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Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Yes, security can be granted over real estate in Luxembourg.

The customary form of security over real estate is a contractual mortgage. A pledge over real estate may also be taken, but this form of security is rarely used in practice as it requires a transfer of possession of the real estate to the secured creditor.

Procedure A contractual mortgage must be in writing and passed before a Luxembourg notary (except for mortgages granted in favour of Luxembourg’s Banque et Caisse d'Épargne de l'État) and two witnesses. The notarial deed shall clearly identify the mortgaged property and the amount that the mortgage secures.

A contractual mortgage that is not established by a notarial deed is invalid and can be declared void by a Luxembourg court at any time.

The contractual mortgage becomes enforceable against third parties upon registration with the mortgage register of the judicial district where the mortgaged property is located. The secured obligations must be certain and liquid, otherwise no registration of the mortgage will be accepted.

Such registration is valid for a period of 10 years and can be renewed for subsequent 10-year periods, provided that neither the underlying debt for which the mortgage was created nor the 10-year term itself is extinguished.

In the absence of renewal, the mortgage will remain valid but will no longer be enforceable against third parties, and the secured creditor will lose its preferential rank over the mortgaged property.

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over machinery and equipment.

Such security shall take the form of a civil law pledge governed by the Luxembourg Civil Code and be executed by way of a notarial deed or under private seal. The perfection of such pledge requires the transfer of physical possession of the relevant collateral to the secured party. No security is created as long as the security provider has possession of the relevant machinery or equipment, making it impossible to grant security over equipment and inventory while leaving the pledgor in a position to make use of such assets. Pledges over machinery and equipment are thus uncommon in practice.

Machinery and equipment may, however, also be pledged under a pledge over a going concern/business universality (gage sur fonds de commerce).

A pledge over a going concern/business universality usually includes all the assets of the pledgor (in a broad meaning, but excluding real estate) such as customers, trademarks, patents, tools, equipment and up to 50% of the stock.

A pledge over a going concern/business universality is subject to specific requirements set out in a Grand-Ducal Decree of May 27 1937, as amended, and can be granted only to authorised credit institutions, notaries or breweries. In particular, a valid pledge over business universality requires that the beneficiary of such pledge be a Luxembourg or foreign credit institution specifically authorised by the government (sitting in council) to enter into a pledge over a going concern/business universality. In addition, a written agreement is required, enforceable against third parties after registration at the mortgage register of the judicial district in which the relevant business is run, or where the stock or goods are located (valid for a renewable 10-year period).

In light of the latter and given that an authorisation has to be obtained from the government, the perfection of a pledge over a going concern/business universality is a costly and lengthy process (unless the relevant credit institution is already authorised). Pledges over going concern/business universality are thus rarely used in practice.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over receivables by two means:

  • a pledge over receivables; or
  • a transfer of ownership by way of security (rarely used in practice).

Pledges over receivables are governed by the Luxembourg Collateral Act and can be created under private seal.

In principle, a receivables pledge takes effect between the parties, and is automatically perfected as against the relevant debtor and against third parties as of the date of execution of the pledge agreement.

However, the debtor of the receivables may validly discharge the relevant claim if payment thereof is made to the pledgor, as long as such debtor did not have knowledge of the creation of the pledge.

A notice of pledge is thus a common step to ensure that the debtor is properly instructed as to whom any payments may be directed prior to and following the relevant enforcement event. It is also advisable to obtain an acknowledgement of such notice by the debtor under which the latter waives its rights of set-off, as well as any other defences that it may have against the creditor of the relevant receivable. The same result may be achieved by having the debtor become a party to the receivables pledge agreement.

Debtors of trade receivables are usually notified of the existence of the receivables pledge only upon the occurrence of an enforcement event or of another contractually agreed trigger event. This implies that the security is not perfected (and the creditor not protected) until such notification has been made.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over financial instruments.

The most common forms of security granted over financial instruments are pledges governed by the Luxembourg Collateral Act.

The act contains a broad definition of ‘financial instruments’ that encompasses, among other things, all transferable securities and other securities (including shares in companies, units in collective investment undertakings, bonds and other forms of debt instrument, loan notes), convertible instruments and claims relating to financial instruments.

