Bank finance and regulation Multi-jurisdictional survey Luxembourg Enforcement of security interests in banking transactions Philippe Dupont and Grégory Minne Arendt & Medernach, Luxembourg [email protected]/[email protected]

Part I – types of security

1. What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. The most common types of security arrangements used in Luxembourg with respect to banking transactions are the pledge (gage) and the transfer of title for security purposes (transfert de propriété à titre de garantie) over claims and financial instruments, and the mortgage (hypothèque) over immovable property. 1 Depending on the circumstances, a standard security package includes some or all these security arrangements. The Luxembourg law of 5 August 2005 on financial collateral arrangements (‘FCAL’) implementing the directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (‘FCAD’) governs pledges and transfers of title for security purposes over claims and financial instruments and provides for a special regime for these security arrangements, offering very high protection to collateral takers. 2 . Pledge over claims or financial instruments The pledge is a contract whereby a debtor or a third party (the pledgor) transfers the possession of one or several movable assets (ie, claims or financial instruments) to a creditor (the pledgee) or an agreed upon third party in order to secure the performance of the obligations of such debtor. The pledge may extend to both present and future assets of the pledgor without any need to specifically designate such assets and may secure present and future obligations of the debtor to the pledgee. The pledge is an ancillary surety of the debt it is intended to secure. The legal ownership of the pledged assets remains with the pledgor during the lifetime of the pledge. 1

Personal security interests such as the first demand guarantee (garantie à première demande) and the suretyship (cautionnement) are also frequently used in banking transactions but will not be considered in this contribution. 2 See paragraph II. 3. below.

Transfer of title for security purposes of claims or financial instruments The transfer of title for security purposes is a contract whereby a debtor or a third party (the transferor) transfers full ownership – including by way of fiduciary transfer (par voie fiduciaire) – of one or several assets (ie, claims or financial instruments) to a creditor (the transferee) for the purpose of securing the performance of the obligations of such debtor and includes an undertaking of the transferee to re-transfer the transferred assets (or equivalent assets as agreed by the parties). The transfer may extent to both present and future assets of the transferor and may secure present and future obligations of the debtor to the transferee. In cases where the transfer of title for security purposes is made on a fiduciary basis, the fiduciary (fiduciaire) must be a professional of the financial sector (eg, credit institution, investment firm, central bank, insurance or reinsurance undertaking, collective investment undertaking, management company for collective investment undertakings, pension fund, central counterparty, settlement agent, clearing house, public authority, securitisation entity). It is held that the transfer of title for security purposes is not an ancillary surety of the debt it is intended to secure. The legal ownership of the assets is transferred to the transferee during the lifetime of the transfer of title for security purposes. Mortgage over immovable property The mortgage, which can be legal, contractual or judicial, 3 is a right in rem over immovable property granted in favour of a creditor (the mortgagee) in order to secure the performance of obligations of a debtor and which enable the mortgagee to be paid by preference on the proceeds generated by the sale of the immovable property which is the subject matter of the mortgage.

The most common form of security interest over real estate is the contractual mortgage. Such mortgage must be granted under notarial deed (acte authentique) and registered with the Administration de l’Enregistrement et des Domaines and the mortgage registry office (bureau de la conservation des hypothèques) of the judicial district (arrondissement judiciaire) where the real estate is located. The contractual mortgage is valid for ten years and must be renewed before the expiry of that period in order to continue to be valid for another period of ten years. The mortgage is an ancillary surety of the debt it is intended to secure. The legal ownership of the immovable property remains with the mortgagor during the lifetime of the mortgage. There is no transfer of possession of the immovable property to the mortgagee or to an agreed upon third party. Under Luxembourg law, liens (privilèges) exist in favour of the seller of real estate (privilège du vendeur) 4 or of the lender (privilège du prêteur de deniers) who finances the acquisition of real estate 5 . 3

Only contractual mortgage (hypothèque conventionnelle) is discussed in this contribution. The seller’s lien secures the payment of the price of the real estate. Such lien must be registered with the mortgage registry office of the judicial district where the real estate is located and is valid for ten years 4

2. In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: (a) Real estate See paragraph I. 1. above. (b) Charging assets (inventory, stocks etc) Common pledges with respect to assets such as inventory or stocks may be excluded in practice, as pledges necessarily imply a transfer of possession by the pledgor. Inventory or stocks may however be the subject matter of a pledge over business and affairs (gage sur fonds de commerce). A pledge over business and affairs includes in principle all the assets of the pledgor (in a broad meaning) such as customers, trademarks, patents, tools, equipment and part of a stock, unless otherwise agreed between the parties. The pledgor who pledges its business and affairs is acting as custodian (gardien) of the pledged assets. This type of security interest is rarely used and often resisted by debtors because of its relatively high cost, low ranking and limited number of beneficiaries. The main characteristics of a pledge over business and affairs are the following: (i)

the beneficiary must be a credit institution; 6

(ii)

the credit institution must be approved as a pledgee by the Luxembourg government sitting in council (the procedure may take several months);

(iii)

only 50 per cent of the stock (if any) of the pledgor may be covered;

(iv)

the pledge is created by notarial deed or under private seal (sous seing privé);

(v)

the pledge is perfected upon its recording with the the mortgage registry office of the judicial district where the business and affairs is located (in case such formality is not fulfilled, the recording of the pledge is voidable provided the absence of the formality is detrimental to a third party);

(vi)

in case of enforcement of the pledge, the pledgee must give a prior notice to the debtor and make the pledged assets seized without the prior permission of a judge;

and must be renewed before the expiry of this period in order to continue to be valid for another period of ten years. 5 The lender’s lien is granted to the lender financing the acquisition of the real estate. Such lien must be notarised. The loan agreement must provide that the loan has been granted to the borrower for the purpose of purchasing real estate. When the seller receives payment, he must acknowledge that the paid amount has been used to pay for the real estate. The lender’s lien must be registered with the Administration de l’Enregistrement et des Domaines and the mortgage registry office of the judicial district where the real estate is located. Registration of the lender’s lien is valid for ten years and must be renewed before the expiry of this period in order to continue to be valid for another period of ten years. 6 Or a brewery.

(vii)

privileges of workers, social security bodies and tax authorities take precedence over the beneficiary of the pledge over business and affairs;

(viii)

the pledge is valid for a period of ten years only (but is renewable);

(ix)

a duty is levied on the secured amount.

(c) Movables Under Luxembourg law, various assets characterised as movable tangible or intangible assets (eg, aircrafts, claims, machinery, plant, shares, stock, vessels). Please refer to the relevant sections in this contribution. (d) Shares The pledge and the transfer of title for security purposes are the most common forms of security interests granted with respect to financial instruments 7 such as shares. The creation (constitution) of a pledge or a transfer of title for security purposes with respect to shares must be capable of written evidence. The written instrument evidencing the creation of the security interest, which is generally in paper format but may also be in electronic format or any other durable medium, must allow the identification of the assets which are the subject matter of the security interest to which it applies. With regard to the perfection requirements, Luxembourg law makes a distinction between book entry shares, bearer shares and registered shares. 8 Book entry shares The perfection of the pledge over book entry shares is achieved (i) by the registration of such shares to an account maintained by a custodian (dépositaire) in the name of the pledgor, of the pledgee or a third party to be agreed upon acting either as pledgee or as third party custodian (tiers détenteur), the shares being designated, in the custodian’s books, individually or

