Cancellation of debts or alternatives in the case of companies in difficulty

It happens in the best families: daughters or sons who are indebted to their parents. This is also happening in the business world. Within related companies there are sometimes weak brothers, companies that are struggling. What do you do in such a case? Can the mother house simply cancel those debts? David Lornoy gives all the answers!

David Lornoy

Cancellation of debts or alternatives in the case of companies in difficulty

Can these debts just be cancelled? 

This is possible, but before we can advise on such a transaction, we would still like to have a complete overview of the reason for these debts. Are they caused by external market conditions? For example, was the cost structure too heavy? Was there too many staff? Or, for example, have goods been purchased at a high price from a group company? Once we have identified all this, we will be able to look for a recovery, and then if we see that there are still a lot of debts that we know cannot be repaid, or can be repaid only in the far too long term, a debt cancellation is an option.

These are related companies. Does that give rise to suspicion on the part of the tax authorities?

Something like that arouses suspicion. No gifts are given between strangers, but of course there are other interests involved between affiliated companies, which makes the tax authorities a little suspicious. What matters is how the tax authorities look: they want to approach this transaction in the same way as they do between independent parties. If the tax authorities feel that there is more to it than that, then corrective mechanisms will be put in place.

It is also a question of: is that transaction or is what is happening normal or abnormal? Should the tax authorities make a judgement on this?

Yes, the tax authorities will, of course, say faster that this is an abnormal transaction that does not conform to market conditions. That is, of course, something that is fleshed out by the judiciary. The case law is often more in the interest of the taxpayer, he also takes more account of the group interest. But, of course, as you can see, this is an issue of fact, and it is actually possible to go to the ruling committee prior to this waiver. One can say these are the facts, cards on the table, what do you think of them? Do you think this is an abnormal transaction or not? What we have noticed is that they do attach a number of conditions to this, and one of those conditions is a clause of return to better condition. In other words, they accept the waiver. This write-off is final, but if the situation of the company allows it, there is a return of profit and the cash flow is positive, then the debt will be revived and still has to be repaid.

Since 2009, there has been the WCO, the law on the continuity of enterprises to prevent enterprises from going bankrupt too quickly, they are actually protected against creditors. Should you go to court to protect a business or a weak brother in the family?

Yes. As you yourself say, the Act on the continuity of enterprises: continuity is central. We often see that there are companies that have had a hard time and that want to get off to a new start, and there is also an external investor who says: 'I want to invest in this, but not on those terms, because I see that mountain of debt there'. And then we go within the framework of a WCO, submit a petition, in which we also explain: how do we get in that situation, why is continuity threatened?

So the judge actually expects your expertise, but an objective judgement?

Yes, that's actually our job, and we get a lot of information and figures from the customer and we're going to objectify them. Such as to enable the court to make its decision in full knowledge of the facts.

And then the debt disappears?

The debt then disappears definitively, so if the court agrees, negotiations can be started with the creditors. What is important here, however, is that the debtor is not taxed on the advantage he receives as a result of the waiver. The disadvantage in this procedure is, of course, the intervention of the court and the accompanying judgements.

What if continuity cannot be guaranteed? Is bankruptcy unavoidable?

Well, bankruptcy is inevitable when the confidence in this company is shaken and there is a suspension of payments. In the event of a deficit uplifting, we often see that debts are paid by another group company. So there is no shaken confidence there. In that case, a deficit uplifting can offer a solution provided that all creditors have agreed and without bankruptcy and that the blot on the blazon of the company is avoided.

Will the reputation then remain more or less intact?

Yes, it will.


Do you have any further questions? You can always contact our advisors!