Security interests and guaranteesCollateral and guarantee support
Which entities in the organisational structure typically provide collateral and guarantee support for bank loan financings? Are there limitations on which entities in the organisational structure are permitted to provide such support?
In secured lending transactions, typically all material companies in the organisational structure provide collateral and guarantee support.
A Belgian company is required to pursue the generation of profit and is not entitled to perform any acts or to enter into any transactions which are not directly or indirectly beneficial to it, do not fall within its corporate purpose, and are not in its corporate interest. These general principles are especially pertinent to the granting of upstream or cross-stream guarantees, or the granting of security interests securing the obligations of third parties.
In practice, a guarantee is often provided for the benefit of other group companies. As a general rule, a Belgian company must not grant guarantees or encumber its assets for the benefit of group companies. The corporate interest must be examined on an individual or a case-by-case basis. However, several leading legal scholars have asserted and case law has held that within a group of companies, the corporate interest of each entity can be assessed by taking into account the interests of the group to a certain extent.
Accordingly, it is accepted that a subsidiary can grant a guarantee in favour of other group companies, provided the commitments are dictated by a common economic, social or financial interest assessed on the basis of a strategy developed for the benefit of the group as a whole, are not entered into without consideration, and are not disproportionate to the financial means of the Belgian company, so that its existence could be jeopardised.
Case law on this subject is scarce and does not offer clear guidelines. In practice, the obligations incurred by a Belgian company in favour of another group entity are often limited to a percentage (in practice often between 75 per cent and 95 per cent) of the company’s net assets, or, if the company is able to derive a concrete advantage from the transaction (eg, it can borrow money itself), to the advantage it obtains. This limitation, if not decisive, may help the company’s management to justify the company’s interest in entering into the transaction.
It is generally easier to demonstrate a benefit to the company granting a security when a parent company guarantees the obligations of a subsidiary (a downstream guarantee) than when a subsidiary guarantees the obligations of its parent company (an upstream guarantee) or the obligations of another subsidiary of its parents (a cross-stream guarantee).
What types of obligations typically share with the bank loan obligations in the collateral and guarantee support? If so, are all such obligations equally and ratably covered by the collateral and guarantee support?
In line with the Loan Market Association’s standard documentation (the LMA documentation), the bank loan collateral and guarantees generally also secure obligations under any of the other finance documents related to the loan, including hedging agreements. Such obligations are generally equally and rateably covered.Commonly pledged assets
Which categories of assets are commonly pledged to secure bank loan financings? Describe any limitations on the pledge of assets.
The most common forms of security are:
- real estate and immovable property;
- shares and other financial instruments;
- receivables (account receivables and other contractual rights);
- bank accounts;
- movable property (such as inventory);
- business undertaking (covering all business assets on a floating basis); and
- intellectual property rights.
The following are limitations on the pledge of assets:
- the collateral needs to be determined or determinable and should constitute ownable assets;
- receivables can be pledged under Belgian law, provided the rights are transferable by law and contract;
- only present real property can be made subject to mortgage (however, a mortgage over land will automatically extend to any buildings subsequently built on that land, unless agreed otherwise); and
- a pledge will not vest over assets acquired or coming into existence after the pledgor has been granted suspension of payments or has been declared bankrupt.
Describe the method of creating or attaching a security interest on the main categories of assets.
Security rights are usually created by way of separate pledge agreements for each type of collateral.Real estate and immovable property
Real estate that is registered in a Belgian mortgage office is encumbered by a mortgage. A mortgage must be created by means of a deed drawn up by a public notary, and must be registered with the tax registration office and filed with the relevant mortgage register in order to be valid against third parties.
The total costs related to creating and perfecting a mortgage amount to approximately 1.5 per cent of the amount secured by the mortgage, including:
- registration duty of 1 per cent of the amount secured by the mortgage (in principal and accessories);
- mortgage duty of 0.3 per cent of the amount secured by the mortgage (in principal and accessories);
- fees of the civil law notary, calculated on a scale basis of the amount secured by the mortgage;
- salary fees of the mortgage registrar, calculated on a scale basis of the amount secured by the mortgage; and
- other costs, such as nominal stamp duties, expenses related to mandatory searches and notifications, and costs of mortgage certificates, etc.
