Belgium

Eric Dirix

I.Introduction

1.General background; structure of national law re security over tangibles

Belgian law on security provides for a system that is similar to that under French law as it existed before the 2006 reform.

The classic security right over tangibles is that of the possessory pledge. In the system of the Belgian Civil Code (“Code civil”) the existence of a pledge without taking actual possession of the collateral is inconceivable (“pas de gage sans dépossession”).1 An alternative to possession of goods can be achieved through possession of negotiable documents representing the goods (Warrant Act) (infra). In practice, other devices using special purpose vehicles (S.P.V.) have been developed (infra).

It is not possible to create a non-possessory pledge of a tangible or a group of tangibles (as has now been made possible under the French reform). The only non-possessory pledge is the enterprise pledge which covers all the movable assets of the enterprise (Act of 25 October 1919). The “negative” publicity resulting from taking away the possession from the pledgor is substituted by “positive” publicity through registration in the land register. A similar security right exists for agricultural enterprises (Act 15 April 1884).

Publicity is an important feature of security rights. Belgian law is traditionally hostile to hidden security rights. This approach is based on the need to protect third parties and dispelling the false impression of wealth. In recent years, however, different exceptions have been introduced. The new Bankruptcy Act 1997 recognized retention of title by the seller ef-

1Under the ancient customary law (before the Civil Code of 1804) non possessory pledges where not uncommon but resulted only in limited protection for the creditor. A preferential right was only possible on condition that the debtor remained in possession (“meubles n’ont point de suite par hypothèque”). In a conflict with a subsequent pledgee in possession, the latter prevailed; cf. Ph. Godding, Le droit privé dans les Pays-Bas méridionaux du 12e au 18e siècle (1987), p. 256 et seq.

fective against the buyer’s creditors without any publicity. In regard to pledges in receivables, the 1994 Act disposed of the formalities of the old Art. 1690 Cc (assignment) and the need for notification for the pledge of claims. The new Art. 2075 Cc provides that the pledgee takes “possession” of the claim as from the conclusion of the pledge agreement.

Belgian law is hostile to ownership transfers for security purposes. It was held by the Supreme Court that a fiduciary transfer has no legal effect vis-à-vis third parties.2 This traditional viewpoint helps to explain why Belgium was one of the last jurisdictions in Europe to recognise retention of title (Bankruptcy Act 1997). An increasing number of exceptions to this principle are however provided for in different statutory provisions.

Since security rights are “real” rights that can be enforced against all other parties and in insolvency proceedings, the principle of the numerus clausus of property law applies. The parties cannot create new types of security rights but have to choose from among the types provided by the legal system. Security arrangements other than a recognized type but instead based solely on the parties’ contract are binding only as between the contracting parties.

Conflicts with entitlements of third parties and the problems of the ranking of different real security rights are in principle determined by the first-in-time rule (prior tempore, potior jure). This rule is not without exceptions (infra).

Another essential feature is the accessory nature of security rights. The purpose of a security right is to secure an obligation. A transfer of a security right without the transfer of the secured obligation is not possible. In order to meet the requirement of accessority, however, the underlying obligation need not necessarily exist at the moment of the creation of the security right. It is sufficient that it exists at the time the creditor enforces its security right. Consequently, the creation of security rights to secure future or conditional obligations poses no difficulty. Another consequence of the accessority principle is that a creditor cannot not obtain a higher amount out of the proceeds of the collateral or retain a higher value of the assets transferred to him, than what is due to him by the debtor. The debtor is entitled to restitution of any surplus.

Belgian law is also marked by a complex system of statutory privileges. The Mortgage Act and different specific statutes protect numerous classes of creditors based on the particular nature of their claims by granting them a specific or a general statutory privilege on all or part of the debtor’s assets, thus giving them a preferential position over unsecured creditors but not generally over secured creditors. The unpaid bal-

2Cass. 17 October 1996, Pas. 1996, I 992 concl. proc.gen. Piret, RW 1996-97, 1395 note Storme.

ance of the purchase price, the unpaid rent, the claims of sub-contractors, of carriers, the cost incurred in order to protect specific assets and the unpaid insurance premiums are, amongst many others claims, secured by a statutory privilege. General liens covering the totality of the (movable) estate of the debtor are granted to the tax authorities, the employees and to social security agencies. When the creditors who have a security interest in immovable property (e.g. mortgage) are satisfied, the creditors with a general privilege on movable property have also a preferential right on the remaining proceeds of the immovable property (Art. 19 Mortgage Act). In regard to statutory preferences on movables, no publicity requirements have to be observed.

