CLARIFICATION AND MODERNISATION AS OF JULY 2022

A new bill of law n°7933, amending, among others, the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the Financial Collateral Law), was adopted by the Luxembourg Parliament on 7 July 2022 and, further to the waiver of the requirement for a second vote on 15 July 2022, was published into law on 20 July 2022 (the Law).

The Law entered into force on 24 July 2022 and the full text of it can be accessed here.

The Law essentially aims at clarifying and modernising the Financial Collateral Law by introducing long-awaited provisions in respect of inter alia the enforcement of Luxembourg law governed security interests, in order to align the Financial Collateral Law with current Luxembourg market practice and case law, strengthening further its creditor-friendly approach without substantially altering its spirit.

This newsletter summarises the key amendments introduced by the Law.

1. Contractual freedom regarding the determination of enforcement triggers

The Law significantly enlarges the definition of "enforcement events" by making an explicit reference to "any event of default or any event whatsoever" (« une défaillance ou tout autre événement quelconque »), as contractually determined by the relevant parties, which occurrence would entitle the beneficiary of the security to enforce the security interest or to trigger a close-out netting provision.

This position reflects the fact that Luxembourg courts have now confirmed that security financial collateral arrangements can be enforced upon the materialisation of any contractually agreed enforcement trigger events, regardless of their nature (for instance, a breach of financial covenant), allowing the beneficiary of the security to enforce its security interest, even absent any breach of security obligations or default payment, if so contractually agreed upon.

2. Homogenisation with the Recovery and Resolution Regulation

Former article 2-1 of the Financial Collateral Law stated that it applies without prejudice to Part I of the law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended, and Part IV of the Luxembourg law of 5 April 1993 on the financial sector, as amended.

For homogenisation purposes, the Law completes the aforementioned provision by introducing an additional reference to the Regulation (EU) 2021/23 of 16 December 2020 on a framework for the recovery and resolution of central counterparties (the Recovery and Resolution Regulation), so as to confirm that the Financial Collateral Law also applies without prejudice to the provisions of the Recovery and Resolution Regulation.

3. Modernisation and flexibility of the enforcement process

Within its general spirit of modernisation, the Law also amends the enforcement process as regards the sale of the pledged assets. It is noteworthy though that the parties may still freely agree on different security enforcement methods, while the enforcement process set forth by the Financial Collateral Law, as amended by the Law, would only become applicable by default in circumstances where the parties have not concluded any different agreement.

Additionally, the Financial Collateral Law previously allowed the beneficiary of the security to enforce the relevant security "by private sale in a commercially reasonable manner, by sale over a stock exchange or by public auction", such public auction being effected in principle through the Luxembourg Stock Exchange. The Law has now updated such public auction procedure, allowing the beneficiary of the security to appoint, among the Luxembourg bailiffs and notaries, an auctioneer in charge of operating the public auction, to take place through a detailed process specified in the Law.

Finally, the Law now gives the possibility to the beneficiary of the security in an enforcement scenario to sell the pledged collateral "on a trading venue on which it is admitted to trading" (« sur la plate-forme de négociation sur laquelle ils sont admis à la négociation »), adopting a wide definition of "trading venue", which includes "a regulated market, a Multilateral Trading Facility or an Organised Trading Facility" (« un marché réglementé, un système multilatéral de négociation ou un système organisé de négociation »), i.e. substantially any regulated or unregulated market.

4. Application of proceeds

As mentioned above, one of the key advantages of the Financial Collateral Law consists in the fact that it allows security interests to be enforced even if there is no payment default or acceleration of the underlying secured obligations.

Following the enlargement of the enforcement triggers as described under paragraph 1. above, the Law, for sake of completeness, clarifies the situation as regards the application of proceeds in case the security is enforced at the time the relevant financial obligations are not due by introducing a new paragraph stating that "where the relevant financial obligations are not due at the time the pledge is realised following an event agreed between parties as constituting an enforcement event, the proceeds of the realisation shall be, unless otherwise agreed, applied to satisfy the relevant financial obligations (« lorsque les obligations financières couvertes ne sont pas exigibles au moment où le gage est réalisé suite à un évènement convenu entre parties comme constituant un fait entraînant l’exécution de la garantie, le produit de réalisation est, sauf convention contraire, imputé sur les obligations financières couvertes »)".

This provision aims at ensuring that the security interests enforcement proceeds are applied at all times towards the repayment of the underlying secured obligations, regardless of the nature of the enforcement trigger, while nevertheless allowing the parties to agree otherwise.

5. Enforcement methods in respect of Insurance contracts

The Law includes an additional sub-paragraph (g) covering insurance contracts in article 11(1) of the Financial Collateral Law, therefore indirectly confirming that insurance contracts constitute financial collateral within the scope of the Financial Collateral Law. The Financial Collateral Law now offers a new, specific enforcement method for this type of claims by providing that a pledge over such insurance contracts can be enforced by requesting the repurchase of the contract or demanding the payment of all sums due under the insurance contract in satisfaction of the secured obligations.