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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The parties may generally freely determine the enforcement triggers. In line with international practice, the most typical enforcement triggers for loans and underlying security documents would be non-payment, commencement of insolvency proceedings and material breach of contract.
Assuming that the enforcement takes place outside of an insolvency scenario, civil law security rights or mortgages may be enforced only in case of a payment default of the relevant debtor, while pledges over financial instruments and claims governed by the Luxembourg Collateral Act may be enforced by the pledgee upon the occurrence of the contractually agreed enforcement event.
First-demand guarantees are independent of the existence and validity of the secured obligations. Hence, it is sufficient that the conditions for enforcement set out in the guarantee agreement be fulfilled, which often entails merely that the beneficiary of the guarantee states that a default has occurred, and demands payment.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Depending on the terms of the relevant agreement, loans and guarantees may be accelerated or enforced by a simple notice/demand to the borrower or guarantor.
As regards security, the procedures vary depending on the type of security being enforced.
Commercial pledges or mortgages may be enforced only after a prior summons to pay has been served on the debtor of the secured obligation (in case of a mortgage, served by a bailiff). The pledgee must then apply for an authorisation from the president of the district court to sell the collateral. The sale must be made through an official appointed by the president of the district court. The president of the district court may authorise the secured creditor (or its security representative) as pledgee to sell the collateral either in whole or in part.
As regards security agreements over financial instruments and claims, the Luxembourg Collateral Act provides for a number of enforcement remedies. The pledgee may, unless otherwise agreed between the parties, without prior notice:
- appropriate the collateral or cause the appropriation of the collateral by a third party at a price determined prior to or after its appropriation in accordance with an agreed valuation method (to avoid any challenge, it is usually recommended to appropriate the collateral at its fair market value);
- sell the collateral in a private sale at arm's length conditions, in a sale organised by a stock exchange (this option is not used in practice) or in a public auction;
- request a judicial decision attributing the collateral to the pledgee in discharge of the secured liabilities following a valuation of the collateral made by a court appointed expert ;
- to the extent possible, proceed with a set-off between the secured obligations and the collateral; or
- in the case of financial instruments, appropriate the pledged assets at their market price (if the financial instruments are admitted to the official list of a stock exchange located in Luxembourg or abroad, or if they are traded on a regulated market functioning regularly, recognised and open to the public) or to the extent applicable, at their net asset value.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In principle, the ranking of different creditors in case of the insolvency of the borrower is as follows:
- The insolvency officer fees and all other insolvency expenses;
- Employees (claims for the last six months, capped to six times the minimum salary);
- Social security (employee's contributions);
- Luxembourg tax authorities;
- Social security (employer's contribution);
- Creditors whose claims are secured by mortgages and pledges;
- Unsecured creditors; and
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