Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i SecurityTypes of security interests

A security interest can be created over movable assets (tangible and intangible) and immovable assets (real estate) located in Belgium.

Real estate

A consensual security right over land, buildings or other immovable property located in Belgium is created by entering into a mortgage deed. Such a mortgage deed must be: (1) executed in Dutch, French or German before a notary; (2) registered with the tax authorities; and (3) recorded in the appropriate mortgage registers of each judicial district in which the mortgaged real estate is located (as there is no central mortgage register).

Since the costs associated with a mortgage are very high and calculated on the basis of the amount secured by the mortgage, security providers will often request limiting the amount secured by the mortgage and covering a significantly higher amount by a mortgage mandate (which is not a security interest, but only a power of attorney to create additional mortgages).

Tangible movable assets

A pledge over specific tangible or intangible movable assets is currently easy to establish in practice following the entry into force of the New Belgian Pledge Law, introducing a new title in the Belgian Civil Code.

Since 1 January 2018, a pledge over movable assets may be perfected by registering the pledge in the Pledge Register (therefore, the transfer of possession is no longer required, but it remains possible to perfect a pledge by a transfer of possession). As a result, it has become much easier to create and perfect a pledge over specific tangible or intangible movable assets. Depending on the amount secured, the registration fee for a pledge can range between €20 and €500, and between €12 and €300 to make a change to the registration in the Pledge Register.

The pledgor retains possession over the assets constituting the business and may sell the assets in the ordinary course of business so that the pledgor can keep on running its business in a normal fashion. The pledge can cover all the assets that constitute the business of the pledgor, including, among other things, the total value of the inventory, the clientele, goodwill, commercial name and signs, commercial organisation, trademarks, patents, know-how, rights under leases, furniture, commercial records, equipment and vehicles – land and buildings are excluded.

Following the entry into force of the New Belgian Pledge Law, the Business Pledge Law has been abolished. A business pledge that was validly created and perfected before this entry into force remains valid and enforceable, but will lose its rank unless it was registered in the New Pledge Register by 30 December 2018. Existing business pledge mandates will still allow establishing pledges that will be subject to the new rules introduced by the New Belgian Pledge Law.

Intangible movable assetsShares and other financial instruments

A pledge over registered shares must be registered in the share register of the company whose shares have been pledged, and this company must be notified of the pledge or acknowledge the pledge.

A pledge over book-entry securities (e.g., shares or other financial instruments held through the Euroclear system) is perfected by transferring possession of the shares; they must be booked into a specific pledged account held by the pledgee or a person representing the pledgee.

Receivables and bank accounts

A pledge over receivables or bank accounts is only enforceable against the debtor of the pledged receivables or against the account bank once the debtor or the account bank has been notified of or has acknowledged the pledge.

Intellectual property

Perfection of a pledge over intellectual property (IP) rights will depend on the types of rights to be pledged; certain pledges must be notified to, or registered with, the relevant IP authorities or registration offices to become effective against third parties.

Security agent

Under Belgian law, certain types of security interests may only be validly created in favour of the creditors of the secured claims and cannot be held by a person acting on behalf of a fluctuating body of creditors. As a result, a Belgian security interest is often created in favour of a security agent acting in its capacity as an independent creditor of a parallel debt. A parallel debt structure is not required regarding a pledge (1) created over financial instruments, such as shares or bank accounts, as such a pledge may be created in favour of a security agent acting as a representative for one or more lenders, or (2) over other movable assets (tangible or intangible) in favour of a security agent acting as a representative for a fluctuating body of lenders.

ii Guarantees and other forms of credit supportGuarantees

There are several types of guarantees available, and parties can modify a guarantee according to their needs. For example, a guarantee can be an independent guarantee or an accessory suretyship. A guarantee can also be callable on first demand. A bank guarantee will often be callable on first demand and be independent from the underlying debt documents. A guarantee may also be unlimited or be provide for a maximum amount. Guarantees, especially upstream or side-stream guarantees, will often be limited to lower the risk that the granting of the guarantee would not be within the corporate benefit of the Belgian guarantor (see Section V).

Netting and set-offs by the borrower

Given the general rule under Belgian law that creditors should be treated equally upon a debtor's insolvency, a person can no longer set off its debt against the receivable of another person following the insolvency of the latter. There are certain exceptions to this rule: statutory netting may occur if certain conditions are met (e.g., the receivables must be closely connected) and contractual netting will, as a rule, also survive the insolvency of one of the parties (unless the netting agreement has been entered into during a 'hardening' period).

The LMA clause that all payments an obligor makes must be made without set-off or counterclaim is generally deemed to be valid under Belgian law.

Negative pledge undertakings

Belgian bank lending documentation will most likely include negative pledge undertakings. Such an undertaking, however, will probably not (this is subject to debate) affect the security interest granted by an obligor breaching such a negative pledge undertaking provided that the beneficiary of the security interest was acting in good faith.

Mortgage mandates and business pledge mandates

Mortgage mandates are used to limit, or at least postpone, the costs related to a mortgage or business pledge. Such mandates are irrevocable powers of attorney to establish additional mortgages or business pledges, but neither create a security interest effective against third parties and nor give any right of priority to the banks. A mandate cannot be used to create a mortgage or a business pledge following the security provider's bankruptcy or during a hardening period preceding the bankruptcy.

iii Priorities and subordinationPriorities

The ranking of creditors is a complex matter under Belgian law. In general, the following principles apply:

  1. creditors rank equally, unless a creditor benefits from a lien or a security interest as provided for by law;
  2. certain creditors, such as the creditors for certain judicial costs and the creditor for costs made to maintain or preserve assets, benefit from a super-priority lien and will always rank ahead of other creditors;
  3. creditors benefiting from a specific lien (e.g., a pledge or a mortgage) will rank ahead of the creditors benefitting from a general lien (e.g., the tax and social security authorities that benefit from a statutory lien); and
  4. in the case of competing security interests, the security interest that has been made effective against third parties first will often have priority.

Subordination can be achieved contractually between creditors, through an intercreditor agreement or a subordination agreement. These agreements are often entered into between the senior creditors, the junior creditors and the debtors. The subordination of claims secured by certain security interests may require that certain formalities are complied with regarding the security interests.