7

Under the FCAL, ‘financial instruments’ has the broadest possible meaning, including (i) all securities and other instruments, including, but not limited to, shares in companies and other instruments comparable to shares in companies, participations in companies and units in collective investment undertakings, bonds and other forms of debt instruments, certificates of deposit, loan notes and payment instruments; (ii) securities which give the right to acquire shares, bonds or other instruments by subscription, purchase or exchange; (iii) term financial instruments and instruments giving rise to a cash settlement (excluding instruments of payment), including money market instruments; (iv) all other instruments evidencing ownership rights, claim rights or securities; (v) all other instruments related to financial underlyings, indices, commodities, precious metals, produce, metals or merchandise, other goods or risks; (vi) claims related to the items described in sub-paragraphs (i) to (v) above or any rights pertaining to these items, whether these financial instruments are in physical form, dematerialised, transferable by book entry or delivery, bearer or registered, endorseable or not and regardless of their governing law. 8 For financial instruments which are not in book entry, bearer or registered form, the perfection of the pledge is achieved when the pledge is notified to or acknowledged by the issuer of such instruments or, in case the financial instruments are held by a third party custodian, when the pledge is notified to or acknowledged by the third party custodian.

collectively by reference to the account in which they are registered, as pledged; or (ii) by notification of the creation of the pledge to the custodian. The transfer of title for security purposes of book entry shares is effective between the parties and becomes enforceable against third parties at the latest at the time of (i) the recording of the shares in an account opened in the name of the transferee or of an agreed upon third party custodian (tiers convenu) acting on behalf of the transferee; or (ii) by their designation, in an account opened in the name of the transferor, as being owned by the transferee. Bearer shares The perfection of the pledge over bearer shares is achieved by the physical delivery of such shares to the pledgee or to the agreed upon third party custodian. The transfer of title for security purposes of bearer shares is effective between the parties and becomes enforceable against third parties from the time of the entry into agreement by the parties. Registered shares The perfection of a pledge over registered shares requires a notation of the pledge in the register of the issuer of such shares. The transfer of title for security purposes of registered shares is effective between the parties and becomes enforceable against third parties from the time of the entry into agreement by the parties. (e) Rights under contracts (receivables) The pledge and the transfer of title for security purposes are the most common forms of security interests granted over receivables (créances) arising under a contract. The creation of a pledge or a transfer of title for security purposes over such receivables must be capable of written evidence 9 . The perfection of the pledge over receivables is achieved when the debtor with whom a contract has been entered into with has been notified of the creation of the pledge or has accepted it 10 . The transfer of title for security purposes of receivables is effective between the parties and becomes enforceable against third parties from the time of the entry into agreement by the parties. Nonetheless, the debtor of an assigned receivable may validly discharge its obligation by performance rendered to the transferor as long as he has no knowledge of the transfer of the receivable to the transferee. 9

See paragraph I. 2. (d) above. In practice, the debtor with whom a contract has been entered into is, where agreed by it, party to the pledge agreement so that the pledge is perfected upon the execution of the pledge agreement by all the parties thereto (ie, the pledgor, the pledgee and the debtor). Where the debtor is not a party to the pledge agreement between the pledgor and the pledgee in order to accept the creation of the pledge, he receives a written notification from the pledgor or the pledgee and accepts the creation of the pledge by return mail. 10

(f) Bank accounts Under Luxembourg law, a security interest over monetary claims (créances de sommes d’argent) is not considered to bear on the cash itself because no cash is physically delivered by the pledgor to the pledgee. The assumption is that the cash is credited to an account in the name of the pledgor. The pledge thus bears on the claim of the pledgor against the bank with whom the cash is on deposit. The currency of the cash is irrelevant. The pledge and the transfer of title for security purposes are the most common forms of security interests granted over monetary claims. The creation of a pledge or a transfer of title for security purpose over such claims must be capable of written evidence. 11 The pledge of monetary claims is perfected when the account bank with which the cash account is maintained has been notified of the creation of the pledge or has accepted it.

