BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL LUXEMBOURG Bonn Schmitt Steichen CONTACT INFORMATION Josiane Wagner Bonn Schmitt Steichen 44, rue de la Vallée L-2661 Luxembourg +352.45.58.58.288
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1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Generally, assets can be charged, liened and/or encumbered under Luxembourg law. When analyzing collateral that may be granted over assets, one distinguishes immovable and movable property. Common forms of security granted over immovable property are:
Mortgages (hypothèques), which can be legal, contractual or judicial. Mortgages cannot be granted over future assets because of the obligation to specifically identify the secured real property for registration and recording purposes. Pledging real estate as security (antichrèse). Seller’s lien (privilège du vendeur), to secure the payment of the sale price of a property. Lender’s lien (privilège du prêteur de deniers), granted to the person or entity that lent the money to finance the acquisition of a property.
As regards movable property, pledges are the most common form of security. They can be granted over most categories of assets, including shares, intangible and future assets, and fungible goods, such as agricultural products (warrant agricole). Aircrafts and ships (with a weight of more than 20 tons), are qualified movable property. However, the laws of 11 June 1966, and of 29 March 1978 provide for specific kinds of mortgages that may be granted over such assets, even though mortgages are usually restricted to immovable property (see question 4 points a and n). Movable assets may also be secured by the transfer of ownership as security, where the asset directly becomes the property of the lender or where the ownership rights in the asset are transferred to the lender through a fiduciary contract, but the exercise of these rights is limited by the agreement between the parties (contrat fiduciaire). Securities such as pledges, and transfer of ownership as a security, granted on financial instruments and claims are governed by the Law of 5 August 2005 on financial collateral arrangements (“Financial Collateral Act”). Pledges over a going concern (gage sur fonds de commerce) are subject to specific requirements set out in the Grand-Ducal Decree of 27 May 1937, as amended, and can only be granted to authorized credit institutions and breweries. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? According to article 3 of the Luxembourg Civil code, everything that is relating to immovable assets is submitted to the legislation of the situation of the asset. As a result, rights in immovable assets are governed by the legislation of the jurisdiction where the property is situated. This principle generally applies to movables as well, in particular to rights in rem or collateral securities attached to movables. Consequently, the existence, conservation, exercise, scope and effects of such rights or collateral securities are generally governed by the lex rei sitae. However, because of the fact that movables can be transferred from one jurisdiction to another, the legislation of their situation may be replaced by the legislation applicable to the contractual relationship that they derive from. Parties to a contractual relationship may choose to submit their contract to a foreign law in accordance with the Rome Convention on the law applicable to contractual obligations. A Luxembourg court could thus decide to apply the law chosen by the parties to the security arrangement relating to movable assets, rather than the lex rei sitae.
Special conflict of law rules apply to financial collateral securities. This type of security is governed by the Financial Collateral Act. The following aspects pertaining to book entry securities collateral are (inter alia) governed by the law of the country in which the relevant account is maintained. • •
the legal nature and proprietary effects of book entry securities collateral; the requirements for perfecting a financial collateral arrangement relating to book entry securities collateral and the provision of book entry securities collateral under such an arrangement, and more generally the completion of the steps necessary to render such an arrangement and provision effective against third parties; the steps required for the realisation of book entry securities collateral following the occurrence of an enforcement event. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Floating charges, or security over the overall assets of an entity are usually defined as present security rights over existing or future property under which, until certain events occur, no encumbrance attaches to the assets in question, so that the debtor may meanwhile continue to deal with them. Such rights are not accepted in Luxembourg as, under Luxembourg law, securities (such as pledges) granted over movable assets necessarily imply dispossession of the pledgor. The closest Luxembourg concept to a floating charge is a pledge on a company’s going business concern (“gage sur fonds de commerce”). Such a pledge encompasses the business universality comprising but not limited to, the goodwill, the right to the lease, the physical installation, the merchandise (up to 50 % of their value only) or other goods of the company. Such a pledge is only available to credit institutions and breweries, duly authorised by the Luxembourg Government to enter into such a pledge. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft; 1. The Luxembourg law of 29 March 1978 governs securities that may be granted over aircrafts. According to this law, aircrafts may be subject to a specific kind of mortgage. Such mortgages are enforceable with regard to third parties only after their inscription at the aircraft mortgage registry (registre du conservateur des hypothèques aériennes). Registration is valid for ten years and subject to renewal requirements after this period. As this law and its implementing regulations do not provide for specific taxes, one has to apply the general tax which is an ad valorem tax of 0,50 ‰ on the aggregate amount
of the secured debt for first recording and renewal, plus nominal registrar’s fees and stamp duties (EUR 2.- per filing). Registration can be accomplished within a week to a month. 2. The aforementioned law further sets out that the following claims are secured by legal privileges on the aircraft:
Court costs disbursed in connection with the sale of the aircraft, and the distribution of the sales price to the creditors; remunerations related to the rescue of the aircraft; costs related to the preservation of the aircraft.
