Debt-to-Equity Swap in Belgium

A debt-to-equity swap in Belgium is a restructuring mechanism by which a creditor exchanges its outstanding claim against a debtor company for newly issued shares in that company. The transaction converts a liability on the debtor';s balance sheet into equity, reducing financial pressure while giving the creditor an ownership stake. Belgian law provides several formal and informal pathways for executing such a swap, each with distinct procedural requirements, shareholder protections and tax consequences. This guide covers the legal framework, the available procedures, the key steps for creditors and debtors, the costs involved, and the practical risks that international parties most commonly encounter.

Belgium';s primary restructuring statute is the Code of Economic Law (Wetboek van Economisch Recht / Code de droit économique), which consolidated and modernised the earlier insolvency rules. The most relevant procedure for a debt-to-equity swap is the judicial reorganisation (gerechtelijke reorganisatie / réorganisation judiciaire), introduced by the Law on Continuity of Enterprises and now embedded in Book XX of the Code of Economic Law. A separate but related tool is the out-of-court amicable agreement (minnelijk akkoord / accord amiable), which allows a debtor to negotiate with one or more creditors without court involvement.

Belgium also transposed the EU Directive on Restructuring and Insolvency (Directive 2019/1023) into national law, adding a preventive restructuring framework that strengthens the position of creditors who wish to convert debt to equity as part of a cross-class cram-down plan. This transposition introduced the concept of a restructuring plan that can bind dissenting classes of creditors, provided the plan satisfies the best-interest-of-creditors test and the absolute priority rule.

The competent court for insolvency and reorganisation matters is the enterprise court (ondernemingsrechtbank / tribunal de l';entreprise). The court appoints a judicial administrator (gerechtsmandataris / mandataire de justice) in certain procedures and supervises the process to protect the interests of all stakeholders.

A debt-to-equity swap in Belgium typically arises in one of two broad scenarios. In the first scenario, a financially distressed company has a significant debt burden that it cannot service, but its underlying business retains operational value. Creditors - often banks, bondholders or trade creditors - prefer to convert their claims into equity rather than trigger liquidation, which would yield a lower recovery. The swap preserves the going concern and gives creditors upside participation if the business recovers.

In the second scenario, a strategic investor or a private equity fund acquires distressed debt in the secondary market at a discount, then converts that debt into a controlling equity stake. This "loan-to-own" approach is increasingly common in Belgian mid-market transactions. The investor effectively buys into the company at a price reflecting its distressed valuation rather than paying a premium for the shares directly.

A common mistake in both scenarios is underestimating the shareholder approval requirements. Belgian company law - primarily the Code of Companies and Associations (Wetboek van Vennootschappen en Verenigingen / Code des sociétés et des associations, "CSA") - requires an extraordinary general meeting to approve a capital increase, which is the legal mechanism through which new shares are issued to the converting creditor. Existing shareholders hold pre-emption rights that must either be exercised, waived or cancelled by a qualified majority vote. Failing to manage this step early can block or delay the entire transaction.

Under the CSA, a debt-to-equity swap is executed as a contribution in kind (inbreng in natura / apport en nature). The creditor contributes its claim against the company as a non-cash asset in exchange for newly issued shares. Belgian law imposes strict formalities on contributions in kind to protect existing shareholders and third parties.

The key requirements are as follows:

• A statutory auditor (commissaris / commissaire) or, where the company has no statutory auditor, an independent auditor, must prepare a written report assessing the value of the contributed claim and confirming that it corresponds at least to the value of the shares issued.
• The board of directors must prepare a separate report justifying the transaction and explaining the impact on existing shareholders.
• An extraordinary general meeting must approve the capital increase by a majority of at least three-quarters of the votes cast, with a quorum of at least half the share capital present or represented.
• The resolutions and the auditor';s report must be filed with the Crossroads Bank for Enterprises (Kruispuntbank van Ondernemingen / Banque-Carrefour des Entreprises) and published in the Belgian Official Gazette (Belgisch Staatsblad / Moniteur belge).

The valuation of the claim is a critical and often contested step. The auditor must assess whether the claim is recoverable and at what amount. A claim that is partially impaired - for example, because the debtor is insolvent - may be valued at less than its face value. This affects the number of shares the creditor receives and the dilution suffered by existing shareholders.

In practice, founders and creditors should consider engaging the auditor early, before the extraordinary general meeting is convened, to avoid last-minute valuation disputes that can derail the timeline.

