Funding Loss in Belgium: The State of the Case Law

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Within the Belgian courts, a large share of seriously contested credit disputes still turns on funding loss and the early repayment of fixed-term credit and loans concluded between a bank and a business before the Act of 21 December 2013 on SME financing entered into force.

The issue

The question is whether a business may repay a credit early, and what break indemnity (funding loss) the bank may claim if it accepts that early repayment. The bank invokes the loss caused by the failure to observe the agreed term: it remains bound to repay, on the interbank market, the funds it borrowed to make available to the borrower. In a falling-rate environment, reinvesting the repaid funds never fully offsets that loss. Funding loss is the difference between the lost margin and the reinvestment. The borrower, for its part, considers the indemnity unfair and, in a low-rate environment, too high, often hoping to refinance elsewhere on better terms.

The stake: capping the indemnity at six months’ interest

The major stake before the courts is, for borrowers, to persuade the judge that an investment-credit agreement should in fact be recharacterised as an interest-bearing loan. If they succeed, they may repay early despite the agreed term and, above all, benefit from the cap on the funding loss / reinvestment indemnity at six months’ interest under Article 1907bis of the (old) Civil Code, which applies only to loans. On 14 March 2019, the Court of Cassation held that, for an interest-bearing loan, the indemnity claimed by the bank, whether called “reinvestment indemnity”, “funding loss” or “break indemnity”, may not exceed the six months’ interest set by Article 1907bis, even where the loan agreement excludes early repayment.

Loan versus credit: the key distinctions

A loan is a real contract, formed by the actual delivery of the funds; it is unilateral, creating obligations only for the borrower; it is a “named” contract regulated by statute; and interest runs from the delivery of the funds, on the whole amount lent, with scheduled repayments in principle beginning at once.

A credit facility is a consensual contract, formed by the mere exchange of consents without any delivery of funds; it is synallagmatic (the bank makes funds available, the borrower uses and repays them); it is an “unnamed” contract, freely negotiable; it typically provides for a reservation commission on undrawn amounts; drawdowns are at the borrower’s discretion; and interest runs only on the amounts actually drawn, with repayments beginning at the end of the drawdown period. We now prefer to speak of a “right to draw” rather than a “freedom to draw”, since that right is always shaped by the parties; but it is the existence of that right that characterises a credit facility.

How to obtain recharacterisation

Under the Court of Cassation’s settled approach, recharacterising an unnamed contract as a named one is admitted only where the agreement or its performance reveals elements radically incompatible with the characterisation chosen by the parties, and provided all the essential features of the named contract (here, the interest-bearing loan) are present. In practice the borrower must, first, show elements radically incompatible with the credit-facility characterisation and, second, show that all the features of an interest-bearing loan are met. Failing that, the claim fails.

The case law: a contrasted picture

The 2019 case law we reviewed is divided along regional lines. It must now be read in light of the two Cassation judgments of 27 April and 18 June 2020, and two further judgments in 2021 and 2022.

Courts refusing recharacterisation (Brussels, Ghent, and the Cassation line)

The Brussels enterprise courts (both language divisions) consistently refused to recharacterise investment credits used to acquire property and finance works. Their reasoning: framing the borrower’s right to draw (drawdown periods, supporting documents, stated purpose, non-drawing indemnity, reservation commission) does not make the contract a loan. Requiring proof of the funds’ destination flows from the banker’s own duty of care and is not a feature of a loan. The Antwerp Court of Appeal, upheld by Cassation on 27 April 2020, confirmed that neither a non-drawing indemnity clause, nor a clause subjecting each drawdown to the bank’s prior approval, nor a fixed amortisation schedule (adjusted where the borrower does not draw the full amount) excludes the credit-facility characterisation.

Courts granting recharacterisation (Liège)

The Liège Court of Appeal took a markedly different line in 2019, recharacterising investment credits as loans where the funds were, in its view, effectively bound to a single purpose drawn in one go, treating the drawdown period as “purely theoretical”. This reasoning is debatable: it tends to reduce the definition of a credit facility to the cash-credit variety and understates the real economic loss the bank suffers on early repayment. The Liège position is not immutable; a differently composed chamber had, on 9 March 2018, refused recharacterisation on similar facts, holding that drawing in one go is not a decisive criterion.

Hybrid decisions (Antwerp, Brussels)

Some courts split a single agreement: the Antwerp enterprise court treated a first tranche used to acquire a real right, drawable only on the deed date, as a loan, while confirming the bank’s right to a reinvestment indemnity on the other tranches. The Antwerp Court of Appeal, defining the freedom to draw as the borrower’s freedom to choose the amount, the timing and the purpose of each drawdown within the contractual limits, recharacterised as a loan a credit whose sole object was a single, near-immediate property acquisition, holding that the freedom to draw disappears where the clauses said to support it are, in concreto, fictitious. It nonetheless acknowledged both the disruption of the parties’ balance caused by early repayment and the real loss suffered by the bank, while holding that Article 1907bis applies imperatively to an interest-bearing loan.

Takeaway

The outcome turns on a factual, contract-by-contract analysis of whether the borrower truly held a right to draw or whether that right was fictitious. A single-purpose credit drawn in one go, over a very short window, tightly bound to one acquisition, is the most exposed to recharacterisation and to the six-month cap. Conversely, a genuine drawdown period, staged drawings, a reservation commission and interest computed only on amounts drawn point firmly to a credit facility, where the full funding loss remains due.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.