Luxembourg Collateral Act Remains Favourable To Creditors: Insolvency Protection Of Creditors And Collateral Takers According To The Laws Of Luxembourg

(Originally published on September 29, 2011)

The Act of May 20 2011 implements EU Directive 2009/44/EC (amending the EU Settlement Finality Directive and the EU Collateral Directive), and amends the Collateral Act of August 5 2005. The Collateral Act has always been a lender-friendly implementation of the Collateral Directive. Most of its provisions have not changed and in general, the Collateral Act remains favourable to creditors in insolvency situations and other contexts.

Constitution and perfection of collateral arrangements

According to the new Article 2 of the Collateral Act, a written list of claims, transmitted to the collateral taker (ie, the pledgee) is sufficient to ensure perfection of the collateral arrangement over claims and to make them effective in respect of third parties and debtors. Separate notification to individual debtors is no longer required in order to enforce such arrangements in respect of the debtor or a third party, facilitating the taking of collateral.

Article 2(3) of the act provides that the security granted to the pledgee will not be affected by:

the substitution or withdrawal right on surplus assets given as security in favour of the pledgor; the right of the pledgor to collect products from assets until further notice; and the right of the pledgor to give instructions in relation to pledged assets. A new Article 2(5) allows an original debtor to waive a right of set-off and other rights against the creditor and any transferees of the claim. A new Article 2(6) allows parties to a financial collateral arrangement to agree that in the event of enforcement of the collateral arrangement, the pledgor waives its right of recourse against the original debtor.

Article 11 of the act has been changed in order to improve enforcement rights. Before the amendments, a pledgee could appropriate the collateral at a price determined by an agreed valuation method, but it was unclear whether this could happen after -or only before- the price was determined. The amendments allow both techniques to be used, direct appropriation being allowed before finalisation of the valuation.

Insolvency aspects of collateral arrangements

According to Article 20(1) of the act, financial arrangements and the enforcement of events are valid and enforceable against third parties, commissioners, receivers, liquidators and other similar persons, notwithstanding reorganisation measures, winding-up proceedings or similar national or foreign proceedings.

Reduction of annulment risk in insolvency procedures

A rticle 20(4) provides that Luxembourg insolvency and pre-insolvency rules are excluded in respect of collateral arrangements. With some minor exceptions, the provisions on annulment that apply to certain types of transaction- in particular, payments, transfers of ownership and grants of collateral - during the hardening period...