On 31 December 2013, the act relating to the financing of small and medium-sized undertakings (the Act) was published in the Belgian State Gazette. The Act seeks to (1) mitigate pre-contractual information asymmetries between borrowing SME’s and creditors as well as (2) promote contractual fairness. By accomplishing the said intermediate goals, the Act seeks to improve SMEs access to credit.
The Act is expected to have a significant impact on SME finance transactions. Our newsletter briefly outlines the Act’s (1) scope of application, (2) key provisions and (3) entry into force.
1. Scope of application
The Act applies to “Credit Agreements” concluded between an “Undertaking” and a “Provider of Credit” that (1°) pursues its commercial or professional activities in Belgium, or (2°) by any means, directs such activities to Belgium or several countries including Belgium.1
1.1. Undertaking
Qualifies as an Undertaking: (1) any association and natural person or legal entity that permanently pursues an economic purpose or a liberal profession and (2) that meets maximum one of the criteria included in article 15 of the Belgian Companies Code:
- the average number of employees during the financial year is less than 50; and
- the annual turnover, excluding VAT is less than €7,300,000; or
- the balance sheet total does not exceed €3,650,000,
unless the average number of employees during the financial year amounts to more than 100.2
1.2. Provider of Credit
A Provider of Credit is a natural or legal person, or a group of such persons, who grants credit in the course of his trade, business or profession except a person or group of persons that offers or concludes credit agreements that are subject to an immediate transfer or assignment to a licensed creditor indicated in the credit agreement.3
1.3. Credit Intermediary
Under the Act a Credit Intermediary is defined as a natural or legal person who is not acting as a creditor and who, in the course of his trade, business or profession, for a fee, which may take a pecuniary form or any other agreed form of economical consideration:
(1) presents or offers credit agreements to Undertakings; or
(2) assists Undertakings by undertaking preparatory work in respect of credit agreements other than as referred to in (1); or
(3) concludes credit agreements with an Undertakings on behalf of the Provider of Credit.
Qualify also as a Credit Intermediary: persons that offer or conclude credit agreements that are subject to immediate transfer or assignment to a licensed creditor indicated in the credit agreement 4
1.4. Credit Agreement
A Credit Agreement is any agreement whereby a provider of credit grants or promises to grant to an Undertaking credit in the form of a loan or other similar financial accommodation.
The Act excludes credit agreements subject to the Consumer Credit Act of 12 June 1991 or the Mortgage Credit Act of 4 August 1992.5
According to the Official Memorandum submitted to Parliament, deferred payments of invoices, intra-group financing, factoring and leasing activities are also excluded from the Act’s scope of application.6
2. Key provisions
As we outline the Act’s key provisions, it will become apparent that the Act is largely inspired by the existing legal framework under the Consumer Credit Act of 12 June 1991. Besides conduct of business rules and information requirements, the Act deals with prepayment fees in the event of early repayment.
Please note that the Financial Services and Markets Authority is charged with supervising compliance with the Act’s suitability and information requirements.7
2.1. Duty of loyalty
The Act requires that Providers of Credit and Credit Intermediaries act equitable and in good faith in their dealings with Undertakings. Any information provided to Undertakings must furthermore be correct, clear and not misleading.8
2.2. Know-your customer requirements
In order to assess amongst others the affordability of credit, Providers of Credit and/or Credit Intermediaries must, before the conclusion of a Credit Agreement, obtain information from Undertakings (and if applicable the persons who provide personal security) with regard to their (1) financial situation and (2) ability to reimburse the credit.
A Code of Conduct, drafted by sector organisations representing both Undertakings and Providers of Credit 9 , will outline which information has to be obtained from the Undertaking, as well as the documentation to be gathered by Providers of Credit and Credit Intermediaries to assess an Undertaking’s financial situation and ability to reimburse the credit. Such Code of Conduct has been agreed on 16 January 2014. The government press release relating to an agreement of 16 January 2014 in respect of the Code of Conduct can be consulted here (in French) and here (in Dutch).
In order to prevent discrimination and in line with the Anti-Discrimination Act of 10 May 2007, Providers of Credit and Credit Intermediaries may not obtain information on a borrower’s (a.) race, (b.) ethnic origin, (c.) sexual conduct, (d.) health, (e.) political, ideological or religious activities, and (f.) membership of a trade union or health insurance.10
Undertakings and/or persons who provide personal security have to provide correct and complete information to Providers of Credit and/or Credit Intermediaries.
2.3. Information requirements
2.3.1. Obligation to pre-contractual information
Before the conclusion of a Credit Agreement, Undertakings have to receive a pre-contractual information document from the Provider of Credit and/or Credit Intermediary. The content of the pre-contractual information document is determined by the Code of Conduct.
