A new legal framework has recently been created for credit facilities granted to SMEs. The goal is to ensure a better balance and greater transparency between the lender and the borrower and to promote access to credit. More details are set out in a code of conduct drawn up by Unizo, UCM and Febelfin, which has obtained binding force through a royal decree.
SMEs find it difficult to access (bank) financing. The act of 21 December 2013 on financing for small and medium-sized enterprises, published in the Official Gazette on 31 December 2013 (the "Act"), attempts to deal with this by introducing a number of practical measures to protect SMEs.
The representative organisations were asked to determine the practical terms and procedures of the Act in more detail in a code of conduct. Unizo, UCM and Febelfin lost no time in doing so, and signed the code of conduct (the "Code of Conduct") on 16 January 2014. The Code of Conduct obtained binding force through a Royal Decree dated 27 February 2014 (Official Gazette 4 March 2014, second edition).
Scope of application
The Act applies to credit agreements entered into between a professional lender and a company, e.g. for a loan, a credit facility or a cash credit. Intra-group loans, factoring or leasing activities, consumer credit and mortgage loans are not covered.
Only lenders granting credit facilities within the context of their "usual" activities fall within the scope of the Act. These are primarily banks. However, other "usual" credit providers may also fall under the Act. These include, for instance, private equity players. Consequently, a single credit facility (granted, for example, in the context of a subordinated shareholder's loan or a vendor loan) will remain outside the scope of the Act. A stipulation in the articles of association that the company's purpose includes the granting of credit facilities is therefore not sufficient.
Only credit granted to small and medium-sized enterprises ("SMEs") is covered by the Act. This refers to both companies and professional practitioners. The SME must fall within the criteria of article 15, §1 of the Companies Code at the time of the credit request. This means that for the last and second-last financial year, the company may not have exceeded more than one of the following criteria:
- average annual workforce: 50;
- annual turnover, excluding VAT: EUR 7,300,000; and
- balance sheet total: EUR 3,650,000.
If the average annual workforce exceeds 100, the company is not an SME and falls outside the scope of the Act.
For the sake of completeness: credit mediators also fall within the scope of the Act.
The Act imposes certain obligations on both the lender and (to a lesser extent) the SME.
Duty of care
Both the lender and the SME must act with care, in good faith and equitably. This obligation relates to both the pre-contractual phase and the contractual phase.
Information duty
Duty to request – The lender must ask for the relevant information necessary to assess the feasibility of the intended project, the financial situation, the repayment possibilities and the current financial obligations of the SME. The information must be asked for when the credit application is made and, at all events, before the credit offer. The same information must be requested in cases where a personal guarantee is granted.
The Code of Conduct specifies the minimum information to be requested, including:
• a description of the activity,
• current (interim and detailed) financial results and the financial plan,
• the purpose of the credit,
• existing information on the credit relationship between the company and the lender,
• existing personal and collateral securities and assets available for security,
• any outstanding financing at company and group level,
• any negative pledges and other commitments that may influence the credit relationship.
Suitability obligation – The lender must always seek the type of credit that is best suited to the needs of the SME. In the event that the lender fails to do so, a judge can order conversion into a more suitable type of credit, without the SME incurring any costs relating thereto.
Documentation obligation – The following information must be supplied to enable the SME to assess the proposed credit:
- At the time of the credit application, the SME must receive a suitable written explanation, setting out, among other things, the main characteristics of the proposed credit. The content and form are further defined in the Code of Conduct.
- The SME is entitled to receive a copy of the draft credit agreement free of charge and upon first request, together with a succinct information document, the contents of which are laid down in the Code of Conduct.
Refusal of credit
The main reasons for refusal must be communicated to the SME. The Code of Conduct determines the content of such reasons, including (depending on the circumstances):
- inadequate information and documentation relating to the company's financial situation, the project, the prospects of success and the company's repayment capacity;
- negative information from the Credit Register for Businesses or a supplier of trade information;
- lack of available (personal or collateral) security, absence of an own contribution to the project, and/or insufficient equity;
- payment arrears;
- the policy and management of the company;
- the intended purpose of the credit is not in line with the policy of the lender.
This enables the SME to amend its credit file or seek another financial partner. The Code of Conduct further specifies that an oral explanation is sufficient. Upon request by the SME no later than six months after the credit application, a written explanation must be given.
Early repayment
The SME is allowed to prepay the credit in whole or in part at any time upon sending notice by registered letter to the lender at least 10 working days before the early repayment. Only break costs (see below) may be charged and the lender may not impose any additional conditions. Additional compensation clauses are automatically null and void.
Break costs
Credit agreements frequently include a clause relating to funding loss ("weder-beleggingsvergoeding"/"indemnité de remploi").
For loans on interest, article 1907bis of the Civil Code applies and remains in full force.
For other loans and credit facilities, the Act restricts the amount of the break costs. The following distinction is made, depending on the credit amount:
- For credit facilities up to a maximum of EUR 1 million, the same restrictions apply as for loans with interest. Break costs are limited to a maximum of six months' interest, calculated on the amount of the prepaid amount and the stipulated interest rate.
- For credit facilities exceeding EUR 1 million, the break costs are to be determined contractually between the lender and the SME, on the basis of the transparent calculation terms of the Code of Conduct.
Funding loss clauses which are not in line with these provisions are set aside. In that case, a judge will reduce the break costs to the statutory maximum amount of six months' interest or, for credit facilities exceeding EUR 1 million, will determine the break costs on an ex aequo et bono basis.
Abusive clauses
The Act prohibits abusive clauses which lead to an imbalance between the lender and the SME. For instance, if the SME fulfils its obligations, unilateral termination by the lender is only possible subject to compensation or a notice period. Such abusive clauses are null and void.
Supervision by the FSMA
The supervision of the Act will be assumed by the FSMA, which has a number of powers (to impose sanctions) in this respect. Lenders must establish a suitable policy and make the necessary organisational and administrative arrangements to ensure compliance with the Act.
Transitional provisions and entry into force
The Act applies to credit agreements concluded as of its entry into force. Existing credit agreements are not affected.
Most provisions of the Act entered into force 10 days after its publication in the Official Gazette; as at the publication date of this contribution, all articles of the Act are in force.
The Royal Decree of 27 February 2014 made the Code of Conduct binding, and the Code entered into force on 1 March 2014.