Since the entry into force of the Financial Collateral Act of 15 December 2004 (the "Collateral Act") implementing Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims (the "Collateral Directive"), financial collateral arrangements have benefitted from increased flexibility and legal certainty in Belgium. In particular, the Collateral Act sets forth simplified rules for the enforcement of collateral arrangements and acknowledges the validity and enforceability of substitutions and margin calls, transfers of title for security purposes, repo transactions and (close-out) netting arrangements, even in the event of insolvency.

Nevertheless, further harmonisation and an extension of the scope of the Collateral Directive were deemed necessary, leading to Directive 2009/44/EC amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and the Collateral Directive. The Act of 26 September 2011 implements Directive 2009/44/EC in Belgium (the "Amending Act"). The Amending Act was published in the Belgian State Gazette on 10 November 2011 and will enter into force on the same date.

The most important changes introduced by the Amending Act are briefly summarised below.

Credit claims recognised as eligible financial collateral

The first and most important change brought about by the Amending Act is an extension of the scope of the Collateral Act to credit claims. The Amending Act defines a credit claim as a pecuniary claim arising out of an agreement whereby a credit institution, mortgage institution or any other entity that extends credit to consumers grants credit or a loan.

As a result, credit claims can now be pledged or transferred for security purposes, in the same way as financial instruments or cash. If an enforcement event occurs, the collateral taker can realise the credit claim as financial collateral, without prior notice or court approval, notwithstanding the existence of any insolvency proceedings or seizure. In addition, the collateral taker is entitled to realise the collateral by way of appropriation, provided the collateral agreement contains provisions to this effect, namely on the valuation of credit claims. The Collateral Act also recognises the assignment of credit claims for security purposes.

To further enhance the transferability of credit claims, the Amending Act introduces the possibility for the debtors of such claims to waive their set-off rights with regard to their creditors and the beneficiaries of the pledge or security agreement. Debtors can also waive bank secrecy rules, thereby allowing creditors to disclose information about the claim and the debtor. Of course, these provisions are without prejudice to mandatory rules of law on consumer credit.

Simplification of the formalities for the pledge or assignment of a mortgage-backed credit claim

A second important change introduced by the Amending Act is that the assignment for security purposes or the pledge of a mortgage-backed claim is no longer subject to the (burdensome and expensive) formalities set out in Articles 5 and 92(3) of the Mortgage Act of 16 December 1851. As a result, an assignment for security purposes or pledge of a mortgage-backed credit claim is enforceable against third parties without having to fulfil any formalities, other than execution of the relevant financial collateral agreement, or pay the 1% registration duty. However, the collateral provider must provide proof of the identity of the pledgee or assignee at the request of any third party.

These changes significantly facilitate the transferability of mortgage-backed credit claims thereby extending the possibilities for credit institutions to raise funds.

Shares of a BVBA/SPRL and CV/SC

Previously, there was some uncertainty as to whether financial instruments had to be traded on a capital market in order to fall under the scope of the Collateral Act. This uncertainty was due to the definition of a financial instrument which, further to the Act of 2 August 2002 on the supervision of the financial markets and financial services, refers to securities traded on a capital market. However, not all companies' shares can be traded on a capital market, in particular those of a private limited-liability company (BVBA/SPRL) or a cooperative company (CV/SC).

While a majority of the literature agreed that the legislature did not intend to exclude inherently untradeable shares, clarification was deemed necessary. The Amending Act therefore specifies that financial instruments, regardless of whether they can be traded on a capital market (e.g. shares in a BVBA/SPRL or CV/SC), fall within the scope of the Collateral Act.

As a result, pledges of the shares of a BVBA/SPRL or CV/SC can now also benefit from the flexible enforcement rules of the Collateral Act.  It should be kept in mind, however, that the Collateral Act does not override the share transfer restrictions applicable to the BVBA/SPRL and CV/SC set forth in the Belgian Company Code.

Exclusion of netting arrangements with non-merchants

On 27 November 2008, the Constitutional Court ruled that the Collateral Act's protection of (close-out) netting arrangements violates the principle of equal treatment set forth in the Belgian Constitution, to the extent that it applies to arrangements entered into with individuals who are not merchants (commerçants/handelaren). As the exact scope of the Constitutional Court's decision remained unclear, there was legal uncertainty in this area.

The Amending Act expressly excludes from the scope of the Collateral Act netting arrangements with non-merchants, including close-out netting arrangements. Consequently, a determination of whether the counterparty is a merchant should be made when entering into a netting arrangement.

Collateral Act partially inapplicable during judicial reorganisations

The Collateral Act's simplified rules on the enforcement of collateral arrangements were applicable in the event of a suspension of the enforcement of security interests during a judicial reorganisation under the Business Continuity Act (Loi sur la Continuité des Entreprises /Wet Continuiteit Onderneming). However, certain case law had held to the contrary.

The Amending Act provides that the Collateral Act's rules on the enforcement of pledges of bank accounts and credit claims (Arts. 9, 9(1) and 15) and the exercise of netting arrangements (Arts. 14 and 15) are not applicable during a judicial reorganisation (i) involving a debtor that is not a public or financial entity (as defined in the Amending Act) or (ii) if the debtor is a public or financial entity, the provisions can only be relied on by creditors that are public or financial entities, except in both cases in the event of default of the debtor. In practice, this means that if court-supervised reorganisation proceedings are commenced against a debtor other than a public or financial entity, creditors are not entitled to enforce their security interests or carry out netting arrangements on the sole ground that such proceedings have been opened.

Likewise, these provisions do not apply in the event the Belgian government takes a decision calling for the disposal of assets belonging to a distressed credit institution or insurance undertaking whose financial situation could undermine the stability of the Belgian or international financial system.

As an exception to the foregoing, the new rules do not apply (i) if the collateral taker exercises a netting arrangement without calling for the termination, rescission or early repayment of the contractual arrangement; (ii) to the enforcement of a pledge of financial instruments (Art. 8 of the Collateral Act), a transfer for security purposes (Art. 12 of the Collateral Act) or a repo transaction (Art. 13 of the Collateral Act); or (iii) to the enforcement of any type of financial collateral relating to derivatives.