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16 April 2019
Insolvency has no effect on enforcement
No possible nullity for breach of commercially reasonable terms
Standard protective rules are ineffective
Fraud cannot lead to cancellation of enforcement
On 16 May 2018 the Court of Appeal ruled on the enforcement process for a share pledge realised via the sale of shares in a Luxembourg company by the pledgee in a private transaction for a symbolic price, where the pledgor (a Luxembourg company) was subject to insolvency proceedings.
The Court of Appeal's decision covered the following points.
Under the Law on Financial Guarantees, a pledge is immune to any insolvency proceedings involving the pledgor. The Court of Appeal's decision specifies that this provision also applies to all enforcement acts relating to the realisation of a pledge. As such, in the present case, the share purchase agreement between the pledgee and the third-party purchaser could not be called into question as a result of the pledgor's insolvency.
The Court of Appeal stated that a potential violation of the rules applicable to a sale of pledged assets which had to be conducted according to the law and the pledge agreement at commercially reasonable terms may in no circumstances lead to the nullity of the sale in question. Rather, such a violation may result only in damages.
The rules which generally apply to the challenge of a transfer of ownership provided for in the Civil Code (eg, sale at a low price, lack of price and donation) do not apply to sale transactions carried out as part of a pledge realisation.
In terms of enforcement, neither guarantee contracts nor performance contracts can be rendered null and void, even in the event of fraud. The same is true if the pledgor is subject to insolvency proceedings.
The Luxembourg District Court had already confirmed – in a case concerning the realisation of a pledge by appropriation of the pledged assets – that even in the event of an abuse in the valuation of assets pledged for appropriation, the punishment of such abuse may in no circumstances result in the nullity of the appropriation.
In the above decision, the Court of Appeal appears to have definitively removed any possibility of effectively challenging a transfer of ownership of pledged assets in an enforcement scenario on the basis of fraud, including manifest fraud by the pledgee. This is in contrast to a 10 July 2013 Luxembourg District Court decision and the general practice to date, which has been to consider the facts on a case-by-case basis.
The Court of Appeal's decision has therefore once again strengthened the effectiveness of financial collateral arrangements governed by Luxembourg law.
For further information on this topic please contact Mathieu Laurent or Maurice Goetschy at Luther SA by telephone (+352 27484 1) or email (email@example.com or firstname.lastname@example.org). The Luther SA website can be accessed at www.luther-lawfirm.com.
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