Luxembourg
Lending
Lending is a regulated activity in Luxembourg except, generally, in the following instances:
- one-off and ancillary lending activities;
- intra-group loans; or
- loans granted to a ‘restricted circle of previously known persons’ (cercle restreint de personnes préalablement connues), which are not considered as granted to the ‘public’, which is generally defined as a multitude of non-identifiable persons.
Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to other loans. For example, for regulated consumer loan contracts:
- the consumer must have at his disposal the information which will enable him to make his decision with full knowledge of the facts;
- before concluding the credit agreement, the credit institutions must assess the consumer’s creditworthiness on the basis of a sufficient number of items of information; or
- the consumer is allowed to withdraw from the credit agreement without stating any reason within the period of 14 calendar days after the execution of the credit agreement.
Finally, a public limited liability company or a partnership limited by shares cannot advance monies, grant a loan, guarantee or security for the purchase of its own shares, subject to completing a whitewash procedure.
Borrowing
While borrowers are generally not regulated, borrowers should consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.
For legal entities, borrowing should be permitted under its corporate object.
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are as follows.
Capacity
It is important to verify the constitutional documents of an entity giving a guarantee or granting security to ensure it has an express (or ancillary) power to do so and that giving a guarantee or granting security is not a (shareholder) reserved matter. If the provision of a guarantee or security exceeds the corporate object of the entity, it will still be bound to third-parties (ultra vires), unless there is evidence that the beneficiary of such act knew that the acts exceeded the corporate object of the entity or could not, in the light of the circumstances, have been unaware of that fact.
Corporate interest
The entry into the guarantee or security must be in the interest of the entity, which is a subjective and factual concept. The corporate interest must be assessed on a case-by-case basis by the board of the entity. The granting of a guarantee or security interest for the obligations of its parent (upstream) or its sister companies or affiliates (cross stream) is often more difficult. The concept of 'group of company' is not recognized as such and the interest of the group is not sufficient to justify the granting of upstream or cross-stream guarantees/security interests. Therefore, the Luxembourg entity giving the cross stream or upstream guarantee/security interest should:
- have some personal interest in granting such assistance (notably through the expected benefits) and act independently from third party considerations;
- take a commensurate risk in regard of the benefit deriving from the operation; and
- not face a financial exposure exceeding its financial means.
It is standard to include a guarantee limitation to address this issue, except for security interests which are deemed to be limited per se.
Financial assistance
It is unlawful for certain companies to provide financial assistance for the acquisition of its own shares by a third party. A whitewash procedure is envisaged by the Luxembourg law on commercial companies dated 15 August 1915, as amended from time to time, but it is rarely applied in practice.
Insolvency
Contractual commitments and guarantees are affected by the opening of insolvency proceedings. In case of such opening of insolvency proceedings secured/guaranteed creditors are registered as members of the general body of creditors. The Law of 5 August 2005, on financial collateral agreements, as amended from time to time, institutes however a framework whereby:
- Luxembourg or foreign bankruptcy and pre-bankruptcy rules are excluded in respect of financial collateral arrangements.
- Immunity from annulment risks in bankruptcy proceedings applies to collateral arrangements governed by the Law of 5 August 2005, on financial collateral agreements, as amended from time to time and to similar collateral arrangements governed by foreign law (provided that the collateral provider is established or resident in Luxembourg).
- There is primacy of financial collateral arrangements over (certain) foreclosure measures.
What are common types of guarantees and security?
Common forms of guarantees
First demand guarantee (garantie à première demande)
This creates an abstract, autonomous and independent contractual recourse by the beneficiary against the guarantor. The guarantor may not rely on any exception, or exemption, derived from the underlying debt arrangement.
Suretyship (cautionnement)
The suretyship is an accessory to the main monetary obligation. The guarantor may rely on exceptions, or exemptions, derived from the underlying debt arrangement.
It is worth noting that Luxembourg law only envisages payment guarantees (and not performance guarantees).
Other contractual arrangements can also be assimilated to a personal guarantee (e.g. “promesse de porte-fort”, personal commitment letters).
Common forms of security
The most common types of security agreements are:
- pledge agreements over financial instruments and claims (including among others, intragroup or trade receivables and investors commitments);
- assignment for security purposes of financial instruments and claims;
- commercial pledges over assets (other than financial instruments);
- mortgages; or
- repurchase agreements.
It is worth noting that security must be granted on an asset by asset basis, except that pledges over ongoing business concerns are permitted but rarely used in practice.
Are there any other notable risks or issues around giving and taking guarantees and security?
Giving or taking guarantees
A civil guarantee must be created by an agreement in writing pursuant to the provisions of the Luxembourg Civil Code. Such a guarantee shall contain some handwritten information (eg the amount of the undertaking in letters and figures). Said restrictions do not apply to commercial guarantees.
Giving or taking security and mortgages
Mortgages must be executed as a notarial deed, involving notarial fees, stamp duties and the attendance by each party to the execution of the notarial deed (powers of attorney are permitted).
Once granted, security and mortgages need to be properly perfected before it can be invoked against third parties. Perfection formalities can range from the entry into the agreement, having the pledge registered in the register of shares/shareholders of the company, notices given to third parties or registration in public registers (depending on the asset).
Notarization is not required for pledge agreements under Luxembourg law.
The entry into the guarantee or security must be in the interest of the entity, which is a subjective concept. The corporate interest must be assessed on a case-by-case basis by the board of the entity. The granting of a guarantee or security interest for the obligations of its parent (upstream guarantee) or its sister companies or affiliates (cross stream) may rise some issues. The concept of group of company is not recognized as such and the interest of the group is not sufficient to justify the granting of upstream or cross stream guarantees or security interests.
Therefore, the Luxembourg entity giving the cross stream or upstream guarantee or security interest should:
- have some personal interest in granting such assistance (notably through the expected benefits) and act independently from third party considerations;
- take a commensurate risk in regard of the benefit deriving from the operation; and
- not face a financial exposure exceeding its financial means.
It is standard to include a guarantee limitation to address such an issue, except for security interests which are deemed to be limited per se.
Pledge agreements and, more generally, security interests governed by the Law of 5 August 2005, on financial collateral agreements, as amended from time to time (such as pledges over financial instruments and claims) are bankruptcy remote:
- they are valid even if entered into during the hardening period; and
- they can be enforced even after the opening of a bankruptcy proceeding.
Xavier Guzman
Partner
DLA Piper Luxembourg
[email protected]
T +352 26 29 04 2052
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