(b) Bank Accounts; Pledges are the most common form of securities granted over bank accounts. Pledges over bank accounts are governed by the Financial Collateral Act. Pledges over bank accounts are validly perfected if they are notified to the bank or accepted by the latter. As pledges are validly created by private deed, and as there is no compulsory registration, no registration/notary fees are due, and there is no waiting time. Generally Luxembourg banks provide for a first ranking pledge over the account in their favour in the general terms and conditions. If a pledge is granted to a third party, the bank has to waive the first ranking pledge. (c) Animals, Crops (in ground and severed) and Timber; The law of 14 February 1900 provides for specific pledges that may be granted by farmers and wine growers over the movable agricultural or industrial products, including animals, deriving from their farms (warrant agricole). The pledged assets may stay with the pledgor, or be transferred to agricultural associations, or a designated third party. The warrant is enforceable against third parties upon registration with the clerk of the justice of the peace. Nominal registrar fees are due. (d) Equipment; 1. Equipment is generally pledged in the context of a pledge on going business concern (see below, point p) 2. Common pledges over equipment may be excluded in practice, as pledges necessarily imply the dispossession of the pledgor. The latter would thus not be able to possess and use the equipment. 3. Equipment may further be subject to transfer of ownership as security where the asset directly becomes the property of the lender or where the ownership rights in the
asset are transferred to the lender through a fiduciary contract, but the exercise of these rights is limited by the agreement between the parties. Such a transfer is effective by the mere agreement between the parties. No compulsory registration or recording requirements apply. As transfer of ownership as security is validly created by private deed, and as there is no compulsory registration, no registration/notary fees are due, and there is no waiting time.
(e) Intellectual Property; 1. Intellectual property rights are considered intangible assets and the most common forms of securities applicable to such rights are, in general, pledges. In order to be enforceable against third parties, pledges over registered IP rights must be registered with the Benelux Office of Intellectual Property (for trade marks and designs) or with the Intellectual Property Department of the Luxembourg Ministry of Economy or the European Patent Office (for patents). Registration of securities affecting registered IP rights are subject to registration fees. Such fees are subject to important variations, depending for example on the jurisdictions for which the registration is filed (e.g. up to EUR 54 for registration of a pledge on a Benelux trade mark). If the intellectual property rights are not registered, the pledge is made by private agreement, and notified to the debtor. No mandatory public registration is required in such cases. 2. Security granted by transfer of ownership of registered intellectual property rights is effective by agreement between the parties. It is enforceable against third party debtors (for example, in the case of IP rights, licensees or parties owing royalties arising from the IP right) upon registration with the Benelux Office of Intellectual Property (for trade marks and designs) or with the Intellectual Property Department of the Luxembourg Ministry of Economy or the European Patent Office (for patents). For fees related to registration of securities affecting IP rights, see above. If the intellectual property rights are not registered, the transfer of ownership as a security is made by private agreement, and notified to the debtor. No mandatory public registration is required in such cases. 3. IP rights are part of the going business concern and may as such also be pledged in the context of a pledge on going business concern (see below, point p). (f) Inventory; 1. Inventory is generally pledged in the context of a pledge on going business concern (see below, point p)
