Belgium: Private Equity Investors And Business Angels Face 'Consumer-Like Protection' For SMEs

Last Updated: 17 March 2014
Article by Elke Janssens and Christophe Verstappen

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 SME1 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.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions