On 1 November 2023, the Luxembourg law of 7 August 2023 on business preservation and modernisation of bankruptcy law (the Reorganisation Law) entered into force with a view to dust off the Luxembourg regime on insolvency proceedings. As new measures were introduced aiming at helping debtors navigating through financial difficulties, proceedings under the Reorganisation Law could potentially affect the trigger of security interests granted under the Luxembourg law of 5 August 2005 on financial collateral arrangements (the Collateral Law) – this includes the widely common security interests over shares, receivables and bank accounts of Luxembourg entities.
More specifically, this situation could arise when the trigger event for the enforcement of the financial collateral arrangements is limited to an acceleration of the debt. Indeed, in the framework of judicial reorganisation requested by a Luxembourg debtor under the Reorganisation Law, one of the measures that can be requested is the suspension of performance of obligations, where such suspension is imperatively required for the purpose of the judicial reorganisation. There is a risk – even if it remains to be seen how Luxembourg courts will implement this possibility in practice – that in such case the enforcement of financial collateral arrangements is also suspended as long as the repayment obligation remains deferred.
In this regard, it is crucial to carefully examine the interaction of both the financial collateral arrangements and the underlying financing arrangements to understand the applicable provisions triggering enforcement. While some financing agreements allow security interests to be enforced upon default without requiring the debt to become due and payable, other arrangements may restrict enforcement to an acceleration of the debt. Going forward, it will become standard practice to review and adjust trigger events and enforcement provisions in financing arrangements to ensure that enforcement triggers in security packages are not contingent on debt acceleration only.
Whilst directly linking enforcement to the occurrence of an event of default may not always be commercially acceptable, a typical alternative would be adding the initiation of reorganisation proceedings under the Reorganisation Law as an additional trigger event for enforcement, ensuring enforceability of the financial collateral arrangements even in the face of and throughout such restructuring measures.
This reality can also affect existing financing arrangements. Where relevant, it is recommended that this additional trigger is included when existing debt documents are amended – this is likely to become the trend going forward.
All in all, Luxembourg financial collateral arrangements remain as effective as always, provided that the applicable trigger events for enforcement are carefully determined to avoid potential pitfalls deriving from the Reorganisation Law.
Contact information
If you have specific questions and/or requests on this topic, feel free to contact our experts:
Arnaud Barchman Wuytiers van Vliet & Iordanis Arvanitidis
Disclaimer
While the greatest care has been devoted to the contents of this publication, AKD cannot be held liable in any way for the consequences of activities undertaken on the basis of this publication.
On 1 November 2023, the Luxembourg law of 7 August 2023 on business preservation and modernisation of bankruptcy law (the Reorganisation Law) entered into force with a view to dust off the Luxembourg regime on insolvency proceedings. As new measures were introduced aiming at helping debtors navigating through financial difficulties, proceedings under the Reorganisation Law could potentially affect the trigger of security interests granted under the Luxembourg law of 5 August 2005 on financial collateral arrangements (the Collateral Law) – this includes the widely common security interests over shares, receivables and bank accounts of Luxembourg entities.
More specifically, this situation could arise when the trigger event for the enforcement of the financial collateral arrangements is limited to an acceleration of the debt. Indeed, in the framework of judicial reorganisation requested by a Luxembourg debtor under the Reorganisation Law, one of the measures that can be requested is the suspension of performance of obligations, where such suspension is imperatively required for the purpose of the judicial reorganisation. There is a risk – even if it remains to be seen how Luxembourg courts will implement this possibility in practice – that in such case the enforcement of financial collateral arrangements is also suspended as long as the repayment obligation remains deferred.
In this regard, it is crucial to carefully examine the interaction of both the financial collateral arrangements and the underlying financing arrangements to understand the applicable provisions triggering enforcement. While some financing agreements allow security interests to be enforced upon default without requiring the debt to become due and payable, other arrangements may restrict enforcement to an acceleration of the debt. Going forward, it will become standard practice to review and adjust trigger events and enforcement provisions in financing arrangements to ensure that enforcement triggers in security packages are not contingent on debt acceleration only.
Whilst directly linking enforcement to the occurrence of an event of default may not always be commercially acceptable, a typical alternative would be adding the initiation of reorganisation proceedings under the Reorganisation Law as an additional trigger event for enforcement, ensuring enforceability of the financial collateral arrangements even in the face of and throughout such restructuring measures.
This reality can also affect existing financing arrangements. Where relevant, it is recommended that this additional trigger is included when existing debt documents are amended – this is likely to become the trend going forward.
All in all, Luxembourg financial collateral arrangements remain as effective as always, provided that the applicable trigger events for enforcement are carefully determined to avoid potential pitfalls deriving from the Reorganisation Law.
Contact information
If you have specific questions and/or requests on this topic, feel free to contact our experts:
Arnaud Barchman Wuytiers van Vliet & Iordanis Arvanitidis
Disclaimer
While the greatest care has been devoted to the contents of this publication, AKD cannot be held liable in any way for the consequences of activities undertaken on the basis of this publication.