Guarantees and collateral for acquisition financings in Luxembourg

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

There are no particular taxes, costs or liabilities charges over a guarantee. No stamp duty or similar tax or charge applies to the creation or enforcement of a specific pledge security interest over movable assets such as shares, bank accounts or receivables; nor are there any public registration requirements.

Registration at the mortgage registry, which is only valid for a duration of 10 years (but is renewable), will entail additional costs. Specific fees apply to securities taken over immovable properties when filed and registered in the mortgage registry. A tax of 0.05 per cent on the total amount of the secured debt for first registration and renewal is levied for mortgage or pledge on a going concern. Pledges on real property are subject to a tax of 1 per cent on the total amount of the secured debt. In addition, mortgages can be entered into by way of filing a notarial deed, which entails additional costs. Notary fees are calculated on a sliding scale, based on the value of the mortgaged or pledged property, or the amount secured if the security is over a going concern. A notarial deed is not strictly required for a real estate pledge or pledge on a going concern but is recommended.

The usual sliding scale is as follows:

• €50 to €3,800: 0.3 to 4 per cent;
• €3,800 to €10,000: 0.15 to 1.5 per cent;
• €10,000 to €50,000: 0.1 to 0.6 per cent;
• €50,000 to €100,000: 0.025 to 0.5 per cent;
• €100,000 to €990,000: 0.01 to 0.1 per cent; and
• €990,000 to €1.25 million: 0.01 to 0.05 per cent.

There is no restriction applying to foreign-registered related companies to provide guarantees in Luxembourg or under Luxembourg law.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

As a general principle, it is unlawful for a Luxembourg limited liability company incorporated in the form of a public limited liability company and for companies generally governed by rules applicable to it to provide financial assistance for the acquisition of its own shares by a third party (subject to certain exceptions). Luxembourg law does not elaborate further on what constitutes prohibited financial assistance. Article 430-19 of the Company Law (formerly article 49-6) provides that a public limited liability company may not directly or indirectly advance funds, grant loans or provide security with a view to the acquisition of its own shares by a third party.

There are several limited exceptions to the general prohibition. For example, it does not apply to transactions undertaken as part of banks’ and other finance professionals’ usual business, nor to transactions in which the shares are acquired by or for employees of the target.

A breach of the financial assistance prohibition may result in civil and criminal liability for the target’s directors. Third-party lenders may face civil liability and the transaction may be annulled.

Since 10 June 2009, a whitewash procedure has been introduced into the law intended to facilitate the restructuring of the shareholding of public limited liability companies, while still protecting the interests of minority shareholders and creditors. Financial assistance is allowed provided the company complies with the ‘whitewash procedure’, which requires, inter alia, that the transaction be carried out at fair market conditions, the company have distributable reserves in the amount of the financial assistance granted, and the transaction be approved by the shareholders, subject to a detailed published management report on the transaction.

Article 430-20 of the Company Law (formerly article 49-6 bis) provides for special rules that apply where there is a conflict of interest between the parties involved in the purchase of the shares and those in charge or involved in the whitewash procedure.

Given the fact that the level of net assets of a Luxembourg holding company or SPV is generally low, the effect of the whitewash procedure is rather reduced considering that the company needs to allocate from its profits an amount of non-distributable reserves at least equal to the value of the financial assistance granted.

There may also be limitations where cross-group or upstream guarantees by subsidiaries of the borrower are being granted. Lacking a definition of ‘group of companies’ in Luxembourg law whereby the interests of the group could override those of a single company, the validity of cross-stream or upstream guarantees will ultimately depend on a corporate benefit analysis by the grantor. In particular, the guarantor should have some individual interest (consideration) in the transaction and the expected benefit deriving from the guarantee should outweigh the risks taken in granting the cross-stream or upstream guarantee. The financial liability resulting from a guarantee should not exceed the financial capacity of the guarantor and, more specifically, should not send the guarantor into an insolvent position. In practice, this may often give rise to contractual limitations of recourse, however disputable, under cross-group guarantees to a certain percentage of the net asset value of the grantor.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

Security interests available under Luxembourg law can be divided into:

• securities over immovable assets, which include mortgage over land, building and vessels; and
• securities over movable assets, which include:
• securities over financial instruments (pledge over shares, claims, bank accounts, debt instruments, assignment of title by way of security), which are governed by the Law of 5 August 2005 on Financial Collateral;
• pledges over goods or tangible assets that are not financial instruments;
• pledges over business assets, which is a general security covering the value of a company’s intangible assets (eg, clientele, business model, trademark, patents, lease rights, etc and up to 50 per cent of the stock of the company), which can only be granted to banks, credit institutions and breweries being accredited by the Luxembourg Minister of Finance;
• preservation of title on tangible assets; and
• retention rights under a sale or warehouse contract.

Luxembourg law also provides for specific guarantees such as personal, independent or joint guarantees or even partial assignment of salary in favour of a creditor.

Luxembourg law does not provide for the creation of fixed and floating charges. It is, however, often the case in international transactions that a Luxembourg company grants a fixed or floating charge governed by foreign law (for further information about enforceability, see question 1).

It is possible to grant a security on all future movable assets of the debtor (not on future immovable assets), but the ‘blanket lien’ does not exist under Luxembourg law.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Under Luxembourg law, the transfer of the possession (dispossession) of the assets over which the pledge is granted is a condition to the constitution of the pledge. Such dispossession can be done in various ways depending on the type of assets to be pledged. Dispossession is also required to make the pledge enforceable against third parties. The law of the pledgor’s jurisdiction may impose further perfection or notification requirements.

The dispossession of registered financial instruments whose transfer takes place by a transfer in the registers of the issuer (as this is the case with respect to the shares in public company limited by shares) may be established by recording the pledge in those registers.

A pledge created over shares in a private limited liability company has to be notified to the company whose shares are pledged.

Unless the debtor whose claims are pledged is party to the pledge agreement, such pledge agreement must be notified to, or acknowledged by, the debtor. Lacking such notification, the debtor of a pledged claim may validly discharge his or her obligation to the pledgor as long as he or she has no knowledge of the mere conclusion of the pledge.

A pledge over bank accounts must be notified to, and acknowledged by, the account bank maintaining the accounts.

A security interests granted over immovable assets (mortgage) or business assets must be registered with the local mortgage registration office.

Failure to comply with these provisions could jeopardise the enforceability of the security interest and its ranking towards third parties and other creditors.

The perfection of security interests over immovable assets (mortgage) or business assets must be registered with the local mortgage registration office.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Luxembourg security interests are accessory in nature and continue to exist as long as the principal claim they secure is in place, hence no renewal procedure is required. However, by derogation, a pledge over business assets and a mortgage over immovable properties are only valid for a duration of 10 years (but are renewable).

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

No. ‘Works council’ consent is not required.

It is recommended to ensure that the granting of guarantees and securities be approved by the grantor itself (ie, its board or relevant authorised corporate body) with the view to assess and ascertain that the granting of guarantees or security satisfies the corporate interest of the grantor and any conflict of interest be cleared.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

The Financial Collateral Law specifically provides that a security over financial instruments can be granted to an agent or a trustee acting for itself and for the benefit of all lenders, to secure the claims of third-party beneficiaries, present or future, provided the third-party beneficiaries are determined or determinable.

For other types of securities (including fiduciary arrangements), the effect of the agency provisions (whether governed by Luxembourg or foreign laws) will be recognised and enforceable in Luxembourg. It is, however, recommended to specify the capacity in which the security beneficiary is acting in the relevant security agreement. For all security interests that fall outside the scope of the Financial Collateral Law and where such security is granted to an agent or a trustee, parallel debt provisions will need to be put in place in the loan documentation.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

In general, the circumstances under which collateral may be released are specified in the security agreement or the credit agreement, where applicable. Collateral is generally released when full discharge of secured obligations occurs. To the extent that the relevant provision does not permit the automatic release of collateral, the consent of the lenders or holders will be required to release the collateral according to the contractual negotiated terms.

Describe the fraudulent transfer laws in your jurisdiction.

Under Luxembourg bankruptcy law, the incurring of debt or the granting of a security interest in collateral in connection with it could be voided under certain condition (see question 33).