In regard to fungible goods (e.g. inventory), substitution can take place without endangering either the security right or its rank. The only requirements are that the substituted goods be of the same class or category and value as the original goods and that the substitution take place without a significant lapse of time.3

The rights of the security holder cover also the proceeds to the extent that “real subrogation” can be said to take place.4 Accordingly, a security right is maintained despite the loss of its original object through the transfer of the real right onto the substituted asset (Art. 10 Mortgage Act). This principle is accepted without discussion in all cases where the substituted asset is a claim (e.g. sub-sale, insurance). This is true not only for possessory pledgees but also for title-retaining sellers and for sellers that rely on the statutory privilege of the seller (Art. 20, 5° Mortgage Act).5 In these latter cases, the seller’s rights are not extinguished by a sub-sale by the buyer. The seller may claim priority over the proceeds of such a sale to the same extent as its rights in the original sold goods. Likewise, the security interest of the seller under title retention is transferred to the claim arising out of a sub-sale.6 Real subrogation is not accepted for substituted assets other than claims or money and is, of course, limited by the condition that identification of the asset in the estate of the debtor is possible.

3Cass. 7 October 1976, Pas. 1977, I 154 concl. proc. gen. Krings, RCJB 1979, 5 note

Fagnart.

4Sagaert, Zakelijke subrogatie (2004).

5De Page, Traité élémentaire de droit civil belge, Vol. VII (1957), p. 180 et seq.

6Cass. (France) 26 April 2000, Bull. civ. IV No. 89; ERPL 2002, 823 note Sagaert. See also Art. 2372 C. civ. (after the 2006 reform).

2.Security devices denominated as such

a)Possessory devices

The possessory pledge (“gage”/“pand”) is governed by the Civil Code (Art. 2071-2084) and in commercial transactions by the Commercial Pledge Act 1872 (incorporated in the Commercial Code). For the commercial pledge the formal requirements of the Civil Code (written contract that must be “registered”7) are not applicable. The essential requirement is that the collateral is removed from the possession of the debtor and placed under the control of the creditor (or an agreed third party). No further formalities have to be observed. There is no need in commercial transactions for a written contract. Proof of the existence of the pledge may be made by any legal means.

The requirement of dispossession of the debtor and the hostility against fiduciary transfers resulted in the need for other solutions to enhance the accessibility of secured credit based on tangibles as collateral.

In order to facilitate the use of inventory stored in warehouses for secured financing, a constructive dispossession was made possible as early as 1862 by the Warrant Act through the creation of a transferable document (“warrant”) representing the goods. This document is delivered to the owner of the goods by the warehouse-holder where the goods are stored and who will release the goods only against presentation of the document. The owner can then transfer this document to his creditor. Under this system it is also allowed that the inventory is stored at the premises of the pledgor but only on the strict condition that the goods remain separated from unpledged goods and that the pledgor has no free access to them. This practice, known in some countries as “field warehousing”, has become less frequent as a result of the practical problems in ensuring the segregation of the goods and the many cases where the issuer of the document was held liable towards the security holder when the security right was successfully challenged by other creditors or the insolvency administrator of the debtor.

In practice other devices using special purpose vehicles (S.P.V.) have been developed. In some cases the inventory is bought at the request of the enterprise (e.g. a manufacturer) by the S.P.V. The S.P.V. subsequently sells it to the enterprise in accordance to the latter’s needs. This protects the inventory not yet sold to the enterprise against the claims of the enterprise’s creditors. Another possibility is the consignment: the S.P.V. buys the goods and delivers them to the enterprise, which then holds and sells the goods as a consignee. A variation is that an S.P.V. buys the inventory from the enterprise and sells it back to the enterprise under

7“Registration” means simply the payment of a stamp duty.

reservation of title. The bank provides credit to the S.P.V. and takes the claim of the S.P.V. against the enterprise as security. The question whether those devices will be honoured in the enterprise’s insolvency proceedings is however uncertain.

b)Non-possessory devices

There is no non-possessory pledge of a tangible or a group of tangibles under Belgian law. However, a non-possessory pledge, in the form of an enterprise pledge came about by the introduction of a non-possessory security right on the enterprise by the Act of 25 October 1919 (“gage sur fonds de commerce”/“pand handelszaak”).8 The purpose was to enhance the possibility for small and medium enterprises to acquire credit: the pledgor remains in possession of all the assets of his enterprise and is entitled to dispose of them in the ordinary course of his business. It is interesting to note that this took place in about the same period in the beginning of the 20th century that other jurisdictions such as Germany and The Netherlands introduced the fiduciary transfer.

This non-possessory pledge can, however, be granted only to banks and financial institutions. The pledgor must be the proprietor of the enterprise. Contrary to an English floating charge, the enterprise charge can be granted by both individuals and companies. This pledge may secure existing and future obligations. The date on which the secured obligation comes into existence is irrelevant to the ranking of the security right. An important limitation, however, is that the secured obligations result from credit extended to the debtor.9

Art. 4 of the 1919 Act provides that the pledge agreement must specify the encumbered enterprise. The enterprise must also remain identifiable. This requirement can pose difficulty in case of a transfer of the enterprise or a merger.

