A Luxembourg court decision of 29 January 2014 confirmed the “secured-creditor friendly” feature of the Luxembourg legal framework by (i) re-affirming that pledge agreements governed by the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”) would survive the insolvency of the pledger, (ii) validating asymmetric jurisdiction clauses and (iii) taking the view that a maturity payment default constitutes de facto an enforcement event under a pledge agreement.

BACKGROUND

In 2006, a syndicate of banks granted a €2.1 billion loan to Spanish borrowers (Alteco Gestión y Promoción de Marcas, S.L., S.L. and Mag Import, S.L.) secured, inter alia, by a Luxembourg law governed pledge agreement over a securities account held in Luxembourg (on which the shares of the French real estate company Gecina S.A., with property holdings worth €10.7 billion in the Paris area, were credited). In October 2012, Spanish bankruptcy proceedings were opened against the two borrowers following a payment default upon maturity. At the request of the bankruptcy receiver, the Spanish court decided, in a summary judgment of 18 October 2012 (confirmed on 5 February 2013), to temporarily suspend, as a provisional and protective measure, the enforcement of the Luxembourg pledge. Secured creditors brought an action before the Luxembourg District Court to establish the validity and enforceability of their pledge, despite the Spanish judgment.

BANKRUPTCY REMOTE CHARACTER OF LUXEMBOURG PLEDGE AGREEMENTS

The Luxembourg court re-affirmed in this judgment the effectiveness of security interests granted under pledge agreements governed by the Collateral Law, by implicitly confirming that the Spanish bankruptcy proceedings opened against the two Spanish borrowers do not affect the enforcement of the pledge granted by the latter in favour of the lenders and that the Luxembourg courts are and remain competent to take any decision relating to the pledge agreement (due to the jurisdiction clause contained in the pledge agreement).

VALIDATION OF ASYMMETRIC JURISDICTION CLAUSES

The Luxembourg court also considered, for the first time, that asymmetric jurisdiction clauses (i.e. jurisdiction clauses binding one party to a specific jurisdiction and allowing the other to initiate proceedings in front of any competent court) are valid under Luxembourg law and refused to follow the Banque Edmond de Rothschild case of the French Supreme Court of 26 September 2012, which invalidated a unilateral jurisdictional clause under the Brussels Regulation by considering that this clause was to be qualified as a “one-sided” clause (clause potestative). It should be noted in that respect that the French decision was strongly criticised by French and European legal commentators and practitioners especially due to the application of a French legal concept in an EU regulation context.

MATURITY PAYMENT DEFAULT

The Luxembourg court further decided that, due to the accessory character of a pledge agreement (in relation to the loan agreement being secured), the non-payment of the loan at maturity constitutes de facto an enforcement event (even if not expressly provided in the pledge agreement) allowing the secured creditors to enforce the pledge.

The court ruled that the right to enforce a pledge in the event of non-payment at maturity is of the essence of the pledge and that any clause that would deprive the creditor of that right should be considered null and void. It remains to be seen, however, if clear and explicit contractual provisions in a pledge agreement might not somewhat alleviate the absolute right of a secured creditor to enforce the pledge upon a payment default.

CONCLUSION

This decision follows the same approach as previous case law relating to the enforcement of pledge agreements which have adopted a secured creditor-friendly approach. Luxembourg courts have affirmed in the past the robust feature of Luxembourg law governed pledge agreements and again confirmed the bankruptcy proof character of Luxembourg law governed pledge agreements.

The decision emphasises the role of Luxembourg as the largest European funds domicile and the second largest fund centre in the world after the United States. This also reaffirms the market infrastructure built up over the past twenty years supported by adequate product regulation, a modern legal infrastructure, constant innovation and a tax framework considered among the most stable and reliable in Europe.