In a recent and awaited judgment dated 8 August 2013, the Belgian Constitutional Court has likely ended the long-standing controversy regarding the differentiated treatment of funding loss applicable to interest-bearing loans (“prêt à intérêt”/“lening op interest”) and credit facilities (“ouverture de crédit”/“kredietopening”).

The Court was called upon by the Brussels Court of Appeal through the prejudicial question mechanism and was asked to rule on whether article 1907bis of the Belgian Civil Code violates articles 10 and 11 of the Constitution by creating an unjustifiable difference of treatment of funding losses between interest-bearing loans and credit facilities.

Indeed, article 1907bis provides that, in case of early repayment of an interest-bearing loan, the borrower cannot be requested to pay to the lender compensation (funding loss) in excess of six months’ interest on the repaid amount. In some situations, borrowers under credit facilities are imposed funding losses in excess of such a limit. The question that arose was whether both types of agreements should therefore be treated in the same way regarding funding losses. The legal limit can obviously cause lenders to incur unrecoverable funding losses and hence cause the lender’s margin to be raised to face potential situations where the funding loss would exceed the six months’ interest limit. The reason these credit facilities were treated differently was in order to avoid this limit. However a controversy remained.

The Constitutional Court now acknowledged that although credit facilities present some analogies with interest-bearing loans, both must be distinguished from a legal and an economic perspective, notably because under an interest-bearing loan the funds are immediately delivered to the borrower, while under a credit facility this is not the case since the borrower must request, by means of a drawdown notice, certain amounts to be put at their disposal. Therefore, given the different nature of a loan compared to a credit facility, the Constitutional Court admitted that a differentiated treatment regarding the applicable funding loss is justified. Lenders under credit facilities should now be free to apply their entire funding losses, even when they exceed six months’ interest, to borrowers willing to repay their credit facilities in advance.