The Luxembourg Court of Appeal’s decision on 11 January 2024 raised significant doubts about the territorial scope of the Luxembourg Law of 5 August 2005 on financial collateral arrangements, as amended (the “Collateral Law”), particularly regarding the protection afforded by Article 20(1) in cases of insolvency proceedings initiated outside the European Economic Area (“EEA”). In that ruling, the Court of Appeal decided that Article 20(1) of the Collateral Law does not apply to non-European insolvency proceedings, thereby denying protection to financial collateral arrangements in such cases.
Article 20(1) states that “financial collateral arrangements as well as the enforcement events, netting agreements and the valuation and enforcement measures agreed upon by the parties in accordance with this law are valid and enforceable against third parties, commissioners, receivers, liquidators and other similar persons notwithstanding reorganisation measures, winding-up proceedings or any other similar national or foreign proceedings.” The Court of Appeal, however, held that the term “foreign proceedings” was limited to jurisdictions within the EEA, as the Collateral Law was derived from Directive 2002/47/EC (the “Collateral Directive”), which aimed to harmonize collateral arrangements at the European level.
In the case under review, insolvency proceedings had been opened against an Ivorian company, and the Court of Appeal concluded that the protections of Article 20(1) did not extend to such proceedings. This interpretation deviated from the common understanding among legal scholars, who had previously considered “foreign proceedings” in Article 20(1) to include any non-Luxembourg jurisdiction, regardless of EEA membership.
The ruling created significant ambiguity for creditors and contradicted the fundamental objective of the Collateral Law, which is to establish Luxembourg as a globally appealing jurisdiction for financial collateral agreements. In response, the Luxembourg government proposed amendments to clarify the legislator’s original intent. The Law of 15 July 2024 relating to the transfer of non-performing loans introduced a critical update to the Collateral Law, explicitly defining “foreign proceedings” as those from any state, whether part of the EEA or not.
Almost a year later, on 19 December 2024, the Luxembourg Cour de Cassation annulled the Court of Appeal’s decision. The Cour de Cassation ruled that Article 20(1) of the Collateral Law, in its version prior to the 2024 amendments, did not distinguish between EEA and non-EEA countries. The Cour de Cassation emphasized that such a distinction would contravene the principle that laws should not discriminate unless explicitly stated. It further noted that the legislator’s intent was to extend creditors protection beyond the scope of the Collateral Directive, underscoring Luxembourg’s commitment to legal certainty in financial collateral arrangements. This decision by the Cour de Cassation restored confidence in the Collateral Law, reinforcing Luxembourg’s status as a secured jurisdiction for financial collateral.
Additionally, an earlier ruling by the Court of Appeal on 19 January 2023, in the same case, addressed the retroactive application of the Collateral Law to financial collateral arrangements perfected before its enactment. In that ruling, the Court of Appeal held that the Collateral Law applies to a pledge agreement dated 3 May 1994, despite pre-existing insolvency proceedings initiated in 2002, further highlighting the law’s expansive scope. This ruling was not challenged by the Cour de Cassation, as the court stated that the annulment resulting from the annulment of a court decision (Court of Appeal’s ruling of 11 January 2024) affects only acts subsequent to the decision annulled, without having any effect on previous decisions. Therefore, the Court of Appeal decided that there was no reason to extend the scope of cassation to the ruling of the Court of Appeal of 19 January 2023.
These rulings collectively reaffirm the strong protections offered by the Luxembourg Collateral Law and its adaptability to evolving legal challenges, ensuring its continued appeal in international finance.