The Luxembourg law of 20 July 2022 (the New Law) amending the law dated 5 August 2005 on financial collateral arrangements (the Collateral Law) entered into force on 24 July 2022 (the Collateral Law as amended pursuant to the New Law hereinafter referred to the New Collateral Law).

The main purpose of the New Law is to further strengthen the attractiveness of the Luxembourg collateral environment towards creditors through the modernisation of somewhat outdated provisions on the enforcement of security interests subject to the Collateral Law and shaping greater legal certainty in respect of enforcement methods widely used in practice.

The major changes can be summarised as follows:

• Enforcing security over specific assets: With a view to improving legal certainty, two new methods of enforcement are now explicitly mentioned:
  
  
  • Funds shares and units: The New Law introduces a new enforcement method specific to financial instruments comprising shares or units issued by an undertaking for collective investments. Except as otherwise agreed between the parties, these instruments can henceforth (1) be appropriated at (a) their market price (for share or units admitted to trading on a regulated or an alternative market) or (b) their latest net asset value (provided that such net asset value is not older than one year) but also (2) be redeemed at the redemption price provided by the constitutional documents of the undertaking for collective investments, empowering the pledgee with a straightforward course of action to dispose of the pledged assets; and
  • Insurance contracts: The pledgee is entitled to exercise all rights arising from (life or non-life) insurance contracts subject to the pledge, including redemption and payment rights, leaving again more flexibility to the pledgee to enhance the value of the pledged assets.
    
    
• Simplifying public auctions: Since 2005, public auctions of pledged financial instruments were effectuated at and by the Luxembourg Stock Exchange (the LuxSE), which held a governmental concession until 2007. Considering this change of status, this role previously entrusted with the LuxSE is (unless otherwise agreed by the parties) now transferred to bailiffs and notaries residing in the Grand Duchy of Luxembourg, subject to a defined and detailed framework provided by the New Law. This may revive the interest for this enforcement method – hardly ever used in practice –, especially with regard to underlying local businesses.
  
  
• Clarifying the trigger for enforcement and the application of proceeds: Article 11 of the New Collateral Law now provides that (a) the pledge can be enforced (following the occurrence of an enforcement event freely agreed between the parties) even though the related secured pecuniary obligations may not yet be due and payable (it is thus not required that a payment default or an acceleration of the underlying debt has occurred) and (b) proceeds from such enforcement should as a rule be applied to the secured obligations, unless otherwise agreed among the parties.

Those improvements can only be welcomed, being consistent with the spirit of the Collateral Law and offering creditors an efficient, reliable and user-friendly legal framework to support and boost the lending activity in Luxembourg.

Contact information

If you have specific questions and/or requests on this topic, feel free to contact our experts:

• Basile Fémelat
• Yann Hilpert
• Arnaud Barchman
• Delphine Gomes

Disclaimer

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