The enterprise pledge comprises all the essential movable assets of the enterprise. There is no need for the parties to describe the different assets or classes of assets, since the pledge is considered to encumber all the

8Prior to the 1919 Act, a similar security right existed already for agricultural enterprises. Loans to farmers can be secured by a legal privilege, which is in fact a nonpossessory pledge, when such is agreed upon in the loan agreement (Act 15 April 1884). Its binding effect on third parties requires the payment of a stamp duty and registration (infra). The moment of registration determines also its rank. There is no

limitation regarding the quality of the creditors. The security right covers all the

tools, animals, equipment etc. on the farm.

9Not: extra-contractual debts or the obligation of the debtor as guarantor for a third party: Cass. 23 December 2005, available at www.cass.be (1 August 2007).

movable assets of the enterprise. Art. 2 of the 1919 Act gives a nonexhaustive enumeration of these classes of assets which are normally included in the pledge, such as tools, equipment, furniture, trademarks, leases and goodwill. All these assets are automatically included in the pledge. The parties are entitled to specify additional classes of assets (e.g. cash, negotiable instruments, claims and inventory) that are not considered as part of the “enterprise” in the sense of the Act.10 A general description of these additional classes of goods is sufficient (for example: “all existing and future claims”).

The security right encumbers also the assets that are subsequently acquired by the pledgor.

The parties may not limit the collateral to a particular class of assets (e.g. only inventory). The pledge must include the essential classes of assets of the business (equipment, goodwill, trade marks). Immovable property is excluded.11 In regard to inventory, Art. 2 of the 1919 Act provides that its inclusion must be expressly mentioned and that, even in such a case, the security interest is limited to 50 % of the value of the inventory at the time of enforcement. The statute provides thus for a “carve out” – rule to protect the unsecured creditors. In so far as the creditor’s claim exceeds an amount that equals 50 % of the value of the stock and is not satisfied out of the proceeds of the other assets, that excess will be unsecured. This protection of the unsecured creditors applies both in insolvency proceedings and in case of individual enforcement by the pledgee.

The pledge agreement must be established in a document, without the need for a notarial deed (Art. 3 of the 1919 Act). The ordinary requirement of dispossession is deemed to be satisfied by publicity (Art. 4 of the 1919 Act), in the form of filing in the land registers. The filing is in the land register of the place where the enterprise is situated (the land registers are not organised nationally but by judicial circumscription, called “arrondissements”). This poses problems in case the enterprise is transferred to another circumscription.12

In order to fulfil this publicity requirement, the pledge agreement must first be “registered”: this is in essence a fiscal requirement. The next step is the deposit of a copy of the pledge agreement and two summaries of the agreement (“borderel”) that contain all the essential elements of the agreement (infra).

10Cass. 6 November 1970, Pas. 1971, I 200; RCJB 1972, p. 320 note Fontaine.

11Except for movables that are considered as immovable property because they are used for the exploitation of the enterprise that is located in the premises of the pledgor: Cass. 26 May 1972, Pas. 1972, I, p. 889.

12According to some case-law, the pledgee is under no obligation to renew the publicity in the new circumscription.

Pledgees (both possessory and non-possessory) are protected with a high-ranking legal preference on the encumbered assets (Art. 20, 3° Mortgage Act). Their position is not challenged by the numerous general legal preferences known under Belgian law (e.g. tax authorities, employees, social security agency).

Conflicts with entitlements of third parties and the ranking vis-à-vis other security rights are in principle determined by the “first-in-time” priority rule (prior tempore, potior jure). The rank of the enterprise pledge is determined by the time of entry into the registry.

The first-in-time priority rule solves the conflicts between the holder of the enterprise pledge and competing rights on the encumbered enterprise (transferee, subsequent pledgee, lien creditor, mortgage holder). This rule applies also in regard to conflicts with entitlements on specific assets of the enterprise, such as a subsequent pledge on inventory (“warrant”),13 the legal preference of the landlord14 or a subsequent pledge of a claim (Art. 2075 para. 3 Cc).

The first-in-time rule, however, is not without exceptions. For instance, the conflict between the holder of an enterprise pledge and the statutory privilege of the unpaid seller (Art. 20, 5° Mortgage Act) is not determined according to that rule, but instead a “purchase money priority” rule applies. The statutory privilege of the unpaid seller will thus defeat an earlier enterprise pledge if the seller fulfilled the publicity requirement (infra).15 Also, a title-retaining seller can revindicate the goods notwithstanding the pledge on the enterprise of the buyer. The same applies for the revindication of the lessor (financial leasing). It has also been ruled that in the conflict between the enterprise pledge that included all existing and future claims and the statutory privilege of the sub-contractor on the claim of the debtor (main contractor) against the employer (Art. 20, 12° Mortgage Act), the first-in-time priority rule is not applicable and the statutory privilege of the sub-contractor prevails over an earlier enterprise pledge.16

13Cass. 19 November 1992, RCJB 1994, 27 note Van Quickenborne.

