Construction company in difficulty? An overview of several legal instruments for debtors and creditors alike.

It is stating the obvious to say that, given the current succession and intertwinement of crises (corona, supply chain, Russian invasion, energy, …), quite a number of construction companies will likely find themselves in difficulty. This creates problems not only for the construction companies in difficulty, but also for their creditors, who are often active in the construction sector as well. Stronger and weaker construction companies are in the same boat. 

This news blog therefore aims to give both sides a non-exhaustive overview of several legal instruments and techniques available to them to optimize their respective positions.

The 3 forms of judicial reorganization

A company in difficulty, i.e. whose continuity is under threat, can first of all draw on a number of existing legal instruments to judicially reorganize the company in difficulty.

Amicable agreement

A first option is to conclude an amicable agreement with the creditors (minimum 2) with a view to restoring the financial situation or reorganizing the company. This route is often used by companies with only a few creditors. 

Such amicable agreements must meet a number of formal requirements. They also offer a number of advantages to the creditors involved (including in the event of a possible subsequent bankruptcy and in terms of their liability if the amicable agreement has ultimately not actually made it possible to preserve the continuity of all or part of the assets or activities). The agreement is (often) homologated by the court at the request of the parties and declared enforceable. 

Finally, the effects of the amicable agreement benefit the natural person who has provided a personal guarantee free of charge for the debtor who requested it.

Collective agreement

A second option is to conclude a collective agreement with all creditors. The purpose of the collective agreement procedure is to obtain the creditors’ approval of a reorganization plan.

The procedure starts with a petition to which a number of (accounting) documents are attached. Based on these, the court decides whether the procedure may be initiated or not. The legislator has introduced an “open portal approach” here, which means that as soon as the statutory conditions are met (namely threatened continuity and the attachment of the required documents), the company in difficulty must be admitted. 

The rights of most of the company’s creditors are then “frozen” for a maximum period of 6 months. During this suspension period, the company is given the opportunity to draw up a reorganization plan on which the creditors must vote. This reorganization plan may contain a range of reorganization measures, the most important of which are a partial debt write-off (up to 80%!) and deferred payment (up to 5 years!). The many advantages are clear: debt forgiveness, broad payment flexibility, very favorable tax effects for debtor and creditor, and last but not least continuity in business. 

Judicial reorganization

A third option is the so-called judicial reorganization procedure by transfer under court supervision. In essence, this procedure consists of transferring the company (or its activities), in whole or in part, to a third party under the supervision of the court. Often, the result of a partial transfer is that the weaker parts are left behind and end up in bankruptcy proceedings. This solution can also provide relief for sole proprietorships, as any residual debts may also be discharged in such a scenario. 

These procedures are far-reaching and certainly not always popular, yet despite their distortive effect on competition they are often necessary to preserve valid economic substance. A debt waiver is a blessing for a company in difficulty, but a financial death blow for the creditor. These instruments are not intended to absorb a general systemic crisis. If every company requires a judicial reorganization, then ultimately none of them will truly be helped. In that case, swift and accurate government intervention must be the first remedy. 

The concrete design of a reorganization plan will also often determine whether the body of creditors, which ultimately still has the final say, gives its approval or not. One company may be saved by mere payment relief, while for another even drastic debt waivers may still not suffice. 

Lastly, the important strategic consideration arises as to when a company is best judicially reorganized. The opening of the procedure is, after all, an important cut-off point, since the procedure only offers protection for those debts that arose (which is not the same as having been invoiced!) before the judgment opening the procedure. Also note that the legislator penalizes waiting too long (including by offering little or no protection against attachments).

Creditors’ defense techniques

There are also still a number of pitfalls for companies seeking judicial protection. Ongoing agreements must normally continue to be performed (such as lease agreements, credit commitments, etc.). Many creditors will also qualify as ‘extraordinary creditors’, which means that, unless they agree individually, the measures included in a reorganisation plan will have far less or no impact on them. A construction company can take a number of legal precautions to be qualified as an “extraordinary creditor” during a suspension of payments. Acting preventively is essential for that. 

Retention of title

A first example is the creditor who, as security for its claim, owns goods in the possession of the debtor on the day insolvency proceedings are opened. This therefore requires that the creditor supplying movable goods has stipulated a valid retention of title over them (i.e. in writing and no later than upon delivery of the goods) in the works contract. In addition, the goods must still physically be in the possession of the debtor at the time the judicial reorganisation procedure is opened. Ideally – at least after making a cost-benefit assessment – the creditor should also register its retention of title in the National Pledge Register, so that the incorporation of the delivered goods into immovable property does not extinguish the retention of title.

Pledge on receivables

A second example is the creditor who holds a claim secured by a pledge on receivables. If the claim is secured by a “pledge on all existing and future receivables of the debtor”, then this claim qualifies as an extraordinary claim during the suspension of payments. For that purpose, the creditor must therefore stipulate such a pledge right in the works contract. 

Special priority right

A third example is the creditor who holds a so-called “special lien,” a category which includes, among others, a subcontractor. Since the entry into force of Book XX in 2018, however, this has been a matter of debate in legal doctrine and case law. To benefit from this protection, the subcontractor concerned does not need to take any prior action when faced with judicial reorganization or the bankruptcy of their main contractor.

Direct claim

A tried and tested fourth technique to mitigate, as far as possible, the consequences of the insolvency of the main contractor, specifically in the case of a subcontractor-creditor, is and remains the so-called “direct claim by the subcontractor”. On every site, they must ascertain the identity of the project owner and, in the event of problems, above all act quickly in writing. In this way, the subcontractor may also remain outside the pool of creditors in the event of the main contractor’s bankruptcy, and in any case judicial reorganization does not prevent the bringing of such a direct claim (which can even be done by email!).

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As a (construction) business, you must first and foremost be aware of the available legal instruments and use them to the fullest extent possible to tackle crises as effectively as circumstances allow. However, make sure you are properly guided in this. Saving businesses, as well as ensuring creditors receive what is due to them, is and remains specialist tailor-made work for skilled insolvency lawyers.

Verkeert uw (bouw)bedrijf in moeilijkheden? Of wordt u als schuldeiser geconfronteerd met een gerechtelijke reorganisatie? Aarzel dan niet om ons te contacteren. Onze ervaren specialisten in insolventierecht en gerechtelijke reorganisaties staan u graag bij met raad en daad.