The official deadline for the implementation of the Directive (EU) 2019/1023 on restructuring and insolvency was scheduled for 17 July 2021. Like many other Member States, Belgium availed itself of the possibility foreseen in the Directive to benefit from an extension of the implementation period by a maximum of one year. The Directive introduces the obligation to separate creditors into different classes for the purpose of voting on restructuring plans in order to prevent vulnerable creditors from being treated unfairly in business restructurings. Such class formation for the approval of a restructuring plan is unprecedented in Belgian insolvency law and could completely upset the bargaining dynamics between stakeholders in Belgian restructurings.
In his article “The impact of the EU Restrucuring Directive on the Belgian collective plan: “To class or not to class?” – that’s the question for the Belgian legislator” (available here), guest blogger Jente Dengler discusses the potential impact of the Directive’s voting model on the Belgian restructuring practice.
A summary of the full article published in INSOL International’s Collection of Short Papers can be found below:
Background
On 20 June 2019, the EU Directive 2019/1023 on preventive restructuring frameworks, discharge of debt and disqualifications was adopted (hereinafter the ‘Directive’).[1] The official deadline for the implementation of the Directive was scheduled for 17 July 2021. Like many other Member States, Belgium availed itself of the possibility foreseen in the Directive to benefit from an extension of the implementation period by a maximum of one year.[2]
The primary aim of the Directive is to improve the preventive restructuring frameworks of the Member States and enable viable debtors to restructure effectively at an early stage to avoid insolvency. Additionally, harmonisation should bring greater transparency, legal certainty and predictability across the EU, maximising returns to creditors and investors and encouraging cross-border investment.[3]
One of the most discussed novelties of the Directive[4] is undoubtedly the requirement to separate creditors in classes for the purpose of voting on restructurings plans. This entails grouping the parties affected by a plan in such a way as to reflect their rights and the seniority of their claims and interests. Such class formation must ensure that rights which are substantially similar are treated equally and restructuring plans are adopted without unfairly prejudicing certain creditors’ rights.[5]
Several Member States have been taking initiatives in the run-up to the Directive’s implementation deadline, such as the Dutch WHOA (Wet Homologatie Onderhands Akkoord)[6], which could, as some proclaim, make the Netherlands the new “restructuring hub” of Europe.[7] The new Restructuring Plan procedure in the United Kingdom (UK), a variant of the well-known Scheme of Arrangement of Part 26 of the Companies Act 2006[8] and the German StaRUG (Unternehmensstabilisierungs- und Restrukturierungsgesetz)[9] have also been introduced in the past year.
Belgium Legislator: To Class or not To Class?
In Belgium, it remained remarkably quiet for a long time. Eventually on 10 June 2020, a first (rather disappointing) proposal amending book XX of the Economic Law Code (hereinafter ‘CEL’) was presented.[10] Unfortunately, very little can be inferred from it regarding the legislator’s intentions in relation to the implementation of the Directive in Belgium. Yet, the mention of “creditor classes” in the bill, marking a first in Belgian restructuring law, did shake the Belgian insolvency landscape slightly awake. The notion of voting in separate classes for the adoption of restructuring plans is unheard of in Belgium and could completely upset the bargaining dynamics between stakeholders in Belgian restructurings.
After all, there currently exists no system of voting in separate classes under Belgian insolvency law (art. XX.78 CEL).[11] Secured and unsecured creditors vote together in one single class despite the significant difference in restructuring measures to which they can be subject (art.XX.72-74 CEL). Even connected creditors vote in the same class, notwithstanding that their interests and priorities clearly lie elsewhere.[12] Moreover, the debtor enjoys a significant degree of flexibility to divide creditors into specific categories for the purpose of treating them differently in a restructuring plan, e.g. strategic vs. non-strategic creditors, financial creditors, connected creditors, etc. (article XX.72 CEL). The fact that these categories are as such not considered for the approval of the plan creates a breeding ground for opportunistic behaviour. In particular, it enables debtors to adopt a strategic position by granting some creditors higher and other creditors lower recovery rates under a plan and to coordinate the voting process in a way to ensure that the required majorities are met to get a plan approved.[13]
It is clear that the Belgian collective plan procedure is irreconcilable with the class voting model of the Directive and therefore no longer tenable. Legislative changes are looming that could compensate for the risk of minority oppression and strategic (mis)behaviour by Belgian debtors. Still, there appears to be some leeway for the national legislator to cling to the collective plan in its current form as much as possible.
