On 10 July 2020, the Luxembourg Parliament adopted a new law relating to professional payment guarantees (the “Law”). The Law creates a new type of personal guarantee granted in a professional context (the “New Guarantee”).
The main objective of the Law is to give a broader place to contractual freedom in the field of personal guarantees while preserving legal certainty, like what the amended law of August 5, 2005 on financial guarantee contracts does for movable property security in financial transactions.
The Law introduces a useful alternative to the traditional regimes of personal guarantees existing under Luxembourg law, namely the suretyship (cautionnement) and the first demand guarantee (Garantie à première demande) which have shown their limits in practice.
The main features of the New Guarantee are:
- the Law is applicable to any guarantee agreement by simply mentioning the choice of the Law in the agreement (to avoid any requalification by the judge);
- the parties are free to determine the features and the legal consequences of the guarantee (contractual freedom);
- the existence of the guarantee must be proved in writing (an electronic format is acceptable);
- the New Guarantee can be granted by any entity (whatever its form, including companies without legal personality ) and natural persons in the context of his/its professional activities;
- the New Guarantee can apply to all sort of claims or associated risks such as payment obligations or delivery of financial instruments and other assets, present, future or even potential assets or risks associated;
- the guarantor after payment of the guarantee will be subrogated to the rights of the beneficiary and will be able to exercise direct legal actions against the defaulting debtor (unless otherwise agreed);
- the guarantor cannot evade its obligations to pay even if the beneficiary or the third-party beneficiary is subject to a liquidation process or safeguard process or any equivalent (unless otherwise agreed).
The New Guarantee will be without contest an additional instrument serving the attractiveness of the Luxembourg business place by better answering the practical needs in financial restructurings.