In order to limit the costs of a registered mortgage, the practice of using a mortgage mandate has developed. Pursuant to a mortgage mandate, the principal grants a power of attorney to one or several attorneys for the purposes of creating one or more mortgages to the benefit of the beneficiary at a later stage. The creation of mortgages upon the exercise of a mortgage mandate will not have any retroactive effect (ie, the security interest will only be created as of the date the mortgage deed is effectively executed, registered and filed with the relevant mortgage office).
Consequently, the principal under a mortgage mandate should have full legal title to the collateral purported to be mortgaged at the date of the mortgage deed. Also, a third party (acting in good faith) to whom a mortgage has been granted and which has been registered and filed prior to the conversion of the mortgage mandate into a mortgage, will benefit from a higher-ranking mortgage.
In addition, if a mortgage mandate granted by a Belgian principal is converted into a mortgage during the hardening period as security for a pre-existing debt, such a security interest will not be enforceable regarding the bankrupt estate of that Belgian principal.
Also, no mortgage mandate may be converted into a mortgage after the bankruptcy of a Belgian principal.Shares
A pledge over shares in a Belgian company is entered into by means of a private deed and does not need to be notarised. In order to render a pledge over registered shares enforceable with regard to third parties, the pledge needs to be mentioned in the share register and such recordation must be dated and signed on behalf of the parties to the pledge agreement.Receivables
A pledge over receivables is created by means of a private deed and can be obtained on both existing and future receivables. It can be granted with or without notifying the debtor of the receivable. Such a pledge is valid and enforceable between the parties and against any third party (other than the debtor of the receivable) upon execution of the pledge agreement. It becomes enforceable towards the debtor of the receivable, from the earliest of either the moment of the notice of the pledge to the debtor or the moment of acknowledgement by the debtor of the existence of the pledge.
A pledge on future receivables may not be valid and enforceable if it is deemed by a court that such future receivables were not sufficiently determined or determinable at the time of the execution of the pledge agreement.Bank accounts
A pledge over bank accounts is created by means of a private deed. The pledge is enforceable between the parties and against any third party (other than the account bank) upon execution of the pledge agreement. The pledge over a bank account will be enforceable with regard to the account bank from the moment the account bank has received notice of the pledge or has acknowledged it.Movable property
A pledge over movable property is created by means of a private deed and can be perfected by either physical dispossession (ie, the pledged assets are no longer in the possession of the pledgor), or registration of the pledge with the National Pledge Register (an electronic public register). The registration duties due for the registration of a pledge in the National Pledge Register amount to a maximum of €500 per pledge.Business undertaking (floating charge)
Belgian law allows the creation of a general non-possessory pledge over the business undertaking of a company. Such a pledge entitles the creditor to a security interest on the following present and future assets, on a floating (going-concern) basis:
- the goodwill, the commercial name and signs;
- trade and service marks, patents and all other intellectual property rights;
- leases, licences or other contracts;
- furniture, equipment and vehicles;
- cash, account receivables, negotiable instruments and securities;
- all assets on accounts with financial institutions, and
- the inventory (raw materials, work in process, manufactured products, finished goods and goods for resale, etc).
Such a pledge is created by means of a private deed and is perfected by mere registration of the pledge with the National Pledge Register. The registration duties due for the registration of a pledge in the National Pledge Register amount to a maximum of €500 per pledge.Intellectual property rights
A pledge over intellectual property rights is created by means of a private deed and can be perfected by the registration of the pledge with the National Pledge Register. The registration duties due for the filing of a pledge in the National Pledge Register amount to a maximum of €500 per pledge.
In respect of industrial intellectual property rights (eg, patents, trademarks, and designs) for which public intellectual property registers exist, certain statutes explicitly refer to the possibility of creating an enforceable right of pledge provided that an excerpt from the pledge agreement is recorded with the relevant authority or registered in the relevant intellectual property register.
However, it remains unclear whether mainly artistic intellectual property rights, such as copyright and related rights, for which no intellectual property register exists, may be encumbered with an enforceable pledgePerfecting a security interest
What steps are necessary to perfect a security interest on the main categories of assets? What are the consequences of failing to perfect a security interest?
See question 20 regarding to the necessary steps to validly create and perfect a security interest.Future-acquired assets
Can security interests extend to future-acquired assets? Can security interests secure future-incurred obligations?
A pledge over future movable assets can be validly created provided that the assets are determined or determinable at the time of entry into the security agreement. The Security Interests Act explicitly provides that a pledge on future assets is possible.
