The law of 5 August 2005 on financial collateral agreements, as amended (the 2005 law), provides an attractive legal framework for creditors as its insolvency ring-fencing provisions protect security rights over qualifying collateral governed thereby from any national or international insolvency proceedings.
On 13 February 2020 the Luxembourg Arrondissement Court ruled on whether the beneficiary or pledgee of a Luxembourg law pledge granted over a bank account could benefit from the protection granted by the 2005 law with respect to insolvency proceedings initiated against his debtor prior to the entry into force of the 2005 law.
In 1993 the beneficiary or creditor granted a loan to a debtor. As security for this loan, the debtor granted a Luxembourg law pledge over his bank account a year after the date on which the loan was extended.
The debtor went bankrupt in 2002 and the creditor notified the enforcement of the pledge to the account bank (with which the pledged account was held) first in 2009 and for a second time in 2018 (ie, after the 2005 law became effective).
Following the refusal of the account bank to transfer the credit balance of the pledged bank account to the creditor pursuant to the enforcement by the creditor of the account pledge, the creditor summoned the account bank before the Luxembourg Arrondissement Court.
The creditor claimed that the account pledge was valid and enforceable notwithstanding the pending insolvency proceedings. The creditor invoked Article 27 of the 2005 law, which provides that the 2005 law applies to financial collateral arrangements entered into before the 2005 law took effect. The creditor further argued that Article 20(1) of the 2005 law provides as follows:
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 [the 2005 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 other words, the creditor argued that the retroactive application of the 2005 law with respect to financial collateral agreements concluded before its entry into force should be extended to insolvency proceedings opened before its entry into force. According to the creditor, if the legislature had wanted to exclude insolvency proceedings opened before the entry into force of the 2005 law from the scope thereof, it would have expressly provided for such exclusion therein, which it did not.
The court rejected the creditor's arguments based on the principle of the non-retroactive application or effect of laws, as reflected in Article 2 of the Civil Code.
The judge underlined that even though Article 27 of the 2005 law states that such law applies to financial collateral arrangements existing before its entry into force, the 2005 law is silent as to its applicability to insolvency proceedings opened before its entry into force.
The judge ruled that accepting the application of the 2005 law to insolvency proceedings opened before its entry into force would constitute a breach of:
- the principle of equality of creditors; and
- the suspension of individual actions or proceedings as from the decision opening the insolvency proceedings.
The judgment does not put into question the flexibility and creditor-friendliness of the legal framework offered by the 2005 law but puts it in the context of the general principles of civil law, as well as the collective procedures law.
The judgment confirms that the principle that the 2005 law applies to financial collateral arrangements created before its entry into force does not extend in the same way to insolvency proceedings opened before its entry into force.
This article was originally published in the Banking & Financial Services Newsletter of the International Law Office.