Where the parties cannot reach agreement outside court, or where a binding plan is needed to impose the swap on dissenting creditors, the judicial reorganisation procedure under Book XX of the Code of Economic Law is the appropriate route. The debtor files a petition with the enterprise court, which grants a moratorium - a temporary suspension of enforcement actions - for an initial period that can be extended.

During the moratorium, the debtor prepares a reorganisation plan. The plan can include a debt-to-equity swap as one of its measures. The plan is submitted to creditors for a vote. Under the rules transposing the EU Restructuring Directive, creditors are divided into classes based on their ranking and the nature of their claims. Each class votes separately. A plan is approved if a majority by value within each affected class votes in favour.

If one or more classes reject the plan, the court may still confirm it under the cross-class cram-down mechanism, provided that:

• At least one class that would receive a distribution under a liquidation scenario has voted in favour.
• The plan does not leave any dissenting class worse off than they would be in a liquidation (the best-interest test).
• The plan respects the absolute priority rule, meaning senior creditors are satisfied before junior creditors receive value.

The moratorium period is typically granted for an initial period of several months, with the possibility of extension. The entire judicial reorganisation, from filing to court confirmation of the plan, commonly takes between six and twelve months for a mid-sized company, though complex cases can take longer.

A non-obvious requirement is that the debtor must demonstrate to the court at the outset that it is in financial difficulty but not yet in a state of cessation of payments. A company that has already ceased payments may be forced into bankruptcy (faillissement / faillite) rather than reorganisation, which significantly limits the scope for a debt-to-equity swap.

If you are advising a creditor or debtor on whether judicial reorganisation is the right pathway, contact info@vlolawfirm.com. We can help structure the setup correctly the first time.

Not every debt-to-equity swap in Belgium requires court involvement. Where the debtor and its main creditors can agree on terms, an amicable agreement is faster, cheaper and more confidential than judicial reorganisation. The amicable agreement is concluded between the debtor and at least two creditors and does not require court approval, though it can be homologated by the enterprise court to give it additional legal protection.

The limitation of the amicable route is that it binds only the parties who sign it. A dissenting minority creditor is not bound and retains the right to enforce its claim. This makes the amicable agreement most suitable where the debtor';s creditor base is concentrated - for example, where one or two banks hold the majority of the debt.

Belgian law also permits a private reorganisation outside any formal insolvency framework, structured purely as a commercial transaction. In this case, the debtor and the converting creditor agree on the terms of the swap, the board convenes an extraordinary general meeting, and the CSA formalities for a contribution in kind are followed. This approach is available to solvent or near-solvent companies that wish to optimise their capital structure without the stigma or cost of a formal insolvency procedure.

Many underestimate the importance of minority shareholder protections in this context. Even where the extraordinary general meeting approves the capital increase, existing shareholders who believe the contribution in kind was undervalued can challenge the transaction. Belgian courts have reviewed such challenges and, in some cases, ordered the company to compensate shareholders for dilution caused by an undervalued contribution. Engaging a credible, independent auditor and following the valuation process rigorously is therefore not merely a formality but a substantive risk-management measure.

The tax treatment of a debt-to-equity swap in Belgium depends on the perspective of each party and the specific structure of the transaction.

From the debtor';s perspective, the conversion of a debt into equity generally does not give rise to taxable income at the moment of conversion, provided the swap is structured as a contribution in kind and the shares are issued at a value equal to the contributed claim. However, if the claim is converted at a discount - meaning the debtor is released from part of its obligation - the forgiven portion may constitute taxable income under Belgian income tax rules. The Belgian Income Tax Code (Wetboek van de Inkomstenbelastingen / Code des impôts sur les revenus) treats debt forgiveness as a gain in principle, though specific exemptions may apply in the context of a court-confirmed reorganisation plan.

From the creditor';s perspective, a financial institution or corporate creditor that has already provisioned the claim as a bad debt may realise a tax loss on conversion if the shares received are valued below the book value of the claim. The tax treatment of any subsequent gain or loss on the shares held by the creditor follows the general Belgian rules on capital gains, which differ depending on whether the creditor is a company subject to corporate income tax or an individual.

Value added tax is generally not applicable to a debt-to-equity swap, as the transaction involves the transfer of a financial claim rather than a supply of goods or services. However, VAT implications can arise in complex structures involving multiple entities or cross-border elements, and specialist advice is warranted.

