Agefi Luxembourg - février 2025

AGEFI Luxembourg 20 Février 2025 Fonds d’investissement By Olivier M ARQUAIS , Counsel & Jeanclaude L ACATENA , Associate in Dispute Resolution, Loyens & Loeff Luxembourg sàrl N otes (“obligations”) are nego- tiable instruments of a collec- tive character conferring creditor rights to their holders (“obliga- taires”) (1) to the benefit of both the issuer (enabling it to ra- pidly secure funds) and noteholders (who receive guaranteed interest pay- ments during the life of the notes alongside the re- payment of the principal at thematurity date). (2) Raisingfundsbywayofissuingnotesorbondshas becomeverypopular inLuxembourgamongst com- paniesofallsizes,whetherpublicorprivate,irrespec- tiveoftheircorporateform.Since2016,allcommercial companies may issue notes, (3) but the collective char- acter of the debt renders themmore appropriate for companies seeking large amounts of funding. (4) Pro- visions applicable by default to the issuance of notes are provided in the LawonCommercial Companies of 10 August 1915 (“ LCC ”). However, these can be amended, derogated from and fully excluded de- pendingonthearticlesofassociationandtheissuance documentation. (5) Issuers may also subject the docu- mentation to foreign law. Rights, organization and representationof noteholders Noteholders are creditors of the company. They are entitled to the reimbursement of the amounts loaned to the company as well as interests, at the due date. The interest ratepayable to the creditor is anessential part of the contractual documentationwhich reflects thefinancialstandingoftheissuer,marketconditions, inflationratesandtheriskstakenbynoteholders. (6) In- terestsaretypicallypayableonayearly,semi-annually orquarterlybasis.Paymentdoesnotdependuponthe availabilityofdistributableassetsandremainsdueac- cording to the terms of the issuance documentation irrespective of the issuer’s financial performance, ex- cept in the event of bankruptcy. (7) Noteholdershave a righttoequaltreatmentwithinthesameclass( masse ), buttheissuermaygrantdifferentrights(e.g.different interest rates,maturitydates, early repayment condi- tions, etc.) todifferent classes. (8) Since the loan to the company is often long-term, the noteholdersaretiedtothefateoftheissueroveralong period. For this reason, the Luxembourg legislator granted noteholders certain information rights over the corporate activity andprovided for the organiza- tion of a class ( masse ) to allow their opinion to be heard. (9) Noteholdershoweverenjoymuchmorelim- ited information rights thanshareholders anddonot have large powers to inspect the company’s affairs. The provisions of the LCC (if applicable) allow them to take knowledge of the documents available to shareholders before the annual meetings (including accounts, management and auditor’s reports). Note- holders may attend general meetings, provide com- ments and ask questions, but they have no voting rights. (10) As creditors, noteholders do not enjoy the righttoconsulttheshareholders’register,whichises- tablished for the benefit of the company and of its shareholders only. (11) Subscribers of a company’s notes forming part of the sameissueareorganizedinaclass( masse ),whichdoes not ownassets of its ownanddoes not possess a sep- aratelegalpersonality.Aclassiscreatedforeachissue ofnotes (12) andallmembersofthisclassmeetingeneral meetingsthatbindthemembersbyamajorityvote. (13) Thecreationofaclassisintendedtofacilitatecommu- nication and decision-making in the issuer’s interest, while also benefiting noteholders. (14) For example, if the issuer is facingfinancial difficulties, thenotehold- ers’majorityvotemayallowtoquicklyrestructurethe conditions of the issuer’sdebt (e.g. reduce the interest rate, amend the conditions of repayment, extend the maturity date, etc.) (15) and may thus prevent a bank- ruptcyfiling.Thefunctioningofnoteholdersmeetings islargelyinspiredbytherulesapplicabletosharehold- ers’meetings of public limited companies. (16) When theprovisions of theLCCare applicable, these provide that each class of noteholders is represented by one or more representatives, who may be ap- pointed either at themoment of issuance of the notes by the competent organ of the company, (17) or during the lifetime of the notes by general meeting of note- holders. In this case, the general meeting of the class decides freely on the representatives’ powers and mandate, duration of appointment and remunera- tion. (18) Their liability is assessed in the same way as that of an employee representative or agent. (19) When representatives have not been appointed at the time of the issuance of the notes, or later on by general meeting, theLCC(if applicable) expresslyallows any interestedparty (e.g. the issuer itself, anoteholder or inprinciple any interested thirdparty), in case of ur- gency, to petition the District Court sitting in com- mercial matters and as in summary proceedings ( comme en matière de référé ), to request the appoint- mentofaclassrepresentativewithspecificpowers. (20) The President of the District Court shall decide fol- lowing the usual form and speed of summary pro- ceedings, which may take as little as a few weeks. Representativesmaybe revokedbygeneralmeeting of the class, or by the tribunal. For the most part, noteholders’ decision making power is transferred to these representatives. Their powers generally include the power to convene meetings, (21) totakeconservatorymeasurestoprotect the noteholders’ rights and interests within their class (22) and to perform certain management acts on behalf of the noteholders. (23) Class representatives may also represent and act in the interests of note- holders in legal proceedings, but only to enforce the resolutions taken by the general meeting of note- holders (and not to enforce noteholders’ individual rights).Thisispracticalfromaproceduralstandpoint since all noteholders would otherwise need to be joined to the proceedings. (24) Irrespective of the appointment of a class representa- tive,noteholdersretaincertainindividualrights,such astherighttothereimbursementoftheprincipaland of the payment of interests at the due date(s). When thecompanyisindefaultandfailstopaytheamounts due, a noteholder may seek to terminate the agree- ment ( résolution ) and/or seek damages, or force the payment by initiatingproceedings. (25) Inthiscase,theclaimantwouldbetheindividualnote- holder,butinprinciplenothingwouldpreventseveral noteholders from initiating proceedings as co- claimants against the same issuer to increase the size of the claim and their bargaining power. While it is often strategically beneficial to join forces to file a claim, claimants shall assess the jurisdictionof the tri- bunalcarefully,astheclaims(ifconsideredseparately) may fall under the jurisdiction of different courts de- pending on the amounts sought. To overcome this hurdle, claimants may argue the existence of a com- mon title ( titre commun ) and/or the strong connexity oftheclaims(e.g.sameissuancedocumentation,same cause of action, risk of conflicting decisions, etc.), to justify bringing thembefore the same court. When the relationship takes a contentious turnwith the issuer, all legal fees incurredby the issuer (e.g. re- sponding to formal notices, establishing a defense strategy, defending against legal proceedings, etc.) would be drawn from the issuer’s funds and may reduce the amounts ultimately available for pay- ments to noteholders. Creditors also want to con- sider the risk that – if faced with a large claim – the issuermayfile for voluntarybankruptcy leaving the creditors no alternative but to file a proof of claim andhopethattheappointedtrusteewillrealizesuffi- cient assets to reimburse the amounts due. (26) Anadditionalhurdlefacedbyinternationalcreditors is tobecomeaware indue timeof thebankruptcyfil- ing and of the issuance of a bankruptcy judgment, as they are under a strict 6-month deadline to file their proof of claim. While a recourse is available to extend this 6-month period, a claimant will have to demonstrate that it was objectively prevented from becoming aware of the bankruptcy and its absence of fault and negligence. This threshold is hard to meet if the publication requirements in the national journals (Wort and Tageblatt) aremet, and since the information of the bankruptcy is available online on theRegister of Commercial Companies. The class of noteholders does not