Corporate Finance Insolvency Litigation – 18th September 2014

KLEYR GRASSO > Newsletter > Corporate Finance Insolvency Litigation – 18th September 2014

Corporate Finance Insolvency Litigation – 18th September 2014

Luxembourg Court of Appeal allows shareholders of a company under compulsory liquidation to choose their own liquidator

In a decision rendered this year on 5 March 2014 (almost unnoticed), the Luxembourg Court of Appeal has taken a quite unusual and unexpected approach as regards the determination of the liquidation modus and the appointment of a liquidator in compulsory liquidations.

Pursuant to article 203 of the law dated 10 August 1915 on commercial companies, as amended (“the Company Law”), the Luxembourg Commercial Court (the “Commercial Court”) may, at the request of the public prosecutor, order the dissolution and the compulsory liquidation of a company which pursues activities contrary to Luxembourg criminal law or which seriously contravenes the provisions of the Company Law (such as for example the obligations to file its annual accounts within the legally determined timeframe) including those laws governing authorizations to do business.

Upon ordering the liquidation, the Commercial Court must appoint a supervisory judge and one or more liquidators. The provisions relating to the compulsory liquidation of investment funds, securitization vehicles, banks or other professionals from the financial sector, are, with that regard, identical.

In the case at hand, a compulsory liquidation had been opened over a Luxembourg law governed company (the “Company”) due to the Company’s numerous violations of the Company Law (e.g. the Company had no longer any registered office, the directors and the auditor had resigned and the annual accounts had not been filed for several years). The Commercial Court appointed a liquidator and decided that the rules applying to the liquidation of  bankruptcies shall apply to the compulsory liquidation of the Company.

The Court of Appeal, although it decided that the compulsory liquidation ordered by the Commercial Court was justified, decided however that (i) given the specificity of the circumstances (the Company was holding a 49 % stake in an African business and had apparently no debts), the liquidation should take place by application of the common law rules (droit commun) on voluntary liquidations set forth in articles 141 to 151 of the Company Law in lieu of the bankruptcy rules, and that (ii) the liquidator (subject to supervision of a judge) does not need to be appointed by the Commercial Court but can be chosen and appointed by the shareholders of the Company.

Although uncommon, the change of the liquidation modus (i.e. application of articles 141 to 151 of the Company Law in lieu of the bankruptcy rules) does not call for any lengthy comments, as it is in line with its article 203 (3) of the Company Law which provides that the application of the bankruptcy rules is merely an option for the judges and that the liquidation modus may be changed.

It is rather the Court of Appeal’s decision to grant the shareholders of the Company the right to appoint and choose their own liquidator that is unique and amazing.

Indeed, article 203 (3) of the Company Law normally provides that in compulsory liquidations the liquidator is appointed by the court. The ratio legis behind this provision is that the rights of third parties are better protected if the compulsory liquidation is being handled by an independent (court-appointed) liquidator. Neither article 203 of the Company Law nor the parliamentary documents provide for an exception to this principle, and it is commonly understood by most, if not all, of the legal professionals in Luxembourg that article 203 does not leave the Commercial Court any choice.

It looks like compulsory liquidations have now been liberalized or privatized, at least in part, or that Luxembourg has now created “semi-compulsory” liquidations.

Had the shareholders in BCCI, Lehman, Landsbanki, the Madoff feeder funds or others known about that option, they would certainly have chosen to ask the Commercial Court to appoint their own persons of trust in order to deal with the liquidation of their businesses.

Too late for them, but others will now try. Is it not true that there are always special circumstances? However, the future will first need to confirm that this new approach of the Court of Appeal is really available as a new option for the liquidation of companies in Luxembourg.