Judicial reorganization through transfer under judicial supervision, despite being too often underestimated, offers a genuine attempt to rescue all or part of a business from insolvency.
After almost four years of existence, the Belgian “Act on Continuity of Enterprises” has achieved great success for companies in financial difficulties that wish to shelter from creditors’ lawsuits in order to attempt a restructuring of their business. The Act enables distressed companies to use effective and flexible recovery procedures to continue their business activities and to avoid insolvency.
The main principle of the Act is that when the continuity of a company is at risk and it is facing the threat of insolvency in the near or medium term (without necessarily having lost the ability to repay its debts as they fall due), the company is entitled to request a moratorium for a period of up to six months.
During this moratorium period, the company facing difficulties has a choice of three different restructuring processes:
(i) entering into a consensual settlement with some of its creditors; or
(ii) obtaining the approval of a majority of creditors for a formal reorganization plan that would then bind all the creditors; or
(iii) transferring all or part of the company’s activities to a court-supervised scheme.
In many cases, the transfer of a company’s activities to a court-supervised scheme must be a genuine attempt to rescue all or part of the business from insolvency. But despite the Act on Continuity, it appears that this procedure is not favoured by many business managers whose companies face critical financial situations.
The transfer that arises as a result of this procedure might be a voluntary or mandatory transfer if the distressed company commences the transfer procedure. A mandatory transfer takes place at the request of the Public Prosecutor, a creditor or interested third party in situations where the circumstances require such transfer in order to avoid insolvency; for example, where an attempted reorganization has failed and the debtor wishes to prevent its business activities ceasing. In this scenario, the prior consent of the debtor is not compulsory in order to initiate a transfer procedure.
While a mandatory transfer might be quite onerous for the debtor, it could also be a beneficial solution for the distressed company and its employees, as shown in recent news. In the resumption of the pharmaceutical activities within Thissen Laboratories, in which we advised the buyer, half of the jobs in the company were safeguarded as a direct result of the application of the mandatory procedure commenced by the Public Prosecutor. Owing to that process, the Public Prosecutor prevented the company from filing for insolvency, as was intended by the managers and shareholders of the company.
The transfer must ultimately be ordered by the court and organized and managed by a court’s representative, appointed specifically for the role. The manager of the company does not take any active part in this procedure, although he retains his executive and managing powers in his company.
While determining whether a takeover bid is appropriate, the court must consider various criteria, as set out in an interesting judgment issued recently by the Commercial Court of Nivelles(2). In that judgment, the Court emphasized the importance of these criteria. The Court explained that the representative is, therefore, bound by the following set of values and principles which he must respect when preparing for a bid to be submitted for transfer authorization:
1. the representative has to choose bids whose primary aim is the maintenance of business activities;
2. if comparable bids are being made, priority must be given to the preservation of employment through a collective bargaining procedure; and
3. the representative and the court must take heed of a creditor’s rights. Their rights should not be compromised. The Court explained that the creditor’s position should not be weakened by the granting of the transfer, whether authorization is granted or not.
Once an offer has been selected by the representative, the court will hear representations from the various stakeholders, including the creditors, and will ultimately approve or reject the sale.
(2) Judgment of 25 June 2012 of the Commercial Court of Nivelles, J.L.M.B., 2012, n° 29 p. 1401.