The perfection of a transfer of title for security purposes over monetary claims is effective between the parties and becomes enforceable against third parties from the time of the entry into agreement by the parties. Nonetheless, the debtor of an assigned monetary claim may validly discharge its obligation by performance rendered to the transferor as long as it has no knowledge of the transfer of the claim to the transferee. In practice, the account bank is either a party to the agreement between the collateral provider and the collateral taker in order to accept the creation of the security interest, or receives a written notification from the collateral provider or the collateral taker and accepts the creation of the security interest by return mail. Luxembourg banks generally benefit from a security interest over all the assets of their customers pursuant to their general terms and conditions. It is thus recommended to obtain a waiver of any present and future security interest or right of retention or set-off existing over or in relation to accounts created in favour of such Luxembourg banks when a security interest over any or all the assets credited to accounts held by them is created in favour of a collateral taker. (g) Financial instruments (eg, securities) See paragraph I. 2. (d) above. (h) Intellectual Property Common pledges with respect to intellectual property rights are not commonly used in Luxembourg in banking transactions. Such rights may however be pledged in the context of a pledge on business and affairs. 12 (i) Plant and machinery 11 12

See paragraph I. 2. (d) above. See paragraph I. 2. (b) above.

Common pledges with respect to plant and machinery may be excluded in practice, as pledges necessarily imply the dispossession of the debtor. Plant and machinery may however be pledged in the context of a pledge on business and affairs. 13 Retention of title is more frequently used for machinery. (j) Other assets Aircraft An aircraft may be subject to a specific kind of mortgage. Such mortgage must be notarised and registered with the aircraft mortgage registry office (bureau de la conservation des hypothèques aériennes). Registration is valid for ten years and subject to renewal requirements after this period. Luxembourg has approved the convention of 16 November 2001 on international interests in mobile equipment and the protocol to the convention on international interests in mobile equipment on matters specific to aircraft equipment which are in force as from 1 October 2008 (‘Cape Town Convention’). Where the mortgage is merely designed for the recording of an international interest pursuant to the Cape Town Convention, the mortgage deed may be done under private seal. Movable goods, consumer goods and capital goods Retention of title purporting to reserve title to goods (ie, movable goods (biens mobiliers), consumer goods (biens de consommation) or capital goods (biens d’équipement)) 14 in favour of a seller until the goods which form the subject matter of the agreement entered into with a purchaser have been paid for in full by the latter is a form of security arrangement existing under Luxembourg law. Retention of title enables the seller of the goods to take precedence over any of the purchaser's secured or unsecured creditors in the event that the purchaser fails to pay for the goods due to its bankruptcy (faillite) and the goods can be reclaimed under certain conditions by the seller if the purchaser does not make payment for them. The seller of a non-fungible movable good who agreed with the purchaser to reserve title in its favour until the payment of the full purchase price may claim such good when it can be identified and recovered at the moment the bankruptcy proceedings concerning the purchaser are opened or, when such good is incorporated into another one, it can be recovered without causing a damage to the good into which it is incorporated. 3 Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? Under the FCAL, pledges and transfer of title for security purposes may be granted in favour of (i) a person acting for the account of the beneficiaries of the security interests (ie, security agent); (ii) a fiduciary; or (iii) a trustee, to secure the claims of third party beneficiaries. Persons 13 14

See paragraph I. 2. (b) above. Goods may be tangible or intangible.

acting for the account of the beneficiaries of the security interests, the fiduciary or the trustee, enjoy the same rights as those granted to direct beneficiaries of the financial collateral arrangement. There is therefore no need to grant the security interests to all the lenders. A similar rule applies with respect to security interests in aircrafts. Although the ‘parallel debt’ mechanism is known in practice, the concept does not exist under Luxembourg law and has never been tested before Luxembourg courts. The ‘parallel debt’ mechanism is used in many banking transactions and generally governed by foreign law. Assuming that such mechanism is valid and enforceable under its governing law, it would normally be recognised by Luxembourg courts. 4. Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. Generally, the provisions of Luxembourg law governing the security arrangements described above have not been amended recently. In particular, the FCAL has not been amended since its entry into force in August 2005. Provisions of the directive 2009/44/EC of the European Parliament and of the Council of 6 May 2009 amending directive 98/26/EC on settlement finality in payment and securities settlement systems and the FCAD shall be implemented into the FCAL by 30 December 2010. These amendments should not have an adverse impact on the legal framework of secured transactions.