2. Common pledges over inventory may be excluded in practice, as pledges necessarily imply the dispossession of the debtor. The latter would thus not be able to possess and use the pledged assets. 3. Inventory may further be subject to transfer of ownership as security where the asset directly becomes the property of the lender or where the ownership rights in the asset are transferred to the lender through a fiduciary contract, but the exercise of these rights is limited by the agreement between the parties. Such a transfer is effective upon agreement between the parties. No compulsory registration or recording requirements apply. As transfer of ownership as security is validly created by private deed, and as there is no compulsory registration, no registration/notary fees are due, and there is no waiting time. (g) Leases; 1. Commercial leases are part of the going business concern, and may as such be pledged in the context of a pledge of the going business concern as a whole. Regarding such pledges, please see below, point p. 2. Moreover, the claims/receivables deriving from a lease agreement may be subject to a pledge or to an assignment in favour of the secured creditor (see below, point k for pledges over receivables). (h) Mineral Interests, including Hydrocarbons; Mineral interests, i.e. the right to exploit, mine or produce minerals lying beneath the surface of a property, or the right to receive royalties from a producing well may be qualified as titles, claims, or rights relating to raw materials/commodities, and fall as such within the definition of financial instruments as set out by the Financial Collateral Act. 1. The most common form of securities granted over financial instruments under the Financial Collateral Act are pledges. Pledges can be created by private deed. They are perfected by a transfer of possession of the pledged assets from the pledgor to the pledgee or to a designated third party. The pledgor can be dispossessed by notification of the debtor, or by his acceptance of the pledge. Such notification and acceptance must be made by notarial or private deed. As pledges are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. 2. Mineral rights may be part of a going business concern and may as such also be pledged in the context of a pledge on going business concern (see below, point p). 3. Moreover, mineral rights may be subject to a transfer of ownership as a security. Such a transfer is enforceable against third parties upon the registration of the transfer in favour of the transferee in the relevant register. As transfers of ownership as security are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration.
(i) Promissory Notes and Chattel Paper; Promissory notes and chattel paper fall within the scope of the definition of financial instruments as set out by the Financial Collateral Act and are thus governed by the provisions of this law. 1. The most common form of securities granted over such assets are pledges. Pledges on financial instruments under the Financial Collateral Act can be created by private deed. They are perfected by a transfer of possession of the pledged assets from the pledgor to the pledgee or to a designated third party. The pledgor can be dispossessed for example by endorsement of the pledged assets, or by notification of the debtor, or by his acceptance of the pledge. Such notification and acceptance must be made by notarial or private deed. As pledges are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. 2. Moreover, promissory notes and chattel paper may be subject to a transfer of ownership as a security. Such a transfer is enforceable against third parties upon the registration of the transfer in favour of the transferee in the relevant register (if applicable), or upon notification to the debtor. As transfers of ownership as security are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. (j) Real Estate; Common forms of security granted over immovable property are:
Mortgage (hpothèque), which can be legal, contractual or judicial. Pledging real estate as security (antichrèse). Seller’s lien (privilège du vendeur), to secure the payment of the sale price of a property. Lender’s lien (privilège du prêteur de deniers), granted to the person or entity that lent the money to finance the acquisition of a property.
The legal formalities required to make the security valid and enforceable against third parties depend upon the type of security used and the type of assets being secured. 1. Mortgage- Contractual mortgages must be formalized in a notarial deed, in the presence of two notaries or of one notary and two witnesses. The lender must register the mortgage with the Administration Registry (Administration de l’Enregistrement et des Domaines). To be enforceable against third parties, the original notarial deed must be registered at the Mortgage Registry (Bureau de conservation des hypothèques) of the judicial district in which the property is located. Registration is valid for 10 years. Before this period expires, it must be renewed in order to continue to be valid for another ten years.
