is important to note that the debtor stays “in possession” during the process.
The liquidation expert will prepare, jointly with the debtor and under the supervision of the judge, the debtor’s bankruptcy. The expert represents the creditors’ interests. If there is a contemplated transfer of the assets/activities to persons/entities linked to the debtor, the expert must inform the supervisory judge in writing. The preparatory work of the bill is quite precise: “The main reason for introducing this procedure is to protect creditors and employees against illegitimate self-assignment, and is essentially an anti-abuse procedure.”
The procedure is completely confidential in order to avoid the negative effects of bankruptcy. It remains to be seen whether the contemplated pre-pack proceedings will meet expectations.