Corporate Finance Litigation & Insolvency – The Luxembourg court solidifies the rights of secured creditors – 3rd March 2014

In two recent decisions dated 29 January 2014, the Luxembourg District Court, sitting in commercial matters, (the “Court”), has once again clarified and reinforced the rights of secured lenders in respect of the enforcement of a pledge governed by the Luxembourg law of 5 August 2005 on financial collateral arrangements, such as amended, (the “2005 Law”). This Law has implemented the European Directive n° 2002/47 EC on financial collateral arrangements (as amended by the European Directive 2009/44/EC) into Luxembourg law.

The 2005 Law provides that a pledgee may enforce the pledge upon the occurrence of an enforcement event, i.e. an event of default, or any other event agreed upon between the parties in accordance with the financial collateral arrangement (the pledge agreement) or the agreement containing the relevant financial obligation (the loan agreement) or by operation of law.

In the two above mentioned cases, the Court had inter alia to decide whether a pledge over shares governed by the 2005 Law is enforceable upon maturity of the secured claim, notwithstanding the fact that non-payment at maturity was not expressly defined as an enforcement event neither in the pledge agreement, nor in the loan agreement.

The Court ruled that a secured creditor’s right to enforce a pledge on default of payment at maturity is of the very essence of the pledge and that any clause depriving a creditor of such right must be considered null and void.

By its ruling, the Court has again underpinned the Luxembourg legislator’s willingness to have the enforcement of financial collaterals immunized against all kind of incidents and maneuvers. The ambition of the Luxembourg legislator was indeed to shield financial collateral arrangement governed by the 2005 Law from all possible challenges and to offer the lending institutions a solid framework within which they can operate safely. In several decisions, Luxembourg courts have already in the past referred to such ratio legis of the 2005 Law and ruled that the enforcement of valid financial collateral arrangements can neither be interrupted nor be challenged by means of interim measures.

Luxembourg definitely remains the jurisdiction in Europe which has implemented the European Directives on financial collateral in the most secured creditor friendly and protective manner.

The fact that the purpose of the 2005 Law is to render financial collateral arrangements unchallengeable does however not mean that there can be no sanctions at all. Whilst it is generally accepted that the remedy against an unlawful enforcement can only be an a posteriori liability claim and not an annulment of the security enforcement, a decision dated 10 July 2013 has nevertheless ruled that in the presence of a manifest abusive and fraudulent enforcement of a pledge, the return of the appropriated assets to the pledgor can be ordered (fraus omnia corrumpit)