The Restructuring Law is based on and implements the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks (the Restructuring Directive) that is meant to align the substantive insolvency and reorganisation laws of all EU Member States by requiring them to put in place preventive restructuring procedures satisfying certain de minimis criteria. The Restructuring Directive aims to remove barriers to effective preventive restructuring of viable debtors in financial difficulties and to contribute to, among other things, minimising job losses and losses of value for creditors.
In the wake of the entry into force of the Restructuring Law, questions have been raised in Luxembourg about the interaction between, on one hand, the measures and tools made available by the Restructuring Law to the debtors in financial difficulties, and in particular its article 30, and, on the other hand, the enforceability of the security interests granted under the Financial Collateral Law.
Are financial collateral arrangements still unassailable?
Yes, there is a consensus that despite the stay of proceedings that can be imposed by virtue of the Restructuring Law on certain enforcement actions with regard to the assets of a Luxembourg debtor subject to the judicial reorganisation proceedings (hereinafter referred to as “debtor”) or other protective measures that a debtor can benefit from under the new law, such stay and measures do not affect the enforcement of the security interests under the Financial Collateral Law. Indeed, the Luxembourg financial collateral arrangements have originally been intended by the legislator to be immune to the opening of any winding-up or reorganisation proceedings and their bankruptcy proof character embedded in article 20(4) of the Financial Collateral Law has again and again been confirmed by case law and doctrine. The Restructuring Law has reenforced this principle by extending the definition of the winding-up proceedings under the Financial Collateral Law (that the financial collateral arrangements are exempt from) to any collective proceedings that are terminated by collective consent (accord collectif) subject to the Restructuring Law.
So, what are the points of attention?
The Financial Collateral Law aims to protect the security interests proper (be it in the form of a pledge agreement, a title transfer collateral arrangement, a repurchase agreement or a fiduciary transfer arrangement (fiducie-sûreté), in each case relating to financial instruments and claims), as well as the enforcement events, and the valuation and enforcement measures agreed upon by the parties in accordance therewith. However, the scope of its protection does not extend to the underlying debt secured by such security interests. Hence, the obligations of a Luxembourg debtor arising under the underlying credit documentation (including the repayment obligations) can still be subject to the protective measures under the Restructuring Law.
The Restructuring Law contains a number of limitations with regard to termination or modification of an agreement or enforcement by a creditor of its rights thereunder against the debtor during the reorganisation proceedings. In particular, amongst other things:
- No termination or modification by reason of reorganisation proceedings: under article 30 of the Restructuring Law, the opening of proceedings for a judicial reorganisation (or a request to this effect) cannot serve as a legal basis for the early termination or otherwise modification of an agreement, notwithstanding any contractual provision to the contrary. Facility agreements customarily contain events of default based on the opening of any insolvency or reorganisation proceedings with regard to a debtor. Article 30 of the Restructuring Law does not per se prohibit to retain such an event of default but the termination or modification of the underlying debt on these grounds may not be possible during the reorganisation proceedings.
- Statutory remedy period: a statutory remedy period of 15 days for a contractual breach by a debtor is applicable;
- Right to suspend performance: article 30 of the Restructuring Law also allows the debtor to suspend the performance of its contractual obligations for the duration of the stay provided that such suspension is imperatively required for the judicial reorganisation. In the case of such suspension, the counterparty is entitled to suspend the execution of its own contractual obligations but may not terminate the agreement by reason of such suspension alone.
Although article 30 of the Reorganisation Law does not explicitly refer to “acceleration” and it remains to be seen how Luxembourg courts will apply this provision in relation to credit agreements, it may be not excluded that acceleration of debt may be restricted by virtue of this article.
