Interview with Manuel Fernandez and Valerio Scollo, both Local Partner at GSK Stockmann in Luxembourg.
Luxembourg has been growing in importance as a legal hub for European debt financing transactions. One can cite the country’s solid legal framework, its openness and stability, and the effects of Brexit, but it is also internal momentum that is driving the increasing attractiveness of Luxembourg.
One enormous draw of Luxembourg is its legal framework, which is market-friendly by being at the same time flexible and certain. The Financial Collateral Law and the recent Professional Payment Guarantees Law, for example, provide a high degree of security for international investors and banks, and they encourage international practitioners to choose Luxembourg law for their international debt financing transactions.
On the one hand, these laws provide a great degree of flexibility to structure deals, and on the other hand, they grant legal certainty, which is investor-friendly. This is optimal for a primary creditor whose repayment is secured by Luxembourg instruments, even in case of insolvency of the debtor. This level of protection is rather unique.
While the Financial Collateral Law is limited to assets (i.e. bank accounts, financial instruments) which are located in Luxembourg, the Professional Payment Guarantees Law can be used as the law of choice for purely international transactions. In this sense, Luxembourg law could play the role of a new lex mercatoria, a common law for European jurisdictions, that has been made even more attractive in the wake of Brexit.
Amending the Luxembourg Securitisation Law
For years, the sector has been asking for an update of the current securitisation legal framework. Bill 7825, which would amend the Luxembourg Securitisation Law and address the concerns and needs of market practitioners, is now in the process of being approved. This will provide more flexibility to Luxembourg’s securitisation structures and could lead to Luxembourg becoming a hub for European securitisation transactions, with the potential for international reach outside of Europe.
Luxembourg has a huge competitive advantage because the country uses civil law, which provides a predictable and familiar legal framework for foreign market players, and because it is located in the center of Western Europe. Luxembourg is also a unique jurisdiction within Europe, open to the rest of the world, much due to the variety of languages mastered here and the mix of cultures.
Brexit: an unexpected positive outcome for Luxembourg
Before Brexit, EU institutions such as the EIB, EIF, and ESM were financing themselves with debt instruments governed by English law, and they were granting loans and guarantees also governed by English law and subject to English courts jurisdiction, which meant English courts were to rule over any such instruments. Following Brexit, this arrangement was no longer practicable, due to the fact that English courts are no longer part of the EU court system. The decision was thus taken to use Luxembourg law for bonds, for loans and for professional payment guarantees. That preference trickled down to the private sector. We now see an increasing number of bonds, loans and guarantees with a more European focus which are governed by Luxembourg law.
“It has become more difficult to enforce in EU countries judgments rendered in the UK. Luxembourg, being a member of the EU, benefits from all the private international law treaties and regulations within the EU. Luxembourg judgements are easier to enforce in another EU country”, says Valerio Scollo, Local Partner at GSK Stockmann.
Still, Luxembourg is trying to improve its legal framework for litigation. In September 2021, there was a reform of civil procedure which aimed to make it swifter, more reactive, and more efficient. In particular, the reforms aim to reduce the time frame for complex written procedures.
An emerging place for arbitration
While Paris and London will continue to be the preferred venues for arbitration, Luxembourg could very well become an alternate location. Private institutions have taken initiatives to try to develop Luxembourg in this regard.
“Luxembourg has very good cards to play. First of all, it is geographically central for a great number of people. Second, for years it has been gathering talent and knowledge in finance, law, economics, and accounting – as well as languages from all across the Union. Finally, Luxembourg has a great reputation for finance, which certainly benefits from its political and legal stability”, says Manuel Fernandez, Local Partner at GSK Stockmann.
There is also a bill, currently before Parliament, aiming to enhance and modernise the legal framework for arbitration. This is a sound investment in the future. Luxembourg will benefit a lot in terms of business and reputation if it can become a location for financial arbitration – and this would be nothing less than consistent with its current evolution and efforts.
Published on 07 December 2021 by Paperjam
Valerio Scollo, LL.M. (NYU), LL.M. (NUS)