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Capitalisation of interest: a bridge too far?

Trust reigns supreme, but it is better to be safe than sorry …

The relationship between franchisor and franchisee is based on trust, but also on various obligations, some of which are financial. In this context, although undesirable, some payment delays can occur. In those circumstances, specific legal tools may come into play, and here we refer the reader to our article (available in FR and NL) on debt collection.

Franchise agreements, or the franchisor’s general terms and conditions, often contain specific clauses designed to encourage franchisees to meet their payment obligations, such as: automatic cancellation of the period allowed for payments without prior notice, additional fees and interest, fixed compensation in the event of delay, the loss of certain benefits otherwise granted, or even automatic termination of the franchise agreement in the event of non-regularisation after formal notice. Less common, but worthy of attention, is the clause providing for “capitalisation of interest”. This technique, which consists of the accrual of interest on unpaid amounts by adding the interest to the principal amount due, so that the interest compounds, can play not only a financial role but also encourage certain franchisees to be more rigorous.

What interest can a creditor claim?

Under Belgian law, there are several categories of interest that may be claimed.

• Default interest, payable as compensation for the loss resulting from the late performance of a monetary obligation the amount of which is determined or sufficiently determinable; this includes, for example, invoices relating to royalties or certain services provided by the franchisor.
• Remunerative interest is interest that serves as compensation for the provision of capital; for example, when a franchisor makes a loan to a franchisee to finance the launch of the latter’s activities.
• Compensatory interest is due as compensation for damage resulting from the non-performance of a monetary obligation the amount of which has not been fixed and which must therefore be determined by the parties or by a court. Here, we refer, for example, to compensation for the infringement of a trademark right or of a non-competition clause.

Concerning capitalisation of interest in the first two categories, Article 5.207 of the new Civil Code (Article 1154 of the former Civil Code) sets out the conditions of application. On the other hand, Compensatory interest, does not fall under these legal provisions and it may only be compounded to the extent that it can be shown that doing so is necessary in order to obtain full compensation.

Compounding of interest

Interest capitalisation – or ‘compounding of interest’ (also referred to as “anatocism”) – consists of incorporating the accrued interest into the principal so that interest is generated on the total amount. When a monetary obligation is not fulfilled, interest begins to accrue from the date of formal notice to the debtor, unless otherwise provided by law or agreement. Once the interest has accrued, and provided that the legal conditions are met – in particular a maturity of at least one year and a legal claim, formal summons or express agreement – this interest may be compounded. It is then added to the capital and, in turn, begins to generate interest.

Article 5.207 of the new Civil Code provides that ” Accrued interest on the principal amount may [only] bear interest [itself], whether by judicial order or by special agreement, provided that, either in the order or in the agreement, the interest in question is due for at least one full year.”

Article 1154 of the former Civil Code provides that “Interest due on capital may [itself] bear [compound] interest, either by judicial summons or by special agreement, provided that, in either the summons or the agreement, the interest is due for at least one full year.”

To illustrate the effect of compounding (capitalising) interest, we will take the example of a debt of EUR 1,000 over a period of eight years at an interest rate of 8% per annum: without capitalisation the amount due would be EUR 1,640, but if compound interest is applied that amount rises to EUR 1,851, which means an increase in the amount of interest due of almost one third.

Franchise agreements normally provide for default interest in the event of late payment of royalties and/or other remuneration, and more rarely for certain advances made to the franchisee. It then becomes possible to compound default interest that has been due for at least one year. Given that delays in the judicial system have an unfortunate tendency to grow daily, legal disputes tend to drag on. The capitalisation option makes it possible to increase the basis on which any interest due is calculated. That prospect may weigh on the franchisee’s mind and encourage them to settle their debt quickly rather than watch it grow exponentially.

What if the franchisor does not include any provisions regarding interest in their contract or terms and conditions?

There is no real concern concerning default interest, as franchise agreements are subject to Article 5 of the Law of 2 August 2002 on combatting late payment in commercial transactions. Under this text, when payment has not been made by the agreed due date, default interest becomes automatically payable, without the need for prior formal notice. This interest therefore accrues automatically from the day following the due date of the debt — as a rule, one month after the obligation arose, unless another deadline is stipulated in the contract. After one full year has elapsed, the capitalisation of default interest may be requested by means of a formal notice. It should also be noted that remunerative interest on arrears falls indirectly under the application of the 2002 law, provided that it is unpaid or that allowing certain contractual exemptions would be manifestly unfair.

