CMS Expert Guide for taking security in Luxembourg

Yes, subject to certain conditions (see section 4. below).

Under Luxembourg law, there are three possible forms:

• suretyship (cautionnement) (a secondary obligation dependant on the validity of a principal obligation, with surety and principal debtor being joint and several obligors), governed by the Luxembourg Civil Code,
• first-demand guarantee (garantie à première demande) (independent of the validity of a principal obligation), mainly instituted by case-law, and
• professional payment guarantee (garantie professionnelle de paiement) (independent of the validity of a principal obligation and also offering great contractual freedom in its terms), governed by the Luxembourg law of 10 July 2020 on professional payment guarantees. 

Yes, personal security (sûreté personnelle) over all assets of the guarantor, as opposed to a right in rem.

Not outside bank guarantee scenarios. 

Yes, but please see comments in section 4. 

Yes, but please see comments in section 4.

Yes, but please see comments in section 4.

For a company/corporate body: 

• granting the guarantee being within its corporate object (the latter would have to be sufficiently wide to permit it or must be amended if it is not). 

Specific attention must be given to whether the company is regulated, listed or a special type of vehicle (e.g. investment fund or securitisation company), as these are subject to specific legal regimes which may prohibit or limit the power to grant guarantees or security. 

• The presence of sufficient corporate benefit and the company not exceeding its financial capabilities in granting the guarantee (both determined by the management body of the company). Considerations here may differ depending on whether the guarantee is (i) downstream (i.e. for the obligations of direct/indirect subsidiaries of the company) or (ii) upstream /cross-stream (i.e. for the obligations of direct/indirect parent-companies or sister-companies to the company) or (iii) granted for the obligations of non-group entity/ies (e.g. companies held at less than 60% by the guarantor, companies holding less than 60% in the guarantor, parallel investment funds, master-feeder structures). 

In scenarios under items (ii) and (iii) above, appropriate guarantee limitation(s) would have to be included in the relevant guarantee (e.g. to a percentage of the guarantor’s own funds and subordinated debt for group scenarios in item (ii), and depending on the case, regarding non-group scenarios under item (iii)). 

• for SA/SCA companies – also the absence of prohibited financial assistance in granting the guarantee (i.e. it does not cover obligations relating to a financing/funding whose proceeds are used directly/indirectly to acquire or subscribe for shares in that company). 

The prohibition may potentially be avoided through e.g. (i) the financing/funding being guaranteed having served to solely make a capital injection into the guarantor without issuance of shares (i.e. contribution to account 115) or an intra-group loan to the guarantor, or (ii) tranching the debt being guaranteed to separate the portion thereof not used for direct/indirect acquisition or subscription for shares in the guarantor (which portion the latter could then guarantee), or (iii) conversion of the guarantor into a corporate form which is not subject to financial assistance prohibitions (e.g. a Sarl).

For individuals:

• the guarantee must be granted in the context of their professional/commercial activities, and
• the matrimonial regime (i.e. separation of assets or common assets) to which that person is subject may have to be considered. 

If a guarantee is granted in breach of prohibited financial assistance, it would be null and void, and potentially voidable if granted in the absence of sufficient corporate benefit or outside of a company’s corporate object. 

Luxembourg law-governed guarantees must be in writing (no notarisation is required and they can be in English) and executed in as many originals as there are parties to the guarantee.   

For companies, the guarantee should be subject to a prior approval (or subsequent ratification) by its management body (if ratified post-execution, it must be signed in accordance with that company’s statutory signature powers). 

Following the insolvency reform of 2023 (effective in 2024), where the guarantee’s enforcement trigger event comprises/refers to/depends on an acceleration of the guaranteed obligations (including, where the enforcement of the guarantee requires – on the basis of the enforcement event(s) defined for it, the sending of a notice of acceleration of the guaranteed obligations), the opening of judicial reorganisation (réorganisation judiciaire) proceedings should be included in the relevant guarantee agreement as an additional/independent enforcement event, to permit the guarantee’s enforcement even in case of judicial reorganisation (réorganisation judiciaire) opened against the Luxembourg guarantor(s)/obligors where a standstill (which otherwise would not permit the guarantee’s enforcement in the above scenarios) has been granted to the guarantor/obligor concerned.

