Key Takeaway
Luxembourg’s law of 5 August 2005 on financial collateral arrangements, as amended (Collateral Law 2005), continues to offer strong safe-harbor protections for financial collateral arrangements and is now confirmed to apply to insolvency proceedings globally.
Recent Developments
Court of Appeal Ruling
On 11 January 2024, the Luxembourg Court of Appeal ruled that the Collateral Law 2005’s safe-harbor protections were limited to European Economic Area (EEA) countries. This meant that insolvency proceedings against a collateral provider in non-EEA countries could prevent the enforcement of financial collateral arrangements subject to the Collateral Law 2005.
Legislative Clarification
In response, Luxembourg’s legislators quickly amended the Collateral Law 2005 to clarify that its safe-harbor protections apply to any country, not just those in the EEA.
Supreme Court Decision
On 19 December 2024, the Luxembourg Supreme Court overturned the Court of Appeal’s decision, confirming that the Collateral Law 2005 provides for a global safe-harbor protection.
Background—Essential Features of the Collateral Law 2005
Luxembourg has become a preferred location for security arrangements in cross-border financings, largely due to the creditor-friendly Collateral Law 2005, since implementing the European Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements (Financial Collateral Directive) into national law. The Luxembourg legislator has used all options available under the Financial Collateral Directive to provide for maximum flexibility and protection of creditors in the context of financial collateral arrangements.
Financial collateral arrangements include pledges and transfer of title arrangements.
By way of illustration, the flexibility and creditor protection of the Collateral Law 2005 are visible through the following features:
Enforcement Trigger
The enforcement trigger of a financial collateral arrangement can either be a payment default or any other event whatsoever as agreed between the parties on the occurrence of which the collateral taker is entitled to enforce the financial collateral arrangement.
Enforcement Methods
The collateral taker has the option between a number of enforcement methods. This includes, among others, the appropriation of the collateral by itself or by a third party, the assignment of the collateral by private sale in a commercially reasonable manner or on a trading venue on which the collateral is admitted, or set-off, in each case as a swift procedure without court intervention.
Insolvency Protection
Except for over-indebtedness proceedings concerning private individuals, financial collateral arrangements are safe-harbored against national or foreign insolvency or restructuring proceedings of any kind, in that those will not present an obstacle to the enforcement of a financial collateral arrangement.
Restrictive Interpretation of Territorial Scope by Court of Appeal
On 11 January 2024, the Luxembourg Court of Appeal ruled that the Collateral Law 2005’s safe-harbor protections were limited to EEA countries (Court of Appeal Judgment). This decision arose from a case involving insolvency proceedings against an Ivorian company, where the court determined that the safe-harbor protections of the Collateral Law 2005 did not apply to non-EEA countries and that, consequently, the pledge (governed by Luxembourg law) could not be enforced following the opening of insolvency proceedings against the collateral provider in a non-EEA country. This interpretation diverged from the prevailing view among legal scholars and practitioners, who had previously understood foreign proceedings to encompass any non-Luxembourg jurisdiction (including non-EEA countries).
Legislative Response
In response to the Court of Appeal Judgment, the Luxembourg legislator immediately seized the opportunity of an ongoing legislative process to clarify the Collateral Law 2005 to explicitly include any third country in the definition of “Insolvency Proceedings.”
Supreme Court Reaffirmation
The Luxembourg Supreme Court overturned the Court of Appeal’s decision on 19 December 2024, confirming that the Collateral Law 2005 protects against insolvency proceedings in both EEA and non-EEA countries. This reaffirmation ensures that financial collateral arrangements are protected throughout from insolvency proceedings, enhancing the security and predictability of financial transactions in Luxembourg.
What This Means for You
Global Safe-Harbor Protection
Financial collateral arrangements are safeguarded against insolvency proceedings in any country.
Swift Enforcement
The Collateral Law 2005 allows for quick enforcement of collateral without court intervention, providing greater certainty and efficiency.
Enhanced Security
Luxembourg remains a top choice for cross-border financings due to its stability and robust legal framework.