14Cass. 11 June 1982, RCJB 1985, 371 note Moreau-Margreve.

15Cass. 28 September 1972, Pas. 1973, I 103 conclusions advocate general Krings; Cass. 7 May 1987, Pas. 1987, I 1034. The Bankruptcy Act (1997) eliminated the publicity requirement applicable to the statutory privilege of the unpaid seller, but retained it in regard to the conflict with the mortgage holder on fixtures. Since this form of publicity still exists, it is held by legal writers that the outcome of the conflict remains unaltered, cf. Dirix/De Corte, Zekerheidsrechten (2006) 362; Gregoire, Publicité foncière, sûretés réelles et privilèges (2006) 405.

16Cass. 25 March 2005, RW 2005-06, 62; RCJB 2005, 472 note Gregoire.

3.Title-based security devices

Belgian law is traditionally hostile to transfers of property for security purposes. With respect to an intangible, the Supreme Court ruled that a fiduciary assignment is valid inter partes, but that it has no legal effect vis-à-vis third parties (supra). As a result, fiduciary transfers cannot be upheld in insolvency proceedings. Different statutes, however, provide for the recognition of fiduciary transfers in specific areas such as financial transactions.17 In regard to tangibles, examples of security rights based on the ownership of the creditor are: reservation of title and financial lease. Although in these cases the creditor is the owner of the collateral – because he retains ownership or because there is a transfer of ownership – these institutions are considered as security rights.

4.Existing registries

In regard to security rights on movables there are registries for enterprise charges, charges on agricultural enterprises and the legal privilege of the seller. For security rights on ships the publicity is similar to that for security rights on immovable property (mortgage) (Art. 25-42 Maritime Act).

a)Enterprise charge

Publicity in regard to the enterprise pledge is organised in the land register. In order to fulfil this publicity requirement, the pledge agreement must first be “registered”. “Registration” is in essence a fiscal requirement, i.e., a revenue-raising device that is functionally a tax on secured borrowing. The costs of registration of the pledge agreement is an amount equal to 0,50% of the secured claim specified in the agreement (which may be stated as a maximum amount). The following step is to submit to the registrar a copy of the pledge agreement and two summaries of the agreement (“borderel”) that contain all the essential elements of the agreement. This summary is copied in the land register and contains the following elements:

a)name, address, profession of the creditor,

b)name, address, place and date of birth and profession of owner of the enterprise,

c)identification of enterprise,

17In regard to intangibles and financial assets in paper form (see: Art. 12 Financial Securities Act of 15 December 2004).

d)the maximum amount of the secured obligation and

e)whether inventory is included.

The additional assets need not to be described in the borderel since the presumption is that the totality of the enterprise is encumbered. However, the fact that the pledge also encumbers the inventory must be mentioned.

The land register filing fee is € 58,50 for secured debt up to € 25.000 and an additional € 20,50 Euro per additional € 25.000 of debt. After payment of the pledge agreement registration fee, the additional costs are minimal (stamp duty, fee of land register and cost of obtaining copies).

All third parties have the right to file to the registrar a request of information. The response, which relates only the data on the summary (“borderel”), is provided in a written document. The fee for a search is € 30 and the normal response time is one or two days.

b)Charge on agricultural enterprise

The requirements are: a document that specifies the existence of the charge, the payment of a stamp duty (0,50 % of the amount of the claim) and the entry in a specific register held by the local tax authority (Registers Office). The costs for the entry in the register are € 30 Euro for debts up to € 25.000 and € 12,50 per additional € 25.000. All third parties can apply for information. The fee for a search is € 5 and normal response time is one or two days.

c)Legal preference of seller

In order to prevail over competing rights of mortgagees and holders of an enterprise charge, the unpaid seller who relies on his legal privilege has to deposit the sales contract (or the invoice) at the law clerk’s office of the commercial court of the residence of the buyer within 15 days after the delivery of the goods. The deposition is without costs except for a stamp duty. All third parties can apply for information. They can do the search themselves (which is free) or apply for a copy of the deposited contract or invoice (at the cost of a stamp duty).

II.Case studies

1.Non-possessory security right in specific existing items of equipment

Belgian law does not allow a non-possessory security right in specific assets. Such an agreement would be valid between the parties, but would not be binding on third parties (or enforceable in insolvency proceedings). It is merely a promise to give security.18 The only non-possessory security right is the enterprise pledge but this must include all the essential assets of the business. An enterprise pledge that is limited to specific equipment would not be effective in regard to third parties.