Part II – enforcement of security

1. Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding – see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide estimate of costs (if they create significant obstacle in enforcement, including applicable taxes and any other duties/ costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from other jurisdiction influences possibility of establishing security and its enforcement. Pledge over claims and financial instruments Luxembourg law provides a wide range of enforcement methods which depend on the type of assets being the subject matter of the pledge. The FCAL provides that, if an enforcement event occurs, the pledgee may, unless otherwise provided for, without prior notice: 15

15

The requirement that the pledgee gives notice to the pledgor before initiating the realisation procedure of the pledged assets has been abolished by the FCAL. The notice requirement continues to apply in

(i)

appropriate the assets (ie, claims and financial instruments) at a price determined by the agreed upon valuation method;

(ii)

assign or cause to be assigned the pledged assets by private sale in a commercially reasonable manner, by sale over a stock exchange or by public auction (vente publique);

(iii)

cause a judgment to be issued ordering that he retains the pledged assets as payment up to the amount of his claim, in accordance with an expert valuation;

(iv)

proceed with netting (compensation) in accordance with the relevant provisions of the FCAL; and

(v)

with regard to financial instruments, appropriate these financial instruments at the market price, if they are listed on an official Luxembourg or foreign stock market or traded on a recognised regulated market open to the public, or at the price of the latest published net asset value, if they are units or shares of an undertaking for collective investment which determines and publishes on a regular basis a net asset value.

In practice, Luxembourg pledge agreements generally contain various enforcement methods in relation to claims and financial instruments which are referred to in the FCAL. The developments in the following paragraphs illustrate in substance the enforcement mechanisms which will be provided for by Luxembourg law governed pledge agreements. Transfer of title for security purposes of claims and financial instruments Generally speaking, upon the occurrence of an enforcement event, the transferee shall, until satisfaction in full of the secured obligations, be fully released from its obligation to re-transfer the transferred assets (or their equivalent) to the transferor 16 and shall be entitled to exercise all rights in respect of the transferred assets. Mortgage over immovable property Upon the occurrence of an enforcement event, the mortgagee must have an enforceable title (titre exécutoire). This is generally the case since the contractual mortgage is entered into before notary public (notaire) and the notarial deed constitutes an enforceable title. In the absence of such title, the mortgagee must obtain a court payment order to enforce the mortgage by way of an attachment over immovable property (saisie immobilière). A summons to pay (commandement), stating that in the absence of payment the immovable property shall be attached, must be served by a bailiff (huissier de justice) to the mortgagor.

case it was contractually agreed and some argue that with respect to consumers enforcement without the giving of a prior notice may be contrary to consumer protection laws. 16 The FCAL provides that ‘[i]n the event of total or partial non-performance of the relevant financial obligations, the transferee is discharged from its obligation of re-transfer up to the amount of its claim against the transferor or the third party debtor in accordance with the termination or netting provisions agreed between the parties and, unless otherwise agreed, without prior notice’.

A writ whereby the mortgagee notifies that he attaches the immovable property being the subject matter of the mortgage must be served by a bailiff to the mortgagor fifteen days after the summons to pay. Such writ to attach (exploit de saisie) must be registered with the mortgage registry office of the judicial district where the property is located. After the registration of the writ to attach, the mortgagee must file a formal application with the clerk of the court requesting a hearing. Such application must be served by a bailiff to the mortgagor. The court assesses the validity of the attachment and appoints a notary public in order to organise the public auction of the immovable property. The public auction is conducted by the notary public and the adjudication price corresponds to the highest bid. The proceeds generated by the public auction are paid to the mortgagee after payment of the notary public’s fees and other creditors preferred by operation of law. Where the security interest is a first ranking mortgage (hypothèque de premier rang), the procedure described above may be shortened if the notarial deed provides that the mortgagee is authorised to sell the immovable property through a notary public without having to comply with the legal requirements for an attachment procedure (clause de voie parée). In such a case, the public auction may occur thirty days after the summons to pay. 2. Please explain briefly specific features (if any) of enforcement of security established over following types of assets: (a) Real estate See paragraph II. 1. above. (b) Charging assets (inventory, stocks, etc) Upon the occurrence of an enforcement event, the beneficiary of a pledge over business and affaires must notify (mettre en demeure) the pledgor and attach the pledged assets. The pledgee must then apply for an authorisation from the President of the District Court to sell the assets forming part of the business. The sale must be made through an official appointed by the President of the District Court. The President of the District Court may authorise the pledgee either to sell all the assets or only a part of such assets. It is traditionally held that there is no possibility to appropriate the pledged assets or to apply for a court attribution (attribution en pleine propriété). (c) Fixed charge over movables See paragraph I. 2. (c) above. (d) Shares Pledge