Belgian transfer pricing rules apply where the debtor and creditor are related parties. The arm';s-length principle requires that the terms of the swap - including the valuation of the claim and the number of shares issued - reflect what independent parties would have agreed. The Belgian tax administration has increased scrutiny of intra-group restructurings in recent years, and documentation requirements are strict.

The costs of a debt-to-equity swap in Belgium vary significantly depending on whether the transaction is executed out of court or through a formal judicial reorganisation.

For an out-of-court swap structured as a contribution in kind, the main cost categories are:

• Auditor fees for the valuation report, which typically start from the low thousands of EUR for a straightforward claim and can rise substantially for complex or disputed valuations.
• Notarial fees, as the extraordinary general meeting resolutions and the capital increase must be recorded in a notarial deed.
• Legal fees for drafting the transaction documents, advising on shareholder rights and managing the filing process.
• Publication and registration costs with the Crossroads Bank for Enterprises and the Belgian Official Gazette.

For a judicial reorganisation involving a debt-to-equity swap, additional costs include court filing fees, the fees of any court-appointed administrator, and the cost of creditor communications and voting procedures. Professional fees in a judicial reorganisation for a mid-sized company commonly run into the tens of thousands of EUR in aggregate.

The timeline for an out-of-court swap, assuming no shareholder disputes, is typically four to eight weeks from the engagement of the auditor to the filing of the completed capital increase. A judicial reorganisation adds several months to this timeline, depending on court scheduling and the complexity of the creditor class structure.

What happens if existing shareholders refuse to waive their pre-emption rights in a debt-to-equity swap in Belgium?

Pre-emption rights give existing shareholders the right to subscribe to new shares before they are offered to a third party, including a converting creditor. If shareholders refuse to waive these rights at the extraordinary general meeting, the capital increase cannot proceed as planned. The debtor and creditor must either restructure the transaction - for example, by offering existing shareholders the right to participate in the swap on the same terms - or seek a court-confirmed reorganisation plan that can override shareholder resistance. In a judicial reorganisation, Belgian law allows the court to confirm a plan that imposes a capital increase on shareholders, provided the plan meets the statutory conditions. This is a significant departure from the general principle of shareholder autonomy and reflects the EU Restructuring Directive';s emphasis on creditor protection in genuine distress situations.

How long does a debt-to-equity swap typically take in Belgium, and what are the main cost drivers?

An out-of-court swap structured as a contribution in kind typically takes four to eight weeks from the start of the auditor';s valuation to the completion of the filing. A judicial reorganisation extends this to six to twelve months or more. The main cost drivers are the complexity of the claim being valued, the number of creditor classes involved, the degree of shareholder or creditor opposition, and whether specialist tax or cross-border advice is required. Professional fees - legal, auditing and notarial - are the largest cost component in most transactions. State and registration charges are relatively modest by comparison. Parties who underestimate the auditor';s role often face delays when the valuation report requires revision or when the auditor raises concerns about the recoverability of the claim.

Is a debt-to-equity swap in Belgium available to foreign creditors, and are there any restrictions?

Foreign creditors can participate in a debt-to-equity swap in Belgium without restriction in principle. Belgian company law does not impose nationality requirements on shareholders of a private limited company (besloten vennootschap / société à responsabilité limitée) or a public limited company (naamloze vennootschap / société anonyme). However, foreign creditors should be aware of several practical considerations. First, the transaction documents and court proceedings are conducted in Dutch, French or German depending on the linguistic region of the enterprise court. Second, the tax treatment of the shares received by the foreign creditor in Belgium depends on applicable double tax treaties and the creditor';s home jurisdiction rules. Third, where the foreign creditor is a financial institution, Belgian financial regulatory requirements may apply to the acquisition of a qualifying holding in a regulated entity. Early engagement with Belgian legal counsel is strongly recommended for foreign creditors unfamiliar with these requirements.

A debt-to-equity swap in Belgium is a powerful restructuring tool, but it requires careful navigation of company law formalities, insolvency procedures and tax rules. The choice between an out-of-court contribution in kind and a court-confirmed reorganisation plan depends on the degree of creditor and shareholder consensus, the urgency of the situation and the complexity of the capital structure. Valuation, shareholder rights and tax treatment are the three areas where transactions most commonly encounter problems.

VLO Law Firms advises international clients on bankruptcy and restructuring matters in Belgium. We can assist with structuring debt-to-equity swaps, managing judicial reorganisation procedures, preparing contribution-in-kind documentation and coordinating with auditors and notaries. To request a consultation, contact: info@vlolawfirm.com