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Enforcement of pledge over shares in Luxembourg, irrespective of whether secured debt due

Order of the First Judge of the District Court of Luxembourg sitting in summary proceedings matters, N°356/2015, 15 July 2015

The enforcement of a pledge over the shares in a company (thereby triggering a change of control of the company) upon the occurrence of an enforcement event specified in the pledge agreement, notwithstanding that the secured debt was not yet due and that the creditor had not claimed the repayment of the secured debt, has been confirmed by a judge sitting in summary proceedings. The ruling confirms the flexibility offered by the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended (the Collateral Act) to lenders.

 In 2011, the investment fund Fondations Capital (the Buyer) acquired, via CTP Investment s.à r.l., 53.07% of the Courtepaille group, a French restaurant chain. In order to finance the acquisition, the Courtepaille group issued three senior bonds with a March 2019 maturity (the Senior Bonds) for a total amount of EUR 160 million, subscribed by one lender (the Lender). Pursuant to the terms and conditions of the Senior Bonds, the Courtepaille group covenanted to comply with certain financial ratios. The non-compliance with these ratios constituted a (non-automatic but subject to a decision of the bondholders) case of early termination and an acceleration of the repayment of the Senior Bonds.
In order to guarantee the repayment of the Senior Bonds, the Buyer, among others, granted to the Lender a pledge over all the shares held by it in CTP Investment s.à r.l. (the Pledge).

Pursuant to the Pledge agreement, the Pledge could be enforced in the following circumstances:

  • non-compliance with the financial ratios; and
  • debtor default under the Senior Bonds.

The financial ratios were breached in September 2013. Negotiations failed and the Lender informed the Buyer of the enforcement of the Pledge and of the appropriation of the shares in CTP Investment s.à r.l., thereby triggering a change of control of the Courtepaille group in favour of the Lender. It is important to note that, prior to the enforcement of the Pledge, the Lender did not call for an early termination of the Senior Bonds and therefore did not request the immediate repayment of the Senior Bonds but simply enforced the Pledge instead.

The Buyer argued that the enforcement of the Pledge was unlawful and/or abusive because the Lender did not first request an early termination of the Senior Bonds and their immediate repayment. The Buyer asked the Judge to suspend the enforcement of the Pledge.

The key issue for the Judge was whether a pledge governed by the Collateral Act could be enforced even in circumstances where the secured obligation was not yet due and payable. The Judge, sitting in summary proceedings, dismissed the Buyer’s claim.

The Judge noted article 1(6) of the Collateral Act, which states that an “enforcement event” means “an event of default or any event as agreed between the parties on the occurrence of which, under the terms of a financial collateral arrangement or the relevant financial obligation agreement or by operation of law, the collateral taker is entitled to realise or appropriate financial collateral or a close-out netting provision comes into effect”.1

As previously held by the Luxembourg district court,2 in addition to a failure to reimburse the secured obligation, parties may agree to other triggering events for enforcement of a pledge.

Under article 11(1) of the 2005 Act: “Unless otherwise agreed, if an enforcement event occurs the pledgee may, without prior notice (a) appropriate or cause a third party to appropriate these assets at the price fixed, before or after their appropriation, according to the valuation method mutually determined by the parties (…)”.3

 The Judge concluded that the Pledge agreement allowed the Lender to enforce the Pledge in the event the Courtepaille group did not comply with certain financial ratios, even if the secured debt was not yet due and payable.

Comment

Pursuant to Article 2071 of the Luxembourg civil code, the pledge is ancillary to the secured obligation. The right to enforce the pledge in the event the debtor fails to pay its debt on the due date is of the very essence of the pledge (even if the contractual arrangements between the parties do not specifically provide for the possibility to enforce the pledge in the case that the debtor fails to pay its debt when due).4

 However, the Collateral Act provides that other events triggering the enforcement of a pledge may be agreed by the parties. This ruling confirms the views of scholars and practitioners that such other events may be completely independent of, and may not depend on, the debt being due and not paid.

The decision of the Judge sitting in summary proceedings matters is provisional by nature. It was not the role of the Judge to interpret the contractual provisions of the Pledge agreement, the terms and conditions of the Senior Bonds, whether the relevant financial ratios were breached, and/or the exact circumstances under which the Pledge was enforced etc. This will be dealt with by the Luxembourg court which has been called to rule on the merits of the case.

In this context, it cannot be ruled out that in certain circumstances enforcing the pledge in accordance with a contractually agreed trigger event but when the secured debt is not yet due, might amount to abusive conduct. This could be the case if, for example, the enforcement were made with malicious intent by the creditor, or, more debatable, in case of a clear disproportion between the benefit achieved by the anticipated enforcement of the pledge and the loss/prejudice inflicted on the pledger, or if the pledge’s enforcement were diverted from its rationale (eg if the enforcement of the pledge was unrelated to covering the payment of the secured debt but aimed only at controlling the pledged assets).5

 Conclusion

The efficiency of Luxembourg financial collateral arrangements and the creditor-friendly environment for lenders, resulting from the Collateral Act, and confirmed in recent case law, are now solidly established.6 For example, we commented, in the June 2014 European Finance Litigation Review, on two decisions of the Luxembourg District Court endorsing case law that consistently protected financial collateral arrangements based on the Collateral Act from legal challenge and all kind of incidents and manoeuvres (including based on the existence of pending foreign proceedings) aimed at undermining the effectiveness of such arrangements.

In its decision of 15 July 2015, the First Judge of the District Court of Luxembourg sitting in summary proceedings matters confirmed the flexibility and friendly environment offered by the Collateral Act to lenders.

Footnotes

1. Order rendered by the First Judge of the District Court of Luxembourg sitting in summary proceedings matters (order N°356/2015, 15 July 2015)
2. Directive 2002/47/EC of 6 June 200

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