24 July 2020

New Option for Luxembourg Guarantors: What are the Implications of the Professional Payment Guarantee?

The Luxembourg law of 10 July 2020 on professional payment guarantee (the PPG Law) makes significant changes to the toolkit available to creditors with much legal certainty, starting 17 July 2020. It also provides a potential breathing space to struggling businesses considering reorganisation options and financial restructurings without compromising creditor rights, and as such, the PPG Law contributes to the support of the economy. Here, we signpost some of the key characteristics of the professional payment guarantee (the PPG).

Why this is important

Luxembourg has long been established as the jurisdiction of choice for implementing large-scale, and often highly complex, cross-border financings and restructurings. This is, in part, because of the secured legal environment made available to creditors in Luxembourg. The law of 5 August 2005 on financial collateral arrangements (the Financial Collateral Law) bolstered the use of security interests conferring a right in rem (sûretés réelles) in Luxembourg. Now the PPG Law leaps forward, adding an additional level of flexibility with a new type of personal guarantee (sûreté personnelle), promoting (as for the Financial Collateral Law) financings, refinancings, and restructurings with a security that forms part of the continuity of the operations of borrower groups and with no specific hardening period to be considered.

The PPG Law complements the personal guarantee instruments already available under Luxembourg law: the suretyship (cautionnement), which is governed by the Luxembourg Civil Code, and the first demand guarantee (garantie à première demande), which has been created by commercial practice. Such existing guarantees are not without their drawbacks:

  • Suretyship: the guarantor can invoke the same remedies which are available to the debtor and which derive from the underlying obligation. The suretyship is an accessory to the principle obligation and cannot exist without a valid underlying obligation. It may not be contracted for an amount above that which is owed by the obligor. The provisions governing the suretyship can be stringent and have been criticised for being debtor-friendly.

  • First demand guarantee: while the guarantor cannot oppose to the secured parties any exemptions derived from the underlying obligation, there is an important risk for the first demand guarantee to be re-qualified as a suretyship, which leads to uncertainties.

The PPG Law addresses these issues and allows parties to pick and choose the attributes of the above regimes which they want to adhere to.

What is a PPG?

A PPG consists in a commitment by a guarantor, to pay to a beneficiary, an expressly indicated amount in relation to certain claims or the risks related to such claims (Article 2 of the PPG Law).

The professional payment guarantee introduced by the PPG Law can be granted by and to any type of legal entity (whether or not the structure has legal personality), public and financial institutions, and, after parliamentary discussion, natural persons. Moreover, all kinds of obligations may be secured by this new form of guarantee, whether or not present or future, pure or conditional.

Although limited to a professional context, the PPG Law has a wide range of applications.

Key characteristics

Contractual Freedom. The PPG Law will further appeal to commercial parties due to its contractual freedom as the terms of the guarantee instrument are freely agreed upon by the parties. The parties can agree:

  • The object and the terms of the PPG, including the terms and conditions of the guarantor’s payment obligation (Article 3 of the PPG Law);
  • The call events. The guarantee can even be enforced in the absence of a default of the claims concerned and realisation of the risks concerned; and
  • To expressly refer to the claims or risks guaranteed for the determination of the amount, terms and duration of the PPG.

Legal Certainty. Associated with the right to contractual freedom detailed above, the PPG Law also brings legal certainty to creditors. As long as the parties expressly opt for the new regime by referencing the PPG Law in their instrument, the provisions of the Luxembourg Civil Code on suretyship will not interfere with the agreed upon terms between the parties. Unlike the first demand guarantee identified above, there is no risk that PPG will be recharacterized into an accessory guarantee.

Third Party Beneficiaries. Similarly to the Financial Collateral Law, the PPG can be granted in favour of an agent or trustee acting on behalf of third-party beneficiaries (Article 4 of the PPG Law). This feature is particularly helpful in transactions with multiple secured parties. This will with no doubt strengthen the attractiveness of the Grand-Duchy as a location of choice for cross-border financial transactions.  

Insolvency Events. The PPG Law further provides that, unless expressly provided in a written agreement, the guarantor may not raise any defences arising from the guaranteed obligation. The guarantor will be liable under the guarantee even if an insolvency procedure or other reorganisation measures affecting the rights of creditors are initiated against the principal obligor of the underlying claims. This being said, after payment under the guarantee, the guarantor will be subrogated in the rights of the beneficiary and will have a personal recourse against the defaulting debtor.

No Registration Formalities. The PPG regime requires neither registration, nor the involvement of any notary or other authority. Similar to the Financial Collateral Law, there are therefore no filing costs and no undue delays arising from any such formalities. It simply requires an agreement between the parties to the transaction. Such agreement may be in written or electronic form.


The PPG Law is a welcome step that will add a new level of security to the implementation of financings and restructurings in Luxembourg. The contractual freedom, legal certainty and absence of re-characterisation of the guarantee agreed with creditors makes it clear that Luxembourg remains among the best in class to protect creditors’ rights and therefore preserve Luxembourg’s key position in large-scale financings and restructurings.  

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