2.Non-possessory security right in present and after-acquired equipment (floating security right)

As is said before, the enterprise pledge (Act of 25 October 1919) must include all the essential assets of the business (e.g. equipment, goodwill, trademarks). A non-possessory security right in present and future equipment can be created by way of an enterprise pledge, but only if it includes also all the other assets of the enterprise, and only if it is granted to a financial institution (supra).

a)Documentation and formalities to achieve effectiveness against grantor and against third parties

The formalities and cost of the enterprise pledge are described above.

b)Discoverability of earlier-created rights in the collateral

A prospective lender can file to the land registrar a request of information about the existence of earlier enterprise pledges (supra).

The position of the pledgee can also be endangered if the pledgor is the owner of the premises where the machines are located and the pledgor has previously mortgaged the immovable property. Tangibles that are fixed on immovable property of the same owner so that they are physically united with it or that are used for the exploitation of such property, are considered as immovable property (Art. 524 and 525 Cc). In regard to the first category, it is held that these tangibles are not included

18 Cass. 7 April 1967, Pas. 1967, I 926.

in the enterprise pledge. Tangibles in the second category are covered by the enterprise pledge19 and a conflict between the pledgee and the mortgagee can thus arise. This conflict is solved according to the first-in-time priority rule. The lender can obtain information about prior mortgages on the immovable property of the manufacturer by filing a request to the land registrar. The fee for a search is € 30.

If the pledgor is not the owner of the premises but instead is a tenant, a conflict can arise between the pledgee and the landlord. The legal privilege of the landlord encumbers all assets that are located in the premises and this is so regardless of their ownership, on condition that the landlord is in good faith (Art. 20, 1° Mortgage Act). This conflict is solved according to the first-in-time priority rule by comparing the date of the registration of the pledge with the beginning of the lease contract (normally: the occupation of the premises by the tenant).20

According to Art. 23 Mortgage Act, the pledgee prevails over the legal privilege of the seller unless the pledgee had knowledge at the time of the pledge that the price was still due. According to case law, the pledgee is deemed to have such knowledge if the unpaid seller of machinery has deposited the sales contract (or the invoice) at the law clerk’s office of the commercial court of the residence of the buyer within 15 days after the delivery of the goods. All third parties can apply for information (supra).

c)Rights of secured creditor upon sale of the collateral by grantor

aa) Rights in the sold collateral

The pledgee is entitled to enforce its pledge against machines that have been sold to a third party (Art. 11 para. 2). This right to pursue (“droit de suite”) the encumbered assets (“raw material, machinery and equipment”) is limited in time (6 months from the transfer) and rather theoretical. Third parties are protected when they acted in good faith. Good faith is presumed (Art. 2268 Cc). The outcome will depend on the circumstance of the sale: is it a normal business transaction, was the price in line with market value, etc. knowledge of the existence of the pledge will not affect the position of the transferee when the transfer is a genuine business transaction. In principle, third parties are not under an obligation to consult the land registers in order to ascertain the existence of an enterprise pledge. According to case-law, however, such a duty does exist for financial institutions. The courts refuse therefore to protect the buyer/ lessor in the case of a “sale and lease back” of machinery that is covered

19Cass. 26 May 1972, Pas. 1972, I 889.

20Cass. 11 June 1982, RCJB 1985, 371 note Moreau-Margreve.

by an enterprise pledge when the buyer/lessor is a financial institution. This holding is based on the reasoning that the buyer/lessor, as a financial institution that is fully familiar with the registration regime, cannot be considered to be in good faith regarding the existence of the enterprise pledge.

bb) Rights in the proceeds of the sold collateral

As long as the purchase price of the subsale is still unpaid, the security right will also encumber the claim against the buyer. The lender may attach the claim in order to prevent payment to the seller. If the purchase price was paid before the opening of insolvency proceedings, the lender will lose, as its proceeds rights do not reach money that has not been mixed with that of Manufacturer’s estate. If the price has not been paid before the opening of insolvency proceedings, the lender will have priority with respect to the claim for the price since mixing of funds with those of the Manufacturer’s estate does not occur when payment is later made to the administrator.

cc)Rights of secured creditor in replacement collateral

Since the enterprise pledge covers all equipment, however acquired, the security right will encumber all machines, regardless of the time of acquisition, their number or value, so the fact that they may replace original collateral is irrelevant, and the coverage does not depend on the doctrine of real subrogation.

dd) Remedies upon default

The pledgee can exercise its rights against the collateral without the requirement of an executory title. When the debtor defaults, the lender instructs a bailiff to seize the totality of the assets (this does not mean physical seizure, but refers to a judicial act which is noted in a registry at the court21). The purpose of this seizure is to ascertain the existence, and make a list, of the encumbered assets. The next step is the filing for a court order by the president of the commercial court to sell the enterprise as a whole or in parts in order to obtain a preferential payment out of the proceeds. The Commercial Code, which covers all commercial pledges, provides for swift enforcement proceedings: the pledgor is summoned,