Yes, as long as determined or determinable (a specific amount being indicated is not required for Luxembourg law guarantees or pledges which are subject to the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the 2005 Law) (each a Pledge)).

Yes, the validity of a Luxembourg law suretyship/Pledge is dependent on the validity of a principal obligation (as they are accessory to the principal obligations), which is not the case for first-demand guarantees and professional payment guarantees. 

If the principal obligations are invalidated, the relevant suretyship/Pledge guaranteeing/securing them may be considered void of purpose and thus be extinguished. 

An indemnity (in the meaning under English law) does not exist as such under Luxembourg law, but may potentially be recognised if established under a foreign law governed document, subject to mandatory provisions of Luxembourg law and to Luxembourg international public policy rules.

Yes, its term would typically be the same as that of the guaranteed/secured obligations; however, it may be released by the beneficiary/pledgee at any time before that. 

Suretyships/Pledges would be extinguished on the full repayment/discharge of the underlying principal obligations. For Pledges, given the formalism of their creation, a written release (and completion of related release perfection steps depending on the type of asset subject to the relevant Pledge) would be required. 

First-demand/professional payment guarantee would terminate on the full repayment of the guaranteed obligations, whether by the guarantor or otherwise.

Yes (foreign beneficiaries or pledgees are allowed).

For Pledges, parallel debt constructs are not necessary, as the 2005 Law allows security agent/security trustee constructs (and generally, one party holding a Pledge for its own benefit and that of other parties who have appointed the former for that purpose). 

Foreign law trusts are recognised in Luxembourg subject to the conditions of the Hague Convention of 1 July 1985 on the law applicable to trusts and their recognition. 

For security interests other than Pledges (e.g. mortgages), parallel debt provisions are necessary in the case of multiple secured creditors. 

If the pledgee/beneficiary does not change as a result of the transfer (i.e. in case of agency/security agency/security trusts, where the pledgee/beneficiary is the security agent/trustee), there are no formalities to complete, except notification to (or acceptance by) the debtor of the relevant obligations of the relevant change, per Art.1690 of the Luxembourg Civil Code. 

If the pledgee/beneficiary does change as a result of the transfer, an amendment and transfer document/provisions will have to be entered into regarding the guarantee/pledge agreement (for Pledges, updated perfection steps would also have to be completed regarding the new pledgee post-transfer, no public registers or notaries would be involved).

If the guaranteed/secured obligations are defined in a wide enough manner so as to cover any changes to their scope, no changes to the guarantee/pledge agreement should in principle be necessary (though, subject to section 11. above).

However, a confirmation thereof by the pledgor/guarantor would be useful. 

Should the relevant definitions not be sufficiently wide to cover the changes, the guarantee/pledgee agreement would have to be amended correspondingly and confirmed.

In such case, where new obligations or obligors are being added, the considerations in section 4. above would also apply and would have to be checked in advance.

Guarantees may be governed by the law agreed between the parties, subject to the provisions of the Rome I Regulation. 

If Pledges cover assets (deemed to be) located in Luxembourg or governed by Luxembourg law, they must be granted under Luxembourg law only (foreign law security documents may not create valid security over Luxembourg law governed assets).

Assets located outside Luxembourg or (considered to be) governed by foreign laws (in accordance with Luxembourg private international law rules) may not be validly covered by a Luxembourg law security document.

No specific restrictions.

Yes, pursuant to applicable restrictive measures in financial matters as set out under applicable laws and regulations at Luxembourg and EU levels. For more details on applicable restrictive measures in financial matters, please visit the Luxembourg Ministry of Finance’s page

For guarantees and in rem security except for Pledges (e.g. mortgages and business pledges): payments made, as well as other transactions concluded or performed, during the so-called suspect period (période suspecte) which is fixed by a Luxembourg court and dates back (not more than) six months before the date determined by the court as when the company has ceased its payments, and, as for specific payments and transactions, during ten days before the commencement of such period, may be subject to cancellation by the Luxembourg court on proceedings instituted by the Luxembourg insolvency receiver (curateur), subject to limitations resulting from the judicial homologation of an agreement with creditors (accord amiable) or the opening, prior to the insolvency, of a judicial reorganisation procedure. 