Upon the occurrence of an enforcement event, the pledgee shall be entitled to enforce the pledge in the most favourable manner provided for by Luxembourg law and in particular:

(i)

in relation to non-listed shares: (a)

appropriate the shares at a price previously agreed upon by the parties to the pledge agreement; and/or

(b)

sell the shares or have the shares sold in a private transaction at arms' length terms (conditions commerciales normales); and/or

(c)

sell the shares by public auction and to apply the proceeds to pay all or any part of the then outstanding secured obligations; and/or

(d)

request from a court of competent jurisdiction that title to the shares be assigned and/or transferred to the pledgee, at a price to be determined by a court appointed expert, for payment of all or any part of the outstanding amount of the secured obligations; and/or

(e)

act generally in relation to the shares in such manner as the pledgee acting reasonably shall determine and as shall be permitted by law;

provided however that any distributions of proceeds of such enforcement shall always be paid to the pledgee.

(ii)

in relation to listed shares: 17 (a)

to sell the shares on the stock exchange or regulated market where they are listed; and/or

(b)

to appropriate the shares at their market value.

Transfer of title of security purposes Upon the occurrence of an enforcement event, the transferee shall until satisfaction in full of the secured obligations, be fully released from its obligation to re-transfer the transferred shares (or equivalent financial instruments) to the transferor at a valuation agreed by the parties and shall be entitled to exercise all rights in respect of the transferred shares. (e) Rights under contracts (receivables) Pledge Upon the occurrence of an enforcement event, the pledge shall become immediately enforceable and the pledgee may thereupon immediately exercise any or all of its rights and powers of execution, realisation and foreclosure under the pledge agreement or otherwise provided by law and, in particular, give instruction to the relevant debtor to pay to the pledgee the amount indicated by the pledgee for off-setting purposes against the secured obligations. 17

The FCAL refers to financial instruments listed on an official Luxembourg or foreign stock exchange or traded on a regulated market recognised and open to the public.

Transfer of title for security purposes Upon the occurrence of an enforcement event, the transferee shall until satisfaction in full of the secured obligations, be fully released from its obligation to re-transfer the transferred receivables (or their equivalent) to the transferor and shall be entitled to exercise all rights in respect of the transferred receivables.

(f) Bank accounts Pledge Upon the occurrence of an enforcement event, the pledge shall become immediately enforceable and the pledgee may thereupon immediately exercise any or all of its rights and powers of execution, realisation and foreclosure under the pledge agreement or otherwise provided by law and, in particular, give instruction to the account bank with which the cash account is maintained to pay to the pledgee the amount indicated by the pledgee for off-setting purposes against the secured obligations. Transfer of title for security purposes Upon the occurrence of an enforcement event, the transferee shall until satisfaction in full of the secured obligations, be fully released from its obligation to re-transfer the transferred monetary claims (or their equivalent) to the transferor and shall be entitled to exercise all rights in respect of the transferred receivables. (g) Financial instruments (eg, securities) See paragraph II. 2. (d) above. (h) Intellectual property See paragraph II. 2. (b) above. (i) Plant and machinery See paragraph II. 2. (b) above. (j) Other assets Aircraft For aircrafts a distinction must be made. If the mortgage is registered as an international interest in accordance with the Cape Town Convention then all remedies provided for by that convention are available to the mortgagee, generally without leave of the court, such as taking of possession and private sale.

