Financial Collaterals: Luxembourg Courts Favor The Protection Of The Lenders

Since the outbreak of the financial crisis in 2008, securities held by the banks under the form of collaterals have been subject to a drastic "resistance test" in the course of debt restructuring exercises. Luxembourg is well reputed for displaying a legal framework offering a most efficient protection for the lenders (banks) pursuant to the law of 5 August 2005 on financial collateral arrangements. This law is regarded as being one of the most protective legal frameworks within the EU legal environment, most notably in case of enforcement of the collaterals. However, in case of post-enforcement litigation, it was wondered to which extent that legal framework would be comforted or, on the contrary, may be fragilized by the local courts.

A series of recent judicial decisions evidence that Luxembourg courts are eager to provide interpretations which reinforce legal protection to the lenders. On May 2010, the district court of Luxembourg adopted a quite liberal approach of the crucial concept of concept of "normal commercial conditions", as this condition is applicable to the mechanism of enforcement of collaterals by way of private sale, which is one of the most popular enforcement measures. The court made also quite clear that "the sanction of the non-respect of selling the pledged assets at normal commercial conditions is not the nullification of the sale yet is under the form of damages". The same interpretation was further followed by the Court of appeal of Luxembourg, in the course of a...