EU Mobility Directive: Key considerations for creditors in Luxembourg related financings

This article was originally published in the AGEFI Luxembourg on 19 May 2025 and is reproduced with permission from the publisher.

 

Directive (EU) 2019/2121, known as the "Mobility Directive," amends Directive (EU) 2017/1132 to harmonize rules on cross-border conversions, mergers and divisions in the EU (Directive).

Luxembourg transposed the Directive through the law dated 17 February 2025 (Transposition Law), which entered into force on 2 March 2025. The law applies to cross-border operations whose draft terms are published from 1 April 2025 onwards.

The Directive harmonizes the legal framework among EU member states regarding cross-border operations (such as mergers, demergers and transformations) and enhances companies' freedom of establishment. It also introduces measures to protect creditors, particularly concerning enforcing security interests and insolvency risks.

This article discusses the considerations creditors should take into account when a Luxembourg entity is involved.

 

Enhanced transparency and creditor protections

Under the Transposition Law, Luxembourg companies involved in cross-border operations have to inform their creditors of proposed safeguards – such as guarantees (cautionnements or garanties) and pledges (gages) – included in the common draft terms (projet commun) (CDT). They have to provide this information at least one month before the extraordinary general meeting (EGM) approving the contemplated cross-border operation.

Creditors can submit observations at least five business days before the EGM. If creditors find the proposed safeguards inadequate, they can apply for additional protections, provided that their claims arose before the publication of the CDT and are not yet due at the time of the publication of the CDT.

To seek additional safeguards, creditors must (i) notify the company of their intent to request (additional) security interests, (ii) demonstrate that the proposed safeguards are insufficient and that the operation could jeopardize claim enforcement, and (iii) file a claim within three months following the publication of the CDT in the Recueil Électronique des Sociétés et Associations to the president of the district court sitting in commercial matters and in summary proceedings (président de la chambre du tribunal d'arrondissement siégeant en matière commerciale comme en matière de référé) in the district in which the company has its registered office. Filing a claim doesn’t suspend the cross-border operation's implementation or effects.

 

Navigating the impact on the Luxembourg security package

Luxembourg's financial collateral arrangements, governed by the law of 5 August 2005 (Collateral Law), are known for their creditor-friendly features, offering straightforward and effective enforcement mechanisms, making Luxembourg a prime jurisdiction for debt financing.

This is why creditors typically choose to request a Luxembourg security package to secure their financings. So what happens if one of the parties to the security package undergoes a cross-border operation?

The impact of cross-border operations on financing arrangements depends on the nature of the pledged assets and the parties involved. We analyse three types of security, assuming that the lex rei sitae is Luxembourg law.

Firstly, regarding pledges over bank accounts, if accounts are located in Luxembourg, Luxembourg law applies, regardless of the pledgor or pledgee's involvement in the cross-border operation.

Secondly, with respect to pledges over receivables, cross-border operations involving any party might not directly affect the governing law of existing receivables. But future claims might be governed by the law of the jurisdiction where a party relocates post-operation.

Thirdly, in relation to pledges over shares or units, a distinction needs to be made between the cases where a pledgee, a pledgor or an entity whose shares/units are pledged is part of the cross-border operation. If a pledgee is the party involved, the impact will be limited as the location of the secured assets will not change.

If a Luxembourg pledgor undergoes a cross-border operation, it's crucial to review the pledge agreement. These agreements often prohibit transferring obligations without the pledgee's consent. Failure to obtain the pledgee's consent in respect of the cross-border operation could breach the agreement, potentially triggering liability and enforcement actions.

If a Luxembourg entity whose shares/units are pledged is part of a cross-border operation and relocates to another jurisdiction, the governing law of those shares/units should change. This shift could affect the creation, perfection and enforceability of the secured creditor's right in rem. To mitigate this risk, creditors might exercise voting rights to oppose the cross-border operation.

 

Preserving creditor protections with Double LuxCo structures

A Double LuxCo structure plays a pivotal role in Luxembourg financing for several reasons. By using a Double LuxCo structure, parties can ensure they maintain the centre of main interests (COMI) in Luxembourg, ensuring the continued applicability of Luxembourg law, and that security interests remain enforceable.

This structure also offers enhanced protection for secured creditors against insolvency risks. It also acts as a safeguard against hostile attempts to relocate the COMI to jurisdictions with more debtor-friendly insolvency laws.

Luxembourg's framework is advantageous for creditors as the Collateral Law in Luxembourg is designed to be bankruptcy remote. This means that security interests established under the Collateral Law – such as the security package referenced above – are enforceable even if the debtor undergoes insolvency or reorganization proceedings. These features make Luxembourg a highly compelling jurisdiction for financing arrangements, offering both robust protection and flexibility to creditors.

With the transposition of the Directive into Luxembourg law, a critical question arises: What happens if one of the companies in a Double LuxCo structure is involved in a cross-border operation?

Cross-border operations could dismantle the Double LuxCo structure, leaving only a single LuxCo in place and potentially exposing creditors to significant risks such as the loss of the Luxembourg’s jurisdictional benefits (ie strong creditor protections and efficient enforcement mechanisms under the Collateral Law) and the shift in the COMI to a less creditor-friendly jurisdiction.

As a result, the company could become subject to foreign insolvency proceedings, possibly triggering moratorium on enforcement actions and reducing creditor control over restructuring processes. Cross-border operations could introduce some legal uncertainty and procedural complexity, delaying or complicating the enforcement of secured assets if they're moved out of Luxembourg.

It's essential that the documentation governing the Double LuxCo structure includes strong clauses to address potential cross-border operations, prohibiting the shift of the COMI to a foreign jurisdiction. Examples of such clauses include representations confirming that the COMI is in Luxembourg, undertakings prohibiting the COMI migration, or covenants including reporting requirements.

 

Understanding the recognition of foreign judgments in Luxembourg

Another issue to be considered is whether a foreign court refusing a cross-border operation and issuing a judgment blocking would be recognized and enforceable in Luxembourg.

In the EU, judgments rendered in one member state are generally automatically recognized in the others without the need for a special procedure, in accordance with Regulation (EU) No. 1215/2012.

In non-EU countries, and in the absence of a bilateral or multilateral agreement, an exequatur may be needed. This procedure involves a Luxembourg court reviewing and declaring the foreign judgment enforceable within its jurisdiction.

Recent case law has made a distinction between acts requiring a law enforcement authority and private acts.

The Luxembourg court clarified that only enforcement actions that require the official involvement of public authorities necessitate prior exequatur of the foreign decision. In other words, such coercive actions can only proceed once the Luxembourg courts have recognized and validated the foreign decision.

In contrast, private actions (eg transcription of the release of a pledge or the transfer of shares in a company’s shareholders’ register), even if they carry legal weight, don’t need prior exequatur. These actions, legally binding, can be taken directly without the need for court validation of the foreign judgment.

 

Key takeaways for creditors

When engaging in financing transactions involving LuxCos, or when a LuxCo involved in a financing participates in a cross-border operation, creditors should pay close attention to:

• Proactive engagement: Creditors should actively monitor proposed cross-border operations and assess the adequacy of offered safeguards.
• Legal recourse: If safeguards are deemed insufficient, creditors have the right to seek additional protections through the appropriate legal channels.
• Structural vigilance: Maintaining structures like Double LuxCo can provide enhanced protection against jurisdictional shifts and insolvency risks.
• Judgment recognition: Understanding the nuances of foreign judgment recognition in Luxembourg is crucial, especially in cross-border disputes.

Cross-border operations entail some complexities, but with the appropriate structuring, both the cross-border operations parties and their creditors can achieve their goals and protect their positions.