Adding to the undoubted success of the Luxembourg law of 5 August 2005 on financial collateral arrangements (the “Financial Collateral Law”), Luxembourg’s appeal as an international hub for cross-border financing transactions is about to get a boost with the introduction of a new legislative tool: the professional payment guarantee (the “PPG”).
Given the vital role that legal security and contractual freedom play in enhancing a jurisdiction’s competitiveness in the financial world, the Luxembourg law of 10 July 2020 on professional payment guarantees (the “PPG Law”) shall be warmly welcomed. While until now, parties to cross-border financings could avail of a Luxembourg law accessory guarantee/suretyship (cautionnement) or a Luxembourg autonomous guarantee (garantie autonome), the PPG now provides an alternative guarantee which is more in line with the expectations of financial players.
What is a PPG?
The PPG is “an undertaking by which a person, the guarantor, undertakes towards a beneficiary to pay, at the request of the beneficiary or an agreed third party, a sum determined in accordance with the agreed terms, in relation to a claim or claims or the risks associated with them”.
In order to benefit from the PPG regime, the parties must explicitly refer to the PPG Law in the guarantee agreement. So long as the PPG is governed by the PPG Law, there is no risk of re-characterisation as a suretyship (cautionnement).
Key characteristics of the PPG
The key characteristics of the PPG regime are:
- Freedom of contract: The parties are free to set the purpose and terms of the PPG; unlike the autonomous guarantee, the PPG agreement can expressly make reference to the guaranteed claims in order to determine the terms of the PPG (e.g. regarding the amount and duration);
- Enforcement flexibility: A PPG can be enforced in any circumstances which are contractually agreed, even if there is no default in the enforcement of the guaranteed claims;
- Third-party beneficiaries: A PPG can be granted in favour of a person acting on behalf of beneficiaries, a trustee or a fiduciary, to guarantee the claims of present or future third party beneficiaries, provided that such third party beneficiaries are determined or determinable;
- Unless otherwise agreed,
- the guarantor cannot raise any defences relating to the guaranteed claims or risks;
- after payment pursuant to the guarantee, the guarantor shall have a personal claim against the principal debtor and shall be subrogated in the rights of the beneficiary up to the amount paid out under the PPG;
- the guarantor remains liable to the beneficiary for the PPG obligations, even if the original debtor of the guaranteed claims is subject to insolvency or other measures affecting the rights of creditors generally.
The PPG Law will enter into force as from 17 July 2020. In due course, we can expect to see the PPG as a common feature of Luxembourg law governed security packages, in particular where guarantors are located in Luxembourg. Indeed, we may even see, in the context of some refinancings, the amendment of existing guarantee agreements to make express reference to the PPG Law, thereby attaining the legal certainty afforded by that law.