21 Art. 1390 Judicial Code.

the rights of the pledgee are examined in a summary way without the possibility for the court to grant any delay to the pledgor, and an administrator (normally a bailiff) is appointed to sell the enterprise as a whole or in parts (Art. 4-8 Commercial Pledge Act). The sale can be by auction or a private sale. Nonjudicial sale by the creditor is not permitted. Predefault agreements that allow the pledgee to appropriate the assets after default are ineffective (Art. 2078 Cc); however, post-default agreements allowing appropriation are effective.22

ee)Insolvency of the grantor

The Bankruptcy Act provides for an automatic stay of enforcement by security holders (Art. 26 Bankruptcy Act). In any event, the courts will appoint an administrator of the bankruptcy to liquidate the enterprise and to distribute the proceeds among the pledgee and the other creditors. The pledgee does not have to contribute to the costs of the insolvency proceedings except to the extent that he benefited from them. When disputed, the court must determine the extent and value of any such benefit.

Reorganisation proceedings (“concordat”) provide for a general moratorium of creditors during the first six to nine months (“observation period”) (Art. 21 Concordat Act 1997). All enforcement actions by creditors – secured and unsecured – are halted. Once the reorganisation plan is adopted, the position of the unsecured creditors is determined by the plan. The duration of the period of so-called “definitive suspension” cannot be longer than 24 months, with a possible prolongation of 12 months (Art. 34 Concordat Act 1997). The secured creditors, creditors with a specific legal lien, unpaid sellers with a reservation of title and the tax authorities are in principle not affected by the plan, unless they agree to it. When they remain outside the plan, their rights of enforcement are nevertheless suspended for a period of 18 months, on the condition that the plan provides for the payment of current interest (Art. 30 Concordat Act 1997). When this stay causes prejudice to their security or property rights, the court can compensate them with an additional security right.23

22In France Art. 2078 C. civ. was abolished as a result of the 2006 reform (see: Art. 2348 C. civ.).

23See Dirix/Verougstraete, Belgian Report, in McBryde et.al. (eds.), Principles of European Insolvency Law (2003), p. 114 et seq.

ff)Motor vehicles collateral

Motor vehicle collateral is not different legally from other collateral. The registration of motor vehicles is not relevant to the issue of ownership and plays no role in the secured transactions context.

3.Non-possessory security right in present and future inventory (floating security right)

As has been said before, the enterprise pledge must include all the essential assets of the business. The parties may not limit the collateral to a particular class of assets (supra). The inclusion of inventory, however, is not mandatory, and, if inventory is to be included, it must be expressly provided for in the pledge agreement and mentioned in the borderel summary (and, thus, given special publicity). Furthermore, even in such cases, the security right is limited to 50% of the value of the inventory (Art. 2 of the 1919 Act, supra). If the inventory is included in the agreement, the pledge will encumber the totality of the inventory (up to 50% of its value) without the need for further specification and regardless of its source.

The enterprise pledge can secure existing and future, absolute or conditional debts.

It is accepted in regard to fungible goods (e.g. inventory), that substitution can take place without endangering the security right or its rank.

a)No difference.

b)No difference (except that no conflict with a mortgagee can

arise and that there is no publicity in regard to the legal privilege of the unpaid seller of inventory).

c)The good faith transferee will acquire ownership of the goods free of any encumbrance.

d)No difference.

e)No difference.

f)No difference.

4.Purchase-money (asset-acquisition) financing – comparison of financing provided by seller, financial lessor and third-party secured lender

Manufacturer can choose between (1) buying from a title-retaining seller (Art. 101 Bankruptcy Act 1997), (2) leasing from a financial lessor (Royal Decree of 10 November 1967) and (3) buying from a seller who does not

retain title but instead relies on its legal privilege on the sold assets (Art. 20, 5° Mortgage Act).

A third-party lender that lends money to the Manufacturer to pay the seller cannot obtain a non-possessory purchase-money security right, although he can, by paying off the seller, become subrogated to the ownership24 or legal privilege of the seller. An assignment of claim will have the same result (Art. 1692 Cc).

a)Documentation and formalities

aa)There are no publicity requirements in regard to retention of title. The only formality is the need for a document stating that the seller is retaining title and that the buyer’s agreement (affirmatively indicated or by acquiescence) is established no later than the moment of delivery.

bb)There are no formalities in regard to financial leases. The requirement (Royal Decree of 10 November 1967) that the equipment must be marked with the notice that it is subject to a financial lease has only an administrative nature without impact on the binding effect of the lessor’s rights.

cc)The legal privilege of the seller is without formalities. Only in order to protect the seller’s preferential right in conflicts with a mortgagee and a pledgee of the enterprise, the seller of machinery and equipment must deposit the sales contract (or the invoice) at the clerk’s office of the commercial court (supra)

b)Priority of each credit source v. earlier and later

competing claimants and sub-buyers re aa) the initial intangible, bb) proceeds of the initial tangible

aa)The seller under title retention can recover the goods, having priority over all earlier and later security rights (e.g. enterprise pledge). The title-retaining seller’s ownership will prevail against all but a bona fide purchaser and a possessory pledgee who took possession of the goods in good faith (Art. 2279 Cc). As a result of real subrogation the right of the seller will also encumber the claims out of sub-sales (supra).

bb)Same answer for financial leasing.