An apparently conflicted EU Legislator
Even the EU legislator itself has in a way remained undecided when it comes to how the process of voting on a restructuring plan should be shaped. On the face of it, the Directive seems to be a fierce advocate of a comprehensive class voting system in order to protect vulnerable creditors in restructurings.[14] A noble goal, but one that, given the complexity of such class formation, the associated legal uncertainty and the risk of delay and additional costs, seems to run directly against the main objective of the Directive: to improve the effectiveness and predictability of preventive frameworks to allow swift restructurings and avoid bankruptcies.[15]
Apparently aware of this reality, the European legislator, somewhat contradictorily, toned down its position leaving the possibility open for Member States to limit the class formation requirement to just two classes (secured vs. unsecured creditors)[16] and to allow SME restructurings to be exempted,[17] knowing that they represent 99 per cent of all businesses in Europe.[18] This, in fact, allows the Belgian legislator to largely retain the collective plan procedure in its current form, even though it firmly goes against the class voting model at least prima facie pursued by the Directive.
This is not necessarily a bad thing, as the current Belgian scheme procedure seems to be among the best in class in Europe when it comes to meeting the Directive’s main objectives of effectiveness, legal certainty and swiftness of national restructuring frameworks.[19] This is undeniably, at least partly, due to the predictability of the voting process without the burdensome class formation requirement. Hence, it is clear that certain interests will always be overridden by others, notably the fairness of the voting process by the need for swift, effective and predictable restructuring frameworks or vice versa.
Considering the difficult reconciliation of these two seemingly conflicting objectives and following the example set by other legal scholars paraphrasing George Orwell in relation to creditor (in)equality in Belgian restructuring plans (“all creditors are equal, but some are more equal than others“),[20] another of his well-known literary quotes comes to mind: “Doublethink means the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them”.[21]
Overall, the author is definitely not opposed to the ambiguous compromise reached within the Directive and the necessary adjustments that the Belgian legislator will have to make, such as the introduction of a class voting model distinguishing, at least, between secured and unsecured creditors, which is only fair considering the different measures they can be subject to. Whether such or maybe even a more comprehensive class voting model will characterise the new Belgian collective plan procedure remains to be seen.
“To class or not to class?” thus remains the question.
The full paper is published by INSOL International and available here
[1] Directive (EU) 2019/1023 of the European Parliament and Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), OJ L 172, 26.6.2019, 18-55.
[2] Idem, Art. 34.2.
[3] Idem, recital 15.
[4] The newness of the Directive needs to be nuanced as the EU Commission already formulated a non-binding recommendation in 2014 with a view to gently steer the national insolvency reforms at the time (Commission Recommendation (2014/135/EU) of 12 March 2014 on a new approach to business failure and insolvency, OJ L 74, 14.3.2014, 65-70). The recommendation roughly included othe same standards as the Directive, but had little impact due to its non-binding nature (Treaty on the Functioning of the European Union, Art 288). In Belgium, too, little consideration was given to this 2014 recommendation when Book XX on insolvency law was introduced into the Economic Law Code in 2017 (BOJ11 September 2017). See also S Madaus, “The EU Recommendation on Business Rescue – Only Another Statement or a Cause for Legislative Action Across Europe?”, Insolvency Intelligence (2014) 27(6) 84; and University of Leeds, Study on a new approach to business failure and insolvency: Comparative legal analysis of the Member States’ relevant provisions and practices, January 2016, 218-280, available at www.ec.europa.eu/info/sites/info/files/insolvency_study_2016_final_en.pdf.
[5] Directive, recital 44.