These financial instruments may be in physical form, paperless, transferable by book entry or by delivery, in bearer or registered form.

Pledges over financial instruments can be created under private seal and are perfected by delivery of the pledged assets from the pledgor to the pledgee or to a third party designated by the pledgor and the pledgee.

Such delivery takes different forms, including:

  • for pledges over registered shares/securities/notes: by registration of the pledge in the relevant register (eg, for a share pledge in the shareholders' register) of the company whose shares/securities/notes are pledged;
  • for pledges over bearer shares: by registration of the pledge in the register of bearer shares held by the depositary of the relevant bearer shares in Luxembourg; and
  • for book entry securities:
  • by the execution of the pledge agreement by the pledgor and the pledgee if the latter is also the depositary of the securities  pledged (automatic perfection);
  • by the execution of a pledge agreement (or control agreement) between the pledgor, the pledgee and the depositary of the securities, or between the pledgor and the pledgee and notified to the depositary, and under which, in both cases, the depositary shall accept to act upon instructions of the pledgee without further consent from the pledgor;
  • by registration of the securities in an account opened in the name of the pledgee; or
  • by registration of the securities in an account opened with a depositary in the name of the pledgor or that of an agreed third party, the securities being designated in the books of the depositary as being pledged by reference to the relevant account in which they are registered (‘earmarking perfection’).

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be granted over cash deposits and usually takes the form of a pledge over the relevant cash account.

Such pledge is governed by the Luxembourg Collateral Act and can be created under private seal. It is perfected towards third parties by the execution of an account pledge agreement between the pledgor and the pledgee, and towards the account bank by the sending of a notice and the confirmation by the account bank, in an acknowledgement, that it waives all its rights over the relevant account (including the first ranking pledge that the Luxembourg account banks usually hold over the cash accounts as per their general terms and conditions).

It is not necessary to block the account to have a valid pledge. The cash deposited from time to time into the account may stay freely available to the pledgor until the pledgee decides to block the relevant account following the occurrence of a contractually agreed trigger event by sending a blocking notice to the account bank.

It is common practice to attach the relevant notice of pledges, acknowledgement notice and blocking notice to the account pledge agreement, and to agree their content between the parties and the account bank before executing the account pledge agreement itself.

Luxembourg banks benefit from a general security interest over all the securities/cash deposits of their customers pursuant to their general business terms and conditions. It is standard practice to obtain, upon request, a waiver by the account bank of any present and future security interest or right of retention or set-off existing over or in relation to (securities) accounts created in favour of such Luxembourg banks when a security interest over any or all the securities/cash deposits credited to the (securities) accounts held by them is created in favour of a creditor.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Yes, security can be provided over IP rights in Luxembourg.

IP rights, which include trademarks, designs, patents and copyrights, are considered intangible assets and the most common form of security over such rights is pledges. However, since IP rights do not fall within the definition of collateral contained in the Luxembourg Collateral Act, pledges over IP rights do not benefit from the lender-friendly provisions of the act and are pledged under civil law pledge agreements.

A pledge over IP rights is concluded under private seal and cannot cover future rights.

In case only unregistered IP rights are pledged (eg, copyrights), such pledge will be perfected by way of a notification of the pledge against the debtor.

Where registered IP rights are pledged, the pledge agreement will need to be registered with the relevant IP registers to be enforceable against third parties (eg, a pledge over Benelux trademarks or designs shall be registered with the Benelux Office for Intellectual Property, a pledge over a Luxembourg patent shall be registered with the Office of Intellectual Property of the Luxembourg Ministry of Economy and a pledge over a European patent shall be registered with the European Patent Office). Given the various IP rights that may be pledged under an IP rights pledge agreement, such registration process may prove to be cumbersome and sometimes costly; pledges over IP rights are therefore rarely used in practice. It is, however, common to pledge the receivables linked to the IP rights under a receivables pledge agreement under the Luxembourg Collateral Act.

Lastly, IP rights are part of a going business concern and may also be pledged under a general pledge over a going business concern.

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