The Act on the financing of SMEs has recently been evaluated and amended. The Amending Act partially reflects the concerns raised in Belgian banking practice, by clarifying the scope of application and by resolving certain points of contention that came up in the evaluation.
Since the Act of 21 December 2013 on the financing of small and medium-sized enterprises (the "SME Financing Act"), the financing of SMEs has been subject to a separate legal framework (for an overview of the highlights of the SME Financing Act, see Eubelius Spotlights March 2014). Under the SME Financing Act (also called the "Laruelle Act"), SMEs have enjoyed a more rigorous protection regime when entering into credit agreements, with the ultimate goal of increasing transparency in the credit market and facilitating the access to credit.
Evaluation and amendment
Two years after the introduction of the SME Financing Act, the act was thoroughly evaluated. The findings of the evaluation were summarised in an evaluation report dated February 2017. The report identified a number of points of contention, which the legislator has tried to resolve in the amending Act of 21 December 2017 (the "Amending Act").
What is an SME?
Since the SME Financing Act of 2013, the legal framework on companies and SMEs has evolved. Changes have included, among others, the increase of the threshold values for identifying a company as an SME (see Eubelius Spotlights March 2016) and the bringing together of different laws in the Economic Law Code. An SME is an enterprise – including members of independent professions – that exceeds one of the following criteria:
- average number of employees: 50;
- annual turnover (excluding VAT): EUR 9,000,000; and
- balance sheet total: EUR 4,500,000.
Under the Amending Act, these criteria will be applied on a consolidated basis and the SME Financing Act will not apply if, in the case of multiple borrowers, one of the borrowers is not considered an SME – which is of importance in connection with group financing. Furthermore, the turnover of new companies (such as SPVs or project companies) in their first financial year can be estimated in good faith. These amendments resolve important concerns raised in Belgian banking practice.
The SME Financing Act caps prepayment penalties. These are penalties for the funding loss which the lender suffers as a result of early repayment of a credit, and they will henceforth be capped at a maximum of six months of interest. This cap was originally only applicable for credits up to EUR 1 million, but the Amending Act has increased the figure to EUR 2 million.
Prepayment penalties for credits exceeding EUR 2 million will have to be calculated in accordance with the formula as set out in the "code of conduct" established by the representatives of the employers' organisations and the credit sector. The Amending Act states that the above-mentioned amount will constitute a maximum amount from now on. A lower prepayment penalty can be determined by a court ex aequo et bono.
Security interests and guarantees
From now on, borrowers can request partial or full release of the security interests and guarantees as soon as the credit has been (partially) repaid. The evaluation indicated that this was a point of contention among many companies: pledged assets cannot be re-pledged with the same priority to secure other credit agreements, which ultimately affects the financing capacity of companies. The lender can refuse to allow the release, but will be required to justify this refusal (e.g. by stating that the solvency of the company has been substantially affected in the meantime).
When the lender requests security interests or guarantees to secure the credit, the most important features of the security interest or guarantee and their impact on the credit request must be explained in a transparent manner and in language which is understandable for the company.
New unfair contract term
The Amending Act introduces a new unfair contract term: contract clauses that give the lender the right to unilaterally change the interest, costs, provisions or any other fees or remuneration are unfair from now on and are thus considered null and void, unless such right is based upon objective and specific criteria that are explicitly mentioned in the credit agreement and made subject to a reasonable notice period.
Information and transparency obligations
As a rule of conduct, the lender is required to find the type of credit that best fits (the financial situation of) the borrower. The information obligation that was previously linked to this rule of conduct was open to interpretation. The SME Financing Act now clarifies that lenders are required to provide the company with a written explanatory note on the different types of credit, possibly adapted to the needs of the company. Thus, it is not sufficient to provide this information on only one type of credit, or to provide information that is not relevant to the company.
The lender is also required to automatically deliver the draft credit agreement at the time of the financing offer and no longer upon the request of the borrower. At the same time, an additional information document must be provide to the company, in accordance with the code of conduct.
Credits under EUR 25,000 will be exempted from these information obligations, as long as there is no prepayment penalty clause included and the credit is not secured by security interests and/or guarantees.
The new provisions of the SME Financing Act apply to all credit agreements entered into on or after the date of entry into force of the Amending Act, which was 1 March 2018 for the information obligations and 8 January 2018 for all the other provisions.