Silent bankruptcy or the private preparation of bankruptcy: useful for acquisition practice? (Source: Reyns Advocaten)

With the implementation of the European Restructuring Directive, the range of insolvency procedures in Belgian law has been expanded once again. As of September 1, 2023, Belgian insolvency law also includes the procedure of the confidential preparation of bankruptcy, also known to some as the pre-pack or silent bankruptcy.

The Goal of the Procedure

The confidential preparation of bankruptcy allows a struggling company to discreetly prepare for bankruptcy without any public announcement. The company will ask the court to declare bankruptcy while requesting permission to confidentially prepare the transfer of (part of) its assets and activities under the guidance of a prospective trustee and supervision of a prospective supervisory judge. Essentially, the preparation involves finding a potential buyer for the viable parts of the company. Negotiations occur beforehand, and immediately after the declaration of bankruptcy, the company will typically transfer (partly) at the agreed price. The aim is to preserve the going concern value of the company as much as possible—often lost due to delays, reputation damage, and deal uncertainty in bankruptcy scenarios. The higher revenue sought through this benefits creditors and leads to job retention.

The Procedure Process

To initiate the procedure, the company must demonstrate that it (i) believes it is in a state of bankruptcy and (ii) that confidential preparation facilitates the liquidation of the company. This last condition is met if the highest possible payout to creditors is achieved, and employment is maintained as much as possible. If the request is granted, a prospective trustee and supervisory judge will be appointed for 30 days. This appointment can be extended once for another 30 days. In this case, progress in negotiations must be demonstrated. The procedure is conducted behind closed doors and is not disclosed in any way. In the absence of any publicity, the debtor does not enjoy protection against creditors during the procedure. Additionally, creditors and the Public Prosecutor can proceed to file for bankruptcy at any time during the procedure. The company retains the right to file for bankruptcy itself during the process. If the debtor takes no action after the (possibly extended) 30-day period, the court will proceed as in a normal bankruptcy. In the subsequent bankruptcy, the prospective trustee and supervisory judge will be appointed as the trustee and supervisory judge, executing the pre-arranged transfer immediately after the bankruptcy ruling.

The Role of the Trustee

The role of the prospective trustee is to assess whether and to what extent the proposed takeover by the debtor is achievable, representing the interests of all creditors. More specifically, the prospective trustee will take the lead in evaluating whether the outlook for a quick transfer of assets and activities is realistic. Unlike in a bankruptcy scenario, the debtor maintains control over the company during the preparation of bankruptcy. The procedure does not involve dispossession or administration but requires oversight and primarily active collaboration to achieve the proposed transfer as quickly as possible.

Useful for Acquisition Practice?

Experience shows that much is lost in the event of bankruptcy. Consider important ongoing contracts that must be terminated by the trustee, departments that must be closed, activities that must be forcibly stopped, etc. However, since September 1, 2023, the confidential preparation of bankruptcy provides an opportunity to anticipate this somewhat. Once it’s determined that the bankruptcy conditions are met, the debtor can engage with a potential buyer prior to bankruptcy. Through this procedure, the continuation of (part of) the profitable assets and activities of the company can thus be safeguarded. If a transfer is made to a related company or to a person who has exercised (in)direct control over the debtor within six months prior to the procedure's opening, the prospective trustee must inform the prospective supervisory judge in writing. Apart from this information obligation, the law does not provide any other requirements or restrictions in this regard.

Conclusion

Since the introduction of the confidential preparation of bankruptcy, several procedures have been initiated and successfully concluded in various courts in Flanders. The new legal tool seems to be proving effective in practice. While in a bankruptcy scenario the company's assets and value immediately depreciate, the confidential preparation aims to ensure a more favorable outcome for the benefit of creditors and employment. Moreover, the viable components and activities of the company are continued by the acquirer without interruption, making the confidential preparation of bankruptcy also a useful tool in the acquisition market.

Feel free to contact Reyns Advocaten if you have any questions regarding an acquisition or transfer of a company. For advice on insolvency, you can always reach out to Reyns Advocaten.