LUXEMBOURG Law and Practice Contributed by: Andreas Heinzmann, Hawa Mahamoud and Eva Jean, GSK Stockmann
liability company. Financial assistance is therefore not prohibited for private limited liability companies. 5.5 Other Restrictions There are no material restrictions save for those described in 5.2 Floating Charges and/or Similar Security Interests (notification formalities required for the perfection of pledges over receivables, bank accounts and the shares of a private limited liabil- ity company) and 5.3 Downstream, Upstream and Cross-Stream Guarantees . 5.6 Release of Typical Forms of Security A security, whether a pledge or a mortgage, is released once the secured obligation is fully discharged (Arti- cles 2082 and 2180 of the Civil Code) or as provided for in the security agreement. Despite such explicit provisions of the Civil Code and for the sake of good order, the parties of a security agreement usually sign a release agreement, which asserts that either the secured obligations under the security arrangement have been paid in full and that the collateral is to be released or the security taker consents to release the pledgor from its obligations under the collateral. 5.7 Rules Governing the Priority of Competing Security Interests As a general principle, contractually secured creditors enjoy a privilege over the assets of the debtor that is restricted on the encumbered asset. With respect to a security interest created pursuant to the Collateral Law, unless otherwise agreed, the first priority pledgee is entitled to receive any proceeds arising out of the enforcement of the security interest. As regards a security interest (which creates a right in rem), the priority of pledges is determined by the date on which they became enforceable against third par- ties – ie, on a first-to-file basis in the relevant register (eg, mortgage register, register of shareholders). In practice, priority rules of competing creditors are usually contractually adapted through entering into an intercreditor agreement; for instance, between credi- tors that should provide and govern the subordination among creditors as per their respective rights over the security interest. Hence, in the case of enforce-
ment of the security interest, lower-ranked creditors will be subordinated in rank, priority and enforcement to upper-ranked creditors, subject to the provisions of the intercreditor agreement, if any. Even though there are no general Luxembourg law provisions on contractual subordination, there is evi- dence of limited Luxembourg case law supporting the validity of special subordination clauses against the bankruptcy receiver of an insolvent borrower. 5.8 Priming Liens Generally, under Luxembourg law, there are no securi- ty interests arising by operation of law. However, there are legal provisions that recognise specific preferenc- es to a group of creditors, effectively making them senior to other creditors of the obligor. Following the insolvency of a Luxembourg company, certain credi- tors benefit from preferences arising by operation of law, which may supersede the rights of secured credi- tors. These are notably the salaried employees of an insolvent company, the Luxembourg tax authorities and the Luxembourg social security institutions. Another example can be found in the Civil Code, which provides that the subrogee who partially paid the debt of a third party will be entitled to exercise its subrogation right against the original debtor only after the debt of the principal creditor has been entirely satisfied. The application of this provision leads to a de facto subordination of the subrogee. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders A typical loan security package in Luxembourg includes security interests governed by the Collateral Law and guarantees, the enforcement of which could be made as follows. Security Governed by the Collateral Law The pledgee can, upon the occurrence of the contrac- tual trigger event (which may be a default under the secured obligations – see also 5.1 Assets and Forms of Security ) and without prior notice, inter alia:
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