Guarantees and securities – banking law in Belgium

5. Guarantees and securities

5.1 Assets and Forms of Security

What are the assets typically available as collateral to lenders and what form does the security typically take? Provide an overview of the applicable formalities and perfection requirements and the consequences of not completing those requirements, together with an indication of the timing and costs involved.

– Receivables

Receivables can be pledged for the benefit of the pledgee. A pledge over receivables is effected by private agreement. Under Belgian law, a pledge over receivables is valid between parties and enforceable against third parties (other than the debtor of the receivables) as from the date of its conclusion. However, in order to be valid against the debtors of the receivables the debtors must be notified of the pledge, by lack whereof a payment to the pledger is valid and the debtor cannot be held liable to make a second payment to the pledgee.

– Bank accounts

For a pledge over bank accounts, the same principles as set out above apply. An acknowledgement by the bank holding the pledged accounts is required in order to protect the pledgee against risks arising out of rights afforded to the bank pursuant to its general conditions or otherwise (a bank usually benefits from a right of pledge over the accounts held by its clients, which must be waived in favour of the pledgee).

– Shares

A pledge over the shares is also effected by private agreement. A pledge over registered shares should be recorded in the share register of the pledgor in order to be enforceable towards third parties. Pledged dematerialised shares should be booked on a separate special financial account.

– IP Rights

Rights over intellectual property can be pledged taking into account the formalities prescribed by the relevant law governing the specific type of intellectual property.

– Pledge over movable assets

Tangible and intangible movable assets, including inventory, can be pledged by way of a « register pledge ». This security will be valid between the parties from the date it is concluded by a private agreement but, in order to be enforceable against third parties, the pledge must be registered in the National Pledge Register. This registration will be valid for a renewable period of 10 years.

A pledge over tangible moveable can also be concluded by way « possessory pledge ». This pledge will be enforceable towards third parties simply by the pledgee taking possession of the relevant assets.

– Real estate

Mortgage

Security over immovable assets can only be done by way of a notarial mortgage deed. The mortgage will need to be registered by the notary in the Mortgage Registry in order to be enforceable towards third parties. This registration will be valid for 30 years.

The notary will need to notify the tax authorities, who then have 12 business days to respond to such notification, and will need to carry out lien searches by requesting official documentation from the competent local authority (depending on where the asset is located). Without these documents, the notary will not be able to execute the mortgage deed. Obtaining these documents usually takes up to three to four weeks. The granting of a mortgage entails a significant cost (taxes, registration fees, notary fees etc.) of approximately 1,6% of the secured amount, with the biggest cost related to the registration of the mortgage in the Mortgage Registry. To lower this cost, it is a common practice in Belgium to split the mortgage into (i) a mandate and (ii) an effective mortgage. By doing so, the  lenders only hold effective security for a portion of the secured obligations, and a mandate for the remainder.

Mortgage mandate

In order to reduce the costs related to the granting of a mortgage, parties may agree to (also) conclude a mortgage mandate. The mortgage mandate will be executed in front of a notary public.

The mortgage mandate does not provide for an actual security right on the assets but only gives the right to establish a mortgage at a later point in time. It is only at the moment of the conversion of the mortgage mandate into an actual mortgage, that the mortgage will be registered in the Mortgage Registry, that the accompanied fees and costs will be due and the security will obtain ranking.

5.2 Floating Charges or Other Universal or Similar Security Interests

Does the law of your jurisdiction permit a floating charge or other universal or similar security interest over all present and future assets of a company?

A pledge on the business of a company can be granted by way of a registered pledge (see above). The pledgor shall be allowed to trade the pledged assets in the ordinary course of its business, unless otherwise agreed between the parties in the pledge agreement. This pledge will need to be registered in the National Pledge Registry.

5.3 Downstream, Upstream and Cross-stream Guarantees

Is it possible for entities in your jurisdiction to give downstream, upstream and cross-stream guarantees? Are there any associated limitations and restrictions and, if so, how are the issues of adequate credit support typically resolved?