For receivables, the Security Interests Act provides that such receivables must be determinable at the time of the granting of the pledge. Although there is no mandatory legal requirement to provide lists of receivables periodically, it is common to include a contractual undertaking to provide or update lists on a quarterly, semi-annual or annual basis.
A pledge over business assets covers the assets of the business on a floating basis. Future assets that are part of the business undertaking will be included and the collateral will be crystallised at the time of foreclosure of the pledge.
A mortgage secures an existing immovable asset, but it is agreed that all future constructions and fittings on such a mortgaged plot of land or building are also covered.
A pledge or mortgage can secure present or future obligations to the extent such secured obligations are determined or determinable. The pledge agreement (except in respect of a security interest over financial collateral, such as shares and bank accounts) or a mortgage deed must, however, mention an agreed maximum secured amount.Maintenance
Describe any maintenance requirements to avoid the automatic termination or expiration of security interests.
Pledges and mortgages are construed as an accessory to the secured obligations. Therefore such a security interest may be impaired or affected by and be declared null and void if the secured obligations are no longer valid and enforceable. However, if secured obligations only partially cease to exist, the corresponding security interest will continue in effect.
A mortgage is valid for 30 years from the date of its filing with the relevant mortgage office. If the mortgagee wants to benefit from the security for a longer period of time (without losing its priority), the mortgage should be extended or renewed by an additional filing with the mortgage office prior to the expiry of such period.
A register pledge is valid for 10 years from the date of its registration in the National Pledge Register. The registration in the National Pledge Register can be extended or renewed by subsequent periods of 10 years prior to the expiry of such a period. The pledgee has to provide a notice to the pledgor of the re-registration.
In the event that the secured obligations are transferred, the pledge will follow the transfer of the secured obligations. However, in order to make the transfer of the register pledge enforceable against third parties, such a transfer must be registered in the National Pledge Register.Release
Are security interests on an asset automatically released following its sale by the debtor? If so, are the releases mandated by law or contract?
No, security interests are not automatically released following the sale of the encumbered asset. Release formalities vary, depending on the type of security interest.Non-fulfilment of guarantee obligations
What defences does a guarantor have against claims for non-fulfilment of guarantee obligations? Can such defences be waived?
Any defences a guarantor may have can, in principle, be waived.
Guarantees can be divided into accessory guarantees or suretyships, and independent guarantees. Independent guarantees are more commonly used in the contexts of cross-border financings, international relations, construction works, real estate leases and public invitations to tender.
An accessory guarantee or suretyship is an agreement in which the guarantor undertakes to pay one or more debts of the principal debtor if the latter fails to fulfil its obligations to its creditor (the beneficiary of the guarantee).
The guarantor’s payment obligation under the suretyship is accessory and subsidiary to the principal debtor’s payment obligations. The existence and scope of the accessory guarantee depend on the contractual relationship between the principal debtor and the beneficiary. Hence, a claim can only be brought against the guarantor if the principal debtor fails to fulfil its payment obligations, unless agreed otherwise. As a result, an accessory guarantee may not exceed the amount of the obligations of the principal debtor with regard to the beneficiary. Further, any defences or exceptions the principal may rely on to refuse payment can also be raised by the guarantor.
An independent guarantee is an agreement whereby the guarantor undertakes to pay a certain amount to the beneficiary if certain conditions are met. Unlike an accessory guarantee, the contractual relationship between the guarantor and the beneficiary is abstract and independent of, and unrelated to, the contractual relationship between the principal (debtor) and the beneficiary (creditor).Parallel debt requirements
Describe any parallel debt or similar requirements applicable in a secured bank loan financing where an agent acts for multiple investors.
The concept of a security agent is expressly recognised under Belgian law. In relation to financial collateral (ie, financial instruments such as bonds and shares, bank account receivables and credit claims) and in relation to security over movable assets (including inventory, business assets, receivables and intellectual property). Such security agent acts as a representative of the secured parties under the security documents. For practical purposes of access to the National Pledge Register (ie, consultation, registration, deregistration, etc), foreign creditors will usually appoint an agent in Belgium to allow such an agent to consult and register securities in the National Pledge Register on their behalf.
Belgian law does not recognise the concept of a security agent in respect of mortgages. Therefore, when structuring club deals and syndicated financings in which mortgages shall be granted as security interest, a parallel debt structure is be required.