As mentioned above, the security interests under the Financial Collateral Law remain fully enforceable, despite the opening of the reorganisation proceedings under the Restructuring Law. However, such security interests can only be enforced upon the occurrence of a trigger event agreed contractually by the parties. Where such trigger event is the acceleration of the underlying debt (or otherwise the requirement to have the secured debt due and payable) and not merely an event of default, care has to be paid to the limitations on acceleration described above. If the acceleration of the underlying debt (whether by any active steps or ipso factum) is impossible due to such limitations, the contractual conditions for the enforcement of the security interest will not have been met and the enforcement may not be possible for the duration of the reorganisation proceedings.
What is the trigger event in my pledge agreement?
As is often the case, the devil is in the detail and the relevant enforcement provisions in the financial collateral arrangements and in the underlying credit agreements need to be carefully considered before jumping to a conclusion on the nature of the applicable trigger event. Most of the credit agreements allow the enforcement of the security interests upon the occurrence of an event of default without the need to have the secured debt due and payable (or accelerated). In other cases, what seems to be at first glance an acceleration linked enforcement event in the pledge agreement may turn out to be something quite different (and more lender friendly) when reading the fine print. The source of confusion is that such enforcement event is sometimes defined as a notice served by the agent under the provision titled “Acceleration” of the underlying facility agreement (or a similar wording to this effect). Despite the misleading title, such provision often merely contains a list of remedies available to the agent upon the occurrence of an event of default (including the enforcement of the security package) that can be used together or separately, at the option of the agent, and where the acceleration of the underlying debt is only an option and one of the available remedies but not a pre-condition to the enforcement of the security interests.
What about future deals?
Going forward, trigger events in the security package and the enforcement provisions in the underlying credit documentation need to be carefully reviewed and, where necessary, adjusted. As the Restructuring Directive is mandatory for the implementation throughout the European Union, such considerations should not be limited to the structures with Luxembourg borrowers only but should also apply where the financing is provided to an entity in any EU Member State, subject to the advice of the local legal counsel in the relevant jurisdiction.
In order to provide a higher degree of protection for the lenders and security takers, one of the options is to ensure that the enforcement triggers in the security package do not depend on the acceleration of the underlying debt and that the security interest can be enforced already at the occurrence of any event of default. This approach is not new and has been routinely used in the past, most particularly in the so-called “Double Luxco” structures with financing provided at the level of a French borrower, in light of the risk of a sauvegarde procedure.
If such option is not commercially viable, the opening of the reorganisation proceedings under the Restructuring Law and application to this effect can be included as additional independent triggers for the enforcement, alongside the acceleration of the underlying debt. Although the Restructuring Law does not permit the termination of the underlying credit agreements due to the initiation of reorganisation proceedings, the enforcement of the financial collateral arrangements at the occurrence of such trigger events should still be possible. Indeed, financial collateral arrangements (including the enforcement events agreed by the parties) remain, under the Financial Collateral Law, enforceable against third parties, commissioners, receivers, liquidators and other similar persons irrespective of any reorganisation measures and winding-up proceedings (including collective proceedings that are terminated by collective consent (accord collectif) subject to the Restructuring Law) and such proceedings do not constitute an obstacle to the enforcement of and to the performance by the parties of their obligations thereunder.
Furthermore, the Financial Collateral Law offers the parties full contractual freedom in determining the enforcement triggers. Although already the case since the conception of this legal act, this principle has been further emphasized by the law of 20 July 2022 amending the Financial Collateral Law that has complemented the definition of the enforcement event by including the word “whatsoever”, which currently reads “enforcement event” means an event of default or any other event whatsoever as agreed between the parties (…).” Consequently, given the above and the character of the Financial Collateral Law as the loi de police, the enforcement of the financial collateral arrangement due the initiation of the reorganisation proceedings under the Restructuring Law (where such trigger is included in the security agreement) should be possible.
To conclude, although the effectiveness of the new measures and tools introduced by the Restructuring Law is yet to be tested, the arrangements under the Financial Collateral Law continue to be a legal stronghold and, with proper structuring, will remain a reliable tool for lenders and security takers alike. This robust framework ensures that Luxembourg remains in the front seat as one of the most competitive and lender-friendly jurisdictions.