The Act of 21 December 2013 (hereinafter the "Act") on the financing of small- and medium- sized enterprises ("SMEs") entered into force on 10 January 2014. The legislator's main objectives were to mitigate pre-contractual information asymmetries, promote contractual fairness, improve SME's access to credit, and facilitate the recovery of the economy. In our March issue of Brussels to the Point, we described the key statutory provisions enacted to pursue these objectives.
In brief, there are various new information requirements. Credit providers are obliged to obtain certain know-your-customer information and provide pre-contractual information and advice before contracting with SMEs. These obligations are detailed in the code of conduct adopted by Febelfin, Unizo and the Union des Classes Moyennes ("UCM"), on16 January 2014 (hereinafter the "Code of Conduct"). Secondly, early repayment is facilitated for SMEs since, pursuant to the Act, they now have a legal right to fully or partially repay a loan at any time, while early repayment penalties by credit providers are limited. Finally, the Actblacklists certain credit provider-friendly clauses in SME credit agreements, including: (i) unilateral irrevocable commitments on the parts of SMEs and (ii) (premature) termination rights for the credit provider without reasonable notice or compensation in fixed-term or open-ended agreements.
Whereas previously lending to companies or merchants was not a regulated activity under Belgian law, the Act introduces a regulatory framework for SME financing, which is now supervised by the Financial Services and Markets Authority (FSMA).
In this contribution, we focus mainly on a number of practical questions concerning the (ambiguous) scope of application of the Act. The Act applies to credit agreements between an SME and a credit provider or credit intermediary. Indeed, a literal reading of the Act indicates a broader scope than may appear at first glance.
The term credit provider, for example, covers not only financial institutions but also any natural or legal person (or group of such persons) granting credit in the course of its business or profession, unless the credit agreement is immediately transferred to a licensed creditor indicated in the agreement.
This implies that a private equity investor participating as a non-majority shareholder in the capital of an SME which provides credit to the company (meaning there is no group and thus no intra-group financing) could be considered a credit provider under the Act. In addition, so-called business angels, i.e. wealthy individuals willing to provide capital to start-ups in exchange for convertible debt or a partial ownership stake, could fall within the scope of application of the Act, provided the credit is granted in the course of their business or profession.
In addition, the term credit agreement is defined very broadly in Article 2(3) of the Act to refer to all agreements whereby a professional lender grants a "financial" credit facility to an SME, i.e. in the form of a loan, a credit line or any other similar facility other than those subject to the legislation on mortgage credit or consumer credit. Thus, documentary credit, deferred payment of invoices, factoring, leasing, intra-group financing, guarantees and sureties could fall within the scope of the Act.
Small and medium-sized enterprises
As for the term SME, the Act refers to other legal concepts, namely (1) an "undertaking" as defined in the Market Practices Act or an "independent professional" within the meaning of the Act of 2 August 2002and (2) a "small company" within the meaning of the Company Code. Hence, for the purposes of the Act, SMEs are any natural or legal persons pursuing an economic goal or a liberal profession which exceed no more than one of the following thresholds:
- fewer than 50 employees on average during the financial year;
- annual turnover of less than EUR 7,300,000 (excluding VAT);
- balance sheet total of less than EUR 3,650,000.
Enterprises which employ more than 100 people on average during the financial year are automatically excluded.
Although the legislator was primarily concerned with protecting financing to "true" SMEs, the definitions and wording of the Act are such that the Act may impact syndicated lending and financing arrangements with special purpose vehicles ("SPVs"), newly established companies and the subsidiaries of large corporate groups. The date on which the company requests the credit facility is the relevant date for determining whether a company is an SME for the purposes of the Act. Consequently, project companies, securitisation SPVs and other SPVs which are about to acquire certain assets may qualify as SMEs for the purposes of the Act. However, such companies may no longer qualify as SMEs as soon as the credit agreement is entered into. Further, when determining whether the Act applies to a company, only the relevant entity should be taken into account even though "small" companies applying for credit may in fact form part of a larger group.
Finally, the territorial scope of the Act raises a number of questions. Pursuant to Article 3 of the Act, its territorial scope is limited to credit agreements which meet the following conditions:
- the credit agreement is entered into with an SME established or with its registered office in the EEA; and
- the credit provider develops its activities in Belgium or
- the credit provider targets Belgium for the performance of such activities and the credit agreement falls within such activities in Belgium.
It is unclear whether the third condition implies that Belgian credit institutions need not take the Act into account when conducting activities abroad.
Preparatory works and parliamentary questions
The foregoing demonstrates that based on the exact wording of the Act, its scope could be considered very broad. However, the legislative history to the Act, in particular the Act's preparatory works, and the related parliamentary questions show that the government was aware of the unwanted consequences the Act could have on certain financing arrangements. Thus, the finance minister made statements in Parliament seeking to restrict the scope of the Act.
The finance minister confirmed that documentary credit, deferred payment of invoices, factoring, leasing, intra-group financing, guarantees and sureties do not fall within the scope of the Act. He also stated that when a credit facility is extended to several borrowers, one or more of which are not SMEs, the Act will not apply. Furthermore, the minister confirmed that the legislator did not intend to target companies established for the sole purpose of holding stakes in other companies (i.e. holding companies). It was also confirmed that if an SME borrower is part of a group, the group's consolidated position should be taken into account to determine whether the company is an SME for the purposes of the Act. Finally, the finance minister confirmed that the activities of Belgian credit institutions abroad (within or outside the EEA) are not subject to the Act.
Until the entry into force of the Act, corporate lending was not a regulated activity under Belgian law. The Act introduced a regulatory framework for SME financing, supervised by the Financial Services and Markets Authority (FSMA). At present, SME financing is subject to specific statutory obligations.
The scope of application of the Act is ambiguous. A literal reading of the relevant provisions of the Act indicates a very broad scope. However, the legislator seems to be aware of this fact. In order to provide some comfort to lenders and stimulate financing in general, the finance minister made a number of statements seeking to clarify and limit the scope of application of the Act. However, the legal force of such statements is unclear and questionable.
Despite the legislator's best intentions and the objectives of promoting contractual fairness and improving access by SMEs to the credit market, the situation for SMEs may have gone from bad to worse. Due to the additional obligations and restrictions imposed on credit providers, acceptance criteria may become stricter and the costs of obtaining credit might rise. In any case, it is clear that SME financing has become more formalistic.