Pledges under Luxembourg law: case law and developments

The law of August 5, 2000 on financial collateral arrangements establishes a legislative framework for the various types of security. This is a very important text, since it reflects the legislator’s genuine desire to give concrete form to the legal security of lenders.

In this section, we will look at two recent case law decisions in this area, which uphold the principle of legal certainty and flexibility for creditors benefiting from financial collateral arrangements.

In its ruling of January 22, 2020 (Arrêt de la Cour d’appel du 22/01/2020 n° CAL-2017.00004), the Cour d’appel de and in Luxembourg has accepted that contractual provisions authorizing the realization of pledges in the event of a breach of leverage comply with the 2005 law. It also admits that the scope of application of the adage fraus omnia corrumpit (Fraud corrupts everything), despite its breadth, cannot be recognized in the presence of a wilful disloyal act that has caused damage, since fraud presupposes “malicious intent, intentional deception, disloyalty with the aim of harming or claiming gain”. Fraud is therefore not accepted in this case, since case law distinguishes between an unfair act committed with the intention of causing damage, and a voluntary unfair act which has caused damage. Fraud is only constituted if the act was committed intentionally to cause damage. However, a pledgee may not use his pledge for purposes that are almost unrelated to the payment of his claim. That’s right, “The appropriation of the pledged assets would have been diverted from its purpose, since it would not have been dictated by the creditor’s desire to repay the principal debt, but on the contrary by his intention to appropriate the pledged assets while retaining his claim in full. The very purpose of the pledge, which is to guarantee repayment of the secured debt, would thus have been hijacked”. (Court of Appeal ruling of 22/01/2020 n° CAL-2017.00004). An early realization of the use of one’s pledge following the occurrence of a sudden event could be considered an abuse of rights if it is made in the main interest of controlling the pledged asset at the expense of the payment of one’s claim.

Another important case law ruling in this area was handed down by the Luxembourg Court of Appeal on July 22, 2020 (Arrêt de la Cour d’appel du 22/07/2020 n° CAL-2020.00511), enshrining the impossibility of implementing measures to suspend the effect of the realization of the pledge. Since the 2005 law on financial guarantees, there has been a real ambition on the part of the legislator to protect these contracts from being called into question. The interim relief judge has jurisdiction in matters of urgency, but is not empowered to take measures that would suspend performance of the financial security contract and the obligations arising from it. The possibility of a posteriori control does not imply the possibility of a priori control. This is because the interim relief judge is only competent for a posteriori control and can therefore only take coercive measures following the execution of the pledge contract.