Bertrand Géradin
Partner | Legal
Luxembourg - Legal Services
Partner
Luxembourg - Legal Services
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Luxembourg is one of the leading domiciles worldwide for international investment portfolio acquisition vehicles.
Acquisition financing is usually secured against the assets and cash flows of the target company as well as of the buyout vehicle.
In practice, given that a Luxembourg holding company generally does not have any operational activities, shares, receivables and cash in bank are the most important assets to cover.
Pledges are the common form of security for such movable property. They are governed by the Law of 5 August 2005 on financial collateral arrangements, as amended (the Financial Collateral Act), which transposed Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (the Collateral Directive) into national law.
Methods of enforcement of security
One of the innovations of the Financial Collateral Act has been to facilitate the enforcement of pledges. It offers to the secured creditor the opportunity to enforce pledges without having to give prior notice to the pledgor. It further provides for the following enforcement procedures (in addition to the right to receive dividends and vote on the pledged shares):
Upon the occurrence of an event of default (which is to be interpreted broadly[1]) as agreed between the parties, the main methods used by secured creditors to realise or appropriate the collateral are the enforcement by means of private sale or the appropriation of the pledged assets.
The flexibility offered by the Financial Collateral Act to lenders was confirmed in 2017 by the Luxembourg District Court[2]. In particular, the court ruled that a Luxembourg pledge can be enforced by a creditor on the occurrence of a contractually agreed enforcement event, without requiring repayment or the need to accelerate the underlying debt obligations.
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In order to reduce the risk of challenge, generally the parties will decide that the valuation will be carried out by an independent external auditor (for instance, a réviseur d’entreprises agréé). Upon determination of the value of the pledged collateral, a set-off against the secured debts will be made (just as in a credit-bid process).
Disapplication of the insolvency rules
One consequence of the policy underlying the Financial Collateral Act's aim to enhance certainty for secured parties is the disapplication, in relation to the granting and the enforcement of security, of both Luxembourg and other jurisdictions' laws relating to bankruptcy, liquidation, reorganisation or similar measures.
The Financial Collateral Act provides that pledges are valid and enforceable against third parties, receivers, liquidators or similar persons notwithstanding a reorganisation, winding up proceedings or similar national or foreign proceedings. The assets subject to the pledge do not form part of the estate of the insolvent company.
The Financial Collateral Act further gives an extraterritorial effect to the above principle by extending the insolvency remote effect to any financial collateral arrangement, or any similar guarantee, granted by a Luxembourg-based entity when such financial collateral arrangement is governed by a law other than Luxembourg law.
Set-off arrangements
The Financial Collateral Act provides that set-off arrangements are valid and enforceable in the event of insolvency proceedings even if the relevant claims are not liked, provided that the agreement containing the set-off provision is valid.
Enforcement of a pledge over bank accounts typically takes the form of the blocking of an account (to the extent that it is not yet blocked prior to an enforcement event) and the right for the collateral holder to take control of the account (including the right to demand direct payment or transfer of the amounts standing to the credit of such an account).
Claw-back rules
In principle, company’s contracts, can be affected by insolvency procedures if they were concluded during the suspect/hardening period (période suspecte) and the preceding 10 days.
The suspect period starts from the moment the company stopped paying its debts (cessation des paiements), though the exact date is fixed by the court (a maximum of 6 months prior to the start of the insolvency procedures).
The following contracts are automatically null and void when concluded during the suspect period:
Additionally, any contract or payment can be annulled by the court if the other party had personal knowledge that the company was insolvent.
If made during the suspect period, out-of-court restructuring arrangements are thus at risk to be declared null and void.
However, security agreements governed by Financial Collateral Act benefit from an immunity against Luxembourg or foreign insolvency proceedings. In addition, the Financial Collateral Act provides that a security agreement is validly constituted and enforceable against third parties, if concluded (i) before the decision is rendered on the opening of winding-up proceedings or the taking effect of a collective measure or (ii) thereafter such date, if the pledgee could prove, either that it did not have any knowledge of, or that it could not reasonably have any knowledge of the existence of a decision on the opening of winding-up proceedings or such a collective measure.
"Quasi pre-pack"
Pre-pack sale is a commonly used restructuring tool in the UK. It entails the sale of a company's business and/or assets which has been arranged in advance of the company entering into administration and will be closed shortly after the appointment of an administrator over the company.
The benefits of this method are, inter alia:
Because of the execution risk resulting from the application of Luxembourg claw-back rules during a restructuring process and due to the fact that in Luxembourg, an administrator cannot be appointed out of court by a debtor and/or its creditors, it is not possible to pre-agree a sale of business in advance in insolvency proceedings in Luxembourg.
As mentioned above, financial collateral arrangements covered by the Financial Collateral Act are valid and enforceable, even if entered into during the pre-bankruptcy suspect period.
An effect similar to the UK pre-pack sale could then be obtained by implementing a "quasi pre-pack" through the enforcement (by way of private sale or out-of-court attribution) of a Luxembourg pledge agreement over the shares of the holding company. Even though untested at this stage, this possibility could prove useful for the implementation of loan-to-own strategies in Luxembourg.
[1] In an order of the First Judge of the District Court of Luxembourg sitting in summary proceedings matters, (N°356/2015, 15 July 2015), the judge concluded that that the Financial Collateral Act allows a lender to enforce a pledge in the event the borrower did not comply with certain financial ratios, even if the secured debt was not yet due and payable.
[2] District Court, July 12 2017, Commercial Judgment 897/2017
Bertrand Géradin
Partner | Legal
Luxembourg - Legal Services
Partner
Luxembourg - Legal Services
Hélène Arvis
Counsel | Legal
Luxembourg - Legal Services
Counsel
Luxembourg - Legal Services
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
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