This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Belgium.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Security over immovable property – mortgage
A security interest on immovable property can only be granted by way of a mortgage. A mortgage is granted by way of a notarial deed and will be perfected and take rank as from the date of inscription in the registers of the mortgage keeper office. Taxes (1% registration tax and 0.3% mortgage rights on the secured amount) and mortgage keeper and notary fees will be due following the execution of the mortgage deed.
To reduce the large burden of the registration tax and mortgage keeper fees, parties often agree to only take a mortgage for a certain percentage of the obligations to be secured and to grant a mortgage mandate for the balance, allowing the beneficiary to increase the mortgage at any time he deems fit (at which time the costs referred to above are due). A mortgage mandate does not create any security right in rem until it has been exercised.
Security over movable property
The type of security interest over movable property and the relevant perfection requirements for such security interest depends on the underlying asset. The entry into force as of 1 January 2018 of the Pledge Act of 11 July 2013 (the Pledge Act) has fundamentally amended the previously existing security regime with respect to movable assets.
Security on shares, bonds and other financial instruments can be created by way of (i) a pledge, or (ii) a security assignment. The creation (and perfection) of a pledge/security assignment on shares, bonds and other financial instruments requires an agreement between the pledgor/assignor and the pledgee/assignee and the dispossession of the pledged/assigned securities. The formalities for effecting delivery of possession vary according to the type of financial instrument in question (e.g. for a security on shares, an entry in the share register).
Security on bank accounts can be created by way of (i) a pledge over bank accounts, or (ii) a security assignment of bank accounts. Both security interests will be valid, perfected and enforceable against third parties as of the moment a valid pledge or assignment agreement is entered into. A pledge or security assignment of a bank account will become enforceable against the account bank and third parties with a concurrent right in rem once the pledge or assignment has been notified to, or acknowledged by, the account bank.
Security on receivables and contractual claims (not constituting financial collateral) is created by way of a pledge. Specific conditions apply to a pledge over certain receivables (e.g. consumer receivables, credit insurance policies, mortgage backed receivables). Creation and perfection are the same as for bank accounts. There is one additional requirement however: the pledgee is required to be authorised to notify the underlying debtor of the pledge for the pledge to be perfected and enforceable against third parties, save for the underlying debtor and third parties with a concurrent right in rem. By having such right to notify the debtor, dispossession is deemed to be achieved. Finally, the receivables pledge agreement will have to include a maximum aggregate amount up to which the secured liabilities are secured by the pledge, incl. principal, interest and any accessories.
Security over tangible movable assets can be granted by way of a pledge agreement which is perfected either through (i) registration in the National Pledge Register; or (ii) dispossession. Registration in the National Pledge Register entails a limited cost (capped at EUR 500) based on the secured amount. Perfection through dispossession is achieved when the pledgor hands over possession of the pledged assets to the pledgee or a third party pledgeholder agreed upon by the parties. To the extent the pledged assets must be used in the production process, a possessory pledge is highly impractical. The pledge agreement will in both cases also have to include a maximum aggregate amount up to which the secured liabilities are secured by the pledge.
Security over a business (or any type of universality) can be granted by way of a pledge and is perfected against third parties by way of registration in the National Pledge Register, entailing a maximum registration cost of EUR 500. The requirement for inclusion of a maximum aggregate secured amount also applies here.
Security on intellectual property is created by way of a pledge and is in principle perfected by registration in the National Pledge Register. However, as the Pledge Act leaves unaffected any special legislation on IP rights, a pledge over certain types of intellectual property (e.g. patents) may also need to be notified to the relevant IP registry and registered in such registry to ensure enforceability of the pledge against third parties. The requirement for inclusion of a maximum aggregate secured amount also applies here.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
A mortgage over real estate is enforced by the sale of the mortgaged property. The mortgagee must have an executory title, which requires an enforceable court judgment or a notarised executory deed. The mortgagee has no right to appropriate the property. A court-appointed notary public will be charged with effecting the (public or private) sale, and the distribution of proceeds in accordance with the ranking of creditors. The time required for enforcement will depend on the debtor’s attitude and the court’s strain.
Unless agreed otherwise, the pledgee of financial collateral is entitled to enforce the security without prior court approval or prior notification. For financial instruments, enforcement will occur by selling or (if agreed by the pledgor in the pledge agreement or at a later time) appropriating the financial instruments, and for bank accounts by appropriating the amounts standing to the credit of the bank account. Appropriation may only occur in accordance with agreed valuation rules between parties.
