Luxembourg Supreme Court decision of 19 December 2024: a welcome confirmation of the scope of Luxembourg Collateral Law

What is the context?

The Luxembourg Law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”), is recognised by the industry to be creditor-friendly as it provides safe harbour provisions protecting in principle financial collateral arrangements from the consequences of, among other things, Luxembourg or foreign winding-up proceedings. However, the precise territorial scope of such protection was cast into doubt further to a decision of the Luxembourg Court of Appeal dated 11 January 2024¹. 

In that ruling, the Luxembourg Court of Appeal decided that Article 20(1) of the Collateral Law does not apply in case of non-European insolvency proceedings, thereby removing the protection of financial collateral arrangements in case of insolvency proceedings opened with respect to the pledgor in countries outside the European Economic Area (“EEA”). 

Article 20(1) provides that “financial collateral arrangements as well as the enforcement events, netting agreements and the valuation and enforcement measures agreed upon by the parties in accordance with this law are valid and enforceable against third parties, commissioners, receivers, liquidators and other similar persons notwithstanding reorganisation measures, winding-up proceedings or any other similar national or foreign proceedings.”

In support of its position, the Court of Appeal stated that the Collateral Law implements into Luxembourg law Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (the “Collateral Directive”) and that the Collateral Directive aimed at introducing a uniform collateralisation regime at European level based on the mutual recognition of financial collateral arrangements between Member States. The Court of Appeal held that this mutual recognition was limited to countries being part of the EEA, and could therefore not receive universal application.

In the case at hand insolvency proceedings were opened against a Côte d’Ivoire company as pledgor and the Court of Appeal considered that the pledge was hence not protected against the effects of such insolvency proceedings. The benefit of Article 20(1) of the Collateral Law was therefore denied to the pledgee.

This unexpected decision brought unwanted uncertainty for creditors facing the risk of insolvency proceedings being opened with respect to non-EEA pledgors. This ruling thereby restricted the benefits of the Collateral Law whilst that law was designed to make Luxembourg universally attractive for the creation of collateral arrangements. This ruling also went against the position taken by legal scholars who have always considered that the term “foreign [proceedings]” used in Article 20(1) of the Collateral Law referred to all jurisdiction other than Luxembourg.

What happened next?

The most significant response to the position taken by the Court of Appeal consisted in the proposal by the government to amend the Collateral Law in order to clarify the initial intention of the legislator which was to cover all foreign proceedings without limitation. 

This was done via a provision of the Law of 15 July 2024 relating to the transfer of non-performing loans which introduced various amendments to the Collateral Law and clarified that “reorganisation measure, winding-up proceedings or any other similar national or foreign proceedings means a reorganisation measure, winding-up proceedings or any other national or foreign proceedings of another State that is a contracting party to the European Economic Area Agreement, 
 or of another State”.²

The distinction made by the Court of Appeal in the aforementioned precedent between countries being part of the EEA and third countries and the resulting territorial limitations of the benefit of Article 20(1) have hence been neutralised in the current version in force of the Collateral Law.

What about the decision itself?

In this context, the case-law of 19 December 2024³ provides for a welcome confirmation regarding the scope of Article 20(1) in its previous version i.e. before the legislative change described above.

Indeed, almost a year after the ruling of the Court of Appeal, the Luxembourg Cour de Cassation (Supreme Court) decided to annul the aforesaid decision of the Court of Appeal on the basis that Article 20(1) in its then version does not operate any distinction between countries being part of the EEA and third countries.

As rightly pointed out by the extensive observations from the Parquet Général, which were followed by the Court, while the Collateral Law did not operate a distinction between European and non-European countries, applying such a distinction would also unfairly benefit non-European pledgors. Furthermore, the Cour de Cassation reminds that no distinction may be made where the law does not distinguish.

As another argument in support of its decision, the Cour de cassation states that its position is in line with the clear intention of the Luxembourg legislator to go beyond the principles of the Collateral Directive in order to protect creditors.

This ruling of the Cour de Cassation is again a significant reminder of the high degree of legal certainty of Luxembourg financial collateral arrangements as sought by the legislator.

Another interesting ruling was issued by the same Court of Appeal on 19 January 2023⁴ regarding the issue of the application of the Collateral Law to financial collateral perfected prior to the enactment of the Collateral Law (The Court of Appeal considered this issue before it ruled on the construction of the word “foreign” as discussed above). Specifically, in this earlier ruling, the issue was whether Article 20 of the Collateral Law could apply in a case where the foreign insolvency was opened before the Collateral Law was initially enacted. The first instance court⁵ had decided that the Collateral Law (as a new law) could not apply to pre-existing insolvency proceedings opened in 2002 with a pledge agreement dated 3 May 1994, based on the principle of non-retroactivity of laws. 

The application of the Collateral Law to pre-existing financial collateral agreements is actually dealt with specifically in the Collateral Law, which provides in its Article 27 that the Collateral Law is applicable in such case. The Collateral Law does not however address the issue of its application to pre-existing insolvency proceedings. On that question, the Court of Appeal overruled the first instance court and held that the pledge of 3 May 1994 was subject to the Collateral Law notwithstanding pre-existing insolvency proceedings.
 

The information contained herein is not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific legal advice concerning particular situations. 

We undertake no responsibility to notify any change in law or practice after the date of this newsletter.