Ad valorem registration duty of 0.24 % is levied on the total amount of the secured debts. Mortgage tax of 0.50 ‰ due on first recording and any renewal (every 10 years). Mortgages cannot be granted over future assets because of the obligation to specifically identify the secured real property for registration and recording purposes. 2. Real Estate pledge- Real estate pledges (antichrèse) must be in writing. The security is perfected by the transfer of possession to the secured party. Real estate pledges are registered with the Administration Registry and at the Mortgage Registry. Registration (duty of 2.4 %) and recording (tax of 1 %) is compulsory. 3. Lender’s lien – This security interest must be notarized in order to be valid. The loan agreement must state that the loan has been granted for the purpose of buying real estate. Further, when receiving payment, the seller must acknowledge that the received amount has actually been used to pay for the acquired real estate. For enforcement, the interest must be registered with the Mortgage Registry and with the Administration Registry. Registration is valid for 10 years and must be renewed before the expiry of this period in order to continue to be valid for another 10 years. 4. Seller’s lien- For enforcement, this interest must be registered with the Mortgage Registry. Registration is valid for 10 years and must be renewed before the expiry of this period in order to continue to be valid for another 10 years. (k) Receivables (credit rights under contracts or invoices); 1. The most common form of securities granted over receivables are pledges. Pledges over receivables are regulated by the Financial Collateral Act. Pledges over receivables can be created by private deed. They are perfected by a transfer of possession of the pledged assets from the pledgor to the pledgee or to a designated third party. The dispossession of the pledgor is validly effected by the notification of the pledgee to the debtor whose debt is being pledged, or by his acceptation of the pledge. Such notification and acceptance must be made by notarial or private deed. If pledges are created by private deed, no registration/notary fees are due, and there is no waiting time for registration. 2. Moreover, receivables may be subject to a transfer of ownership as a security. Such a transfer is perfected upon the execution of the transfer agreement even if the assigned debtor has not yet been given notice of the transfer. In such cases the debtor may continue to validly pay the transferor until it is informed of the transfer. As transfers of ownership as security are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. (l) Rights under Contracts (excluding Receivables);
Rights deriving from contracts that fall within the definition of financial instruments, as set out by the Financial Collateral Act (e.g. securities, warrants, all types of claims) are governed by the provisions of that law. 1. Pledges over financial instruments under the Financial Collateral Act can be created by private deed. They are perfected by a transfer of possession of the pledged assets from the pledgor to the pledgee or to a designated third party. The dispossession of the pledgor is validly effected by the notification of the pledge to the issuer of the financial instruments or the designated third party, or by their acceptance of the pledge. Such notification and acceptance must be made by notarial or private deed. Such notification and acceptance must be made by notarial or private deed. As pledges are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. 2. Transfer of ownership as a security is enforceable against third parties upon the registration of the transfer in favour of the transferee in the relevant register (if applicable), or upon notification to the debtor. As transfers of ownership as security are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. (m)Shares (in book-entry and certificate form and other securities); 1. The most common form of securities granted over shares are pledges. Pledges over shares are regulated by the Financial Collateral Act. Pledges over shares can be created by private deed. They are perfected by a transfer of possession of the shares from the pledgor to the pledgee or to a designated third party. Transfer of possession can be transferred in various ways, for example by: • • •
Transfer by material delivery to the pledgee or a designated third party. Entry of the pledge in the company's shareholder register. Endorsement of the pledged assets.
As pledges are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. 2. Moreover, shares may be subject to a transfer of ownership as a security. Such a transfer is perfected upon the registration of the transfer in favour of the transferee in the relevant register. As transfers of ownership as security are validly created by private deed, no registration/notary fees are due, and there is no waiting time for registration. (n) Vessels; 1. The law of 11 June 1966 governs the securities that may be granted over vessels with a weight of more than 20 tons, or with a length of more than 20 meters. According to this law, vessels may be subject to a specific kind of mortgages. Such mortgages must be made by notarized deed. They are enforceable with regard to third parties only after their inscription at the navigation mortgage registry (bureau de
conservation des hypothèques fluviales). Registration is valid for ten years and subject to renewal requirements after this period. As this law and its implementing regulations do not provide for specific taxes, one has to apply the general tax which is an ad valorem tax of 0,50 ‰ on the aggregate amount of the secured debt for first recording and renewal, plus nominal registrar’s fees and stamp duties (EUR 2.- per filing). Registration can be accomplished within a week to a month. 2. The aforementioned law further sets out that the following claims are secured by legal privileges on the vessel:
Court costs disbursed regarding the sale of the vessel, and the distribution of the sales price to the creditors; Claims resulting from the employment contracts entered into between the owner of the vessel and the captain and the crew, for a maximum of 6 months; and related social security charges for a maximum of three months; Remuneration resulting from the rescue of the vessel; Costs, related to the preservation of the vessel, to navigation and port taxes, due after the seizure. Indemnities due for damages caused by the vessel to persons or goods, or for loss of freight.
