Modernization of the Luxembourg law on financial guarantee contracts | Denton

On July 24, 2022, the Luxembourg law of July 20, 2022 entered into force and includes a set of provisions amending the Luxembourg law of August 5, 2005 on financial collateral agreements, as amended (the “Collateral Law”). This amendment and other proposed amendments (Bill 8055) seek, among other things, to clarify and consolidate current market practices and to adapt the law of security interests to apply to ledger technologies. distributed (“DLT”).

I. Luxembourg law of July 20, 2022

The Luxembourg law of July 20, 2022 has reinforced the legal certainty of the parties when determining a chargeable event. In the old legal framework, the term was questionable, due to the slightly different definition of the “generating event” in Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (the “directive”) than in the law on securities, which transposes the directive. Some parties in court have concluded, based on the Directive’s definition, that a financial security agreement can only be enforced if the obligations secured have become due. The Luxembourg law of July 20, 2022 confirms the position taken by the Luxembourg courts which emphasize the autonomy of the financial guarantee contract in relation to the guaranteed obligations as well as the possibility for the parties to stipulate that their financial guarantee contract can be executed from the occurrence of any agreed event (i.e. breach of covenant, representation or warranty, etc.) even if the obligations secured have not become due.

The second key change introduced by the Luxembourg law of 20 July 2022 is a modernization of the enforcement methods, by introducing the possibility for the creditor to require the redemption of the pledged units or shares of an undertaking for collective investment and to exercise all rights arising from the pledged insurance contract. This confirms that a pledge governed by security law can be repossessed:

  • units or shares of an undertaking for collective investment; and
  • an insurance contract.

The Luxembourg law of July 20, 2022 also modernized the public sale procedure in the event of execution of the financial guarantee contract (which is now aligned with the auction procedure).

ii. Bill n° 8055 and pledge on DLT financial instruments

Bill 8055 is in line with the reforms already carried out by the Luxembourg legislator in the field of the digitization of financial instruments. It started with the amendment of the Luxembourg law of August 1, 2001 on the circulation of securities, as amended by the Luxembourg law of March 1, 2019 (Law on the circulation of securities), and the Luxembourg law of April 6, 2013 on dematerialized securities, as amended by the law of January 22, 2021 in order to allow the use of distributed electronic registers for the keeping and/or registration of securities accounts.

The law on securities already provides that the application of the law, the situation of the securities still held with the account holder concerned, the validity or the effectiveness of the security constituted in accordance with the law on securities, cannot be affected by maintaining securities accounts within such secure electronic record mechanism or by crediting securities to securities accounts via such secure electronic record mechanism.

In light of the law on the circulation of securities and the law on dematerialized securities, the draft law aims to expressly recognize pledges on financial instruments using distributed ledger technology and to allow the use of ledger technology distributed in financial security contracts in a legally secure manner, regardless of the technology used.