Can I protect my company against creditors in case the continuity of my company is threatened as a result of COVID-19?

It is now clear that the COVID-19 virus strikes heavily in Belgium, Europe and the rest of the world. An economic crisis seems inevitable.

It is therefore written in the stars that the continuity of many Belgian companies will be jeopardized. At the time this article is being written, more than 1,000,000 employees are applying for temporary unemployment benefits for economic reasons in Belgium. More and more companies are temporarily closing their doors.

It is a sign that many entrepreneurs are taking measures to safeguard the continuity of their business. This is not a purely non-committal initiative.

Article 2:52 of the Belgian Code of companies and associations (“BCCA”) indeed states explicitly that when there are compelling and corresponding facts that could jeopardize the continuity of the company, the management body must respond. It will have to deliberate on the measures to be taken to safeguard the continuity of the economic activities for a minimum period of twelve months. If directors fail to deliberate, their liability is compromised.

In addition, there are other mechanisms that are set in motion and that address the responsibility of the directors. As soon as the continuity of the company is endangered, the so-called stop loss procedure threatens to be activated. This procedure means that the governing body must prepare a special report and convene the general meeting. In the report, it must propose the dissolution and liquidation of the company or propose measures to restore its financial health. The general meeting must then make an autonomous decision on the proposals of the governing body within two months.

If it is opted to continue the activities of the company but one is confronted with payment difficulties, it could be tried to obtain protection against its creditors by appealing to the possibilities of a reorganization provided in the Belgian Law on Insolvency. This aims to protect a company against its creditors for a certain period of time. The latter will no longer be able to collect the outstanding debts. In the meantime, the company can implement measures to restore its financial situation and avoid bankruptcy.

Depending on the specific situation, companies can opt for an extrajudicial or a judicial reorganization.

The extrajudicial reorganization means that an entrepreneur voluntarily chooses to reach an amicable agreement with at least two of its creditors, outside the court, with or without the intervention of a business intermediary. The aim of the agreement is to reorganize the assets or activities in order to guarantee the continuity of the company. It should also be comprehensive and subject to a confidentiality clause. At the request of the parties involved, the agreement can be homologated by the court, giving it an enforceable character. Third parties are not bound by the settlement and can only inspect it with the consent of the creditors involved. The agreement is opposable to any later bankruptcy estate.

Extrajudicial reorganisations offer the advantage that confidential negotiations can be started with the creditors that are the basis of the possible discontinuity. Moreover, there is no announcement of the start of the procedure, nor of any (homologated) agreement. In other words, there is a high degree of discretion. The major drawback, however, is that third parties are not bound by the agreement and can continue to collect their outstanding debts.

If an extrajudicial reorganization is not possible or desirable, a company can seek protection through the judicial reorganization. The purpose of this procedure is also to ensure the continuity of all or part of the assets or activities of the company, regardless of whether the company is currently eligible for bankruptcy.

The judicial reorganization is initiated by means of a motivated petition addressed to the competent insolvency court. This petition generally has a suspensive effect, so that creditors of the company cannot exercise their rights until the insolvency court has rendered its decision. This temporarily blocks the execution of known claims in order to safeguard the continuity of the company.

The purpose of the petition is always to reach a judicial amicable agreement, or a collective agreement on a reorganization plan or a transfer to third parties under judicial authority.

The judicial amicable agreement includes the same principles as an out-of-court amicable settlement, except that in these proceedings the company is supervised by a delegated judge. The agreement must always be homologated by the insolvency court, after which a publication in the Belgian Official Gazette takes place.

The collective agreement aims to reach an agreement with all creditors on a restructuring plan for the company. This plan includes a descriptive section (action plan to reverse the company’s situation) and a defining section (how creditors will be paid). The plan accurately determines the rights of all creditors involved, payment terms, debt reductions to a maximum of 20% of the principal, etc. The plan’s execution term may not exceed 5 years. The plan must be approved at a special meeting at which the majority of the creditors present, representing at least half of all amounts due, must give their approval. The insolvency court must subsequently approve the agreement, making it binding on all creditors involved, even if they have opposed the restructuring plan.

The transfer to third parties under judicial authority has as its object the sale of all or part of the economic activities of the company in distress. This procedure is a last resort to safeguard the profitable activities of the company and have them continued by a third party-purchaser. As a result, the company becomes an empty shell and can possibly be declared bankrupt at a later stage. When transferred to third parties, the creditors’ rights are transferred to the sales price received. The initiative for the transfer procedure can be in the hands of the company itself (= voluntary), or can be initiated by the creditors, the public prosecutor’s office or any other interested party (= forced). It can therefore not be ruled out that a competitor will seek in court the forced transfer of the activities of a company in difficulty.

EY Law has extensive experience in guiding companies in difficulty. You can always contact us when you are facing payment difficulties to discuss the possible options for protecting your company. We can of course also assist you if one of your business partners ends up in a judicial reorganization procedure.

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