Bankruptcy and Insolvency – Banking law in Belgium

7.1 Company Rescue or Reorganisation Procedures Outside of Insolvency

Explain the availability and practice of company rescue or reorganisation procedures outside of insolvency proceedings in your jurisdiction?

Apart from the traditional insolvency proceedings (i.e. bankruptcy and liquidation), Belgian insolvency law provides for a number of restructuring options which can be divided into two groups: formal, court-supervised reorganisation proceedings (i.e. reorganisation through an amicable/collective agreement or a transfer of undertaking under judicial authority) and informal, out-of-court work-outs, i.e. (i) the amicable settlement and (ii) the appointment of a company mediator:

  • If the company does not face immediate enforcement actions or bankruptcy filings by its creditors, it could negotiate a debt restructuring agreement with its most important creditors (usually banks) and by doing so, successfully shield off insolvency. If the debtor concludes an amicable settlement with at least two of its creditors with a (motivated) view to preserve to continuity of the business and then files it with the clerk’s office of the Enterprise Court, it will be protected against certain claw back actions in case the company would subsequently enter into bankruptcy.
  • A second work-out involves the appointment of a company mediator by the president of the Enterprise Court or the chamber of commercial investigation in order to facilitate the reorganisation of all or part of the company’s assets or activities. The debtor itself may propose a company mediator to the court. The Enterprise Court will define the assignment of the appointed company mediator.

These informal work-outs are never publicly disclosed, which has proven to be a useful feature for turnarounds in practice.

7.2 Impact of Insolvency Processes

What impact does the commencement of insolvency processes have on a lender’s rights to enforce its loan or any security or guarantee?

With regard to the insolvency processes with a view to liquidate the company (i.e. bankruptcy and liquidation), the general rule is that the enforcement rights of individual creditors are suspended once the process has been declared open.

The opening of bankruptcy proceedings generally entails that all claims against the debtor are halted, enforcement is suspended and interests no longer accrue (concursus creditorum). Secured creditors are entitled, under certain circumstances, to enforce their rights, not being subject to the bankruptcy proceedings and even without the intervention of the bankruptcy receiver (i.e. the so-called ‘separatists’). In any case, creditors whose debt claims are secured by movable assets (e.g. a pledge), cannot enforce their claims until the first verification of claims (usually one month after the bankruptcy judgment). In practice however, it will usually be the bankruptcy receiver that takes all necessary actions and then pays out these creditors according to their preferential rights on the proceeds of the asset sale. As for creditors whose claims are secured by immovable assets, and in particular, a first ranking mortgagee, they will generally be able to pursue the sale of the mortgaged asset after the first verification of the debt claims.

In case of a liquidation, whether it is a judicial or voluntary liquidation, unsecured creditors and creditors with a general privilege on all assets lose their enforcement rights, except to the extent that the enforcement would not prejudice other creditors or the proper course of the liquidation. Secured creditors in principle do not lose their enforcement rights.

With regard to reorganization proceedings (reorganization through an amicable or collective agreement or the transfer of undertaking under judicial authority), the opening of such procedure entails a moratorium protecting the debtor against all enforcement by its creditors, both secured and unsecured, but interest continues to accrue on the outstanding claims.

7.3 The Order Creditors Are Paid on Insolvency

In what order are creditors paid on a company’s insolvency?

In case of bankruptcy the debts will generally be ranked according to the following set of priority rules:

  • Estate’s debt: all cost and debt incurred by the bankruptcy receiver during the bankruptcy proceedings will have ultimate priority. Additionally, fees and costs of the receiver in light of the sale of encumbered assets (e.g. fees of an auction house) will be paid with the proceeds of these assets before they are distributed to the concerned secured creditor(s).
  • Secured creditors: creditors that have been granted a security interest in a certain asset have a preferential right on the encumbered assets, whether by means of appropriation or on the proceeds of the sale of that asset. For the part of their claim that exceeds the encumbered, they will be considered as ordinary (unsecured) creditors. Claims will be ranked in accordance with the date on which the security interest was perfected (e.g. registration or filing). As mentioned above, certain specific preferential rights may rank ahead of these secured claims (e.g. legal costs or costs made for the preservation of the asset concerned).
  • Preferential rights: certain creditors may have a preferential right on certain or all assets of the estate (e.g. tax authorities, unpaid seller, unpaid landlord, etc.). Preferential rights on a specific asset (e.g. unpaid seller, unpaid landlord) rank before general preferential rights (e.g. tax and social security authorities, employees) and sometimes even before secured creditors with a security interest on that specific assets (e.g. pledgeholder). Between secured creditors and creditors with a specific preferential right, the principle* is that the oldest right takes precedence (‘prior tempore potior iure’).
  • Ordinary creditors: Once the creditors mentioned above have been paid in full or to the extent that were secured, the sale proceeds of the remaining assets will be distributed among the unsecured creditors who will rank pari passu (unless a creditor agrees to be subordinated).

* Some creditors might have a specific preferential right prescribed by law and their claims may therefore rank ahead of earlier perfected secured claims (e.g. legal costs incurred in the interest of all creditors or costs made for the preservation of an asset).

7.4 Concept of Equitable Subordination

Does your jurisdiction have a concept of equitable subordination or similar?

Belgian legislation does not recognize the concept of equitable subordination. Belgian courts may, however, order the subordination of a claim as a sanction, e.g. if a lender granted a loan to a company which was by far not creditworthy. Only few courts have in the past decided to subordinate a creditor’s claim due to unlawful conduct by the concerned creditor.

Also with regard to intra-group claims, if the claims are not contractually subordinated, they will not be treated differently from claims of third party creditors. In line with what is mentioned above, only intra-group debt structures established with the intent to prejudice third party claims may be challenged before the courts and as a result be treated as subordinated claims.

7.5 Risk Areas for Lenders

What are the risk areas for lenders if the borrower, security provider or guarantor were to become insolvent?

When a borrower, security provider or guarantor becomes insolvent the related claims and security rights of lenders might lose value, because the lenders need to compete with other privileged creditors or the collateral is insufficient to cover the total debt. In addition enforcement might be delayed or no longer possible.

In case of bankruptcy any payments or security granted, upon the opening of insolvency proceedings, to lenders might also become subject to claw back actions proceedings.

Certain transactions may be declared ineffective vis-à-vis third parties if concluded or performed by the debtor during the hardening period (a period of up to a maximum of six months prior to the date of the bankruptcy judgment). There is an exhaustive list of automatic and non-discretionary claw-back events. These claw-back events are (i) gifts and undervalued contracts, (ii) payments made for amounts that are not due at the date of payment, (iii) or new security granted for existing debt and (iv) all other payments made to creditors. These can be challenged by the bankruptcy receiver if the creditor that accepted payment was aware of the financial distress of the company at the time of the event.

In addition, the court can, at the request of the bankruptcy receiver, declare other transactions ineffective that have been entered into or performed during the hardening period provided the counterparty was aware of the fact that the debtor was virtually bankrupt and the court determines that this declaration would benefit the bankruptcy estate (i.e. that the challenged transaction was detrimental to the rights of the creditors).

Moreover « fraudulent transactions », i.e. abnormal transactions that are detrimental to the rights of the creditors and where there is fraud on the part of both the debtor and the other party, can be declared ineffective. This is regardless of whether they occurred during or before the hardening period.

If the lender acts as a credit institution, it has an obligation to inquire about his client’s ability to repay his debt and must evaluate the validity of the securities granted to him. If the institution does not comply to that provision, it may be ordered to reimburse the sums resulting from the call on the guarantee or the enforcement of the securities.

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