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On Friday 26 March 2021, a new law reforming the Belgian insolvency legislation has been published (the "Insolvency Reform Law").
The Insolvency Reform Law is the latest development in a series of measures taken by the Belgian authorities in the context of the COVID-19 pandemic and the much-feared wave of bankruptcies resulting from it. Previously, a temporary moratorium on creditors' rights was issued (and extended), in order to mitigate the financial consequences of the pandemic. The purpose of the Insolvency Reform Law is now to introduce structural changes to the existing insolvency legislation.
Main structural changes
• Introduction of a pre-pack insolvency through a preparatory agreement ("voorbereidend akkoord" / "accord préparatoire")
The purpose of the introduction of a pre-pack insolvency is allowing a company in financial distress to prepare, in full confidentiality, a formal insolvency procedure. A judicial officer ("gerechtsmandataris" / "mandataire de justice"), appointed by the Court (but who can be proposed by the company), will assist the company in its negotiations with creditors to seek for an amicable or collective settlement. The appointment of the judicial officer is not published (in the Belgian official journal). The major advantage is thus that the pre-pack insolvency regime offers complete confidentiality, which is not the case when a company requests a judicial reorganization proceeding.
During the preparatory agreement phase, the general debt moratorium ("opschorting"/"suspension") applicable to judicial reorganizations does not (yet) apply to the debtor. However, the judicial officer may request the court to impose certain measures (e.g. deferment of payments) to protect the debtor against specific creditors.
Once the debtor and (two or more) creditors have come close to an agreement, the judicial officer may request a transition to a formal judicial reorganization proceeding. The pre-pack insolvency should thus ensure that a reorganization is carried out more efficiently and successfully. In addition, the debtor is spared from publicity on its precarious financial situation for as long as possible, avoiding the further loss of value that is typically triggered when a company opens a formal (and public) insolvency proceeding.
• Less strict formal requirements to start a judicial reorganization proceeding
Secondly, the Insolvency Reform Law has brought an easement of the formal entry requirements for the judicial reorganization proceeding. Certain documents, which previously had to be filed together with the petition to open a judicial reorganization, may now also be filed later, or do not have to be filed at all. This concerns for instance a cash flow planning, a recent statement of assets and liabilities, an exhaustive list of creditors, etc.
Through this increased flexibility, the legislator aims to grant companies quicker and easier access to the reorganization proceedings.
Related tax change
The Insolvency Reform Law also extends the scope of the tax exemption of write-downs on receivables and provisions to those resulting from "extra-judicial agreements" until the plan or agreement is fully implemented or until the proceedings are closed.
In other words, the tax exemption is now also applicable to write-downs recorded by creditors (resulting in a tax-deductible expense) in the framework of confidential "pre-pack insolvency agreements".
Unfortunately, the debtors' correlative debt restructurings (leading to the recognition of an extraordinary profit) remain taxable, except if it is part of a public judicial reorganisation agreement.
A "pre-pack agreement" may therefore come at a (tax) price when debtors lack sufficient (effectively) deductible tax attributes (e.g. losses) to offset against said extraordinary income. If this price is prohibitive, the debtors may be forced to enter into a public judicial reorganisation… a choice that should not be influenced by tax reasons.
The Insolvency Reform Law is the latest development in a series of measures taken by the Belgian authorities in the context of the COVID-19 pandemic and the much-feared wave of bankruptcies resulting from it. Previously, a temporary moratorium on creditors' rights was issued (and extended), in order to mitigate the financial consequences of the pandemic. The purpose of the Insolvency Reform Law is now to introduce structural changes to the existing insolvency legislation.
Main structural changes
• Introduction of a pre-pack insolvency through a preparatory agreement ("voorbereidend akkoord" / "accord préparatoire")
The purpose of the introduction of a pre-pack insolvency is allowing a company in financial distress to prepare, in full confidentiality, a formal insolvency procedure. A judicial officer ("gerechtsmandataris" / "mandataire de justice"), appointed by the Court (but who can be proposed by the company), will assist the company in its negotiations with creditors to seek for an amicable or collective settlement. The appointment of the judicial officer is not published (in the Belgian official journal). The major advantage is thus that the pre-pack insolvency regime offers complete confidentiality, which is not the case when a company requests a judicial reorganization proceeding.
During the preparatory agreement phase, the general debt moratorium ("opschorting"/"suspension") applicable to judicial reorganizations does not (yet) apply to the debtor. However, the judicial officer may request the court to impose certain measures (e.g. deferment of payments) to protect the debtor against specific creditors.
Once the debtor and (two or more) creditors have come close to an agreement, the judicial officer may request a transition to a formal judicial reorganization proceeding. The pre-pack insolvency should thus ensure that a reorganization is carried out more efficiently and successfully. In addition, the debtor is spared from publicity on its precarious financial situation for as long as possible, avoiding the further loss of value that is typically triggered when a company opens a formal (and public) insolvency proceeding.
• Less strict formal requirements to start a judicial reorganization proceeding
Secondly, the Insolvency Reform Law has brought an easement of the formal entry requirements for the judicial reorganization proceeding. Certain documents, which previously had to be filed together with the petition to open a judicial reorganization, may now also be filed later, or do not have to be filed at all. This concerns for instance a cash flow planning, a recent statement of assets and liabilities, an exhaustive list of creditors, etc.
Through this increased flexibility, the legislator aims to grant companies quicker and easier access to the reorganization proceedings.
Related tax change
The Insolvency Reform Law also extends the scope of the tax exemption of write-downs on receivables and provisions to those resulting from "extra-judicial agreements" until the plan or agreement is fully implemented or until the proceedings are closed.
In other words, the tax exemption is now also applicable to write-downs recorded by creditors (resulting in a tax-deductible expense) in the framework of confidential "pre-pack insolvency agreements".
Unfortunately, the debtors' correlative debt restructurings (leading to the recognition of an extraordinary profit) remain taxable, except if it is part of a public judicial reorganisation agreement.
A "pre-pack agreement" may therefore come at a (tax) price when debtors lack sufficient (effectively) deductible tax attributes (e.g. losses) to offset against said extraordinary income. If this price is prohibitive, the debtors may be forced to enter into a public judicial reorganisation… a choice that should not be influenced by tax reasons.
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The Insolvency Reform Law entered into force immediately as from its publication and is only of limited duration, until 30 June 2021. However, the impact of the new rules will be evaluated and presumably, the reform will be extended or even sustained.
Please click here to view the full text of the new Insolvency Reform Law: Moniteur Belge - Belgisch Staatsblad (fgov.be)
Please consult your contact person or any lawyer at Fieldfisher in case you would like to learn more about these new developments.
This article was authored by: Louis-Francois du Castillon, Sofie Heremans, Geoffroy Galéa, and Stephanie De Smet
Please click here to view the full text of the new Insolvency Reform Law: Moniteur Belge - Belgisch Staatsblad (fgov.be)
Please consult your contact person or any lawyer at Fieldfisher in case you would like to learn more about these new developments.
This article was authored by: Louis-Francois du Castillon, Sofie Heremans, Geoffroy Galéa, and Stephanie De Smet