Belgium’s new insolvency law has arrived

15 September 2017

On 11 September 2017, the Act of 11 August 2017 adding a new Book XX to the Economic Law Code ("ELC") was published in the Belgian Official Gazette.

Book XX brings together the existing Continuity of Enterprises Act of 31 January 2009 ("CEA") and the Bankruptcy Act of 8 August 1997 in a single text, which at the same time is integrated within the ELC. Going beyond the mere coordination of existing legislation, the legislator has also taken the opportunity to amend the law on insolvency in a number of areas. In addition, a number of specific adaptations have been made.

Here is a brief overview of some significant changes.

The scope of Belgian insolvency law ratione personae is being broadened considerably

The most notable innovation is undoubtedly the fact that the scope of Belgian insolvency law ratione personae will be much broader in the future than it has been up until now.

Whereas today, on the one hand the Bankruptcy Act applies exclusively to traders, and on the other hand only traders, farmers, agricultural companies and civil companies in commercial form (excluding members of a profession and professional firms) may invoke the CEA, in the new Book XX these connecting factors have been eliminated and replaced by a different, much broader criterion. As a result, not only will the scope of application ratione personae of the Bankruptcy Act and the CEA be put on the same footing – which is undoubtedly a good thing – but the current situation, where certain insolvent economic operators manage to slip between the cracks in the insolvency legislation, will be eliminated.

Specifically, the scope of application ratione personae of Book XX is based on the concept of an "enterprise", which is defined using three criteria. For the purposes of Book XX, an "enterprise" means:

  • any individual who independently exercises a professional activity;
  • any legal entity; and
  • any organisation without legal personality.

All persons or entities in one of these categories fall within the scope of Book XX and consequently may be declared bankrupt, or may be the subject of judicial reorganisation proceedings.

The term "individual who independently exercises a professional activity" is much broader than the concepts of "trader" (in the Bankruptcy Act and the CEA) and "farmer" (in the CEA) which are currently used. Professionals will undoubtedly fall within the scope of insolvency law after the entry into force of Book XX, and the same applies to many other individuals who today do not fall within the scope of the insolvency law ratione personae, such as artisans, interior designers, artists, speech therapists, composers, etc. In its opinion on the draft act, the Council of State stated that the description used by the legislator implies that an individual who is a company director must be considered as an "enterprise" to which Book XX applies.

The rule that all "legal entities" fall within the scope of the insolvency law ratione personae also makes it applicable to many additional entities. As from the entry into force of Book XX, civil companies in commercial form may not only be the subject of judicial reorganisation proceedings – as is already the case today (except in the case of a member of a profession or a professional firm) – but can also be declared bankrupt. Much more striking, however, is the fact that the link with the concept of "legal entity" means that, in the near future, non-profit organisations, international non-profit organisations and foundations will all fall within the scope of Belgian insolvency law ratione personae.

The legislator has made only one exception to the principle that the acquisition of legal personality makes the entity concerned subject to insolvency law: public-law entities – such as the federal state, the communities and regions, the provinces, etc. – are not "enterprises" within the meaning of Book XX.

"Organisations without legal personality" primarily means undertakings that do not have legal personality, especially (commercial and civil) partnerships, silent partnerships and the temporary commercial company. Associations without legal personality – "de facto associations" – are regarded by the legislator as enterprises only if their object is distribution or where they in fact distribute benefits to their members or to persons who have a decisive influence on the organisation's policy.

As a general exception, credit institutions, insurance companies, investment firms, management companies of collective investment undertakings, liquidation and settlement institutions and equivalent institutions, reinsurance undertakings, financial holding companies and mixed financial holding companies are excluded from the scope of a large part of Book XX; Sections II to V ("Detecting Enterprises in Difficulty", "Provisional Measures", "Enterprise Mediator and Amicable Agreement" and "Judicial Reorganisation") do not apply to them. However, they do fall within the scope of the other sections of Book XX – such as Section VI ("Bankruptcy") and Section VII ("Liability Claims") – with the proviso that, according to the Explanatory Memorandum, these arrangements apply to them "only on a residual basis".

Changes to the procedure for judicial reorganisation

Regarding judicial reorganisation proceedings – which, as is well known, can pursue three objectives: a judicial amicable settlement, a collective agreement, or a transfer under judicial supervision – the legislator has generally adopted the principles which can already be found today in the CEA. However, a number of very specific changes are being made.

The mere submission of a petition to start judicial reorganisation proceedings will often no longer be sufficient to stop an imminent public sale of seized goods: if a public sale has already been scheduled for a date within two months of the date of filing of the petition, the sale may simply continue during the suspension period, unless the court decides otherwise at the request of the enterprise seeking initiation of the judicial reorganisation proceedings.

One notable change concerns the fate, in a subsequent bankruptcy or liquidation, of tax and social security debts incurred during the suspension period: whereas the initial draft act aimed at clarifying – in line with the Court of Cassation's position in two judgments dated 27 March 2015 – that in this context such debts do not acquire the status of a debt of the bankruptcy estate, the final legal text specifies exactly the opposite (with the understanding that this does not apply to any ancillary sums associated with these debts).

Judicial amicable settlements must obtain the approval of the court and be declared enforceable by it. (It can be noted that this is also an option in the case of an extrajudicial amicable settlement). In addition, the bankruptcy-proof nature of judicial (and extrajudicial) amicable settlements, and of measures taken in implementation of such settlements, are strengthened.