Any sale of shares might be subject to limitations by law, in the articles of association or in contracts. These transfer restrictions are opposable to third parties, if not waived at the time of the creation or enforcement of the pledge.
As regards the enforcement of pledges granted by pledgors that are not consumers over other movable assets such as tangibles, trade receivables, IP rights or a business, foreclosure is subject to notice that the pledgee intends to enforce the pledge, triggering a 10 day waiting period (which is shortened to 3 days in case of perishable goods or goods subject to fast value reductions), after which the pledgee is entitled to instruct a bailiff to rent out the goods or sell them by way of a public or private sale. In addition, the pledgee may appropriate the goods if agreed by the pledgor in the pledge agreement or at any later time, subject to the condition that the agreement states that the value of the goods at the moment of appropriation will be determined by an expert or, for goods traded on a market, according to the market price.
In case of a non-possessory pledge, the pledgee will need to obtain the pledged goods from the pledgor. Hence, the pledgor’s cooperation will be required. If the pledgor does not cooperate, the pledgee will need to obtain a court order, ordering the pledgor to deliver the assets to the pledgee.
Upon request by the pledgor, the pledgee or any other third party with an interest, a dispute in relation to the enforcement may be brought before a court (i.e. the attachment judge). Such court proceedings suspend the enforcement of the pledge but will be decided by the judge as a matter of priority.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
The conditions for bankruptcy are (i) the debtor faces a durable cessation of payments and (ii) it is unable to obtain further credit (cumulative conditions). A durable cessation of payments exists when a debtor continuously is unable to repay its (some of its) debts as they fall due. If the debtor can still be redressed or still has access to sufficient credit, the debtor is not in a state of bankruptcy.
The directors of the debtor have a legal obligation to file for bankruptcy, within one month of the date on which the bankruptcy conditions are met. Failure to do so may lead to personal liability of the directors. In addition, criminal penalties may apply, if it was the director’s intention to postpone the bankruptcy.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
At 0:00 hours on the day of the court order opening the bankruptcy, the management and administration powers will be taken over by a bankruptcy trustee. The directors must comply with any request of the bankruptcy court and/or trustee.
The court appoints a judge-commissioner, who will supervise the trustee, approve certain transactions and report to the court. The court usually only intervenes upon request of the trustee (who has very broad powers, and must realize all assets and distribute the proceeds amongst the creditors), e.g. to approve a temporary continuation of the business or decide upon a contested creditor claim. Depending on the complexity, a bankruptcy procedure usually takes 1-3 years.
In-court reorganization procedure
If the court grants the debtor a stay, the debtor remains in possession. Provided certain conditions are met, the DIP or a third party may request the court to appoint a legal officer or ad hoc director. When granting this request, the court will describe the appointed officer or director’s assignment and duties.
A stay is usually granted for a period of 1-6 months, with an absolute maximum of 18 months (this requires exceptional circumstances).
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The general principle of a bankruptcy is that all creditors must be treated equally (paritas creditorum); proceeds of the bankruptcy estate will be distributed to the creditors pari passu. This principle does not apply to three groups of creditors: creditors of the bankruptcy estate (e.g. the trustee’s fees, new debts following the bankruptcy date and claims that relate to the performance of existing agreements), creditors with special preferences (e.g. mortgagees and pledgees), and creditors with general preferences (e.g. employees, tax debts, social security debts).
There is no equitable subordination. Few courts have, however, decided to subordinate a creditor’s claim if unlawful conduct by such creditor is established (under the abuse of rights doctrine).
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Upon request of the trustee, certain pre-insolvency transactions must or can be declared unenforceable against the bankrupt’s estate if they were performed by the debtor between the date of cessation of payments and the date of the bankruptcy order (suspect period).
The date of cessation of payments usually coincides with the date of the bankruptcy order. However, the bankruptcy court may determine a suspect period (maximum six months), if sound and objective circumstances show that the debtor already ceased payments before the date of the bankruptcy order.
Given their unusual nature, these actions will be declared unenforceable against the body of creditors if performed during the suspect period: (i) gifts and transfers for no consideration, (ii) sub value contracts, (iii) payments of undue debts, (iv) payments in kind of due debts, and (v) security interest granted for antecedent debts. The court may declare acts unenforceable if they took place during the suspect period and if the third party was aware of the cessation of payments by the debtor. Finally, any fraudulent acts or payments to the detriment of the creditors, whenever performed, can be declared unenforceable (actio pauliana).
