Enforcement of security under Luxembourg law
19 January 2023
19 January 2023
Luxembourg has become an extremely popular financial centre and place of incorporation for portfolio acquisition vehicles. Furthermore, as the largest fund domicile jurisdiction in Europe, Luxembourg is a key player in the fund finance space.
This development is largely due to the highly creditor-friendly Luxembourg legislation relating to security interests offering lenders a safe single point of enforcement and making Luxembourg a great jurisdiction for debt financing.
In practice, acquisition finance facilities are usually secured against the assets and cash flows of the target company as well as of the buyout vehicle. Since a Luxembourg holding company generally does not have any operational activities, securities, receivables and cash in bank accounts are the most common assets to be covered by security arrangements.
As regards fund financing, the security package will comprises of a pledge agreement over the uncalled capital commitments of the fund investors and the right of the general partner to call said commitments and a pledge over the bank account into which the capital contributions are paid.
Similarly, in margin financings or NV facilities, it is important to have easily enforceable and solid security interests over the pledged assets, often securities accounts and other financial instruments.
Pledges are the most common form of security over movable property. They are governed by the Law of 5 August 2005 on financial collateral arrangements, as amended (the “Luxembourg Financial Collateral Law”), which transposed Directive 2002/47/EC of 6 June 2002 on financial collateral arrangements into national law.
In July 2022, the Luxembourg Financial Collateral Law was reformed. The reform reinforces the legal certainty of Luxembourg financial collateral arrangements by introducing a number of welcome clarifications to several frequently-discussed notions and enforcement mechanisms in the law.
In the brochure below we consider the creditor-friendly advantages and main methods of enforcement of a pledge under the Luxembourg Financial Collateral Law.