The long anticipated law of 7 June 2023 implementing the European Directive on restructuring and insolvency brings about a major reform of Belgian insolvency law. Among various other innovations, it introduces a new judicial reorganisation through collective agreement for large enterprises.
The new law will apply to all procedures opened as from 1 September 2023.
In this second of two blog posts (see first here), we will examine to which extent creditors can seek to impose a debt-to-equity swap on shareholders within the new judicial reorganisation for large enterprises.
For reference: debt-to-equity swaps prior to 1 September 2023
Under the old regime, debt-to-equity swaps were rare. Although a debt-to-equity swap was mentioned in the law as a possible reorganisation measure, the procedure was not designed to affect shareholders without their consent. The debtor was the only party able to initiate the procedure and to draw up and file a reorganisation plan. In practice, the debtor was unlikely to propose a measure that would result in the dilution of the shareholders without their consent. In any case, shareholders could always block a debt-to-equity swap given the corporate law requirement of approval by a shareholders’ meeting.
The new regime: shareholders no longer immune
Under the new regime, shareholders are allocated to a class and can be affected by the restructuring plan. The restructuring plan can be voted contrary to the wishes of the shareholder class (cross-class cram-down) if, among other conditions, the plan does not deviate from the normal ranking of liquidation priorities. Considering shareholders come last in the normal ranking of liquidation priorities, this condition will typically be satisfied.
The new law further provides that shareholders’ meetings may not unreasonably block the implementation of the restructuring plan. Upon request by any interested party, the court will order the shareholders’ meeting to take the decisions required to implement the restructuring plan.
Which measures can be imposed on shareholders?
The exact nature of the measures that can be imposed on shareholders pursuant to a cross-class cram-down is not entirely clear. The parliamentary works state that “withdrawing the financial rights attached to the shares is the most obvious option”, that “[i]n certain cases it may also be necessary to modify the governance rights attached to a (particular class of) shares, for example when such class has the power to decide upon a dividend distribution” and that such “modification of governance rights can make a debt-to-equity swap more attractive for creditors”.
I am not sure that withdrawing the financial rights to the shares is indeed the “most obvious” option. It will in any case not be possible to completely withdraw all financial rights to the shares (articles 5.14 and 7.16 Companies and Associations Code). Perhaps the more obvious solution is a debt-to-equity swap combined with the cancellation of part or all of the shares of the existing shareholders so that the creditors can obtain up to 100% of the share capital of the debtor company?
But a number of exceptions
The new law expressly permits shareholders to retain their shareholding if they (i) provide new financing or (ii) they are crucial for the continuity of the debtor and commit themselves to retain their shareholding for a reasonable period of time. The parliamentary works rephrase these rules as enabling the shareholders to retain the additional value that will be brought to the restructured debtor as a result of the further implication of the shareholders.
Also, the parliamentary works validate the practice of “gifting”. This means for example that secured creditors may “give” part of the value that accrues to them to the shareholders (even if intermediate classes, such as unsecured creditors, are bypassed).
The above exceptions could be used by the board of directors to draw up a restructuring plan that is unduly favourable to shareholders. Indeed, the board of directors generally retains responsibility for initiating the judicial reorganisation procedure and drawing up the restructuring plan. Creditors can of course refuse to vote an unbalanced restructuring plan. If the alternative is bankruptcy, creditors may however prefer to pass over part of the reorganisation value to shareholders.
Appointment of a practitioner in the field of restructuring
On the other hand, the new law introduces a new way for creditors to influence the restructuring plan, and thereby avoid a transfer of value to shareholders. Indeed, once the debtor has successfully filed for a judicial reorganisation through collective agreement, any creditor will receive the right to petition the court to appoint a practitioner in the field of restructuring.
If a majority of the creditors support the request and agree to pay the costs of the practitioner in the field of restructuring, the court must approve the request. Given that the parliamentary works require the majority of creditors to be determined by headcount of creditors (rather than by amounts owed), it may be impractical to achieve this majority. However, even if this majority is not achieved, the court may still appoint a practitioner in the field of restructuring if this is required to protect the interests of the parties concerned.
If appointed, the practitioner in the field of restructuring will assist the debtor and the creditors in the negotiation and preparation of the restructuring plan. The practitioner in the field of restructuring cannot file the restructuring plan without the consent of the debtor. The debtor may however not refuse its consent unreasonably. If the debtor refuses its consent unreasonably, the court may decide to allow the practitioner in the field of restructuring to file the restructuring plan unilaterally.
There could be situations in which secured creditors may be able to strategically use a practitioner in the field of restructuring to influence the content of the restructuring plan and perhaps impose a debt-to-equity swap on shareholders.
Initiation of a silent judicial reorganisation
The new law goes even further and permits creditors to petition the court to appoint a practitioner in the field of restructuring even if the debtor has not (yet) filed a request for judicial reorganisation. This petition will be granted if the continuity of the activities of the debtor is threatened in the short or medium term, unless this would not be “in the collective interest of the creditors including the employees”. The interests / preferences of the debtor are not taken into account.
If the petition is approved, a practitioner in the field of restructuring will be appointed with a view to confidentially preparing a silent judicial reorganisation through consensual or collective agreement. The practitioner in the field of restructuring will assist in the negotiations. Again, the practitioner in the field of restructuring cannot file the restructuring plan without the consent of the debtor. The debtor may however not refuse its consent unreasonably. If the debtor refuses its consent unreasonably, the court may decide to allow the practitioner in the field of restructuring to file the restructuring plan unilaterally.
This is certainly not a fully watertight solution given that the debtor may at any point in time terminate the silent judicial reorganisation procedure and hence prevent the approval of the restructuring plan. Still, under certain circumstances, it could be a way for creditors to put a debt-to-equity swap on the agenda.
Conclusion
The new law considers shareholders as a class that may be subject to reorganisation measures. It also grants creditors new means to appoint a practitioner in the field of restructuring and hence influence the restructuring plan. In light of these two important developments, there may be more scope for creditors to impose a debt-to-equity swap on shareholders. If so, this could become a useful alternative to a share pledge enforcement.
Eric Blomme
Partner
Simmons & Simmons
Corporate Finance Lab 