Introduction

On 30 May 2013, the Belgian House of Representatives adopted the new act on security interests on movable assets[1] (the New Act).

The New Act significantly changes the current legal framework for the creation, perfection and realisation of security interests on all kinds of movable assets, whether tangible or intangible, including receivables and universalities. In particular, the New Act introduces, in addition to the traditional possessory pledge, a non-possessory pledge on movable assets which will be subject to registration in a newly created public register called the “National Register of Pledges”. The New Act aims to modernise, simplify and make the rules on security interests on movable assets more coherent. It is also expected to facilitate the financing of equipment, inventory, stock and related receivables.

The new rules on security interests on movable assets will be integrated in the Belgian Civil Code, by replacing the old section “Title XVII” with an entirely new section “Title XVII – security interests in rem on movable assets”.

They will enter into force on a date to be determined by Royal Decree, but at the latest on 1 December 2014.

Creation and perfection of a pledge under the current legal framework – impediments

Under the current legal framework, security on movable assets can be created either by way of a possessory pledge (pand/gage) or a non-possessory pledge on a commercial business (pand op de handelszaak/gage sur fonds de commerce).

In the case of a possessory pledge, a debtor must deliver the possession of the pledged asset(s) to the secured creditor or a third party pledgeholder. The creation and perfection of such possessory pledges require dispossession: the pledgor must relinquish possession of the pledged asset(s). Traditionally, any such dispossession has to be exclusive, unambiguous, public and continuous. Given the need for dispossession, it proves to be highly impracticable to efficiently leverage inventory, liquids, stock, large machinery and other tangible movable assets as underlying collateral for raising debt, especially if they are used during a production process or have to be constantly accessed by the pledgor.

Contrary to a possessory pledge, a non-possessory pledge on a commercial business has the advantage that the assets, constituting the commercial business, do not have to be transferred out of the control of the pledgor. The pledge of a commercial business has similarities with an English law floating charge, since the priority right of the pledgee only extends to the assets of the commercial business at the time of an enforcement. However, the pledge of a commercial business has to include all constituent movable parts of the pledgor’s commercial business, being the tangible and intangible movable assets constituting an universality for the purpose of running a specific business. It cannot be limited to some specific asset classes. In addition, only 50% of the value of stock could be covered by the pledge. Furthermore, a pledge on a commercial business can initially only be granted to EU licenced credit institutions and certain financial institutions, and its creation and perfection gives rise to a 0.5% registration duty as well as mortgage register fees calculated on the amount secured by the pledge. Given these limitations, a pledge on the commercial business is generally perceived as having become outmoded since it does not meet the need to leverage specific assets cost-efficiently for financing purposes.

Creation and perfection of a non-possessory pledge under the New Act

Under the New Act, the dispossession requirement to create and perfect a valid pledge will no longer apply if, in practice, parties opt for non-possessory pledges on movable assets.

A non-possessory pledge under the New Act will be created by means of a pledge agreement between the pledgor and the pledgee. The pledge will be perfected and effective towards third parties as of registration of the pledge in a newly created public register called the “National Register of Pledges” (Nationaal Pandregister/Registre national des Gages).

Registrations in the National Register of Pledges will remain valid for a (renewable) term of ten years. In the case of multiple pledgees, priority will be determined according to the anteriority rule (prior tempore, potior iure), i.e. the date of registration or the date of dispossession. A pledgee who has registered a pledge will prevail over a purchaser or any other party acquiring or attaching the pledged asset after the date the pledge was registered.

The Act on the pledging of the commercial business of 25 October 1919 will be abolished by the New Act. Existing pledges on a commercial business, which are recorded in the mortgage register under the old rules will only keep their ranking, if they are registered in the National Register of Pledges within a period of 12 months after the new rules come into force. Accordingly, pledgees will need to take timely action to preserve their rights.

First indications from the Ministry of Finance suggest that a registration tax of 0.5% on the secured amount will be due for initial registrations in the National Register of Pledges. The registration, consultation, modification, renewal and removal of data in the National Register of Pledges will also be subject to payment of minor retributions. The amounts will be determined by Royal Decree.

Non-registered pledges, involving dispossession of the pledged asset(s) will remain as an alternative to non-possessory registered pledges.

Security agent

Under the New Act, a pledge agreement which is entered into by a representative acting in its own name, but for the account of one or more beneficiaries, will be valid and effective vis-à-vis third parties if the identity of the beneficiaries can be determined from the pledge agreement. This meets the requirements of international market practice for syndicated lending whereby a security agent usually acts on behalf of the lenders with respect to the creation and enforcement of security interests[2].

Enforcement

In the event of a payment default, the New Act allows for immediate enforcement of a pledge, without prior court approval, where the pledgor is not a consumer[3]. However, prior notification to the debtor and the other pledgees will be required.

If stipulated in the pledge agreement (and to the extent the agreement also provides that the value of the pledged assets will be determined by an expert on the day of the appropriation or, in the case of assets that are traded on a market, at the market price), a pledgee will also be entitled to appropriate the pledged assets, instead of requesting their sale[4].

In the absence of an appropriation clause, the pledgor can still validly consent to appropriation, if such consent is given after the pledgor defaults on its payment obligations.

The pledgor, the pledgee and any interested third party can submit any dispute, with respect to the enforcement of the pledge, to the court. Such proceedings will suspend the enforcement of the pledge.

Commingling of fungible goods/Segregation/Transformation

The New Act provides that the commingling of fungible goods belonging to one or more pledgors, will not impair a pledge created on such assets. In addition, any such commingling will not impact the pledgor’s right of recovery if the pledgee, or a third party holder, is declared bankrupt.

If a pledged asset is transformed by the pledgor into a new asset, the pledge will automatically encumber such new asset (unless otherwise agreed). However, if the pledgor has used third party owned assets to transform the pledged asset and insofar that a separation of such assets is impossible or economically not justifiable, the pledge will only be effective against the transformed pledged asset if the original pledged asset constitutes the main part of the transformed asset.

Transfer of the right of pledge

Traditionally, an assignment of a secured claim entails the automatic assignment of the benefit of the pledges since they constitute accessory rights. The New Act, however, imposes an additional formality in this respect. Assignees will only be able to enforce their rights of pledge against third parties as of the date of registration of the transfer of the pledge in the National Register of Pledges. This is a new requirement.

Super priority

The New Act recognizes the super priority rights of sellers who benefit from a reservation of title clause. These will rank above all other pledgees, despite there being no publicity of the reservation of title. The same goes for creditors who rely on a right of retention for the costs they may incur to preserve the assets in question.

The New Act also introduces the concept of an extended reservation of title in the Belgian Civil Code: a reservation of title in relation to an asset extends to the receivable which replaces the asset if it has been sold (e.g. upon the sale of assets by the debtor to a third party). Lenders should bear this in mind when contemplating factoring agreements or receivable purchase agreements with Belgian originators.