Restriction of the Tax Authorities’ benefits during judicial reorganization
19 May 2016
by Steven Daems
Tax Authorities tend to have a very beneficial position when it comes to debt securisation. But there are limits to this advantage.
In its judgment of 18 February 2016 the Constitutional Court decided that the Belgian Tax Authorities’ practice to register its legal mortgage on the assets of the debtor during the judicial reorganization procedure of the debtor, is a violation of the principle of equality included in Articles 10 and 11 of the Belgian Constitution.
Article 31 of the Belgian Act on Continuity of Enterprises prohibits a creditor to seize its debtor’s assets during the suspension period, in order to secure the execution of its claim upon expiry of the suspension period. The period of suspension runs from the application for judicial reorganization until termination of this procedure.
Contrary to other creditors, the Tax Authorities have the advantage of a legal mortgage on all assets of tax debtors. This legal mortgage gives the Tax Authorities a preferential position and can be opposed to third parties as soon as it has been registered with the Mortgage Office (Article 425 WIB (92) – Art. 86 VAT Code). Tax Authorities commonly proceed to this registration during the suspension period, giving it a preferential position at the expiry of the suspension period, compared to other creditors.
The consequences of registration of a legal mortgage equal the consequences of a seizure of the debtor’s assets. The latter is expressly prohibited in the Act on Continuity of Enterprises, while the registration of a legal mortgage is not.
The Court opines that there is no reasonable justification for this distinction and considers it contrary to the basic principle of equality.
As of 18 February 2016, the Tax Authorities are no longer allowed to proceed to registration of a legal mortgage during the suspension period.
This decision is beneficial to all companies that have to deal with judicial reorganization procedures of a debtor, as the same principles on debt securisation during reorganization proceedings now apply for Tax Authorities and other creditors. This is also good news for real estate owners that would have to file judicial reorganization. Registration of a legal mortgage can no longer prohibit the transfer of immovable assets during the registration procedure.
We welcome this court ruling, as it at least puts ordinary creditors and Tax Authorities on the same level during reorganization procedures, when it comes to debt securisation.
Further case law of the Constitutional Court and the Courts of Commerce will show whether the Tax Authorities comply with the judgment.
On a side note, the Constitutional Court intervened due to a preliminary question, whereby it was asked to (partially) assess the Act of Continuity of Enterprises in the light of the general principle of equality as laid down in Articles 10 and 11 of the Belgian Constitution. In the future, it will no doubt be interesting to follow as to whether the Court will further examine the compliance of the Act of Continuity of Enterprises (which specifically allows certain inequalities) with the general constitutional principle of equality.