On 1 July 2020, the Luxembourg Parliament adopted a new law relating to professional payment guarantees (the “Law”) or garantie professionnelle de paiement in French. The Law was published in the Official Journal on 13 July 2020 and will enter into force on 17 July 2020.
The Law creates a new type of personal guarantee granted in a professional framework (the “Professional Payment Guarantee”).
The Professional Payment Guarantee is designed to enhance Luxembourg attractiveness as lenders’ friendly legal hub to structure cross-border financing or refinancing transactions and for that purpose:
- complement the existing traditional personal guarantees under Luxembourg law namely the suretyship (cautionnement) and the first demand guarantee (garantie à première demande) while remedying their shortcomings; and
- supplement the security interests in rem (sûretés réelles), such as pledges or the transfer of title for security purposes, that benefit from the regime of the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the "Collateral Law").
The Professional Payment Guarantee: definition and scope of application
Being a new type of personal security under Luxembourg law, the Professional Payment Guarantee is defined as “the commitment of a person, the guarantor, towards a beneficiary to pay, on demand of the beneficiary or of an agreed third-party, a sum determined in accordance with the agreed terms, in relation to one or more claims or risks associated to them” (article 2 of the Law).
The Professional Payment Guarantee agreement must be established in writing (either as an unilateral act by the guarantor or as an agreement between the guarantor and the beneficiary), including in electronic form or any other durable medium, and to benefit from this specific regime, the instrument formalising the Professional Payment Guarantee must expressly be submitted to the Law.
The guarantor may be any company (including companies without legal personality, such as special limited partnerships (sociétés en commandite spéciales)), collective investment funds as well as States, national, European and international public institutions and natural persons. On that latter category of guarantors, the final text adopted by the Luxembourg Parliament departs from the bill of law which expressly excluded the natural guarantors and follows the Luxembourg Council of State’s recommended position.
The Professional Payment Guarantee can be granted over present or future claims as long as they are identified or identifiable at the time the Professional Payment Guarantee agreement is entered into to secure all kinds of obligations as determined by the parties, including without limitation any obligations to pay.
Similarly to financial collateral arrangements under the Collateral Law, the guarantee can be granted to a third-party acting on behalf of the beneficiaries, such as a security agent, a trustee or a fiduciary agent.
Key features of the Professional Payment Guarantee
Light formalism
As mentioned above, save for the explicit reference to the Law which must be inserted in the written agreement constituting the Professional Payment Guarantee between the parties, formal conditions are limited to the minimum. The Professional Payment Guarantee agreement may be made under private seal and is thus not subject to taxes or registration duties.
Contractual freedom of the parties
The Law grants the parties a wide scope of contractual flexibility, only limited by public order rules and general principles of contract laws.
The parties will be thus able to combine terms of the existing personal guarantees (i.e., suretyship and independent guarantee) while benefiting from a flexible and beneficiary-friendly special regime inspired by the Collateral Law to tailor the features of the Professional Payment Guarantee to their most specific needs.
As for example, the parties can freely determine:
- the purpose and modalities of the Professional Payment Guarantee, in particular the payment obligations of the guarantor;
- the events giving right to call the Professional Payment Guarantee, including in the absence of default or acceleration of the secured claims.
Further, unless otherwise agreed between the parties to the Professional Payment Guarantee, the Law provides for by default protection provisions such as:
- the guarantor cannot raise any defences related to the concerned claims or risks;
- after payment, the guarantor has a personal recourse against the debtor and is subrogated to the beneficiary’s rights up to the paid amount.
Legal certainty
By expressly submitting the Professional Payment Guarantee instrument to the Law, the parties will benefit from the special regime applicable to the Professional Payment Guarantee and any risks of requalification of the Professional Payment Guarantee into a suretyship will be alleviated.
With respect to insolvency remoteness, the Professional Payment Guarantee will benefit from the same regime as pledges granted under the Collateral Law. Indeed and unless the parties agree otherwise, the guarantor continues to be bound towards the beneficiary for all of its obligations under the Professional Payment Guarantee even if insolvency proceedings or reorganisation measures are initiated against the guaranteed debtor, including where such claims are subject to rescheduling, reduction or to conversion in capital measures.