[6] Faillissementswet, Arts 369-387 (inserted by the ‘Wet homologatie onderhands akkoord, Staatsblad 2020, 414’). See also Kamerstukken II 2018/19, 33 695, no 18, 3.
[7] Bloomberg, Netherlands Bids to Topple London as Europe’s Restructuring Hub (November 13, 2019) available at https://www.bloomberg.com/news/articles/2019-11-13/netherlands-bids-to-topple-london-as-europe-s-restructuring-hub.
[8] UK Companies’ Act 2006, part 26A (inserted by Corporate Insolvency and Governance Act 2020 on 26 June 2020).
[9] Unternehmensstabilisierungs- und -restrukturierungsgesetz vom 22. Dezember 2020 (BGBl. I S. 3256).
[10] Parl.St. Kamer 2019-20, nr. 55-1337/001, 1-13.
[11] The two-fold threshold to be met is a majority in number, representing at least 50 per cent of the total debt of the voting creditors.
[12] Connected creditors sometimes present themselves to take part in the vote and to tip the scales in favour of
the debtor (see Comm. Antwerp, 31 October 2016, RABG (2017) 16 1299). See also A Van Hoe
and M Vreven, “Knelpunten bij de gerechtelijke reorganisatie door een collectief akkoord”, TBH (2011) 9 855.
[13] See M Vanmeenen, “In de ban de continuïteit”, TBH (2015) 6 519; N Ouchinsky, “Le plan de réorganisation judiciaire: questions choisies” in L Bermond and P Libiez, Loi sur la continuité des entreprises en pratique: regards croisés, ajustements et bilan (Larcier, Brussel, 2014) at 56-68; and S Landuyt, “De ‘voorrang’ van de Belgische aandeelhouder bij herstructurering van vennootschappen in moeilijkheden onder druk”, Corporate Finance Lab 13 January 2020, available at https://corporate
financelab.org/2020/01/13/de-voorrang-van-de-belgische-aandeelhouder-bij-herstructurering-van-vennootschappen-in-moeilijkheden-onder-druk/.
[14] Directive, Art 9.4 and recital 44.
[15] See, for instance, recitals, 1, 2, 6, 7, 15, 16, 24, 29, 30, 47, 69, 85 and 90 of the Directive.
[16] Directive , Art. 9.4. Despite the need of voting in classes to protect vulnerable creditors expressed in the preamble of the Directive (recital 44), no explanation is provided as to why this class voting obligation is in fact limited to only two classes.
[17] Directive, Art. 9.4, third paragraph. At recital 45, the EU legislator tries to justify the exemption for SMEs by making reference to their relatively simple capital structure. Yet, the rationale of the class formation requirement has little to do with the debtor’s capital structure, but seeks to prevent creditor minority oppression – a risk that is no more or less present in restructuring plans of SMEs (as pointed out by F De Leo, “Definiëring (buiten)gewone schuldvorderingen in de opschorting (of hoe het verleden het heden is)”, TBH (2019) 1226).
[18] Directive, recital 17.
[19] According to various comparative insolvency studies conducted in recent years, it appears that Belgium performs well compared to other European countries in terms of duration, recovery rates and success rate of resolving insolvency. See, for instance, University of Leeds, Study on a new approach to business failure and insolvency: Comparative legal analysis of the Member States’ relevant provisions and practices, January 2016, 36, available at www.ec.europa.eu/info/sites/info/files/insolvency_study_2016_final_en.pdf and EU Commission, Impact assessment study on policy options for a new initiative on minimum standards in insolvency and restructuring law, 2015, 36 available at https://ec.europa.eu/info/sites/info/
files/final_report_formatted_jiipib2_for_publication_final_opoce_0.pdf.
[20] F De Leo, “[Reorganisatieplan] All creditors are equal, but some creditors are more equal than others”, RDC-TBH (2017) 7, 734-742 with literary reference to G Orwell, Animal Farm: A Fairy Story (Martin Secker & Warburg Ltd, London, 1945) at 112
[21] G Orwell, Nineteen Eighty-Four (Martin Secker & Warburg Ltd, London, 1949) at part 2, sec 9.
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