Is the Default Interest Rate Claimed by the Bank Excessive?

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An interest rate of 15.40% per year?

In our review of Belgian banking case law for 2019, we came across numerous decisions on the application of high default interest rates, in a context of generally low market rates. The interest rate applied by a bank has been debated for decades.

In a case before the Liège Court of Appeal, the court upheld the rate applied by the bank on its cash credit facility, increased by 6%, giving a rate of 15.40% per year. It held that this was not a usurious rate and that it corresponded to banking practice.

The court stressed a notable difference between two situations. On one side, a borrower who scrupulously meets scheduled monthly repayments. On the other, a client who, overnight, following a termination and the resulting acceleration of the amounts due, owes a large sum of money without any guarantee of payment. The 6% increase, as a penalty clause, was not excessive.

Nor was the combination of that penalty clause with default interest, since each covers a distinct head of loss. Default interest compensates the loss from the immobilisation of capital. The penalty clause repairs the loss from the non-performance itself: the risk of losing the capital, recovery costs, and so on [1].

And a rate of 16.60% per year?

The Brussels Court of Appeal later confirmed this position [2], on slightly different reasoning. The court first recalled Article 806 of the Judicial Code: in default judgments, the judge may only raise of his own motion rules of law not invoked by the claimant where the claim or plea is contrary to public policy. It then recalled Article 1153 of the Civil Code, which it considered to be precisely a public-policy provision to be raised of the court’s own motion.

The court noted that the bank, appellant and claimant at first instance, had applied a rate of 15.40% per year in its proof of claim in the principal debtor’s bankruptcy. Since the terms binding the guarantor and the bank stipulated that the sums owed by the guarantor would bear interest and commission at the same rates and conditions as those contractually owed by the principal debtor, the court reversed the judgment below and confirmed the validity of the 15.40% rate.

The same court [3] also upheld a rate of 16.60% per year.

Having recalled that the principal debtor, meanwhile declared bankrupt, had adhered to the bank’s general terms and conditions, and that the guarantors had undertaken to repay all sums owed by the borrower under the credit facility, the court confirmed that those contractual provisions bound the parties as their governing law. It is therefore, in the court’s words, inoperative to question the reality and origin of the rate in order to contest it afterwards.

In mortgage credit matters, see our earlier article on the calculation of rates in the event of arrears or termination of the credit agreement.

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[1] For a comprehensive treatment, see C. Biquet-Mathieu, “Crédit hypothécaire et crédit d’investissement, indemnités, frais et pénalités”, in Le crédit hypothécaire, Actualités et réponses pour la pratique, Anthemis, Limal, 2015.

[2] Brussels, 18 January 2019, unreported, R.G. 2018/AR/1814.

[3] Brussels, 29 March 2019, unreported, R.G. 2017/AR/884.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.