Posted - 01.07.2020
On 10 July 2020, the Luxembourg Parliament (Chambre des Députés) adopted a new law relating to professional payment guarantees (the “Law”).
The Law introduces a special regime for personal guarantees granted in a professional context (the “Professional Guarantee”) among parties who wish to benefit from greater contractual freedom in determining the features and the legal consequences of a guarantee.
The Professional Guarantee will be a useful alternative to the traditional regimes of personal guarantees existing under Luxembourg law:
- i. the suretyship (cautionnement) which is governed by a long-standing statutory regime in the Luxembourg Civil Code. The defining feature of a guarantee under the form of a suretyship is that the guarantee obligation is accessory to the underlying guaranteed obligation in the sense that the obligation to pay under the guarantee exists only insofar, and on the same terms, as the underlying guaranteed obligation; and
- ii. the first demand guarantee (garantie à première demande) which is not governed by a statutory regime but has been recognised since the eighties by well-developed case-law of Luxembourg courts (and French precedents to which the Luxembourg courts refer). Compared to a suretyship, the first demand guarantee is an autonomous guarantee in that the obligation to pay is independent from the underlying guaranteed obligation.
The applicable regime varies depending on the legal qualification of the guarantee as a suretyship or as a first demand guarantee. In practice, first demand guarantees need to be drafted carefully, taking into account the distinctive features of both types of guarantees so as to mitigate the risk of requalification of the guarantee into a suretyship which is less favourable to the beneficiary of the guarantee.
The Law introduces a contractual-based guarantee regime and provides for greater legal certainty by allowing the parties to combine features of a suretyship and of a first demand guarantee to suit their structuring needs without, however, the risk of requalification.
Many financial transactions are structured as guarantees as they constitute, inter alia, an effective risk mitigation and risk transfer tool.
Financial institutions rely on guarantees as they are eligible for unfunded credit protection under Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms amending Regulation (EU) No. 648/2012 (1) or in the context of balance sheet operations such as securitisation transactions.
In the context of financings and re-financings of large financial, industrial or commercial groups, parent company guarantees are used to enhance the creditworthiness of borrower subsidiaries of the group and are typically part of the overall security package granted to the lenders.
Guarantees are also a valuable tool in the context of State or European Union initiatives for promoting access to finance in certain sectors or for certain market players. In the current circumstances, the proposed Professional Guarantee will be a useful tool for the implementation of the Covid-19 crisis management measures adopted at European Union level which are likely to take the form of guarantees granted by the European Investment Bank and the European Investment Fund.
Last but not least, SMEs could also benefit from the Professional Guarantee given that this guarantee is not reserved to large groups or financial players. Indeed, the broadness of the range of claims which may be subject to this guarantee could be interesting for SMEs as well.
The main features of the Professional Guarantee are summarised below:
Opt-in regime: the Professional Guarantee regime will apply simply by making the guarantee subject to the Law irrespective of the terms of the Professional Guarantee. The Professional Guarantee must be evidenced in writing (including in electronic form);
Guarantor: Professional Guarantees (in the sense that they are granted by a party in the context of his/its professional activities) may be granted by any company (including companies without legal personality), collective investment funds and any form of co-proprietorship as well as States, national, European and international public institutions and natural persons;
Contractual freedom (inter alia):
- • the Professional Guarantee may be granted to secure, inter alia, any payment obligations or the delivery of financial instruments and other assets, present, future or even potential assets or risks associated to such claims and may also, without limitation, secure risks associated to any type of claims, whether in respect of determined or determinable claims, individual claims or claims being part of a portfolio of claims, and may be called on demand by the beneficiary in circumstances and upon the conditions freely determined by the parties;
- • unless agreed otherwise by the parties, the guarantor will, after payment under the guarantee, be subrogated to the rights of the beneficiary of the guarantee and will be able to exercise direct legal action against the defaulting debtor;
- • the Professional Guarantee could be called upon even in the absence of a default or the occurrence of the risk guaranteed, if the parties so decide;
- • a Professional Guarantee may be provided in favour of a person acting on behalf of the beneficiary of the guarantee, a fiduciary or a trustee;
- • unless agreed otherwise by the parties, the guarantor will not be able to invoke any defence relating to the underlying guaranteed obligation.
- • unless agreed otherwise by the parties, the guarantor will continue to be bound under the Professional Guarantee even if insolvency proceedings or reorganisation measures are initiated against the guaranteed debtor.
Please click here to access the English translation of the Law.