Under Belgian law, a mortgage cannot be validly created in favour of a person who is not the creditor of the claim purported to be secured by such security right. Therefore, a parallel debt (covenant to pay) is included in the loan documentation to address this. Under a parallel debt clause, each obligor undertakes to pay the security agent an amount equal to the total amount owed by that obligor to the lenders or finance parties under the loan documentation. The parallel debt constitutes a separate, independent claim of the security agent against the obligor. The security right is granted to secure the parallel debt obligations. The security agent, as creditor of the parallel debt, will then take contractual assignments as to ensure that the other lenders also benefit from the mortgage. Such parallel debt clause in favour of the security agent also allows that, if the participation of a lender (other than that of the security agent) is transferred, the security right shall remain in place as security for the secured obligations (ie, the parallel debt obligations).
There is no statutory law or case law available on parallel debts and security rights provided for such debts. However, parallel debts have become standard practice in Belgium and it is generally accepted by legal scholars and leading practitioners that a parallel debt creates a claim of the creditor thereunder, which can be validly secured by a mortgage.Enforcement
What are the most common methods of enforcing security interests? What are the limitations on enforcement?
An enforcement procedure can be initiated by any creditor that has a claim on the debtor which is fixed and due. It is thus possible for a creditor that has a second-ranking security interest to initiate the procedure. In the latter event, the initiator (that is second ranked) of the enforcement procedure, will not obtain any prerogatives and will be paid after the payment of the first ranked creditor, provided that the residual amount is sufficient to cover the claim of the second ranked security interest.Pledges
A pledgee can enforce its security rights upon a (payment) default and can do so without insolvency proceedings being opened, if the conditions (eg, a payment default) stated thereto in the pledge agreement have been met.
A pledgee has the right to enforce all types of pledges over movable assets (including inventory, equipment and business assets) without prior court authorisation. Enforcement will then take the form of a public or private sale, lease of the pledged assets or, if so agreed and a valuation method has been provided in the pledge agreement, appropriation of the same.
The pledgee should inform the debtor or third-party pledgor (as well as any other pledgee or creditor that has seized the pledged assets) of its intention to enforce the pledge, by means of a registered letter. After expiry of a waiting period of 10 days (which in certain circumstances can be shortened to three days), and provided no objections have been filed with the attachments judge, the pledgee may publicly or privately sell or lease the pledged assets or appoint a bailiff to do so. In a private sale, the pledgee may not act as purchaser. The sale or lease should take place in good faith and in an economically responsible manner. Enforcement occurs at the risk of the pledgee, whose liability cannot be limited or excluded.
In addition, the pledgee is allowed to appropriate the pledged assets, if this possibility is expressly provided for in the pledge agreement or subsequently (but prior to enforcement) by agreement between the pledgor and the pledgee. The value of the pledged assets must be determined at the time of appropriation, either by an expert or based on the fair market value of the same or similar goods.
At any time during the enforcement proceedings and at the latest within one year from the end thereof, any interested party can petition the attachments judge if it objects to the manner in which the pledge is being or was executed or the proceeds distributed.
The enforcement of security rights over financial collateral (such as bank receivables, cash and financial instruments (including shares)) does not require prior court approval. Enforcement can take place by means of a public or private sale or, if this possibility and a valuation method have been provided in the pledge agreement itself or any subsequent agreement, by means of the appropriation of the assets by the pledgor.
With respect to a pledge over account receivables, the pledgee is entitled to keep the proceeds from the pledged account receivables for the satisfaction of its principal claim, as provided in the pledge agreement, at any time or after the occurrence of an event of default.
In the event of insolvency proceedings, the creditors whose claims are secured by a pledge over financial collateral (such as bank receivables, cash or financial instruments (including shares)) can proceed with enforcement. The enforcement of a pledge over other assets is suspended during the period of verification of the claims (approximately three months).
Beneficiaries of a pledge over receivables, bank accounts, and financial instruments (including shares) are able to enforce their security despite any standstill pronounced in connection with reorganisation proceedings of a Belgian company. The enforcement of other security interests, such as a pledge over movable assets or a pledge over inventory, is suspended for a period of six months, which can be extended to up to 18 months.Mortgages
Enforcement of a mortgage outside bankruptcy requires an enforceable title, consisting of an executory judgment or a notarised (officially recorded) deed in which the obligation to pay is defined. No enforceable title is required to rely on one’s rights as mortgagee in the context of bankruptcy proceedings and a sale by the receiver in bankruptcy.
A notarial deed will constitute such an enforceable title if, besides creating a mortgage, it also contains the loan or facility agreement or, at least, states in detail the terms and conditions of the secured obligations. A mere reference in the notarial deed to a private agreement detailing the claim is not sufficient in itself.