If the mortgage is registered only on a national basis the procedure is more cumbersome. It generally requires the taking by the mortgage of a judgment against the mortgagor. Upon judgment given by the Luxembourg court in favour of the mortgagee for the debt, the mortgagee may proceed to have that judgment enforced against the mortgagor. The mortgagee’s bailiff will serve an order for payment on the mortgagor to inform him that, if he fails to pay the debt owed to the mortgagee, the aircraft will be attached and sold. The procedure subsequent to the order for payment is rather detailed and goes beyond the scope of this contribution. In substance, the auction of the aircraft will be undertaken by a bailiff in the presence of the President of the District Court. Any interested party may, within eight days following the sale, request another auction to be held and the first auction to be cancelled if such party is prepared to offer an additional one-sixth of the sale price (procédure de surenchère). After the sale, the purchaser must pay the price to the Caisse des Dépôts et Consignations. The distribution of the sale proceeds to the creditors will either be made by amicable distribution before a judge appointed by the court or by the court itself. Movable goods, consumer goods and capital goods With regard to retention of title, the right of the seller to claim the purchased goods exists only in case the purchaser is declared bankrupt (en état de faillite) within the meaning of Articles 437 ff. of the Luxembourg Commercial Code. Luxembourg law does not recognise such a right in favour of the seller in the event the purchaser is subject to controlled management (gestion contrôlée) within the meaning of the grand ducal regulation 24 May 1935 on controlled management. Where the purchased goods have been sold by the purchaser to a third party before the opening of a bankruptcy proceedings, the seller has the right to claim all or part of the price unpaid by the purchaser at the date of the bankruptcy judgment. 3. How does a commencement of bankruptcy or insolvency proceeding influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over following types of assets in a bankruptcy or insolvency proceeding: Generally speaking, creditors of a bankrupt merchant compete in the bankruptcy. Creditors who benefit from security interests such as pledges, transfers of title for security purposes or mortgages do not compete with unsecured creditors and may enforce their security interests. Hardening period Transactions concluded or performed, as well as certain payments made, during the hardening period (période suspecte) which is fixed by the District Court (Tribunal d’arrondissement) are subject to cancellation by such court upon proceedings instituted by the receiver (curateur). The hardening period dates back not more than six months from the date on which the District Court formally declares a merchant bankrupt. In respect of certain payments and transactions, an additional period of ten days before the commencement of the hardening period is taken into consideration.

During the hardening period fixed by the District Court (ie, six months) and an additional period of ten days preceding such hardening period, specified transactions (eg, the payment of debts which are not due, whether payment is made in cash or by way of assignment, sale, set-off or by any other means; payment of debts which are due by any other means than in cash or by bill of exchange; the sale of assets without consideration of for materially inadequate consideration) must be set aside. Payments made for matured debts as well as other transactions concluded for consideration during the hardening period are subject to cancellation by the District Court upon proceedings instituted by the receiver if they were concluded with the knowledge of the cessation of payments. Regardless of the hardening period, the receiver has the right to challenge any fraudulent payments and transactions made prior to the bankruptcy, without limitation of time. Undisclosed preferences Generally speaking, certain creditors of an insolvent party have rights to preferred payments arising by operation of law, some of which may, under certain circumstances, supersede the rights to payment of secured creditors, and most of which are undisclosed preferences (privilèges occultes) arising by operation of law. This includes, in particular, (i) the rights relating to the fees and costs of the court appointed insolvency official as well as any legal costs; (ii) the rights of employees of the insolvent party to certain amounts of salary; (iii) the rights of the Luxembourg tax authorities; and (iv) the rights of Luxembourg social security bodies, as well as certain other rights, which preferences may extend to all or part of the assets of the insolvent party. It should, however, be noted that a creditor benefiting from a valid (notably with regard to specific insolvency provisions) and enforceable pledge under Luxembourg law is – in addition to a preference right – granted a retaining lien (droit de rétention) which authorises that creditor to refuse to return the pledged assets to the debtor (or the receiver in bankruptcy) unless its claims have been fully redeemed. (a) Real estate Mortgages and liens which have been registered (inscrit) within the ten days preceding the hardening period or during the hardening period may be declared void if the mortgage or the lien was not registered within fifteen days of the deed creating the mortgage or the lien. (b) Charging assets (inventory, stocks etc) The beneficiary of a pledge over business and affaires may enforce the security interest regardless of the bankruptcy adjudication of the pledgor. The receiver may however recover the pledged assets by paying the debt owed to the pledge. The proceeds resulting from the enforcement of the pledge shall be applied in priority to discharge the secured obligations. Any surplus remaining after the satisfaction of the secured obligations shall be paid to the receiver. In case where the proceeds are not sufficient to discharge the secured obligations, the pledge will be considered as unsecured for the remaining of its claims.