2.3.2. Obligation to provide adequate explanations
Providers of Credit and or Credit Intermediaries must provide Undertakings, when they apply for credit, with written explanations. These explanations must enable Undertakings to assess which types of credit are suitable for their situation. The explanations have to include the essential characteristics of the relevant credit agreements and the specific effects they may have on the Undertaking.11
2.3.3. Copy of the draft credit agreement
Unless the Provider of Credit, at the time of the request, is unwilling to proceed to the conclusion of the credit agreement with the Undertaking, the Undertaking must also be provided with a copy of the draft credit agreement free of charge.
2.3.4. Information requirement upon credit refusal
If, upon the creditworthiness assessment, a credit application is rejected, the Provider of Credit and/or the Credit Intermediary must inform the Undertaking about the principal elements that support the refusal to grant or mediate credit. Undertakings could also require a written document that outlines why the Undertaking was refused credit.12 The Code of Conduct includes further guidance on the information to be provided to the Undertaking in the event of credit refusal.
Note that the Act explicitly provides that a positive creditworthiness assessment by a Provider of Credit or Credit Intermediary does not imply a “right to credit”.
2.4. Obligation to provide advice
Providers of Credit and/or Credit Intermediaries are required to choose, amongst the types of credit agreements they usually offer or mediate, the type of credit agreement that is most appropriate for the Undertaking, taking into account the Undertaking’s financial situation and the purpose of the credit agreement.13
In case a Provider of Credit violates the obligation to provide advice as to suitability, courts could –without charge – require the Provider of Credit to change the existing credit to a type of credit that is more appropriate for the Undertaking, taking into account the Undertaking’s financial situation and the purpose of the credit at the time the credit was originally granted.
2.5. Early repayment
Undertakings have the right at any time to fully or partially prepay the amount of principal outstanding under a Credit Agreement.
Undertakings have to inform the Provider of Credit at least ten days in advance by registered mail of their intention to discharge fully or partially their obligations under a Credit Agreement.14
In response to SME-sector complaints on the funding loss compensation to be paid by borrowers in case of early repayments, the Act restricts the prepayment penalties with regard to credits that do not qualify as a “loan” (in which case art. 1907bis of the Civil Code applies). As is the case under art. 1907bis of the Civil Code, prepayment and related fees may not exceed six months of interest over the prepaid amount, calculated at the rate of interest accruing on the principal amount.15
Under the Act, Providers of Credit and Undertakings remain however free to determine contractually the prepayment penalty in the event that the original credit exceeds € 1,000,000.
Important: no compensation may be charged if (1) the early repayment occurs with the proceeds of an insurance that covers the repayment of the credit, (2) in case Credit Agreements are centralized by one and the same Provider of Credit, or (3) a non-material changes to the Credit Agreement.16
The novel provisions with regard to prepayment only apply to Credit Agreements concluded as from the Act’s entry into force (10 January 2014).
2.6. Prohibited contractual terms
In order to enhance contractual fairness, the Act finally defines three types of prohibited contractual terms. These terms are null and void.17
3. Entry into force
The Act has partly entered into force on 10 January 2014 and is applicable to all Credit Agreements that are concluded as from that date. Some provisions (articles 5, 6, 7, 8 and 11 relating to a.o. the information duty) will enter into force by royal decree, or at the latest on 1 March 2014. The limitations as to repayment penalties and the new rules described in sections 2.1, 2.5 and 2.6 entered into force on 10 January 2014.
The texts of the Act can be found here
4. Establishment of EASME
For the sake of completeness, we note here that at the European level, an Executive Agency for Small and Medium-sized Enterprises was established as per 1 January 2014 (Commission Implementing Decision 2013/771/EU). The Agency (“EASME”) is entrusted with implementation of, amongst others, the COSME-programme (for competitiveness of enterprises and SME). One of the pillars of COSME is “better access to finance for SMEs”. Please refer to the relevant European Commission websites for more information on the COSME programme and/or EASME.
________________________________________
Footnotes
1. Art. 3 of the Act.
2. Art. 2, 4° of the Act.
3. Art. 2, 2° of the Act.
4. Art. 2, 1° of the Act.
5. Art. 2, 3° of the Act.
6. See Official Memorandum page 8.
7. See in this regard art. 15 of the Act. Provider of Credits and Credit Intermediaries are required to take suitable organizational measures to comply with the Act’s provisions.
8. Art. 4 of the Act.
9. See in this regard art. 10 of the Act.
10. See Official Memorandum page 11.
11. Art. 7, §2 of the Act.
12. Art. 8 of the Act.
13. Art. 6 of the Act.
14. Art. 9 §1 of the Act.
15. Art. 9 §2 of the Act.
16. Art. 9 §3 of the Act.
17. Art. 13 of the Act.
