Luxembourg law pledge
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A word about credit risk mitigation
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A pledge — that is, a form of security interest — governed by Luxembourg law.
Especially useful if your lex situs happens to be Luxembourg, which has always been relatively common, and is more so now the United Kingdom has sentenced its own financial services industry to a lingering and painful death by existing the European Union, likely to become ever more common.
Not having a developed law of equity[1], Luxembourg law doesn’t faff around with concepts like fixed or floating charges, making its security analysis a lot less tedious: there is none of this doleful “is it a fixed charge or a floating charge, oh woe is me! What would Re Spectrum Plus or the extended liens decision have to say about that?”
When do you need a Lux pledge?
When the assets you are taking security over are situated in Luxembourg. See: lex situs.
What’s in it
Luxembourg law pledges are boring documents. I mean no slight on Luxembourg, or Luxembourg law, when I say that. Luxembourg is a nice place and it has excellent laws. Lux pledges should be boring. They fulfill an important, but nonetheless mechanical role: they make sure your security arrangement works as a matter of Luxembourg law, since that’s where the assets are, and you’ll be at the mercy of the Luxembourgoisie should you want to enforce it.
It’s a simple process and there's little magic in it, but this won’t stop custodians developing 17-page templates. Just to be sure, you understand.
Definitions
Of course there will be definitions. what self-respecting legal document will be without them? Expect to see, in particular, reference to:
- The 2001 Law, being the law dated 1 August 2001 regarding the transfer of securities and other fungible instruments, as amended.
- The Financial Collateral Law, being the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended.
- The Pledged Assets: What are you actually granting security over? This is the stuff in an account in Luxembourg. Expect it to include:
- Financial Instruments being financial instruments (“instruments financiers”[2]) in the widest sense of the word admitted under Luxembourg law, though you can expect the defintion to rabbit on a bit: you know, whether or not in dematerialised form, printed on urine-soaked vellum, gossamer, kleenex etc.
- Related Assets, meaning income, dividends, interest, proceeds, payments in kind of any type, kind or nature — again, expect counsel to go to town here. This is where the frustrated author inside every modern securities lawyer really lets her figurative imagination run wild.
- Secured Obligations: What does the pledge actually secure? this needs to be quite tightly defined otherwise the pledgor might never get the assets back. “Obligations arising under a 2010 GMSLA dated XYZ” ought to do it.
The Pledge
A fairly simple statement, admittedly studded with a little bit of Français, about what's going on:
- The Pledgor pledges the Pledged Assets in favour of the Pledgee, who accepts, as first-priority pledge (gage de premier rang) for the due and punctual discharge in full of all of the Secured Obligations.
The Acknowledgement
The Custodian will need to acknowledge that it has notice of the pledge. This will perfect the security, and is a key part of the deep magic of security interests. A similar requirement exists in most jurisdictions. The pledgor may instruct the Custodian to mark the assets as pledged consistently with the Financial Collateral Law
And that’s about it: rather like going to a Christening. the main event is now over, and you now have to sit in the church for three quarters of an hour croaking hymns, listening to the choir warble through some psalms, the vicar grumble through the same tedious sermon he’s been doling out for thirty years etc. So strap yourselves in.
Reps and warranties
What self-respecting legal contract would be complete without representations and warranties? Expect the Pledgor to be asked to make several reps as to legal matters (such as “the pledge is a financial collateral arrangement (contrat de garantie financière)”. Reps as to legal matters are, of course, basically stupid in any circumstances; particularly this one where it is some foreign, romanesque, burlesque system of law from a place thronging with dentists and people wearing pork pie hats. You can try arguing “How on earth should I know? I’m not a Luxembourg lawyer. I don’t even speak French for crying out loud.” This may make you feel better but it is not likely to get you anywhere. You will eventually have to accept this blighted, messed up universe for the imperfect place it is and make the representation. After all, what if it isn't? Whose problem is that? by the time anyone works it out it sure won’t be yours.
Enforcement
There will be specific Luxembourg law requirements about how you enforce the pledge, should it ever come to that. The pledgee may:
- Appropriate the assets (with details as to how they are valued for that purpose)
- Sell the assets privately on normal commercial terms (“conditions commerciales normales”)
- Sell them across exchange or publicly
- Ask a court to give them to the Pledgee against discharge of the secured obligations
- Set them off against secured obligations
Boilerplate
Expect pages and pages of guff: continuing security, cumulative with other security interests, not prejudiced by delay, waiver or indulgence, amendment, or any other act that might act to prejudice the security otherwise. the pledgor will have to waive its rights under the Luxembourg Civil Code, and also hold the pledgee harmless unless it has been negligent, fraudulent or wilfully naughty. then: Costs, notices, amendments, severability, succession, governing law.
See also
References
- ↑ The fiduciary concept notwithstanding, which sounds EXACTLY like a product of the law of equity.
- ↑ It is a common feature of foreign law pledges to sprinkle elaborate foreign lingo around the document in italics as if they are some kinds of magic words.