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
As a general rule, ongoing legal proceedings are not impacted by the opening of insolvency proceedings. In case of a bankruptcy, however, the bankruptcy trustee must decide whether to continue the litigation. If the litigation is not in the interest of the bankrupt’s estate, a trustee has the right to file a discontinuance (which implies that the trustee is no longer pursuing or challenging the claims at dispute).
The general rule does not apply in case the enforcement of creditors’ claims. The opening of an insolvency procedure (in some cases temporarily) suspends all enforcement proceedings, although certain exceptions exist (e.g. the enforcement of a pledge on financial collateral or specific receivables is not affected by the insolvency).
The opening of an insolvency procedure by a Belgian court shall be recognized in all other EU Member States, pursuant to Article 19 of the Insolvency Regulation 2015/848.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
The (out-of-court) rescue procedures are laid down in the law of 31 January 2009 on the continuity of enterprises.
A company in distress can enter into an out-of-court amicable arrangement with two or more of its creditors, to restructure or remedy the company’s financial situation. This arrangement will not be subject to judicial scrutiny, and must be filed with the commercial court’s registrar. The arrangement is protected against certain claw-back rules that may apply if the debtor is declared bankrupt.
A judicial reorganisation procedure is available to a company if its continuity is threatened in the short or medium term. Being in a state of bankruptcy does not prevent a company from seeking protection under this procedure.
Besides the in-court amicable arrangement, a debtor can apply for a transfer of (part of) its activities under court supervision, or a procedure whereby a reorganisation plan is agreed upon with the debtor’s creditors. The reorganisation plan must be approved by the majority of the creditors that must represent at least half of the outstanding principal amounts, and the court.
The directors remain in charge of the management of the debtor, but a delegated judge will supervise the procedure and report to the court. Only if the board has made blatant mistakes or is acting in bad faith, a temporary director/administrator can be appointed by the court to replace the existing board.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Yes. Under certain conditions, these new debts are qualified as debts of the estate, and have (subject to certain limitations) absolute priority if the debtor subsequently goes bankrupt.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
No, unless the relevant creditor agrees therewith. In both a reorganization and bankruptcy procedure, however, an exception thereto exists with respect to the so-called “guarantee free of charge”.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
No, Belgian law does not know the concept of creditor committees in restructuring proceedings.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
Existing agreements are not automatically terminated; any contractual provision to the contrary is deemed ineffective (exception: a close-out provision of a netting agreement). The debtor has the right to decide not to perform (except for employment contracts) during the stay if such non-performance is necessary for its reorganisation, or to enable a transfer of activities. The opening of judicial reorganisation proceedings does not have an impact on a retention of title clause.
Existing agreements are not automatically terminated, unless parties agreed otherwise, or if the agreement was concluded intuitu personae. The trustee may decide not to perform under the existing agreement (a party can force the trustee to decide within 15 days); in such case, the damages for non-performance will be treated as an unsecured claim. Under certain conditions, movable assets sold under a retention of title clause may be recovered.
Under the Financial Collateral Law of 15 December 2004, set-off provisions will be enforceable notwithstanding insolvency proceedings if certain conditions are met. Insolvency proceedings include bankruptcy, judicial reorganisation proceedings or other situations of concurrence of creditors known under Belgian law, and foreign administrative, judicial or voluntary collective or reorganisation proceedings. Certain limitations apply to the enforceability of set-off provisions in case of judicial reorganisation.
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
Restructuring: transfer of activities
At the request of the company in distress or the public prosecutor, the court appoints a judicial administrator to organise and effect the transfer of activities. The administrator is free to determine the process and conditions, and acts under the supervision of a delegated judge. The transfer is subject to the court’s scrutiny. Subject to certain exceptions, the transfer will be free from any liens and binding on all (secured) creditors. Pre-packaged sales are not possible.
The trustee must sell all assets in the interest of the estate and creditors. He can sell the assets or activities through a private or public sale process. The assets are sold free and clear of any liens or encumbrances. After realising all assets, the trustee must call a final meeting of creditors to approve the accounts, costs and distribution of proceeds. A credit bid is available to certain creditors (such as the first ranking mortgagee in case of a sale of the mortgaged real estate). Pre-packaged sales are not possible.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
The directors of a debtor should respect the duty of due care and diligence in the performance of their tasks (criterion: a reasonable, cautious and diligent director), and act in the corporate interest of the debtor. Besides the contractual, tort and criminal liability, there are also specific grounds for director’s liability in case of bankruptcy:
- Any (former) (shadow) director can be held liable for all or part of the company’s debts up to the shortfall if that person committed a gross and manifest negligence that contributed to the bankruptcy.
