Small and medium-sized enterprises (SMEs) have gained 'consumer-like protection' pursuant to the Act of 21 December 2013 on the financing of SMEs (hereinafter the "Act"), published in the Belgian State Gazette on 31 December 2013. The goal of the Act is to improve access to credit for SMEs.
Scope of application
The Act applies to credit agreements entered into between an SME[1] and a credit provider or credit intermediary. The scope of the Act is broader than may appear at first glance. The term credit provider, for example, covers not only financial institutions but also any natural or legal person or group of such persons granting credit in the course of its business or profession, unless the credit agreement is immediately transferred to a licensed creditor indicated in the credit agreement.
The Act does not cover (i) mortgage credit, (ii) consumer credit, (iii) deferred payments of invoices, (iv) factoring, (v) leasing, and (vi) intra-group financing.
This means that any private equity investor that participates as a non-controlling shareholder in the share capital of an SME and in the framework there of provides credit to the company in which case there is no 'group' and therefore no intra-group financing, can be considered a credit provider under the Act. In addition, so-called business angels, i.e. wealthy individuals willing to provide capital to start-ups in exchange for convertible debt or a partial ownership interest, can fall within the scope of the Act, provided the credit is granted in the course of their business or profession.
Although consumer credit agreements are expressly excluded from the scope of the Act, the influence of the Consumer Credit Act of 12 June 1991is undeniable. The Act provides for six duties or obligations for credit providers and intermediaries, These obligations can be grouped into three broad categories.
Gathering and provision of information
Credit providers and intermediaries are required to obtain certain know-your-customer information regarding the financial situation of the enterprise and its ability to repay the credit. The Act provides that the specificities of this and other obligations shall be worked out in a code of conduct to be agreed by representatives of credit providers and enterprises. On 16 January 2014, such a code of conduct was agreed by Febelfin, Unizo and UCM (hereinafter the Code of Conduct).[2] The Code of Conduct states that an exhaustive list of information to be gathered is not desirable. The Code merely refers to the "goed kredietdossier"[3] , contains a list of minimum information to be gathered with regard to the enterprise and any personal guarantor, and states that the enterprise itself has to provide any other to be considered relevant information to the credit provider.
Once the credit provider or intermediary has gathered all necessary information, it must explain in writing the relevant types of credit agreements available and the characteristics thereof in order to allow the enterprise to quickly compare its options. The Code of Conduct states that this explanation will of course be general in nature and that credit providers and intermediaries can use a standard document with certain minimum information, listed in the Code of Conduct.
The credit provider or intermediary must also assess which type of credit is best suited to the enterprise, taking into account its financial situation and the purpose of the credit. If an offer is made, a draft credit agreement must be provided free of charge, together with a brief information document providing an executive summary of the draft credit agreement, the contents of which, according to the Code of Conduct, must allow the enterprise to compare credit providers and/or intermediaries. If the credit agreement is not suited to the enterprise, it can ask the court to change the existing credit agreement into a more appropriate type. This will not be considered a novation, and all existing collateral and guarantees remain the same.
If the credit application is refused, the credit provider or intermediary must inform the enterprise of the main grounds for refusal. This explanation can be provided orally, but the enterprise should also be provided with a written explanation upon request, provided the request is made within 6 months from the refusal. The Code of Conduct contains a non-exhaustive list of possible grounds for refusal. Both the Act and the Code of Conduct expressly state that this does not create an 'obligation to contract', the sole objective of this requirement is to create transparency in the event of refusal.
Easier early repayment
One of the major complaints of SMEs was the lack of transparency of early repayment clauses in credit agreements. The Act now explicitly states that SMEs have the right to fully or partially repay a credit at any time, provided they inform the credit provider at least ten business days in advance by registered mail. This right of early repayment may not be made subject to any requirements other than compensation (of the credit provider) for the funding loss.
In this regard, a distinction must be made between credit agreements which constitute a "loan'" within the meaning of Article 1907bis of the Civil Code , in which case the compensation is capped at six months' interest on the prepaid amount, calculated at the interest rate provided for in the credit agreement, and other types of credit agreements. For other credit agreements, the Act distinguishes between (i) credit agreements for amounts below EUR 1,000,000, in which case the same cap provided for in Article 1907bis of the Civil Code applies, and (ii) credit agreements for amounts exceeding EUR 1,000,000, in which case the parties are free to negotiate the amount of funding loss compensation, provided they respect the guidelines set out in the Code of Conduct, which provides for a standard, transparent scheme from which derogation is possible, provided any such derogation is clearly communicated to the enterprise in the credit agreement.
No compensation is due in the event of (i) early repayment pursuant to an insurance policy covering repayment of the credit, (ii) the regrouping of existing credits from the same credit provider, or (iii) a non-material change to the credit agreement.
If more compensation is charged than is permissible under the Act, the court will reduce the amount of compensation to the maximum provided for by the Act or, for credit agreements exceeding EUR 1,000,000, to an amount determined ex aequo et bono taking into account the guidelines set out in the Code of Conduct. Any clause providing for additional damages, on top of the abovementioned compensation for funding loss shall be considered null and void by virtue of law.
Blacklisted clauses
The Act mentions three blacklisted clauses. Such clauses shall be considered null and void by virtue of law. The blacklisted clauses are those which:
- provide for an irrevocable commitment by the enterprise, while the obligations of the credit provider are subject to a condition depending exclusively on its own will;
- allow the credit provider to terminate a fixed-term agreement prematurely, at its sole discretion and without the payment of reasonable compensation to the enterprise, apart from cases of force majeure or an event of default by the enterprise; and
- allow the credit provider to terminate an open-ended agreement, without reasonable notice, apart from cases of force majeure or an event of default by the enterprise.
Entry into force
The Act partially entered into force on 10 January 2014 and applies to all credit agreements entered into as from that date. In accordance with the Royal Decree of 27 February 2014, the obligations pertaining to the gathering and provision of information and the clarifications thereof in the Code of Conduct are applicable as from 1March 2014.
Conclusion
The Act and the Code of Conduct introduce 'consumer-like protection' for SMEs. Since the start of the worldwide financial and economic crisis, such enterprises have been struggling to access credit and have been increasingly turning to private equity investors and other entities or individuals for solutions to their financing problems. The importance of the Act should not be underestimated, especially considering its broad scope of application and the fact that Belgium has traditionally been an SME-country.
[1] SMEs are natural or legal persons pursuing an economic goal or a liberal profession that exceed no more than one of the following thresholds:
- fewer than 50 personnel on average during the financial year;
- annual turnover of less than EUR 7,300,000 (excluding VAT);
- balance sheet total of less than EUR 3,650,000.
Enterprises that employ more than 100 people on average during the financial year are automatically excluded.
[2] See http://www.financieringvanondernemingen.be/sites/default/files/140116%20-%20KMO-gedragscode%20-%20Nl.pdf
[3] See http://www.financieringvanondernemingen.be/kredietaanvraag/goed%20kredietdossier.