The main issues involved in a company granting any downstream, upstream or cross-stream guarantee/security in respect of any obligation of a company belonging to the same group concern the existence of a valid and direct corporate benefit for that subsidiary. Under Belgian law there is no legal concept of group interest and only showing that the security would be in the interest of the group is not sufficient.

As the corporate benefit can be shown by the company receiving an indirect financial or commercial benefit  from the granting of the security, granting a guarantee for a facility being made available to a parent, sister or subsidiary company will generally satisfy the corporate benefit test. Corporate benefit justifications may be that the guarantor is able to benefit from lower interest rates or better conditions or that the parent company will provide inter-company loans to the subsidiary. To further support the premise that the granting of security is in the company’s interest, it is general practice in Belgium to include guarantee limitations. Such guarantee limitations may include any or a combination of the following:

  • to an absolute figure to be determined by the directors
  • to one or more tranches of the facility (for instance the tranches that are available to the guarantor (whether as direct borrower or as beneficiary of an on-loan))
  • to a percentage of the net assets of the guarantor
  • to amounts borrowed by the guarantor, directly or indirectly through intercompany loans.

The granting of an intra-group guarantee/security must also fall within the corporate purpose of that company. The corporate purpose of a Belgian company is set out in its articles of association and Belgian companies can only act within the boundaries of this corporate purpose. Transactions entered into by a Belgian company which are deemed not to fall within its corporate purpose can be nullified and result in liability for the directors.

5.4 Restrictions on Target

In the context of a target being acquired, is the target restricted from granting guarantees or security or financial assistance for the acquisition of its own shares and, if so, can this be permitted following the adoption of a particular procedure?

A Belgian company is only allowed to advance funds, grant loans or provide security with a view to the acquisition of its own shares, or with a view to the acquisition or subscription by others of certificates relating to the shares, if that company complies with a specific procedure including several stringent conditions.

Given the cumbersome nature of these conditions, it is not common that companies choose to comply with the procedure as they will usually structure a transaction avoiding financial assistance. This involves providing for guarantee limitations to avoid that the target would be guaranteeing the debt raised to finance its own acquisition.

5.5 Other Restrictions

Outline any other restrictions in connection with, or significant costs associated with, or consents required to approve (e.g. works council, or similar) the grant of security or guarantees.

Financing transactions do not involve, as such, the consultation of the works council.

5.6 Release of Typical Forms of Security

How are the typical forms of security released?

The release of security is usually effected by the pledgee unconditionally and irrevocably releasing the security in a release letter or release agreement. However, the parties can determine specific conditions to the release in the relevant security documents.

Certain types of security require additional perfection actions:

  • Share pledge – The existing share pledge should be deregistered from the share register
  • Register pledge – The pledge over the movable assets (or the business) should be deregistered from the National Pledge Registry
  • Mortgage – A notary public must be instructed to deregister the mortgage from the Mortgage Registry

5.7 Rules Governing the Priority of Competing Security Interests

What are the rules governing the priority of competing security interests in your jurisdiction. What methods of subordination are used in your jurisdiction and can the priority be contractually varied? Will contractual subordination provisions survive the insolvency of a borrower incorporated in your jurisdiction?

The priority of a competing security interests will depend on the moment that the validly created security has been made enforceable towards third parties. Once the borrower goes into bankruptcy, the mortgagees or creditors will be paid off according to their rank and the timing of the registration of their respective secured interests.

In case several pledges are established over the same shares, the pledge that was registered first in the share register will have the highest rank. In case of a pledge over the same receivables, the pledge that was notified to the debtor first, will be first ranking. In the event that several mortgages are granted over the same property, the ranking of the mortgages will depend upon the time of their registration in the Mortgage Registry. However, all mortgage securities registered on the same day are creditors of equal rank and will be paid off pro rata.

Although there are no specific provisions under Belgian law in relation to contractual subordination, it is a common practice in Belgium to work with subordination or intercreditor agreements. The specific content of such agreement will be determined by the relevant parties, taking into account the particular transaction.

Unsecured and unsubordinated payment obligations (so other than those preferred by law and to the extent not otherwise provided in an subordination or intercreditor agreement) will rank pari passu.

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