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21 July 2017
Restructuring plan – main features
Can secured creditors be crammed-down?
Is such difference in treatment constitutional?
Why and to what extent are secured creditors protected?
Future amendments to insolvency legislation and security rights over movable assets
Restructuring plan – main features
The Business Continuity Act of January 31 2009 aims to enable debtors in difficulty to continue their activities by restructuring their debts (for further details please see "Reorganisation proceedings: access and possibilities"). One of the proceedings that the act introduced is the reorganisation of debt pursuant to a restructuring plan. The debtor draws up a restructuring plan which must first be approved by the creditors that it affects. The majority of creditors participating in the vote, representing at least half of the outstanding debt in principal sum, must approve the restructuring plan. Once the courts have approved the restructuring plan, all creditors, including those that voted against it or did not participate in the vote, will be bound by it.
The restructuring plan may consist of several measures, including the waiver of (part of) certain debts. However, none of these measures (with the exception of a temporary stay on the enforcement of claims) may be imposed on secured creditors, unless they expressly agree to it.
'Secured creditors' are creditors that benefit from a specific lien, such as a pledge or a mortgage. A restructuring plan cannot therefore cram-down secured creditors.
There is a clear difference in treatment between secured creditors and other creditors. On October 6 2016 the Constitutional Court ruled that such difference in treatment is constitutional.
The legislature thought that it was important to protect secured creditors in order to avoid an increase in costs applicable to loans and credits. Whether the complete amount of the secured creditor's claim is protected is subject to debate in jurisprudence and legal doctrine. In the case of a pledged receivable, it is likely that the creditor's entire claim will be considered to be a secured claim and thus cannot be crammed-down irrespective of the value of the pledged receivable. The Supreme Court confirmed this standpoint in a recent judgment. As a result, creditors that included a pledge on their customers' receivables in their general terms and conditions would benefit from the status of secured creditor under the Business Continuity Act in respect of their claims secured by such pledge.(1)
Draft legislation was recently introduced in Parliament to amend insolvency legislation (for further details please see "Changes to insolvency regime proposed"). This proposal also includes changes to the above mechanism regarding secured creditors.
Further, the Pledge Law will introduce a new pledge register to allow the creation and perfection of a pledge over movable assets in a more practicable and cheaper way. The new pledge register is expected to come into effect on January 1 2018, but delays are possible. Recording a pledge over movable assets in the new pledge register will not be mandatory, as it is at present, and it will remain possible to make a pledge effective against third parties by transferring possession (however, such a transfer of possession is often impossible in practice). Further, recording a pledge over certain assets, such as receivables, in the new pledge register will not be allowed.
Under the existing proposal on amendments to insolvency legislation – which has not yet been voted into law(2) – a secured claim could be crammed-down to the extent that it exceeds the amount recorded in the applicable register or, if such recordation is not made, the value of the secured asset. Such recordation will take place in the mortgage register for mortgages or the new pledge register following the Pledge Law's entry into force. A business pledge, which covers movable assets, is at present recorded in the mortgage register, but that regime will be abolished once the Pledge Law comes into effect. Recording a mortgage or a pledge in the appropriate register incurs certain costs. These costs are calculated on the basis of a percentage of the secured amount that the parties wish to record.
Therefore, if a creditor wishes to improve its position as a secured creditor following the new insolvency legislation's entry into force, the creditor should consider recording the security in the applicable register (which at present is mandatory for mortgages and business pledges) at an appropriate amount. Since a creditor that benefits only from a pledge over receivables will be unable to record the pledge in the new pledge register, its position could be impaired under the new insolvency law regime. The creditor's claims may be crammed-down by a reorganisation plan to the extent that its claims exceed the value of the pledged receivables.
It is worth considering taking a security interest such as a pledge or a mortgage over a Belgian company's assets. Even if the value of the secured assets is limited, the security interest would grant the beneficiary the status of a secured creditor under the Business Continuity Act. Following the new insolvency legislation's entry into force, the status of secured creditor under the act can be improved if the security is recorded in the applicable register for an appropriate secured amount. Under the new legislation, the claims of a creditor that benefits only from a pledge over receivables may be crammed-down to the extent that its claims exceed the value of the pledged receivables.
For further information on this topic please contact Bart Heynickx or Kasper Van Landeghem at ALTIUS by telephone (+32 2 426 1414) or email (email@example.com or firstname.lastname@example.org). The ALTIUS website can be accessed at www.altius.com.
(1) These general terms and conditions can provide that the goods delivered by the creditor remain the creditor's property until full payment of the outstanding claim (ie, reservation of title clause; for further information please see "Reservation of title: legal guidelines and practical tips") and, if these goods were to be (further) distributed to the debtor's (final) customers, the creditor would automatically have a pledge on all of the debtor's outstanding claims in that regard.
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Kasper Van Landeghem