(o) Vehicles; 1. Vehicles may be subject to transfer of ownership as security where the asset directly becomes the property of the lender or where the ownership rights in the asset are transferred to the lender through a fiduciary contract, but the exercise of these rights is limited by the agreement between the parties. Such a transfer is effective by the mere agreement between the parties. No compulsory registration or recording requirements apply, and thus, no registration/notary fees are due, and there is no waiting time for registration. 2. Pledges over vehicles may be excluded in practice, as pledges necessarily imply the dispossession of the pledgor. The latter would thus not be able to possess and use the vehicle. 3. If the vehicle forms part of a going business concern, it may be pledged in the context of a pledge on going business concern (see below, point p) 4. In practice, it occurs that banks that have financed the acquisition of a vehicle, take a guarantee over future indemnity rights that may derive from an insurance contract entered into by the owner of the vehicle. Such a guarantee generally takes the form of a pledge or an assignment under the Financial Collateral Act. This Act provides indeed that pledges/transfers of ownership as a security may extent to the future assets of the pledgor/transferor (see above, point k for pledges over receivables). (p) Business as an ongoing concern.
Pledges over a going concern (gage sur fonds de commerce) are subject to specific requirements (Grand-Ducal Decree of 27 May 1937, as amended) and can only be granted to authorised credit institutions and breweries. A pledge on the company’s going business concern (“gage sur fonds de commerce”) encompasses the business universality comprising but not limited to, the goodwill, the right to the lease, the physical installation, the merchandise (up to 50 % of their value only) or other goods of the company. A written agreement is required. They are enforceable against third parties after registration at the Administration Registry and at the Mortgage Registry of the judicial district in which the business is run or the stock or goods are located. The beneficiary of a pledge over a going concern or of a mortgage, whose claim has become due and payable, can serve a summons to pay and, without a judicial order, seize the pledged assets (including any that have been moved without his previous consent). Enforcement is a court driven process. A court order is required for realisation by public auction or appropriation. A fee of 0.24% on the total amount of the secured debt, or a fixed duty of EUR12. The fixed duty may be available if the underlying credit agreement has a sufficient connection with a foreign jurisdiction. A tax of 0.05% on the total amount of the secured debt is due, for first registration and renewal. As a governmental authorisation has to be obtained before registration can be made, perfecting a pledge ongoing business may take several months.
5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? a) Mortgages, civil and commercial pledges and agricultural pledges (warrant agricole) are usually enforced by public sale of the secured assets. After an event of default occurred, the commercial pledge (as provided for under articles 110 to 120 of the Commercial Code) may be enforced by the pledgee, being already in possession of the pledged assets and after serving a summons to pay upon the pledgor, by seeking a court decision fixing the conditions of the sale by public auction. Pledges over financial instruments and claims governed by the Financial Collateral Act can be enforced by seeking attribution of the securities in court and auction at the Luxembourg Stock Exchange. In addition, the pledgee can:
Appropriate the pledged assets at the price determined by a valuation method agreed between the parties. Sell the pledged assets or have them sold by private sale at the stock exchange or by public auction.
Set off the pledged assets against the secured obligations. In case of financial instruments, appropriate the instruments at their stock quoted price, if listed, or at their last published net asset value if they are units in an undertaking for collective investment that publishes their value on a regular basis.
