The new Belgian restructuring plan for large enterprises: secured creditors no longer entitled to the reorganisation value

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.[1]

The new law will apply to all procedures opened as from 1 September 2023.

What does this reform mean for secured creditors? In this first of two blog posts, we will examine the “value” to which secured creditors are entitled under the new judicial reorganisation through collective agreement for large enterprises.

For reference: treatment of secured creditors prior to 1 September 2023

Before examining the new regime for large enterprises, let us look at the old regime. Incidentally, that old regime will continue to apply to SMEs (which do not opt out) in the future.

The public judicial reorganisation through collective agreement is a pre-bankruptcy moratorium procedure. During the procedure, the debtor is not required to make payment of pre-existing debt and execution measures are generally suspended. The debtor stays in possession and draws up a reorganisation plan proposing debt write offs and other concessions to be made by the creditors.

Provided these reorganisation measures were approved by a 50.01% majority (by principal amount owed and by headcount) and subject to ratification by the court, the measures were binding on non-consenting creditors. There were no classes for voting purposes.

At first sight, secured creditors benefitted from very strong legal protection. Indeed, the reorganisation plan could not contain any measures affecting a secured creditor save (i) a suspension of its rights for a period of up to 24 (or exceptionally 36) months provided that interest was paid in full or (ii) with its individual consent.

Strangely enough, even in a situation where the value broke within the secured debt, generally speaking:

• unsecured creditors were required to receive at least 20% of the principal amount owed;

• a differentiated treatment of creditors, with for example higher pay outs for unsecured but essential creditors, was allowed;

• unsecured creditors could sometimes veto a reorganisation plan because of the required headcount majority;

• shareholders were not affected at all; and

• the debtor was the only party able to initiate the procedure and to draw up and file a reorganisation plan; in this light, the debtor could be tempted to propose favourable treatment for essential and sometimes affiliated creditors.

In practice, secured creditors were often presented with the choice of either pushing the debtor into bankruptcy or consenting to a transfer of part of the reorganisation value to unsecured creditors and/or shareholders.

The new regime: voting within classes

Under the new judicial reorganisation through collective agreement for large enterprises, both creditors and shareholders will be divided in separate classes if the rights they have in the case of a liquidation or on the basis of the restructuring plan are incomparable in terms of their nature, quality or value. As a minimum, secured and unsecured creditors shall be treated in separate classes.

The restructuring plan will be submitted to the court for ratification if it is approved by a 50.01% majority (by principal amount) within each class.

Dissenting minority creditors within a consenting class will be bound by the restructuring plan (cram-down) provided that the plan satisfies the “best-interest-of-creditors test”. The best-interest-of-creditors test is satisfied if no dissenting creditor would be manifestly worse off under the restructuring plan than such a creditor would be if the normal ranking of liquidation priorities in the event of bankruptcy would be applied (ie liquidation value test).

Even if the restructuring plan is not approved within each class, it may nevertheless be submitted to the court for ratification and imposed on the non-consenting classes (cross-class cram-down) if the plan satisfies the following additional conditions:

1. the plan is approved by at least one class of creditors which can reasonably be expected to receive payment if the normal ranking of liquidation priorities were applied (or, if there are only two classes, the plan is approved by one of these two classes);
   
2. the plan does not deviate from the normal ranking of liquidation priorities (ie the reorganisation value is allocated in line with such normal ranking of liquidation priorities); exceptions are possible if there are reasonable grounds and the non-consenting class is not manifestly prejudiced; and
   
3. no class can, under the restructuring plan, receive or keep more than the full amount of its claims or interests.

Is this a good thing for secured creditors?

Yes and no.

Yes because the issues under the old regime as described above fall away.

No because, under the new regime, secured creditors shall henceforth only be included in the class of secured creditors for an amount equal to the “value they would receive from their security in a bankruptcy or liquidation in accordance with the normal ranking of liquidation priorities”. For the remainder of their receivable, they will be treated as unsecured and included in a class of unsecured creditors. In that capacity, they will rank (i) after unsecured creditors who benefit from a general preferential claim (algemeen voorrecht / privilège général): mainly tax and social security authorities and (ii) pari passu with ordinary unsecured creditors.

What is then this “value they would receive from their security in a bankruptcy or liquidation in accordance with the normal ranking of liquidation priorities” to which secured creditors will be limited under the new regime? In our view, this “liquidation value” will not necessarily be equal to the value in case of a piecemeal execution sale of individual assets. Indeed, it is possible for a business to be sold as a going concern even within the framework of a bankruptcy or liquidation. That being said, even in case of such sale as a going concern, the value obtained will no doubt be lower in a bankruptcy or liquidation than in a restructuring.

Are there other risks for secured creditors?

Yes.

The very strong legal protection under the previous law provided each secured creditor with an individual veto right on measures affecting it. Similarly, LMA-style loan agreements typically provide for various unanimous Lender decisions. Under the new law, secured creditors will no longer benefit from such unanimity (even if this would be contractually provided for). Indeed, secured creditors will now be aggregated in a class and vote by a 50.01% majority. The minority will be subject to cram-down. 50.01% is a rather low majority threshold, especially considering the risk that secured creditors of different types could be lodged together in a single class. 

Cross-class cram-down will not typically be a risk for secured creditors (at least not for the part of their receivables which does not exceed the liquidation value of the secured assets) given that the restructuring plan may in principle not deviate from the normal ranking of liquidation priorities. There is however an exception if there are “reasonable grounds” and the secured creditors are not “manifestly prejudiced”. It remains to be seen whether this exception will become a loophole to shift value from secured creditors to unsecured creditors (eg essential suppliers).

Also, the parliamentary works for the new law state that there is no requirement to immediately pay out the secured creditors (ie no cash-out option). Rather, there is large freedom for the parties to agree payment terms where a strict application of the absolute priority rule would lead to “results contrary to economic rationality”.

Conclusion

The new judicial reorganisation for large enterprises addresses a number of issues that resulted in secured creditors recovering less value than what they would seem to be entitled to.

On the other hand, under the new regime, the difference between the “liquidation value” and “reorganisation value” will no longer accrue to secured creditors. Rather, it will accrue to unsecured creditors who benefit from a general preferential claim (algemeen voorrecht / privilège général): mainly tax and social security authorities. Only once these authorities are satisfied in full, the remainder will be shared pro rata between ordinary unsecured creditors (including secured creditors for the part of their receivables which exceeds the “liquidation value”).

It remains to be seen whether the overall impact of the new law on recoveries for secured creditors will be net positive or negative.

Eric Blomme
Partner
Simmons & Simmons

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[1] Large enterprises are defined as companies exceeding one or more of the following criterions on a consolidated basis: (i) annual average number of employees: 250, (ii) annual turnover excluding VAT: EUR 40,000,000 and (iii) balance sheet total: EUR 20,000,000. Companies that do not exceed any of these criterions may also opt in to the new procedure on a voluntary basis.