For Pledges: in principle, they are bankruptcy-remote – as regards both national/Luxembourg and foreign insolvency rules.

In addition, the 2005 Law expressively specifies that “foreign” (in respect of the abovementioned foreign rules) refers to “another State that is a contracting party to the European Economic Area Agreement, or of another State”, which is useful in the context of (i) netting and insolvency proceedings and (ii) conflict of laws. 

However, following the insolvency reform of 2023 (effective in 2024), where the Pledge’s enforcement trigger event comprises/refers to/depends on an acceleration of the secured obligations (including, where the enforcement of the Pledge requires – on the basis of the enforcement event(s) defined for it, the sending of a notice of acceleration of the secured obligations), the opening of judicial reorganisation (réorganisation judiciaire) proceedings should be included in the relevant pledge agreement as an additional/independent enforcement event, to permit the Pledge’s enforcement even in case of judicial reorganisation (réorganisation judiciaire) opened against the Luxembourg pledgor(s)/obligors where a standstill (which otherwise would not permit the Pledge’s enforcement in the above scenarios) has been granted to the pledgor/obligor concerned.

The assets pledged under the 2005 Law must be determined or determinable; they can include future assets of the same type as the existing ones being pledged.

No, floating charges/all-assets security do not exist under Luxembourg law. Different types of assets have to be identified and will be subject to separate types of security interests and related security documents.

Yes, subject to the same considerations as discussed in section 4 above.

Noting that, for Pledges and security interests in rem in general, corporate benefit considerations may be “softer”, as this type of security is considered, by its nature, to be limited to the specific assets expressed to be subject thereto (as opposed to being an “all-assets” security, like a guarantee).

Yes, but only for real estate (article 2127 of the Civil Code). Ship and aircraft mortgages must be established by authentic deed (either by a notary or civil registration officer); not applicable for Pledges.

Mandatory (with the Luxembourg mortgage bureau of the location of the assets) for mortgages and business pledges. Renewals would be required after 10 years pursuant to article 2154 of the Civil Code. 

Yes, for Pledges over registered shares and other similar instruments issued in registered form (bonds, PEC’s, notes), in the register of such instruments or shares (as held by the relevant issuing/pledged company), renewals would be required in the case of the issuance of further shares/instruments by the relevant company or other changes to the pledged shares/instruments (e.g. reduction of capital with cancellation of shares, repayment leading to cancellation etc.).

Any notarised security must be executed in French or German (with an English version usually included in the same document). 

For non-notarised security, it is usually in English and no local translation is required.

A local translation would only be needed when the security agreement is submitted as evidence in court. 

Luxembourg courts usually do not require local translations for documents drafted in English.

Executed in writing and containing mandatory terms provided by applicable laws.

Yes, provided that the security document creating the Pledge (over registered shares/instruments)/(business or common law) pledge/mortgage does not permit the mortgagor/pledgor to deal with the assets during the life of the security (e.g. until an event of default).

However, as most perfection steps regarding Pledges are not public and cannot be verified/seen by a third party, the latter may still seek and obtain an attachment over the pledged assets.

In such case, the pledgee would nonetheless be entitled to enforce the Pledge (once the relevant enforcement trigger event has occurred), and would be paid in priority from the enforcement proceeds (any surplus thereof going to the attachment creditor).

Perfection completion determines the rank of a security interest (determined by the date/time of completion of the perfection steps, notice/acknowledgement process, registration etc.) and its enforceability against third parties. 

Regarding receivables, any perfection requirements under the laws of foreign debtors to Luxembourg law pledged receivables would also have to be completed (as, by Luxembourg private international law rules, the laws of the debtor determine perfection). 

Also refer to section 21. above.

Establishment of security and level of security regulation is generally:

Security is easily established (for Pledges) and encumbrances are easily checked (for mortgages and business pledges).

Medium complexity (for the creation of mortgages and business pledges, and for checking the existence of Pledges as their perfection is not public).

No, in the case of mortgages and other security agreements required to be notarised.

Pledge agreements under the 2005 Law can be signed in electronic form with qualified electronic signatures (“QESs”), as QESs are deemed equal to a wet-ink signature.

For Pledges, signatures can be in counterparts, via e-mail exchange of pdf copies.

