An innovative regime for personal guarantees
The Luxembourg law of 10 July 2020 on professional payment guarantees (the Law on Professional Payment Guarantees) entered into force on 17 July 2020, ending a remarkably fast and efficient parliamentary process which started just end of April this year. The Law on Professional Payment Guarantees introduces into the Luxembourg legal environment a specific, robust and innovative regime for personal guarantees (sûretés personnelles) granted in a professional framework. A professional payment guarantee consists in an undertaking by a guarantor to pay a beneficiary, at the request of such beneficiary or an agreed third party, an amount determined based on agreed terms, in relation to one or more claims or associated risks. Professional payment guarantees complement the two existing regimes of personal guarantees: (i) cautionnements (suretyships – i.e. broadly guarantees directly linked to an underlying obligation) foreseen in the Luxembourg Civil Code and (ii) garanties autonomes (stand-alone guarantees – i.e. broadly guarantees independent from an underlying obligation) resulting from the practical construction recognised by Luxembourg courts for over three decades.
Personal guarantees (sûretés personnelles) must be distinguished from collateral or security interests conferring a right in rem (sûretés réelles). The latter have witnessed an undeniable success since the entry into force of the law of 5 August 2005 on financial collateral arrangements.
In respect of personal guarantees, however, Luxembourg practitioners have been struggling for some time now with the risk of requalification surrounding the use of stand-alone guarantees in respect of which an array of uncertainties exist, leading potentially to the risk of requalification by the courts into less practical and beneficiary-friendly cautionnements.
The new regime introduced by the Law on Professional Payment Guarantees brings in a welcomed milestone in the development of personal guarantees and strengthening legal certainty. Personal guarantees that will be explicitly subject to this new regime will benefit from interesting protections and features, such as:
- the underlying claims or risks related to the guarantee can be explicitly identified in the instrumentum of the guarantee;
- the guarantees can be called upon in all contractually agreed cases, including in absence of default or acceleration of the underlying claims;
- the guarantees can be granted to a security agent or equivalent body acting on behalf of the secured parties;
- it can be contractually agreed that such guarantees will remain valid irrespective of the start of insolvency proceedings or safeguard measures against the debtor of the underlying claims.
The Law on Professional Payment Guarantees foresees a wide scope of contractual flexibility for the parties, making it easy to tailor the features of the guarantee to their specific needs, only limited by public order rules and general principles of contract laws. The Law on Professional Payment Guarantees furthermore provides for a number of provisions that will apply unless otherwise contractually agreed by the parties, such as the inapplicability of defences by the guarantor and the subrogation of the guarantor in the rights of the beneficiary upon payment of the guarantee.
Interestingly, the nature of the secured claims or risks is not limited and can include payment obligations, delivery of financial instruments, existing, future or hypothetical claims, but also risks relating to any type of claims.
The Law on Professional Payment Guarantees makes it clear that professional payment guarantees must be made in writing (which includes explicitly electronic format or any other durable medium).
Practitioners will need to bear in mind when drafting professional payment guarantees that such guarantees need to include a specific provision confirming the express intention of the parties to submit the guarantee to the particular regime put in place by the Law on Professional Payment Guarantees. Such specific provision is welcomed and will cast legal certainty surrounding guarantees, thereby excluding risks of requalification by the courts.
Scope of application
The Law on Professional Payment Guarantees does not restrict the type of persons which can grant or be the beneficiary of professional payment guarantees. As a result, both individuals and legal entities, either domestic or foreign, with or without legal personality (such as special limited partnerships (sociétés en commandite spéciales)), can rely on the provisions of the Law on Professional Payment Guarantees. Professional payments guarantees can also be granted by public bodies and institutions, national and supranational.
It is worth pointing out that the new regime shaped by the Law on Professional Payment Guarantees can be made applicable to guarantees granted prior to its entry into force by amending such guarantees to include an express submission to the Law on Professional Payment Guarantees. In case there are doubts (or could be doubts) about the nature of a previously granted guarantee, it will thus be straightforward to build in legal certainty by amending such guarantee and thereby removing risks of future requalification by a court. This is typically the case for guarantees granted by parent companies in favour of their subsidiaries to the benefit of landlords in the framework of lease agreements entered into by their subsidiaries. To avoid risks of requalification of previously granted guarantees, parties involved may wish to add an explicit reference to the Law on Professional Payment Guarantees in the body of their Luxembourg law governed guarantees.
Professional payment guarantees will indubitably be welcomed by legal practitioners, in light of their flexibility and beneficiary-friendly regime. In the framework of financing or debt issuance transactions, this new tool can be expected to be quickly and widely used, in a similar fashion as security interests subject to the law of 5 August 2005 on financial collateral arrangements which have been largely relied upon in cross-border transactions for fifteen years now. The specific features of professional payment guarantees can also be expected to be of use in the framework of the structuring of Luxembourg investment funds and in the sphere of funds financing in particular.
Lastly, the outbreak of the Covid-19 pandemic and the financial difficulties that may result for groups of companies may also require financial support to be granted to and/or by Luxembourg companies, notably by way of personal guarantees. Actors (including small and medium-sized enterprises) will certainly be interested in experiencing this new regime on professional payment guarantees, particularly in light of its cost-efficient nature (no registration is required) and straightforward process (it is a pure private deed not requiring the involvement of a notary or other authorities). Practitioners are thus looking forward to making use of this new regime that constitutes another useful tool in the hands of the Luxembourg financial place to continue preserving and strengthening the financial health of Luxembourg companies and beyond.