As a result, a creditor can directly appropriate pledged financial instruments or claims without a court order. The parties can directly agree on a valuation method for the pledged assets. This can include appointing an independent expert to determine the appropriate value, under the methods or conditions that the parties agree on. b) Security arrangements that are governed by a foreign law may be recognized by Luxembourg courts. However, as regards their enforcement, the law of the jurisdiction in which the secured assets are located (lex rei sitae) will usually apply. Enforcement of securities granted over assets located in Luxembourg must thus comply with Luxembourg law (see above, question 2). 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Trustees or security agents may be used in Luxembourg. According to the Financial Collateral Act, securities may be granted to a person (agent) acting on behalf of the beneficiaries, of a fiduciary, or of a trustee, in order to guarantee the claims of current or future beneficiaries. The latter must however be identified or at least identifiable. The agents benefit from the same rights than the beneficiaries of the security. There is no need to grant the security in favour of all the lenders. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Insolvency Security arrangements are contracts and as such, they may be affected by insolvency procedures if they were concluded during the suspect period (période suspecte) or during the ten days preceding the suspect period. The suspect period generally starts from the moment the company stopped paying its debts (cessation de payements), though the exact date is fixed by the court (a maximum of six months before the start of the insolvency procedures). If a security is provided by a Luxembourg company during the suspect period, the security will be void if it was newly provided, or extended, for pre-existing debt. Furthermore, any security will be void when executed by a pledgee, who was aware, at the time of contracting, of the insolvency of the Luxembourg company (article 446 of the Commercial Code). Mortgages, liens and pledges on going business concern are deemed to be void, if both:
Registration took place during the suspect period or during the preceding ten days; and the date of the creation of the security and the date of the registration are separated by more than 15 days.
If securities are void or declared void in accordance with the principles set out above, they may not be enforced against the insolvency official. As an exception, financial collateral arrangements that fall within the scope of the Financial Collateral Act, are enforceable, even in insolvency situations. The Financial Collateral provides for the following rules: o Financial collateral arrangements, netting contracts and the methods of evaluation and execution agreed between the parties in conformity with the Financial Collateral Act are valid and enforceable against third parties, auditors, administrators, liquidators and other similar entities regardless of the existence of re-organisation measures, winding up proceedings or the existence of any national or international insolvency situations. o Any termination, valuation, execution and close-out netting arrangements effected as a method of implementation or as a conservatory measure are deemed to have occurred prior to any such proceedings. o The Luxembourg provisions relating to civil/commercial pledges, as well as national and foreign provisions relating to re-organisation measures, liquidation proceedings and other insolvency situations are not applicable to financial collateral arrangements or to netting contracts and do not impede the execution of such contracts and their resulting obligations notably of re-transfer or retrocession. o Netting agreements, financial collateral arrangements concluded, as well as the provision of financial collateral under such arrangements provided, on the day of the commencement of winding-up proceedings or reorganisation measures but prior to the order commencing such procedures are valid and enforceable against third parties, auditors, liquidators, administrators or other such entities. When a netting agreement or a financial collateral arrangement comes into existence, or a relevant financial obligation has come into existence or financial collateral has been provided on the day of but after the moment of the commencement of winding up proceedings or reorganisation measures, it shall be legally enforceable and binding on third parties, auditors, administrators, liquidators and other such entities if the collateral taker can prove that he was not aware, nor should have been aware, of the commencement of such proceedings or measures. The two foregoing paragraphs also apply to payments made by a person on the day of the commencement of the winding up proceedings or the reorganisation measures.
o In order to avoid debate on the time such collective procedures take effect, the Financial Collateral Act provides that official requests to commence reorganisation measures or judicial decisions to open liquidation proceedings must state the date and time of their taking effect. The practical consequence of this provision is that from now on all requests for controlled management and all insolvency or liquidation judgments must include a precise date and time. Pursuant to the foregoing provisions, the Financial Collateral Act expressly recognises the validity and enforceability of all financial collateral arrangements covered by it, even if entered into during the pre-bankruptcy suspect period. This offers greater certainty to financial market participants and removes inequalities that previously existed between different forms of security arrangements in Luxembourg. The aim of the Financial Collateral Act is to render financial collateral arrangements unattackable. However, this does not mean that there will be no sanction in the event the parties to such arrangement enter into same for fraudulent reasons. In the case of fraudulent behaviour those responsible can always be sanctioned pursuant to the rules on civil responsibility. Ranking If the debtor becomes insolvent, secured creditors are paid before unsecured creditors from the proceeds of the sale of the debtor’s assets securing the secured creditor’s respective claims, if all the required formalities have been complied with. However, several privileges and claims rank above the claims of secured creditors. The usual ranking is as follows:
Court costs, including the fees of the trustee, or receiver appointed by the court. Compensation for victims of an accident. Funeral costs. Unpaid wages or salaries of employees of the insolvent company. Tax and social security claims. Specific privileges on movable assets (as opposed to general privileges, specific privileges can only be enforced on specific assets of the debtor, for example, rents can be secured by the furniture of the rented premises). General privileges on movable and immovable assets (which can be enforced on all the assets belonging to the debtor). Specific privileges on immovable assets (which can only be enforced on specific assets, such as the seller’s lien or the lender’s lien whose rights can solely be secured by the immovable asset purchased by the debtor). Mortgages/Pledges Unsecured creditors
The ranking of the subordinated creditors depends on the ranking agreed on contractually. As an exception to the above, security arrangements that are governed by the Financial Collateral Act may be enforced notwithstanding any national or foreign insolvency rules. Collateral takers may thus realize their collateral regardless of the insolvency of the collateral provider.