Certain account-holding banks still require wet-ink signatures (transmitted by pdf, via e-mail) for account Pledges and related documents – to be checked on a case-by-case basis.

Yes, (public) for mortgages and business pledges – not available online. 

No, for Pledges (not public, or accessible online).

A security holder (or a person duly authorised by it).

For Pledges over registered shares/instruments, once the pdf copies of the relevant registers are received from the company (originals are not possible to be provided; by law, the registers must remain at all times with the company), these are fairly quick and easy to check for any existing/prior Pledges. 

For Pledges over receivables (arising for bank accounts or other contractual receivables) and bank accounts (notably, securities accounts), there is no possible way to check for prior/existing Pledges other than requesting information thereon from the relevant debtor/account-holding bank (they may not always disclose such information).

For Pledges, releases are fairly quick (they do not need to be notarised, can be subject to a suspensive condition and typically may be implemented on the same day as the new Pledges over the same assets, provided that all release and pledge perfection steps are synchronised).

For mortgages, depending on whether the necessary pre-arrangements with the enacting notary have already been set up (e.g. powers of attorney, mortgage register searches, agreed form mortgage deed, including completed as to content etc.). This can be done within one day.

For Pledges over receivables, debtors are usually party to the pledge agreement, though this is not always possible (i.e. notably, for debtors regarding receivables which do not arise under intra-group loans and for future debtors which are not such yet). A notice (and, sometimes, acknowledgement) process would have to be provided for them (see also section 22 above). 

For bank account Pledges, the notice and acknowledgement process may be quite smooth and quick (usually completed within 1 business day from the date of the notice), depending on whether the process has already been pre-arranged with the account-holding bank and all KYC documents the latter has required (including from the pledgee) have been provided to and approved by it.

Certain account banks require (due to their internal processes in that regard) more than 1 business day (i.e. between 2 and 3 business days, depending on the bank) for the provision of the acknowledgement, though in practice they may do so more quickly.

Please also refer to the final paragraph in section 16 above.

Yes, but not exclusively. Other enforcement triggers may be agreed by the parties (especially for Pledges).

Yes, any non-performance of the principal agreement, as agreed by the parties. 

Yes, any non-performance of the security agreement, as agreed by the parties.

Yes, as agreed by the parties. 

Yes, any other events agreed by the parties are possible. 

Not legally required. There may be one contractually applicable under the main finance documents.

Yes, (available) for Pledges (e.g. appropriation, private sale) and mortgages (public sale/auction). 

Depending on the terms of the Pledge agreement, an enforcement notice may be required by them (though not by the 2005 Law). Acceleration of the secured obligations is also not legally required, but may be useful in determining the amount remaining unpaid.

Yes, appropriation (for Pledges only). The value is determined based on the terms of the Pledge agreement in that regard (usually, the fair value, determined by the pledgee or by an external expert appointed by it, based on the methods and information considered pertinent by the valuer).

Yes, private sale (for Pledges only), at normal commercial terms (not necessary to have a competitive bidding process or multiple offers; the value is the sale price as agreed between the buyer and the pledgee/seller).

Public auction/sale is also available for both Pledges and mortgages.

No. 

For Pledges over receivables (including intra-group and arising from bank accounts), enforcement can also be done by way of set-off between the receivables and the secured obligations or by the pledgee requesting direct payment of the receivables from the debtor/the account-holding bank.

Yes, sometimes (for Pledges, usually contained in the pledge agreement). 

Enforcement of security interests other than Pledges may be time-consuming in practice and have an associated costs.

For Pledges, fairly easy (if the out-of-court methods are chosen), creditor-friendly and relatively quick.

Mortgages and business pledges may take longer and may require the intervention of a public officer (e.g. a bailiff or a notary public), an auction process and additional costs to the beneficiary.

Not as such (the 2005 Law reflects recent insolvency proceedings reform, but which did not change the principle of insolvency-remoteness of Pledges, subject to the point on judicial reorganisation and enforcement in the last paragraph of section 16 above). 

The laws in that regard are rarely changed and if changed then to the extent necessary to improve the regulation, align them with other related legislation’s updates and remove or regulate properly unclarity/inconsistency revealed during the practical implementation.