Everything You Want to Know About a Silent Bankruptcy

Since September 1, 2023, the Economic Law Code offers a new procedure for companies facing financial difficulties: the private preparation for bankruptcy, better known as the 'silent bankruptcy' or 'quick bankruptcy'. This process allows companies to discreetly prepare a transfer of assets and activities before the official declaration of bankruptcy.

Who or what is the procedure for?

The silent bankruptcy is specifically designed to avoid the negative effects of bankruptcy and to retain as much of the company's value 'as a going concern' as possible.
The traditional way to transfer a distressed company, particularly through a court-supervised transfer (known as 'GRP 3'), is often too complex and costly. This procedure involves suspension publicity, followed by a public bidding process by the appointed court trustee. This can be highly detrimental for companies with volatile assets or in competitive markets where customers, employees, and suppliers might quickly turn to competitors.
By allowing companies to prepare a restart quietly and without business interruption, the legislator aims to provide a solution.

How does the procedure work?

The silent bankruptcy is a preparatory process that unfolds as follows:

• Application: The debtor believing they are in a state of bankruptcy submits a petition to the commercial court, demonstrating that the private preparation for bankruptcy (1) will facilitate the liquidation of the company and achieve the highest possible payout to creditors, and (2) will preserve employment as much as possible.
• Preparation: If the request is granted (within a maximum of 3 days), the debtor has 30 days to prepare the full or partial transfer of their assets and activities (extendable to a maximum of 60 days). A prospective trustee and a prospective examining magistrate are appointed by the court to oversee the process and assess the feasibility of the transfer.
• Bankruptcy + transfer: The prepared transfer is executed immediately after the preparation is completed and the bankruptcy is declared. The prospective trustee becomes the actual trustee and conducts the transfer 'as a going concern'.

What are the main advantages?

• Value Maximization: By implementing the transfer as a 'going concern', the business retains its value and can yield a higher return for the company's creditors (compared to selling assets separately).
• Confidential Nature: As the name suggests, the procedure is confidential, with no publicity given to the application, admission to the procedure, or the appointment of the intended liquidator (e.g., in KBO, Belgian Official Gazette, RegSol). This helps avoid unrest among suppliers, employees, and other stakeholders. To maintain confidentiality during the process, using non-disclosure agreements in acquisition discussions is essential.
• Control Retention: The debtor remains in control and prepares the transfer. Although this is done in consultation with the intended liquidator, the latter cannot contact other potential buyers without the debtor's consent. This is advisable for maintaining desired discretion, as the sudden intervention of an intended liquidator can raise alarms. Engaging an independent M&A advisor to explore the market might be beneficial.
• Fewer Formalities: The mandatory certificates for enforceability of the transfer of the business fund to tax authorities and social security are not required.
• Employee Selection: While it must be shown that the confidential preparation benefits employment, the acquirer is not obliged under CAO32bis to take over all employees related to the company.
• Declaration Obligation: The obligation to file for bankruptcy within a month after cessation of payments is suspended during the procedure.
• Legal Certainty: Since the intended liquidator finalizes the transfer once officially appointed as liquidator at the time of bankruptcy declaration, the likelihood of challenging the transfer later is minimal.

What are the key considerations?

• No Moratorium: During the silent bankruptcy, creditors can still enforce securities, seize business assets, and summon the debtor to bankruptcy (compared to GRP 3 procedure).
• Related Parties: The debtor and related parties can also apply as potential acquirers, provided that the intended liquidator and intended supervisory judge are transparently informed.
• Preparatory Only: The debtor can only prepare the transfer. The actual closure of the transfer happens after bankruptcy by the intended liquidator, who will also be officially appointed as liquidator.
• Role of Intended Liquidator: The intended liquidator oversees the process and safeguards the creditors' interests. Since he will officially be appointed as a liquidator in the subsequent bankruptcy, he has a vested interest in the actual realization of the transfer at the highest possible price. His interests align with those of the creditors, as his fee is calculated as a percentage of the sales proceeds. Close cooperation and a good relationship with the intended liquidator are key for a successful transfer.
• Secured Creditors: The rights and position of secured creditors with privileges on the assets to be transferred must be considered during the process. This includes, for example, the company's main bank, which often has a pledge on the business fund, and suppliers with a retention of title.
• Time Pressure: The speed of the procedure (30-60 days) could also be an obstacle: the debtor must act quickly and negotiate under time pressure.

In Summary

The confidential preparation provides a legal framework for businesses on the brink of bankruptcy to efficiently prepare a restart. While the procedure has challenges, such as the lack of protection against creditors, it offers significant advantages such as time and cost savings, confidentiality, control, preservation of 'going concern' value, and legal certainty for both transferor and acquirer.