An attempt to reform and rationalize the Belgian Bankruptcy Act of 8 August 1997 and the Continuity of Enterprises Act of 31 January 2009 included the introduction of a "silent bankruptcy" that offered distressed companies the opportunity to prepare for a real bankruptcy discreetly and without any publicity, along the lines of the UK's pre-pack procedures.
While the bill was adopted in mid-July 2017 and will apply to insolvency proceedings opened on or after 1 May 2018, the attempt to include pre-pack procedures in the reform has failed.
On 2 April 2017, a draft bill broadly addressing bankruptcy reform was submitted by the Belgian Government to the House of Representatives.
As European Court of Justice Advocate General Paolo Mengozzi would later say, "The success of the pre-pack is part of a growing trend in modern insolvency law of favoring approaches which, unlike the traditional approach aimed at winding up the undertaking in difficulties, seek to turn the undertaking around, or at least save its units which are still economically viable. In that context, the pre-pack, which is characterized by its informal elements (a preliminary extra-judicial phase) and formal elements (a phase which takes place within the insolvency procedure), provides undertakings with a flexible tool capable of resolving certain crisis situations quickly."1
The draft bill would have allowed a Belgian debtor who believes that the conditions for bankruptcy are met to request the Court of Commerce to appoint a prospective insolvency administrator and a prospective supervisory judge. The appointment would be made, provided that it could be demonstrated that it would:
- Limit the damage of a subsequent bankruptcy
- Increase the chance of a favorable sale of the debtor's assets - preserving continuity, and for a favorable price
- Preserve employment
The request would be reviewed by the court within a three-day period. The appointment of the prospective insolvency administrator would be limited to a period of 15 days and, at the request of the prospective insolvency administrator or the debtor, could be extended for a maximum of 15 days.
If a prospective insolvency administrator is appointed, the debtor would have to "inform the prospective insolvency administrator of the negotiations and the terms of a possible transfer of all assets or part of, or all activities or part of the company." In considering the proposed transaction, the prospective insolvency administrator would have to "examine the extent to which the objective proposed by the debtor can be realized" and take the necessary preparatory measures for the bankruptcy, "while representing the interests of the debtors' joint creditors".
Almost immediately after the publication of the draft, the new procedure on silent bankruptcies came under fire. Opponents argued that it is an illusion to suggest that a pre-pack is being considered for the benefit of all creditors. In reality, the interests of one or more of the company's secured creditors, its shareholders or directors will usually be pursued.
Different authors commented that allowing the prospective insolvency administrator to be appointed as the eventual insolvency administrator will restrict the ability of parties to challenge the validity of the transfer that was agreed upon during the pre-pack procedure. Critics also underlined that a pre-pack, organized and initiated by the debtor, may not result in the assets being widely offered to all potential buyers, which could have a negative impact on the conditions governing the sale and ultimately, the price.
Currently in the Netherlands (and also in the UK), neither the preparatory phase nor the mechanics to effect a pre-pack sale are regulated by statute, but rather stem from practice. In the explanatory memorandum, the Belgian Government nevertheless confirmed that the new procedure was "based on the Dutch model".
Concerns over the protection of employees
The most significant opposition to pre-packs came from Belgian trade unions, who argued that the prepack procedure proposed by the Government would significantly reduce employee safeguards. They referred to "Project Butterfly", the rescue plan of the Estro Groep, formerly the largest childcare group in the Netherlands.
In 2014, ten days after the appointment of a provisional administrator to Estro, a sister company of its principal shareholder set up a NewCo intended to be a vehicle to relaunch the business. A week later, Estro was declared insolvent; on the same day, Estro's business and undertaking were sold to NewCo as part of a pre-pack transaction. Two days after that, the insolvency administrator dismissed all the Estro Groep employees. NewCo immediately offered positions to 2,600 of the workers, leaving 1,000 workers who had been dismissed without an offer of new employment. It was asserted that while implementing Project Butterfly, no other potential options were explored, apart from a sale to the connected NewCo.
The Dutch workers’ unions and four of the dismissed employees challenged the pre-pack sale before the European Court of Justice. Pending the final decision of the Court, in March 2017 Advocate General Mengozzi delivered his Opinion determining that Directive 2001/23, which protects workers' rights in the event of a transfer of an undertaking, does apply to pre-pack procedures.2
In the wake of Estro
In Belgium, the unions' objections to the draft bill were heard by the House of Representatives. An amendment was proposed which would include workers' representatives in the preparatory process.
However, during the consultation period in the House of Representatives, the ECJ handed down its final decision in the Estro case3. Consistent with the approach taken by the Advocate General (and also by the UK courts when the same issue was considered there), the ECJ determined that a pre-pack sale is designed to facilitate an immediate relaunch of the viable parts of an insolvent business's undertaking. It should not therefore be considered to be "instituted with a view to the liquidation of the assets of the transferor" − which would be required for the employee protection regulation not to apply. Consequently, the regulation does apply to pre-pack transfers, and employees' rights are protected.
A future without Belgian pre-packs
Following the final decision of the ECJ, the Belgian Minister of Justice, Koen Geens, decided to withdraw his proposal, leaving out the new pre-pack procedure altogether. He stated, "I've been up all weekend, but could not find a solution to the judgment of the European Court of Justice and did not feel like bringing something to a vote where there is insufficient legal certainty. It would therefore not be used in practice."
These developments make it clear that, not just in Belgium but across the European Union, most pre-pack sales are likely to be interpreted as not having been instituted "with a view to the liquidation of the assets of the transferor" and consequently, that their employees are entitled to the full protection of Directive 2001/23. The unequivocal reasoning of the ECJ in the Estro judgment, coupled with the firm opposition of Belgian trade unions and a more general concern regarding the potential for pre-pack businesses not to be fully exposed to the market, suggest that it is unlikely that an amended proposal will be successfully introduced in Belgium any time soon.
1 ECJ, nr. C-126/16, ECLI:EU:C:2017:241, 29 March 2017, Opinion P. Mengozzi
2 ECJ nr. C-126/16, ECLI:EU:C:2017:241, 29 March 2017, Opinion P. Mengozzi
3 ECJ, nr. C-126/16, ECLI:EU:C:2017:489, 22 June 2017, Judgment.