24 For France since the 2006 reform: Art. 2367 C. civ.

cc) The legal privilege of the seller will prevail against all but a bona fide purchaser, a possessory pledgee that took possession of the goods in good faith and the legal privilege of the landlord who does not have actual knowledge when the goods are brought onto the premises25 that the price is still unpaid (Art. 23 Mortgage Act). (The landlord’s position as bona fide third party is the same vis-à-vis title retention, financial (and operating) lease, seller’s legal privilege and any other owner whose goods are found on the leased premises; it differs only vis-à-vis the enterprise pledge (see above)). Real subrogation will also apply to claims out of subsales.

c)Remedies

aa)No particular formalities have to be observed. In case the buyer (Manufacturer) refuses to respond to the request for payment or repossession, the seller can obtain a court order to seize the goods (Art. 1463 Judicial Code). The proceedings in order to obtain a court order in such cases are very expeditious. The seller is however not entitled to retain any surplus (infra).

bb)Same answer for financial leasing.

cc)The seller can seize the goods. The seller will be paid in priority out of the proceeds of the sale.

d)Insolvency proceedings

aa) After the opening of insolvency proceedings, the seller can recover the goods from the administrator (Art. 101 Bankruptcy Act 1997). There are no formalities to be observed. The only requirement is that the seller declares his title before a specified stage in the proceedings has been reached. The administrator can only oppose the claim of the seller by offering payment of the outstanding balance (Art. 108 Bankruptcy Act 1997). The administrator has also a right of retention for the costs he has expended to preserve the goods. According to the principle that a security right may not procure enrichment to the creditor, it is held by most

25Cass. 4 December 2003, RW 2004-05, 623 note Storme, available at http://www. cass.be (1 August 2007).

legal writers that if the value of the goods exceeds the amount of the remaining debt, the seller must pay the surplus value.26

bb)The property rights of the lessor are also upheld in insolvency proceedings. The value of leased object is to be deducted from the totality of the debts of the lessee.27 The lessor is under the obligation to pay the amount by which the value of the property exceeds the amount that is still due from the lessee. Further, it is held by case law that the lessor is not entitled to terminate the contract in case of the bankruptcy of the lessee when the administrator offers the payment of the remaining instalments.

cc)The seller has to declare his claim in the proceedings and will receive a priority payment out of the proceeds.

5.Bona fide acquisition

A third party that buys at normal market price in the ordinary course of business in good faith acquires ownership of the goods free of the enterprise pledge (see following paragraph), the title retained by a seller, the unpaid seller’s privilege and the rights of a financial lessor (Art. 2279 Cc). Even knowledge of the existence of the competing position is likely to be irrelevant, unless there was also indication that the buyer had reason to know that its seller would not pay its secured debt to the competing claimant. The standard may have a different meaning when applied to a buyer that is a professional (e.g., a dealer in used equipment), and an obligation to check the land register exists only for financial institutions (supra).

The holder of the enterprise pledge has a droit de suite in case of an unauthorised transfer of “raw material, machinery and equipment” (Art. 11 para. 2 of the 1919 Act). This droit de suite applies only to these types of assets.28 The transferee, however, is protected if he acted in good faith and in the ordinary course so that the sale appears to be a genuine transaction in which the parties were not acting in concert to undermine the security right of the lender. In such cases, the good faith of the buyer

26 For France: Cass. (France) 5 March 1996, Bull. civ. IV, No. 72; Cass. (France) 23 January 2001, Bull. civ. IV, No. 23. See also: Art. 2371 C. civ. (after the 2006 reform).

27Cass. 8 November 2002, RW 2003-04, 1459 note Van Oevelen.

28Cass. 21 October 1999, available at http://www.cass.be (1 August 2007): not to intangibles.

is accepted and knowledge of the existence of the enterprise pledge is irrelevant.

6.Possessory pledge – constructive or fictive possession

For a possessory pledge, possession of the collateral by a third person (not the pledgee or its agent) with respect to whom there is an agreement between the parties (Art. 2076 Cc) that such person will serve as pledge holder is sufficient, provided that this person agrees to hold possession of the collateral for the benefit of the pledgee.29 This is actual dispossession of the pledgor.

A form of constructive possession might be said to exist under the Warrant Act (supra) in that the possession of the document is considered to be the equivalent of the possession of the goods. Otherwise, Belgium does not recognize constructive or fictive possession.