An innovative regime for personal guarantees
The Luxembourg law of 10 July 2020 on professional payment guarantees (the Law on Professional Payment Guarantees) entered into force on 17 July 2020, ending a remarkably fast and efficient parliamentary process which started just end of April this year. The Law on Professional Payment Guarantees introduces into the Luxembourg legal environment a specific, robust and innovative regime for personal guarantees (sûretés personnelles) granted in a professional framework. A professional payment guarantee consists in an undertaking by a guarantor to pay a beneficiary, at the request of such beneficiary or an agreed third party, an amount determined based on agreed terms, in relation to one or more claims or associated risks. Professional payment guarantees complement the two existing regimes of personal guarantees: (i) cautionnements (suretyships – i.e. broadly guarantees directly linked to an underlying obligation) foreseen in the Luxembourg Civil Code and (ii) garanties autonomes (stand-alone guarantees – i.e. broadly guarantees independent from an underlying obligation) resulting from the practical construction recognised by Luxembourg courts for over three decades.
Personal guarantees (sûretés personnelles) must be distinguished from collateral or security interests conferring a right in rem (sûretés réelles). The latter have witnessed an undeniable success since the entry into force of the law of 5 August 2005 on financial collateral arrangements.
In respect of personal guarantees, however, Luxembourg practitioners have been struggling for some time now with the risk of requalification surrounding the use of stand-alone guarantees in respect of which an array of uncertainties exist, leading potentially to the risk of requalification by the courts into less practical and beneficiary-friendly cautionnements.
The new regime introduced by the Law on Professional Payment Guarantees brings in a welcomed milestone in the development of personal guarantees and strengthening legal certainty. Personal guarantees that will be explicitly subject to this new regime will benefit from interesting protections and features, such as:
- the underlying claims or risks related to the guarantee can be explicitly identified in the instrumentum of the guarantee;
- the guarantees can be called upon in all contractually agreed cases, including in absence of default or acceleration of the underlying claims;
- the guarantees can be granted to a security agent or equivalent body acting on behalf of the secured parties;
- it can be contractually agreed that such guarantees will remain valid irrespective of the start of insolvency proceedings or safeguard measures against the debtor of the underlying claims.
The Law on Professional Payment Guarantees foresees a wide scope of contractual flexibility for the parties, making it easy to tailor the features of the guarantee to their specific needs, only limited by public order rules and general principles of contract laws. The Law on Professional Payment Guarantees furthermore provides for a number of provisions that will apply unless otherwise contractually agreed by the parties, such as the inapplicability of defences by the guarantor and the subrogation of the guarantor in the rights of the beneficiary upon payment of the guarantee.
Interestingly, the nature of the secured claims or risks is not limited and can include payment obligations, delivery of financial instruments, existing, future or hypothetical claims, but also risks relating to any type of claims.
The Law on Professional Payment Guarantees makes it clear that professional payment guarantees must be made in writing (which includes explicitly electronic format or any other durable medium).
Practitioners will need to bear in mind when drafting professional payment guarantees that such guarantees need to include a specific provision confirming the express intention of the parties to submit the guarantee to the particular regime put in place by the Law on Professional Payment Guarantees. Such specific provision is welcomed and will cast legal certainty surrounding guarantees, thereby excluding risks of requalification by the courts.
Scope of application
The Law on Professional Payment Guarantees does not restrict the type of persons which can grant or be the beneficiary of professional payment guarantees. As a result, both individuals and legal entities, either domestic or foreign, with or without legal personality (such as special limited partnerships (sociétés en commandite spéciales)), can rely on the provisions of the Law on Professional Payment Guarantees. Professional payments guarantees can also be granted by public bodies and institutions, national and supranational.
It is worth pointing out that the new regime shaped by the Law on Professional Payment Guarantees can be made applicable to guarantees granted prior to its entry into force by amending such guarantees to include an express submission to the Law on Professional Payment Guarantees. In case there are doubts (or could be doubts) about the nature of a previously granted guarantee, it will thus be straightforward to build in legal certainty by amending such guarantee and thereby removing risks of future requalification by a court. This is typically the case for guarantees granted by parent companies in favour of their subsidiaries to the benefit of landlords in the framework of lease agreements entered into by their subsidiaries. To avoid risks of requalification of previously granted guarantees, parties involved may wish to add an explicit reference to the Law on Professional Payment Guarantees in the body of their Luxembourg law governed guarantees.
Professional payment guarantees will indubitably be welcomed by legal practitioners, in light of their flexibility and beneficiary-friendly regime. In the framework of financing or debt issuance transactions, this new tool can be expected to be quickly and widely used, in a similar fashion as security interests subject to the law of 5 August 2005 on financial collateral arrangements which have been largely relied upon in cross-border transactions for fifteen years now. The specific features of professional payment guarantees can also be expected to be of use in the framework of the structuring of Luxembourg investment funds and in the sphere of funds financing in particular.
Lastly, the outbreak of the Covid-19 pandemic and the financial difficulties that may result for groups of companies may also require financial support to be granted to and/or by Luxembourg companies, notably by way of personal guarantees. Actors (including small and medium-sized enterprises) will certainly be interested in experiencing this new regime on professional payment guarantees, particularly in light of its cost-efficient nature (no registration is required) and straightforward process (it is a pure private deed not requiring the involvement of a notary or other authorities). Practitioners are thus looking forward to making use of this new regime that constitutes another useful tool in the hands of the Luxembourg financial place to continue preserving and strengthening the financial health of Luxembourg companies and beyond.