Luxembourg
Some of the key areas affecting the giving of guarantees and security are as follows.
Capacity
It is important to verify the constitutional documents of an entity giving a guarantee or granting security to ensure it has an express (or ancillary) power to do so and that giving a guarantee or granting security is not a (shareholder) reserved matter. If the provision of a guarantee or security exceeds the corporate object of the entity, it will still be bound to third-parties (ultra vires), unless there is evidence that the beneficiary of such act knew that the acts exceeded the corporate object of the entity or could not, in the light of the circumstances, have been unaware of that fact.
Corporate interest
The entry into the guarantee or security must be in the interest of the entity, which is a subjective and factual concept. The corporate interest must be assessed on a case-by-case basis by the board of the entity. The granting of a guarantee or security interest for the obligations of its parent (upstream) or its sister companies or affiliates (cross stream) is often more difficult. The concept of 'group of company' is not recognized as such and the interest of the group is not sufficient to justify the granting of upstream or cross-stream guarantees/security interests. Therefore, the Luxembourg entity giving the cross stream or upstream guarantee/security interest should:
- have some personal interest in granting such assistance (notably through the expected benefits) and act independently from third party considerations;
- take a commensurate risk in regard of the benefit deriving from the operation; and
- not face a financial exposure exceeding its financial means.
It is standard to include a guarantee limitation to address this issue, except for security interests which are deemed to be limited per se.
Financial assistance
It is unlawful for certain companies to provide financial assistance for the acquisition of its own shares by a third party. A whitewash procedure is envisaged by the Luxembourg law on commercial companies dated 15 August 1915, as amended from time to time, but it is rarely applied in practice.
Insolvency
Contractual commitments and guarantees are affected by the opening of insolvency proceedings. In case of such opening of insolvency proceedings secured/guaranteed creditors are registered as members of the general body of creditors. The Law of 5 August 2005, on financial collateral agreements, as amended from time to time, institutes however a framework whereby:
- Luxembourg or foreign bankruptcy and pre-bankruptcy rules are excluded in respect of financial collateral arrangements.
- Immunity from annulment risks in bankruptcy proceedings applies to collateral arrangements governed by the Law of 5 August 2005, on financial collateral agreements, as amended from time to time and to similar collateral arrangements governed by foreign law (provided that the collateral provider is established or resident in Luxembourg).
- There is primacy of financial collateral arrangements over (certain) foreclosure measures.
Are there any restrictions on lending and borrowing?
Lending
Lending is a regulated activity in Luxembourg except, generally, in the following instances:
- one-off and ancillary lending activities;
- intra-group loans; or
- loans granted to a ‘restricted circle of previously known persons’ (cercle restreint de personnes préalablement connues), which are not considered as granted to the ‘public’, which is generally defined as a multitude of non-identifiable persons.
Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to other loans. For example, for regulated consumer loan contracts:
- the consumer must have at his disposal the information which will enable him to make his decision with full knowledge of the facts;
- before concluding the credit agreement, the credit institutions must assess the consumer’s creditworthiness on the basis of a sufficient number of items of information; or
- the consumer is allowed to withdraw from the credit agreement without stating any reason within the period of 14 calendar days after the execution of the credit agreement.
Finally, a public limited liability company or a partnership limited by shares cannot advance monies, grant a loan, guarantee or security for the purchase of its own shares, subject to completing a whitewash procedure.
Borrowing
While borrowers are generally not regulated, borrowers should consider whether either the mortgage or consumer lending regimes apply to their activities, in which case they will benefit from the protections mentioned above.
For legal entities, borrowing should be permitted under its corporate object.
What are common lending structures?
Loans can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility). Luxembourg law governed loans can be syndicated but are rare.
Syndicated facilities by their nature involve more parties (such as agents and security agents which fulfil certain roles for the finance parties) are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, eg term loans, asset backed loans, working capital loans, equity bridge facilities, project facilities or letter of credit facilities.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
Repurchase agreements
Repurchase agreements are also used as a financing tool.
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers is subject to less regulatory oversight.
By contrast, lending in the context of mortgages and to consumers are subject to specific obligations on the lenders set out in the Luxembourg Consumer Code (ie more pre-information of the borrower).
As a more general principle, the Luxembourg courts determination as to whether lender misconduct is serious will be dependent on whether borrower is a professional or not.
Do the laws recognize the principles of agency and trusts?
Agency
Agency (mandat) is recognized by the Luxembourg Civil Code as a contract under which a principal grants to an agent power to act in its name and behalf. However, powers of attorney, mandates (mandats) or appointments of agents (including appointments made for security purposes) may terminate by law and without notice upon the occurrence of insolvency proceedings and may be revoked despite being expressed to be irrevocable.
The Law of 5 August 2005, on financial collateral agreements, as amended from time to time (the Collateral Law), provides that financial collaterals may be held by a person designated by the beneficiaries (ie security agents acting for the lender(s)) without owning any secured debt (so no parallel debt mechanism is needed). Security trustee arrangements are also recognized under the Collateral Law.
Trust
The concept of a trust is unknown under Luxembourg law. However, foreign law trust arrangements are recognized in accordance with the Hague convention of 1 July 1985 on the law applicable to trusts and on their recognition (Hague Trusts Convention), ratified by a Luxembourg law dated 27 July 2003 on trusts and fiduciary contracts, as amended from time to time.
Luxembourg law has implemented the concept of fiduciary (fiducie), which, however, does not offer the same features of a trust.
Are there any other notable risks or issues around lending?
Generally
Luxembourg loan agreements and finance documents are subject to general contractual principles. For instance:
- They should be entered into in bona fide.
- Penalty clauses (clauses pénales), and similar clauses on damages or liquidated damages are allowed to the extent that they provide for a reasonable level of damages.
- Compounding of interests is subject to certain conditions.
- Specific performance may not always be available and may result only in damages.
Specific types of lending
Specific to the area of mortgage lending is the issue of whether a lender falls within the recently formed Luxembourg mortgage loan regime. The Mortgage Credit Directive, implemented in Luxembourg in the Luxembourg Civil Code, aims to prevent the irresponsible lending and borrowing practices that were exposed during the global financial crisis. The Mortgage Credit Directive applies to first and second ranking mortgages. It imposes a number of requirements on lenders including the need to:
- conduct affordability tests before lending;
- provide standard information about the mortgage to enable borrowers to compare products; and
- ensure that staff are suitably trained.
Standard form documentation
Apart from consumer, mortgage or small corporate loans, major loan financings are not typically governed by Luxembourg law. However this may change as credit providers are using more regularly Luxembourg law.
Syndicated finance transactions are governed by documentation based on recommended forms published by the Loan Market Association (LMA). Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions, implemented in Luxembourg by the Law of 18 December 2015 on the resolution, reorganization and winding up measures of credit institutions and certain investment firms and on deposit guarantee and investor compensation schemes.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail in’ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail in’ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of Luxembourg or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract, corporate interest and financial assistance matters are to be considered.
Xavier Guzman
Partner
DLA Piper Luxembourg
[email protected]
T +352 26 29 04 2052
View bio
and then 