- Any (former) (shadow) director may be held liable for (part of) the social security contributions and related costs due at the time of the bankruptcy if (i) he committed a gross fault which caused the bankruptcy, or (ii) during the period of five years before the bankruptcy, he was involved in at least two bankruptcies, settlements or similar operations, with debts towards the Social Security Institute.
- Directors of companies are jointly liable for failure to pay the company tax prepayments or VAT if this is due to a fault in the performance of their management tasks. Not only the managing director, but also other (shadow) directors may be held liable if it is proven that they committed a fault that contributed to the failure.
- Under the new bankruptcy law, directors can also be held liable if it is established that they have continued a loss-making operation, whereas bankruptcy should have been filed.
Shareholders of limited liability companies are only held liable for the specific contribution they have undertaken to make (exception: shadow directors or on the basis of tort). If the debtor is an NV/SA (public limited liability company) and all shares are held by a single shareholder for a period that exceeds one year, the shareholder is deemed to guarantee all obligations of the debtor.
Founders can be held liable if the debtor becomes bankrupt within three years following its incorporation, and if the debtor’s capital on incorporation was manifestly insufficient for the normal conduct of the intended business activity over at least a two-year period.
A lender may be held liable if by granting or maintaining a loan it created a wrongful appearance of solvency of the debtor, which incentivised third parties to contract with the insolvent debtor (criterion: a normal, prudent and reasonable lender, placed in the same circumstances). Untimely/abruptly withdrawing a loan may also lead to liability.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No, directors and other stakeholders remain liable for previous actions and decisions. They can be held liable either by the trustee or, in certain cases, by individual creditors. Certain guarantors of the debtor’s debt can be released.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?
Insolvency proceedings opened by a court of a Member State within the territory of which the centre of a debtor’s main interests (COMI) is located, are directly effective in all Member States, without prior exequatur proceedings (unless such recognition would be manifestly contrary to a State's public policy).
For debtors that have their COMI located outside the EU, Belgian courts will recognise foreign decisions if the decision was given by a court in a state where the debtor had its establishment at the time the action was introduced, and the decision respects certain safeguards (e.g. rights of defence). Such decisions will be recognised without the need to apply for a recognition procedure.
The UNCITRAL Model Law on Cross-Border Insolvency has not been implemented in Belgium and such implementation is not planned for the future.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
The courts of a Member State where the debtor has its COMI (or an establishment) may open main (territorial) insolvency proceedings, regardless of the place of incorporation. In the case of legal persons, the COMI is presumed to be the place of the registered office, in the absence of proof to the contrary (Regulation 1346/2000).
With respect to debtors that have their COMI located outside the EU, Belgian courts will have jurisdiction to open (i) principal proceedings, if the main establishment or the statutory seat of the debtor is located in Belgium, and (ii) territorial proceedings, if the debtor has an establishment in Belgium.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Under Belgian law, there is no so-called company group law. Each company within a group structure is considered to be a separate legal entity (except if the conditions for piercing the corporate veil are met). Hence, the insolvency of a parent company does not automatically lead to the insolvency of its subsidiaries.
Is it a debtor or creditor friendly jurisdiction?
Belgian insolvency laws provide for a good balance between the debtor and creditor’s interest. We do identify a tendency towards preserving the continuity of the debtor’s activities, combined with an increased accountability of the debtor towards creditors.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
No. However, employee representatives and labour unions are frequently given the floor by courts in insolvency proceedings, and Belgian courts tend to lean towards decisions that safeguard the continuity of employment. Unions (through their affiliated political parties) do have an increased say in big insolvency proceedings, which can be used as leverage against the debtor/creditors.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
In all, the legal framework of Belgian insolvency provides for a well-balanced and efficient system. On 11 September 2017, the new bill of 11 August 2017 on the reform of the existing Belgian insolvency and restructuring law was published in the Belgian Official Gazette. The bill seeks to recodify the relevant laws into one single code (Book XX of the Code on Economic Law), and introduces some modernisation, e.g:
- the scope of application of the insolvency and restructuring proceedings is broadened;
- modernization and modification of both insolvency procedures;
- the introduction of an electronic file/procedure (the Central Registry of Solvency, www.regsol.be, was launched on 1 April 2017); and
- the introduction of a set of coherent rules with respect to director’s liability.
The bill will enter into force on 1 May 2018.