cease to exist when the issuer is declared bankrupt. The judicial appointment of a noteholders’ representative (article 66NCPC) Difficulties may arise when noteholders need to ap- point a class representative to enforce their rights againstabadfaithissuerbutcannotpetitionthePres- ident of the District Court pursuant to article 470-4 LCC,becausetheprovisionsoftheLCCwere excluded. In this case, noteholders need to rely on the terms of the issuance documen- tation to seek to convene a general meeting and pass the necessary resolutions, which mayallowarecalcitrantissuertocreatevar- ious obstacles tomaterially prevent the or- ganizationof a generalmeeting. Thetermsandconditionsmayprovide that noteholders – holding a cer- tain percentage in nominal amount of the notes outstand- ing – can request the issuer to convene a general meeting, but the issuermay contest or be un- responsive. The contractual documentationmay allow note- holders to convene the general meeting requiring the involvement of service providers, (27) but their agree- mentsmay be terminated. In such cases, the needmay arise to formally appoint a class representative without delay to initiate legal proceedings, in Luxembourg or abroad, to preserve the noteholders’ rights. Any interested party (most often a noteholder or an asset manager representing theinterestsofitsinvestors)mayconsiderinitiatingan action based on article 66 of the Nouveau code de procédure civile (“ NCPC ”) to request its own ap- pointmentasclassrepresentativeandinitiateproceed- ings onbehalf of the class. Article66NCPC (28) provides anexceptional recourse in civil procedure in that it allows a requestingparty to ask the court to render a unilateral measure ( ex parte ), which is to say not further to an adversarial debate, eitherwhen the lawexpresslyallows for it or when the necessity dictates. With respect to the ap- pointment of a class representative, since the law does not expressly allow a unilateral measure, the requesting party shall demonstrate a very clear case of necessity. This criteria ismet eitherwhen it is nec- essary tocreateanelement of surprise,when it is im- possible to identify with certainty and precision the personsagainstwhomthemeasuresaretobecarried out, or in cases of urgency. (29) The courtswill make a narrow interpretation of these conditions, given the unilateral and exceptional nature of the procedure. The case law is clear that urgencymust be linked to the risk of serious and imminent harm requiring an immediate measure which cannot suffer from the delay caused by recourse to an adversarial proce- dure. (30) Inotherwords, urgencyamounts toaneces- sitywhich suffers no delay. In thehypothetical scenarioconsideredabove, the re- questing party may argue that it is objectively pre- vented from holding a general meeting to appoint a classrepresentative,andpresentclearandconvincing evidence of the harm suffered by the noteholders if the unilateral measure is not granted expeditiously (theurgencybeingassessedonthedayoftherequest). The requesting party may demonstrate that the im- mediate need for the measure (usually rendered within a fewdays) renders inappropriate another re- course,includingsummaryproceedings(leadingtoa decisionwithin a fewmonths). The court will likely not grant themeasure based on article 66NCPC if the summary proceedings do not offeranefficientrecoursebyreasonofadelaycaused bytherequestingparty. (31) Further,iftheappointment is imperative to initiate proceedings, the requesting party may be expected to prove, on the basis of the supportingdocumentation,thatitisanissueofstand- ing and admissibility of the claimbased on objective necessity, rather than an issue of personal conven- ience to thenoteholders (whichwould likelynot jus- tify doing awaywith an adversarial debate). Inanyevent in theseproceedings, as is the casewhen any unilateral measure is sought from the court, the requesting party is under a reinforced obligation of loyalty to bring forward complete and sincere infor- mationtothejudge. (32) Anegativeoutcomewouldnot damagetherequestingparty’sinterestsasthedecision wouldnotbenotifiedtothepersonagainstwhomthe measure is sought. The requesting party may file an appeal before