In the context of judicial reorganisation proceedings with a collective agreement, it should be pointed out that the definition of "extraordinary suspended debt claims" has been changed: going forward, this term means "the suspended debt claims that are guaranteed at the time of initiation of the judicial reorganisation proceedings by collateral security, and the debt claims of the creditor-owners". In addition, it is stipulated that such claims are only extraordinary in the amount for which registration has been effected; in the amount of the realisable value of the good in the going concern (if there was no registration); or at book value (if the collateral relates to specific pledged debt claims).

In the same context, the minimum percentage for which the reorganisation plan must (in principle) propose payment – currently 15% – will be raised to 20%, and it is clarified that the ban on reducing or cancelling suspended debt arising from work performed before the start of the judicial reorganisation procedure does not apply to tax or social security contributions or debts.

In judicial reorganisation proceedings with transfer under judicial supervision, in future the prospective bidder will be offered the opportunity to include one or more existing agreements not concluded intuitu personae (including the associated debts) within the scope of its bid. Subsequent sale to the bidder concerned will then result in the legal substitution, in the designated agreements, of the bidder in place of the enterprise subject to judicial reorganisation, without the consent of the relevant contracting partner being required.

Changes regarding bankruptcy

In the part of Book XX that deals with bankruptcy, the changes to the current Bankruptcy Act – independent of the significant extension of the scope of bankruptcy ratione personae discussed above – also generally tend to be very specific.

In endeavouring to encourage giving entrepreneurs a second chance, the legislator has opted to exclude goods that the bankrupt trader acquires during the bankruptcy – e.g. income from new activities – from the liquidation assets. The only exception to this principle relates to goods acquired by the company in liquidation during the bankruptcy on the basis of a cause that precedes the bankruptcy.

The existing provisions relating to the fate of agreements concluded before the date of the bankruptcy judgment which are not terminated by that judgment are clarified by stipulating that the bankruptcy trustee may terminate such agreements unilaterally "when the management of the liquidation assets necessarily requires this" and that such a decision "cannot compromise rights in rem of third parties enforceable against the liquidation assets".

The current scheme regarding the declaration of excusability of the bankrupt individual is replaced by remission of debts. The basic principle is that, at his/her request, the bankrupt individual is "freed from the remaining debts, without prejudice to the collateral provided by the debtor or third parties". In order to promote a second chance for the entrepreneur, the legislator assumes that it is not normally necessary to await the closure of the bankruptcy proceedings in order to be able to rule on the question of obtaining remission of debts. If remission of debts is granted, the (former) spouse or (former) legal cohabitant of the bankrupt person who is personally involved with respect to the debt that the latter incurred during the marriage or legal relationship will be released from that obligation unless it relates to personal or joint debts arising from an agreement concluded by them that is unrelated to the bankrupt person's professional activity.

New rules on director liability

The legislator also uses the introduction of Book XX to transfer from company law to insolvency law a number of existing legal provisions relating to the liability of directors in the case of bankruptcy. The relevant provisions are included in Section VII of Book XX, which applies to all enterprises with the exception of individuals who independently exercise a professional activity. In each case, they target current or former directors, managers, managing directors, members of a board of directors or supervisory board, and all other persons who had real managing authority in respect of the business of the enterprise (referred to below as "the directors or managers" for the sake of brevity).

The existing liability of a public limited liability company ("naamloze vennootschap"/"société anonyme" – NV/SA), a private limited liability company ("besloten vennootschap met beperkte aansprakelijkheid"/"société privée à responsabilité limitée" – BVBA/SPRL) and a cooperative company with limited liability ("coöperatieve vennootschap met beperkte aansprakelijkheid"/"société privée à responsabilité limitée" – CVBA/SCRL) for a manifestly gross error that has contributed to bankruptcy now becomes a general rule which applies to all legal entities and organisations without legal personality which are enterprises within the meaning of Book XX. In addition, the scope of the current exception for a "small" BVBA/SPRL and a "small" CVBA/SCRL is generalised. By extension, "small" non-profit organisations, international non-profit organisations and foundations are also excluded from the scope of this liability rule.

In a further specific change, the objective liability of the directors of an NV/SA, a BVBA/SPRL or a CVBA/SCRL for unpaid social security contributions where the directors have been involved with debts to a collector of social security contributions in at least two bankruptcies or liquidations within five years prior to the declaration of bankruptcy, is transformed into a single liability rule for all enterprises covered by Section VII of Book XX. The legislator has abolished the rule in the current scheme which stipulated that such liability also existed in the case of gross error by the directors or managers, and that there was to be an irrebuttable presumption of gross error where the company was headed by a person who had been involved in at least two bankruptcies or liquidations with debts to a collector of social security contributions.

Finally, based on the current principle of "wrongful trading", Book XX contains a new liability rule. In the case of bankruptcy, the directors or managers may be held wholly or partly liable for the net liabilities when: (i) at any time before the bankruptcy, they knew or ought to have known that there was manifestly no reasonable prospect of maintaining the enterprise or its activities and avoiding bankruptcy, and (ii) the person concerned was a director at the time, and (iii) from that moment on, the person concerned did not act as a normally prudent and careful director would have acted in the same circumstances. By way of exception, it is stipulated that the new liability rule does not apply when the enterprise declared bankrupt is a "small" non-profit organisation, international non-profit organisation or foundation.

Entry into force

Book XX enters into force on 1 May 2018 and applies to insolvency proceedings initiated as from the Act's entry into force. An earlier date of entry into force may be determined by Royal Decree for each provision of the Act.