8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Debt subordination is possible in Luxembourg. Generally, debts are subordinated by a contract in which a creditor either:
Subordinates the payment of his claim to other claims or creditors (subordination clause). Agrees to enforce his claim against only a limited number of assets owned by the debtor, or waives his right to enforce his claim against a certain number of assets (limitation of enforcement clause).
Subordination and limitation of enforcement clauses are contractual and must therefore comply with the general law on the validity of contracts. Subordination clauses can be specific (for example, limited to a defined financial operation) or general. In general clauses, the creditor accepts that, if the debtor becomes insolvent or is liquidated, his claim is paid after all other creditors have been paid. Such a clause does not prevent the creditor from being paid when the debt becomes due and payable. Subordination of security is also used in relation to financial instruments subject to the Financial Collateral Act. Multiple ranking pledges over financial instruments and claims are possible. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) Generally, debts can assigned or sold to a third party (cession de créance). Such a transfer of debt includes the debt itself, as well as the rights and interests attached to it, such as security interests, privileges and mortgages (Article 1692, Civil Code). For enforcement purposes, the transfer of the debt must be notified to, or accepted by the debtor. Thus, in an assignment situation, there is no need to create a new security in favor of the assignee. Novation implies that a claim is substituted by another claim. Thus, an existing claim is extinct, while a new claim is created. Novation may be realized either by:
substitution of the debt (a new debt is created between the debtor and the creditor, whish extinguishes the existing debt); or by substitution of the debtor (the existing debtor is discharged by the creditor, and replaced by a new debtor); or by substitution of the creditor (the existing creditor is replaced by a new creditor, the debtor is discharged towards the first creditor)
Article 1278 of the Civil Code provides that any security interests (such as privileges or
mortgages), attached to the former (extinct) claim have lapsed by virtue of the novation unless the creditor has explicitly reserved them to subsist. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? Under Luxembourg law, it is possible to have on top of a security an assignment of the collateral. In general, there are no specific provisions precluding the combination of two or more forms of securities, as long as the mandatory rules pertaining to the relevant securities are complied with. If for example a pledge is granted over an asset, it is essential for the validity of the pledge that this asset remains in the possession of the creditor, or a designated third party. In practice, a creditor who has already been granted a pledge over a certain asset may also have the ownership over the same asset assigned to him as a security. There are also situations, where the creditor benefits from different securities covering different aspects of one transaction. For example, a creditor can benefit from an assignment or a pledge over receivables to be paid by the debtor’s debtor, and simultaneously benefit from a pledge over the bank account on which the receivables are to be paid. It should however be noted that, under the Financial Collateral Act, a pledgee may directly appropriate the pledged assets upon an event of default without a court order. Consequently, in some situations, there is no direct need for a same creditor to have on top of a pledge the assignment of the collateral. If there are different creditors, a debtor may grant a pledge on the same asset to each of them. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Step-in rights are lawful in Luxembourg, but only in situations where the Financial Collateral Act applies. Under this act, a creditor can directly appropriate pledged financial instruments or claims without a court order. Under the Luxembourg Commercial and Civil code however, the pledgee must necessarily apply to a court for a decision ordering appropriation of the secured assets, or ordering a public sale. Any clause having the effect to circumvent this provision is null and void.
