Through its decision of 27 November 2008, the Belgian Constitutional Court declared netting arrangements in insolvency proceedings, which are explicitly allowed under the Belgian Financial Collateral Law of 15 December 2004, unconstitutional where such netting arrangements apply to non-merchants. Despite the numerous criticisms about this decision, the amended Belgian Financial Collateral Law, entered into force on 10 November 2011, now explicitly excludes non-merchants from its scope. However, even in the case of non-merchants, financial institutions can still claim netting by operation of (the more strict conditions of) the Belgian Civil Code.
The Belgian law of 15 December 2004 on financial collateral arrangements, and several tax provisions in relation to security collateral arrangements and loans of financial instruments (the so-called “Financial Collateral Law”), revolutionized the law as it validated, among other things, general netting and close-out agreements or clauses.
Netting and close-out clauses are often (if not always) contained in agreements between financial institutions and customers and allow them to terminate the agreement(s) upon the occurrence of an event of default of the counterparty (e.g. a bankruptcy or another insolvency proceeding) whereby the parties will set off all their mutual claims arising from the termination of the agreement(s).
Until recently, such clauses were, pursuant to articles 14 and 15 of the Belgian Financial Collateral Law, enforceable against third parties, notwithstanding the opening of a bankruptcy or any other insolvency procedure and regardless of whether the contractual parties were companies or individuals or whether they were commercial or non-commercial parties, as long as the following conditions were met: (i) the clause had been entered into prior to the opening of an insolvency proceeding and (ii) the mutual claims to be netted existed at the moment of the opening of the insolvency proceeding (which included claims that only became due as a result of the insolvency proceeding).
Moreover, pursuant to article 16 of the Belgian Financial Collateral Law, a bankruptcy receiver or a creditor could only question the validity of a netting arrangement undertaken by the bankrupt entity during the so-called “suspect period” of a maximum six months prior to the date of bankruptcy if such a netting agreement was entered into without any consideration or for a consideration which was clearly below market value or if such agreement was concluded fraudulently. As regards an entity in judicial reorganization, the law of 31 January 2009 on the continuity of enterprises even explicitly provides that netting arrangements are enforceable.
The Belgian Constitutional Court, however, ruled on 27 November 2008 that the provisions of the Financial Collateral Law regarding the enforceability of netting agreements are unconstitutional if one of the contractual parties is an individual who is not a merchant within the meaning of article 1 of the Belgian Commercial Code. This decision is based on the questionable rationale that the Financial Collateral Law is inspired by the idea of economic growth and financial stability and therefore only applicable to companies and wealthy individuals. The Court argued that, given the intended purpose of enhancing economic growth and stability in the financial sector, the provisions of the Financial Collateral Law allowing credit institutions to enforce netting agreements in insolvency proceedings are not pertinent to the extent that they also apply to debtors who are private individuals and who are forced to file a petition for a collective debt arrangement. Despite widespread criticism about this judgment, the law of 26 September 2011, entered into force on 10 November 2011, adapted the Belgian Financial Collateral Law to this ruling of the Constitutional Court. Indeed, its articles 14 and 15 now explicitly exclude non-commercial parties from netting agreements.
In practical terms, this means that financial institutions cannot invoke contractual netting against a non-merchant individual. As a result, the Belgian Financial Collateral Law has lost much of its strength as a ground for enforcing netting agreements. However, the second part of article 14 § 2 and article 15 §3 of the Belgian Financial Collateral Law contain an exception in relation to ex-merchants, provided that at least one of the claims arose when he or she was still a merchant, in which case netting agreements remain enforceable.
Does the above mean that financial institutions are, under Belgian law, unable to apply any set-off of debts and receivables relating to their clients in case of insolvency proceedings? No, Belgian law still foresees in the possibility of netting by operation of law in accordance with articles 1289 et seq. of the Belgian Civil Code. Pursuant to these provisions, a legal right of set-off occurs, even if the parties are not aware of the circumstances giving rise to the right of set-off, if, in relation to two debts, the reciprocal claims are established, liquid and mature. In cases of insolvency, netting is allowed if the aforementioned conditions are met and if the claims to be netted arise out of the same agreement or out of different agreements which are closely connected with each other. Even if the appreciation of this “close connection” depends on a factual appraisal by the competent court and is, therefore, uncertain, contractually agreed “connectivity” between claims should constitute valid evidence of such “close connection”.