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Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
Immovable property can be secured by means of either a traditional (ie, non-possessory) mortgage or an antichrèse, a rarely used registered security interest which provides for possession of the real property by the mortgagee. A mortgage is created using a notarised or officially recorded instrument and rendered effective against third parties upon recordation with the mortgage register of the judicial district where the property is located. Registration is valid and enforceable against third parties for 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 security interest will no longer be enforceable. In addition, an undertaking to mortgage is possible and can be effected using a private deed, without the involvement of a notary.
An antichrèse is created by means of a notarised instrument specifying the period for which it is granted. For the entire duration of this term, the creditor takes possession of the real property, which it must maintain in a good state of repair, but does not become the actual owner. Like a traditional mortgage, an antichrèse must be recorded with the relevant mortgage register. Security interests in movable property are created by means of a pledge under the Luxembourg Civil Code (ie, not the Financial Collateral Act, which governs the pledge of financial instruments and receivables). A pledge can be granted for most types of movable assets, either tangible or intangible, present or future, including fungible goods such as agricultural products. A pledge must form the object of a written agreement and the pledgee may not re-use the collateral; the perfection of a pledge of movable property requires the physical delivery of the assets by the pledgor to the secured creditor (or its representative) as pledgee. Given that physical possession is required to perfect a civil law pledge, a security interest in future assets will in principle be considered an undertaking to pledge (ie, an undertaking to deliver the subsequently acquired collateral for the purpose of granting a security interest). Such a promise will become an effective security interest only upon physical transfer of the collateral. Financial collateral arrangements derive from the EU Directive on Financial Collateral Arrangements (2002/47/EC), which was implemented by the Financial Collateral Act. They are now the most commonly used form of security in international financing transactions.
Financial collateral arrangements cover any pledge or assignment of financial instruments or receivables (including most shares and bonds). The act allows any party to grant or benefit from this type of security and provides for extensive freedom of contract. This type of security is extremely cost effective, subject to few formalities and easy to put in place and enforce. However, certain assets (eg, IP rights and immovable property) are specifically excluded from its scope. The advantage of these security arrangements is that secured creditors under the act are entitled to enforce their security interests without being frustrated by insolvency proceedings or an obligation to declare their claims to the trustee in bankruptcy. Security interests that fall within the act’s ring-fencing provisions are protected from Luxembourg or foreign insolvency proceedings arising due to the insolvency of a Luxembourg company. In addition, any applicable zero-hour rules, fraudulent conveyance provisions or clawback periods provided for by the general insolvency rules do not apply to financial collateral arrangements governed by the act.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In principle, secured creditors are considered to fall outside the scope of bankruptcy, which means that they can enforce their claims and do not have to wait for the distribution of the proceeds by the bankruptcy trustee.
For other creditors, the order of payment in bankruptcy is as follows:
- Creditors of the bankrupt estate (ie, bankruptcy expenses such as the trustee's fees and procedural costs) are given priority over all other claimants.
- Preferred creditors of the bankrupt estate, including lien creditors such as the tax authorities and other governmental services and employees, and creditors with non-bankruptcy remote contractual or judicial security.
- Ordinary unsecured creditors, which are paid pro rata out of the remaining proceeds, if any.
Statutory lien creditors are given priority over other secured and unsecured creditors, in addition to a general right of priority over the body of creditors. Such liens include claims by courts and insolvency officials, employees and the tax and social security authorities. The creditor may have either a special lien on a specific asset or a general lien on all of the debtor's assets.
The court-appointed trustee in bankruptcy first settles the costs and disbursements incurred in the context of bankruptcy (including the trustee's fees, all bankruptcy administration costs and all disbursements made in the interest of liquidation). In general, the priority of preferred claims in bankruptcy is as follows:
- legal expenses incurred in the interest of all creditors;
- employee claims;
- claims for social security contributions (owed by the employees);
- claims by the Luxembourg tax authorities;
- claims for social security contributions (owed by the employer); and
- claims for contributions to professional associations.
There is some uncertainty with regard to the priority of secured creditors under the Financial Collateral Act in connection with statutory liens or preferential rights.
Without prejudice to statutory claims or liens, priority will depend on the type of security and the date of perfection or registration applicable (ie, security under the act, general civil law security or mortgage).
In general, unsecured creditors are satisfied after:
- the holders of specific and general liens or preferential rights;
- mortgagees; and
They also rank behind the holders of securities granted under the act.
In addition, the obligations of unsecured creditors rank at least pari passu with all unsecured and non-subordinated obligations, with the exception of any rights of set-off or counterclaim (the principle of equal treatment of unsecured creditors with the same priority).
Finally, certain unsecured creditors may be given priority over other subordinated creditors due to subordination arrangements governed by foreign or Luxembourg law.
Can this ranking be amended in any way?
The ranking cannot, in principle, be changed. However, it is always possible to contractually subordinate one creditor to another if all parties agree to do so and the company is solvent. Such subordination arrangements will not necessarily be enforceable in bankruptcy or against third parties to the agreement. Luxembourg law regulates and expressly recognises contractual subordination between securitisation companies and their creditors and investors only.
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