Update - Luxembourg law of 10 July 2020 on professional payment guarantees
The Luxembourg law of 10 July 2020 on professional payment guarantees (garantie professionelle de paiement) has been published. This new law introduces the legal framework for a new type of guarantee, adding to the security interests and guarantee instruments available under Luxembourg law. Interesting to note that after parliamentary discussions, natural persons are not excluded from granting a professional payment guarantee.
Luxembourg draft law 7567 on professional guarantees of payment
On 22 April 2020, draft law 7567 (the Draft Law) on professional guarantees of payment (garantie professionelle de paiement) has been submitted to the Luxembourg Parliament. The Draft Law aims to introduce a special regime for guarantees in a professional context by creating a new type of guarantee, allowing a more flexible structuring and remedying the shortcomings of the suretyship (cautionnement) constituted under the Luxembourg civil code and the independent guarantee (garantie autonome), an instrument created by Luxembourg market practice and confirmed consistently by Luxembourg case law over the years.
The Draft Law foresees two overarching principles for the creation of a professional guarantee of payment. Namely, that the guarantee has to be documented in writing (including electronic support) referencing the law and that it cannot be granted by natural persons but only by legal entities. However, this does not exclude that a professional guarantee of payment can be issued by a professional for the benefit of a natural person.1
In addition to those ground rules, the professional guarantee of payment leaves the floor to contractual freedom and can thus be constituted by a guarantor unilaterally or bilaterally, provided that it references the law. As such, parties can combine elements of the suretyship and the independent guarantee without incurring the risk of requalification of their instrument and determine any type of trigger events for the guarantee to be called.
In addition, the professional guarantee of payment may secure all kinds of obligations determined by the parties, including without limitation any obligations to pay or deliver financial instruments or other assets, present or future, actual, hypothetical or contingent, determined or determinable, whether individually or by reference to a portfolio, provided that these are in line with public policy.
The professional guarantee will resist against insolvency proceedings opened in respect of the principal obligor.
To suit the needs of cross-border financing and international capital markets transactions, the guarantee may be issued in favour of a third party acting for certain beneficiaries, a security agent, a trustee or a fiduciary as under the Luxembourg law of 5 August 2005 on financial collateral arrangements.
The intentions of the Luxembourg law of 5 August 2005 on financial collateral arrangements have served as a model for this Draft Law which is evidenced by the above mentioned characteristics of a professional guarantee of payment. This can only be welcomed by the international financial markets.
The additional legal certainty avoiding the risk of requalification of the personal guarantee, combined with contract freedom as the driver for the modalities thereof will make this new Luxembourg tool very useful in cross-border financing and capital markets transactions. Once the Draft Law is adopted and enters into force it should not take long for the financial markets to notice.
For more information and to stay up to date on this topic, please reach out to the contacts listed on this article or your usual Simmons & Simmons contact.
1 July update – After parliamentary discussions, natural persons are not excluded from granting a professional payment guarantee.