7.Over-security

There is no doctrine of over-security under Belgian law. There are other concepts that have potential application in debtor-creditor relations generally, but these are not based on a relationship between the value of the collateral and the amount of the secured obligations. General principles of law such as the doctrine of abuse of rights apply both in the relation between creditor and debtor and in the relation between creditors. There are reported cases about the liability of banks for extending credit.30 There is a growing awareness in political circles against possible abuses by financial institutions,31 particularly in regard to security provided by family members of a debtor.32

29Cass. 10 July 1941, Pas. 1941, I 295.

30Simont/Bruyneel, La responsabilité extra-contractuelle du donneur de crédit (1984).

31See for example the recent proposal by some members of one of the ruling parties for a resolution to be adopted in parliament demanding a parliamentary inquiry on current banking practices (Parl. Doc., Chamber of Representatives, 2006-07, No. 512855/001).

32Proposal in regard to personal sureties: Parl. Doc., Chamber of Representatives 2006-2007, No. 51-2730/001. See also the proposal to introduce the homestead exemption: Parl. Doc., Chamber of Representatives 2006-2007, No. 51-2873/001.

8.Legal (non-consensual) rights of unpaid seller

The unpaid seller is protected by a legal privilege on the sold assets (Art. 20, 5° Mortgage Act). The position of the unpaid seller was changed dramatically by the new Bankruptcy Act 1997 in particular by the recognition of retention of title. In addition, the legal privilege was strengthened. Under the new provisions, the privilege is conferred automatically on any seller (the restriction to equipment is abolished) and without the need to comply with publicity requirements (except for the purpose of ranking in regard to the conflict with mortgagees and pledgees of the enterprise).

A peculiar remedy, a relic from ancient customary law, is the rei vindicatio (Art. 20, 5° Mortgage Act) that enables the unpaid seller who was under no obligation to deliver the goods before payment, to reclaim the goods within a period of 8 days after the delivery. The importance of this right in business practice is rather limited.

9.Special property registries

Belgium has ownership registries only for ships. There exist various other special registries (e.g. for vehicles and aircraft) but with no or doubtful relevance for the determination of the ownership.

a)Ships

Registered ships can be encumbered by mortgage. The rules regarding the mortgage of ships are similar to those on the mortgage of immovable property (Art. 25-42 Maritime Act).

b)Aircraft

There is a register for aircraft, pursuant to international treaties (Royal Decree 15 March 1954), but this is an administrative matter, and its effects on ownership are unclear. It is clearly not set up to register security rights. Belgian law contains no specific provisions for security rights on aircraft. A possessory pledge on an aircraft would be very unpractical since it would require that the pledgor lose control over the aircraft. A more feasible way to use the aircraft as collateral is the granting of an enterprise pledge on the company.

10.Non-possessory security rights in raw materials –

effects of processing (commingling, attachment/accession)

Security rights in raw materials can be upheld only when the materials are still identifiable in the estate of the buyer and have not been mixed with other goods. Accordingly, the unpaid seller under retention of title will lose his ownership of the materials when the goods have been mixed with other goods of the same species. When all the materials in a commingled batch have been sold by the same seller, most legal writers accept that the seller under reservation of title can reclaim the goods notwithstanding the commingling. If the materials of the same type were supplied by different sellers, it is possible, according to some legal writers, for the sellers to recover the goods jointly. The goods are then distributed among the sellers pro-rata.

There are no specific rules or criteria of identification. Whether the object of the security right can be identified must be determined according to common sense. It is not possible to extend contractually the security right of the seller to the goods that are transformed or newly created in a manufacturing process.

11. Cross-border issues

The rights in rem are governed by the law of the State on whose territory the asset is located (lex rei sitae) (Art. 87, § 1 Private International Law Code).33 This law also establishes the existence of legal preferences on those assets and their ranking.

The validity between the parties of the security right (e.g. pledge agreement, fiduciary transfer) will be governed by the lex contractus.

The question of the binding effect of the security right on third parties before a Belgian court will be addressed according to the law of the state where the goods are located (lex rei sitae). This means that a security right created in country A will be recognized in country B only if it is similar to a security right that is recognized under the law of country B or can be translated to an equivalent institution. Accordingly, a retention of title that was validly created under the law of country A will be recognized in Belgium (country B) since Belgian law recognizes such a security device. Its effects will be determined by Belgian law. A “prolonged” retention of title (on claims of sub-sales) created in country A will be recognized to the extent the result would be similar to the outcome under

33The Code that came into force in 2004 is the result of a joint project of all Belgian law faculties. An English translation of the code can be found at http://www.ipr.be (1 August 2007).

the principles of real subrogation. On the other hand, a fiduciary transfer, a retention of title that extends to the newly produced goods or to other claims, or a non-possessory pledge on assets located on Belgian territory will be ineffective against competing rights of creditors in a Belgian insolvency proceedings since such types of security rights have no thirdparty effects under Belgian law.