A draft law aimed at amending the conditions of the pledge over moveable assets has been discussed and proposed by a group of experts. The proposals made in the draft law tended to meet the practical business needs of the borrowers, combined with the criteria of security to be offered by a pledge. Without any reason, the proposal of law has been withdrawn by the Belgian Parliament.
In the current Belgian legal regime in relation to a pledge over moveable assets, the validity of the pledge is subject to the actual and continuous “dispossession” of the concerned pledged assets. These assets must therefore be beyond the control of the pledgor, and kept by either the pledgee or a third party pledgeholder, jointly appointed by the parties. A practical and customary way of complying with such a requirement is to store the pledged assets in warehouses owned and operated by a third-party acting as custodian for both parties.
However, all practitioners admit that this requirement of dispossession does not meet the requirements of business practice, given among other things the need of the pledgor to be in a position to dispose of the pledged assets, especially when the pledged assets consist to a substantial degree of the Belgian-based assets of the pledgor. We note that the lenders as well are usually prepared to accept that the borrower keeps the free disposal of the pledged assets, provided that a minimum value of pledged assets be stored at all times in the warehouses and as long as no event of default occurs. Lenders therefore do understand that the pledge over moveable assets should not restrict the pledgor’s business or, at least, not prevent the pledgor from running its business in the normal way.
In this respect one should note that the alternative to a pledged moveable asset, consisting of a pledge over the whole business assets (gage sur fonds de commerce/pand over handelszaak), suffers from two important disadvantages, i.e. that the stock can only be pledged up to 50% and that registration duties of 0,5% of the amount pledged will be due (and usually borne by the borrower).
Based on the above considerations, all players in the market expected (and required) changes to the legal old-fashioned requirements on pledges over moveable assets.
Good news arrived on 14 October 2011, when a group of experts presented a Draft Law (‘Avant-projet de Loi’/'Voorontwerp van Wet') aimed at revolutionising the conditions of validity and enforceability of the pledge over moveable assets. The main purpose of the Draft Law was precisely to replace the current requirement of dispossession with a regime based on electronic registration of the pledge.
The main amendment introduced by the Draft Law was that a pledge over moveable assets (and inventory) would not require any dispossession by the pledgor of the concerned pledged assets. As a result, the parties could decide that the pledgor retains the free disposal of the pledged assets, and therefore could lease, transform or sell certain of the pledged assets (provided that the action undertaken was made in the ordinary course of business). In other words, the pledge would exist between the parties through their sole consent (even if, formally, a written pledge agreement would have to be entered into).
Based on the Draft Law, the existence of the pledge would be opposable vis-à-vis third parties through the recording of the pledge in a federal electronic register. The date of the recording of the pledge in said register would fix the priority of the lien, and in case of conflict with another pledgee, the date of the first recording would prevail. The electronic register would be publicly available. However, and although the dispossession would no longer be a compulsory requirement, the pledgor and the pledgee could still decide to arrange a dispossession of the pledged assets. In such case, the date of dispossession could be the commencement date of the enforceability of the pledge vis-à-vis third parties.
Where no dispossession takes place (meaning that the pledgor would retain the disposal of the pledged assets), the Draft Law provides that the pledge will “follow” the pledged assets. As a consequence, should the pledgor dispose of the pledged assets, the pledge over these assets shall remain in place (subject to certain conditions) in favour of the pledgee irrespective of the change of ownership.
We also note other major changes proposed in the Draft Law, also required by the practice and justified by the business practices, as follows:
- A trustee would - finally! - be entitled to act on behalf of a pool of lenders and enforce the pledge in their name and on their behalf. In the current regime, given that the trustee figure is still unknown under Belgian law in case of a pledge over moveable assets, borrowers and lenders are forced to structure a 'parallel debt figure' to achieve that end.
- Except as otherwise agreed by the parties, the pledge would be enforceable without the need for a court decision. The enforcement rules are therefore softened and the parties would be entitled to set out the enforcement procedure directly in the pledge agreement. If the parties decide not to formalise this procedure in writing, the pledgee would be entitled by law to enforce the pledge through the public sale, private sale or lease of all or part of the pledged assets, even if it would not prevent the pledgee from first seizing other assets of the pledgor (e.g. before enforcing the pledge or instead of enforcing the pledge). The Draft Law however provides that the enforcement (and the way of enforcing) must be economically justified. In no circumstance could the pledgee limit or exclude its liability in this regard.
Needless to say, those changes (and especially the one in respect of the dispossession) were expected and the proposals made in the Draft Law would have finally met the parties’ expectations and needs, in eradicating the old-fashioned legal conditions of pledges over moveable assets.
To our surprise, we have however noted that the Belgian Parliament resolved on 8 March 2012 to withdraw the proposal of law. We have no indication as to the reasons for such decision and whether the withdrawal is permanent or not.
Let’s really hope that the proposals made in the Draft Law will not be stored in the Parliament’s archives and that they will rapidly be filed again for a happy end…! This is in the interest of all parties.