If the notarial deed is limited to the mere creation of a mortgage and is not an enforceable title, the mortgagee will first need to obtain a final court decision ordering payment before enforcing the mortgage.
If the mortgage deed constitutes an enforceable title, the enforcement procedure can be initiated directly.
Enforcement is initiated by means of service of a payment order by bailiff, stating that the mortgaged asset will be attached (seized) if the debt is not paid. Seizure should occur at least 15 days and no more than six months from the date of the payment order. The order should mention, among other things, that the mortgagor has eight days to propose to the attachments judge to purchase the mortgaged asset.
Subsequently, the attachment order must be recorded in the register of the competent mortgage office. Publication is mandatory.
Within one month after recordation of the attachment, the appointment of a civil law notary, entrusted with organising a public sale of the mortgaged asset, should be requested. This request must be filed with the attachments judge. If all conditions are met, the judge will appoint a civil law notary.
The civil law notary will prepare the terms of sale, which will be reviewed by the court. The notary will then sell the property at auction within six months after his or her appointment. After the sale, the notary will divide the proceeds among the creditors by rank.
Although it is difficult to estimate the duration of enforcement proceedings since incidents may arise (eg, the mortgagor may file opposition before the attachments judge at various stages) that may cause additional delays, the duration of the enforcement proceedings (without the occurrence of any incidents) is approximately six to seven months.Fraudulent conveyance and similar doctrines
Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, corporate benefit and similar doctrines on the structure of bank loan financings.
A claim for fraudulent conveyance may be lodged against any act performed or payments made with the fraudulent intent to prejudice the creditors. In order to succeed such a claim, the claimant needs to prove that the transaction was detrimental to the creditors. The term ‘detrimental to the creditors’ is very broadly interpreted and the transaction constitutes an act of fraud of the bankrupt. Fraud is deemed to exist, for instance, if the act performed, taking all circumstances into account, is extraordinary and the debtor was aware that the act was to the detriment of the (other) creditors.
In addition, under Belgian law voidable preference rules challenge certain acts performed by a Belgian bankrupt during the hardening period, being the period between the date of cessation of payment of the Belgian company and the date of the bankruptcy judgment.
In principle, the date of cessation of payments is deemed to be the date of the bankruptcy judgment. However, if there are serious and objective circumstances indicating that the debtor has actually ceased paying its debts prior to the date of the bankruptcy judgment, the court can determine a hardening period which may, at the maximum, go back six months prior to the date of the bankruptcy judgment (or such a longer period, as may be determined by the court, if the debtor company was already dissolved before its bankruptcy).
Certain acts performed by the bankrupt during the hardening period must be declared null and void at the request of the receiver in bankruptcy. Such acts include, among others:
- any transfer of movable or immovable property without consideration, or equivalent transactions (settlement of a debt without consideration, offering to be a guarantor of debt without consideration, etc);
- any contractual engagement against consideration, if the value of what is transferred by the bankrupt significantly exceeds the value of what he receives in return; and
- the grant of mortgages or liens on assets of the bankrupt for pre-existing debts.
Furthermore, all acts of which the bankruptcy trustee demonstrates that the following three conditions are satisfied may be declared null and void:
- the acts took place during the hardening period;
- the third party who dealt with the bankrupt company was aware of the cessation of payments (mere knowledge by a third party is sufficient - it is not necessary to provide evidence of bad faith on the third party’s part); and
- the acts are detrimental to the property of the bankrupt company.
Financial assistance restrictions apply in the event that funds borrowed or lent by a Belgian company are used to finance or refinance, in whole or in part, an acquisition of or subscription to that Belgian company’s shares, profit shares or certificates relating to any of these, or the security interests or guarantees granted by a Belgian company in view of the direct or indirect acquisition or subscription of any of that Belgian company’s shares, profit shares or certificates relating to any of these.
A transaction carried out contrary to the corporate interest may be declared null and void or unenforceable, if the other contracting party knew, or should have been aware, that the transaction was not in the corporate interest, based on the theory of third-party complicity. It should be stressed that directors have a power of appreciation of the corporate interest. The review of the corporate interest by a court is marginal and the court will only sanction transactions that are manifestly detrimental to the corporate interest of the company.
Following Belgian thin capitalisation rules, under certain conditions the tax deductibility of the net borrowing costs is limited.