(c) Fixed charge over movables See paragraph I. 2. (c) above. (d) Shares The FCAL provides an exceptional protection to collateral takers in the case of insolvency of the collateral provider. Pledge agreements and transfer of title for security purposes agreements as well as enforcement events, and valuation and enforcement measures agreed upon by the parties in accordance with the FCAL are valid and enforceable against third parties, commissioners (commissaires), receivers (curateurs), liquidators (liquidateurs) and other similar persons notwithstanding reorganisation measures (mesures d’assainissement), winding-up proceedings (procédures de liquidation) 18 or any other similar national or foreign proceedings. With the exceptions of the provisions of the Luxembourg law concerning the prevention of overindebtedness (surendettement) of natural persons, the provisions of Book III, Title XVII of the Luxembourg Civil Code (ie, provisions governing civil pledges), of Book I, Title VIII (ie, provisions governing commercial pledges) and of Book III, Title I to IV (ie, provisions governing insolvency and similar proceedings) of the Luxembourg Commercial Code and national or foreign provisions governing reorganisation measures, winding-up proceedings or other similar proceedings and attachments (saisies) or other measures such as criminal confiscation (confiscation pénale) as well as a purported assignment (cession) or other disposal of or in respect of rights, are not applicable to pledge agreements and transfer of title for security purposes agreements and do not constitute an obstacle to the enforcement and to the performance by the parties of their obligations thereunder. (e) Rights under contracts (receivables) See paragraph II. 3. (d) above. (f) Bank accounts See paragraph II. 3. (d) above. (g) Financial instruments (eg, securities) See paragraph II. 3. (d) above. (h) Intellectual property 18

The FCAL distinguishes two types of insolvency proceedings that could be opened against a Luxembourg entity: (i) reorganisation measures; and (ii) winding-up proceedings. ‘Reorganisation measures’ are defined as ‘measures which involve any intervention by administrative or judicial authorities which are intended to preserve or restore the financial situation and which affect pre-existing rights of third parties, including but not limited to measures involving a suspension of payments, a suspension of enforcement measures or a reduction of claims’. ‘Winding-up proceedings’ are defined as ‘collective proceedings involving realisation of the assets and distribution of the proceeds among the creditors, shareholders or members, as appropriate, which involve any intervention by administrative or judicial authorities, including where the collective proceedings are terminated by a composition or other analogous measure, whether or not they are founded on insolvency or are voluntary or compulsory’.

See paragraph II. 3. (b) above. (i) Plant and machinery See paragraph II. 3. (b) above. (j) Other assets Aircraft A recorded mortgage will take priority over all other subsequently recorded mortgages and charges over the aircraft with the exception of claims such as (i) judicial costs incurred in the sale of the aircraft and the distribution of the proceeds provided that they were incurred for the common benefit of the creditors; (ii) necessary expenses incurred in the conservation of the aircraft or in its rescue; (iii) preferential rights of employees and tax authorities pursuant to insolvency proceedings. Movable goods, consumer goods and capital goods See paragraph II. 2. above. 4. Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? There are no specific features or problems of enforcement proceedings. 5. Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceeding. Are there any amendments which will be introduced in the near future (within one to two years) which might have impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law. To our knowledge, there are no particular amendments which should be introduced into Luxembourg insolvency laws.