For information, the statutory interest rate applicable in the event of late payment in commercial transactions can be found on the website of the Federal Public Service Economy. It is set at 10.5% per annum for the first half of 2026, while the (ordinary) legal interest rate for 2026 is set at 4.5%. (These rates are the same as for the second semester of 2025 and for calendar 2025.)

(Article text finalised on 30 December 2025. Applicable interest rates verified on 30 March 2026.)

SILENT BANKRUPTCY

Jan 22, 2025

When a company is no longer able to pay its short-term debts and is no longer considered creditworthy, the company must file for bankruptcy within a month. In traditional bankruptcy, once the filing is made the court will pronounce the bankruptcy immediately and a bankruptcy notice will be published in the Belgian Official Gazette. A receiver will be appointed, as well as a supervisory judge to oversee the procedure.

Since the introduction of Articles XX.97/1 to XX.97/6, which has applied as from1 September 2023, the Belgian Code of Economic Law (“BCEL”) allows a company in bankruptcy to prepare for bankruptcy quietly, i.e. without publicity.

A silent bankruptcy (also known as “pre-pack”, to use the Anglo-Saxon expression) is initiated by filing a petition in which the debtor demonstrates that this method of reorganization will (1) facilitate the liquidation of the company whereby the highest possible payout to the joint creditors is achieved and (2) preserve employment as much as possible. The chambers will then consider this request within three working days. If the request is granted, the company court will appoint a provisional receiver and a provisional supervisory judge for a maximum period of thirty (30) days, extendable by up to 30 days. They will, in principle, also act as receiver and supervisory judge in the event the company is effectively declared bankrupt. During the proceedings no suspension is granted, and it remains possible for a creditor to still sue the company in bankruptcy. The enterprise itself may also still file for bankruptcy during the preparatory phase.

The provisional receiver represents the interests of the creditors and must examine the feasibility of the scheme proposed by the debtor. In doing so, he or she should check in particular whether a proposed business transfer would be made to related parties and, if that is the case, inform the provisional bankruptcy judge.

The advantage compared to traditional bankruptcy is that the debtor retains control which permits the debtor to prepare the transfer of part or all of assets or activities within a short period of time prior to the bankruptcy declaration. The transfer is only effective once the bankruptcy is declared. This procedure can maximize the proceeds available for the creditors by allowing the transfer of assets to take place on a going concern basis.

There are also other significant advantages of the Silent Bankruptcy procedure:

• Although it will be a point of focus for the supervision by the provisional receiver and the provisional supervisory judge, it is not excluded that a transfer may be made to a party “related” to the existing shareholders or directors.
• The chance that the agreed transfer is reversed at the request of the receiver in the bankruptcy is limited, since the preparation took place under his supervision and that of the supervisory judge. Because of the way the receiver’s fee is calculated, he also has an incentive to achieve an asset transfer that meets the conditions of the ‘pre-pack’ after his formal appointment.
• The Supreme Court, in a judgment of 19 January 2006, defined the concept of de facto liquidation, where the directors of a company actually proceed to liquidation in disregard of the rules of priority among creditors. The risk of liability for this is virtually eliminated by silent bankruptcy.
• The obligation to request and transfer tax and social security certificates to the transferee, under penalty of joint and several liability for the debts of the transferor, does not come into play in bankruptcy.

• Under Belgian law, where an economic entity is transferred to a new employer as a ‘going concern’ Collective Bargaining Agreement n° 32bis (CBA32bis) applies. But in a Silent bankruptcy the effects of CBA 32bis are limited; the transferee can freely choose whom to employ. Continuing employee’s seniority and any applicable sectorial CBAs will be transferred.

The silent bankruptcy procedure also brings certain new questions and concerns to the surface:

• Apart from a few high-profile cases, silent bankruptcy is currently proving unpopular. In the district of Flemish Brabant and Dutch-speaking Brussels, where the Dutch-speaking company courts of Brussels and Leuven have jurisdiction, only eight silent bankruptcies have been pronounced to date. Cases before French-speaking courts appear to be more frequent.
• There is no firm guarantee that the agreed transfer will be effectively carried out by the receiver after the bankruptcy judgment. Indeed, the receiver is not obliged to do so. A prudent liquidator who judges that the agreed transfer is sub-optimal may still consult the market and may possibly transfer the assets to a third-party.
• The supervising bankruptcy judge, who often has a business background, has considerable influence on the analysis of the price of the agreed transfer in practice notwithstanding his legally limited role.
• Finally, provisional receivers consider that their powers are too limited to adequately protect the interests of creditors. In addition, there is no clear mechanism for verification of the agreed transfer by a judicial authority which, in practice, is regulated on the basis of article XX.142 of the CEL governing the urgent transfer of assets subject to rapid depreciation.