Restructuring & Insolvency Q&A: security
The restructuring & insolvency Q&A series provides a comprehensive overview of some of the key points of law and practice of the regulatory environment in Luxembourg. Today's chapter focuses on security.
What principal forms of security interest are taken over assets in your jurisdiction?
For immovable property, mortgages are generally the most common form of security taken in Luxembourg and may be granted in a legal, judicial or contractual manner. For a contractual mortgage to be validly constituted, it must:
- be created by notarial deed, indicating the nature and location of the immovable property over which the mortgage is being granted; and
- be granted for an evidenced amount.
A mortgage will be legally binding and effective against third parties once it has been registered in the Luxembourg mortgage register (which should be done in the district in which the property is located). The registration is valid for 10 years and may be renewed indefinitely for further 10-year periods thereafter, provided that neither the underlying debt for which the mortgage was created nor the 10-year term itself is extinguished.
For movable property, financial collateral arrangements, governed by the Collateral Law, are the security of choice in Luxembourg, especially in respect of the Luxembourg special purpose vehicles that commonly sit within international groups and operate as financial companies or bond issuers. Financial collateral arrangements under the Collateral Law cover any pledge or assignment by way of security regarding financial instruments and receivables (including most types of shares and bonds). The Collateral Law allows any party (even non-commercial, non-regulated parties) to grant or benefit from the security thereunder and provides extensive contractual freedom. The benefits of a security interest under the Collateral Law are as follows:
- It is highly cost effective;
- It is easily put in place and enforced;
- It is subject to few formalities (usually just notification or registration in a shareholder or bondholder register); and
- It is considered ‘bankruptcy remote’.
The enforcement of the share pledges over the top Luxembourg SPV in a corporate group to gain control of the group is also relatively well tested and there is extensive case law on the matter, which adds to the legal certainty surrounding such security packages and their enforcement.
In practice, Luxembourg SPVs are also established to create a single point of enforcement in order for this creditor-friendly security system to be used to its maximum potential.
Aside from financial collateral agreements, there are other less common types of securities over moveable property, such as assignments by way of security, civil pledges and commercial pledges, including the business pledge.
How can those security interests be enforced (and what factors could complicate or prevent this process)?
Enforcement of security subject to the Collateral Law is quick and cost efficient (not taking into account the valuation), and may be done out of court even in a bankruptcy scenario.
The Collateral Law allows the enforcement of a pledge over shares in a Luxembourg company, accounts held in Luxembourg and claims governed by Luxembourg law upon the occurrence of a trigger event (which is freely determined by the parties) without prior notice, and which can be freely determined. Such trigger events need not entail an acceleration or even a payment default.
The security agent/pledgee may, among other things:
- appropriate the collateral or have the collateral appropriated by a third party at a price determined, before or after the appropriation of the collateral, pursuant to the valuation method agreed between the parties in the pledge/security agreement;
- sell or cause the sale of the collateral by way of:
- a private sale on arm’s-length conditions;
- a sale via the stock exchange; or
- a public auction;
- request a court that title to the collateral be transferred to it; or
- offset the value of the collateral against the secured liabilities or request a direct payment from the relevant debtor (in case of a pledge over receivables).
In practice, the two most commonly used enforcement procedures are those set out in the first and fourth bullet points above. No court involvement is required for the enforcement of the pledge/security, except for the enforcement procedure under the third bullet point above.
The Collateral Law does not specify any specific period within which enforcement must occur and the timing will depend in particular on:
- the enforcement method chosen;
- any possible recourse of the security provider (although unlikely to succeed); or
- the potential involvement of third parties (eg, courts, stock exchanges or valuation experts).
Financial collateral arrangements which fall within the Collateral Law are valid and effective against all third parties, including the bankruptcy trustee or liquidator, notwithstanding any insolvency proceedings, liquidation proceedings or any other situation leading to a competition among creditors, even if the security agreement has been entered into or amended during the claw-back period.
Other security interests not governed by the Collateral Law are more burdensome, time consuming and costly to enforce, and in case of bankruptcy will normally require court/receiver involvement, as they are not bankruptcy remote.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
First published in Mondaq
Anne-Marie NicolasPartner Attorney at Law / Avocat à la Cour
Anne-Marie Nicolas, partner, is a member of the Banking & Finance Practice Group in our Luxembourg office. She co-heads the Luxembourg Restructuring Team. Anne-Marie focuses on secured lending, including acquisition finance and real estate finance, as well as debt restructuring.T: +352 466 230 314 E: [email protected]
Richard SteichenAssociate Attorney at law / Avocat à la Cour
Richard Steichen, associate, is a member of the Banking & Finance Practice Group in our Luxembourg office and a member of the Restructuring Team. He focuses on secured lending and financial restructurings.T: +352 466 230 492 E: [email protected]