the Court ofAppeal within 40 days. In caseofapositiveoutcome,theLuxembourglegislator provided that the person againstwhomthemeasure is carried out may exercise a retractation recourse against it, withinno specific timeframe. Recourse against the issuer’s debtors: the indirect legal action (action oblique) In principle, under Luxembourg law, contracts only createrightsandobligationsbetweenthecontracting partiesanddonotprejudiceorbenefitthirdparties. (33) Thus, noteholders have no direct right of action againstanydebtoroftheissuertoenforcetheirrights under the notes, or to compel any debtor to comply with its obligations, irrespectiveof the issuer’s failure to act. However, creditorsmay take certain steps on behalf of their debtor to recover amounts due to it. Article 1166 of the Luxembourg civil code provides thatcreditorsmay,undercertainconditions,exercise therightsoftheirnegligentdebtorsagainsttheirown debtors by way of an indirect legal action ( action oblique ). The issuance documentationmay expressly confirmthe right of noteholders to initiate such indi- rect legal action on behalf of the issuer and provide certain conditions of application. Luxembourg case law identified the following cri- teria to succeed in an indirect legal action: (34) (i) the movingpartymust have amonetary claimwhich is certain, liquidanddue against its debtor (themajor- ityviewis that thevalue of the claimmust bepurely monetary); (35) (ii) it must have a serious and legiti- mate interest in bringing its debtor’s claimforward, (iii) it must demonstrate that its debtor fails to act against its owndebtor(s) and that this failure is likely to endanger its rights and jeopardize its claim against its debtor (the issuer’s failure must be com- plete, as inappropriate action by the issuer such as initiating proceedings before thewrong court or on thewrong grounds, would likely create an obstacle to the indirect action), (iv) itmust have theobligation to act in order to preserve its interests as amatter of emergency, and (v) the rights exercisedby themov- ing party cannot be personally attached to the per- son of the debtor. By exercising an indirect legal action, a noteholder steps in the shoes of thenegligent issuer and initiates proceedings seeking to reconstitute and increase the size of the issuer’s estate. The creditor initiating this actionhasnopreferential right over its outcome: any amounts recoveredwouldnot allowpayment of the moving party directly, but rather return to the neg- ligent debtor, so as to enable the noteholders to ex- ercise their means of enforcement against the issuer’s assets.(36) If its powers andmandate allow for it, itmaybe appropriate for a class representative to initiate these proceedings since the indirect legal action benefits all creditors of the issuer. Procedural tactics in Luxembourg corporate and financial disputes: noteholders’ relief 1)CORNUG., Vocabulaire juridique ,13 th ed.,2016,PUF,p.710 2)MERLE,P., Droitcommercial.Sociétéscommerciales ,2024,Dalloz, p.448 3)Article100-14LCC. 4)STEICHEN,A., Précisdedroitdessociétés ,6 th ed.,2018,p.390. 5)Article100-14LCC 6) STEICHEN, A., Précis de droit des sociétés , 6 th ed., 2018, p. 397, para.512 7) STEICHEN, A., Précis de droit des sociétés , 6 th ed., 2018, p. 397- 398. 8) STEICHEN, A., Précis de droit des sociétés , 6 th ed., 2018, p. 397- 398. 9)J.P.WINANDY,Manueldedroitdessociétés,2019,p.551. 10)Article470-2LCC. 11)J.P.WINANDY,Manueldedroitdessociétés,2019,p.504. 12)Article470-2LCC. 13)Article470-10LCC. 14)STEICHEN,A., Précisdedroitdessociétés ,6 th ed.,2018,p.399. 15)Article470-13(5)et(6)LCC. 16)Forexampleregardingconveningordinaryorextraordinary generalmeetings,agendas,resolutions,etc.,Article470-11LCC; STEICHEN,A., Précisdedroitdessociétés ,6 th ed.,2018,p.400. 17) Their powers are defined by law and listed at article 470-5 LCC. 18)Article470-4LCC. 19)Article470-7LCC. 20)Article470-4(2)LCC. 21)Article470-9LCC. 22)Article470-5(1)(3)LCC. 23)Suchasacceptingthecollateraltosecurethecompany’sdebt, grantingthereleaseofmortgageinscriptions,supervisingtheex- ecution of the amortization plans and payment of interest, rep- resenting noteholders in bankruptcy and related proceedings, etc.,Article470-13(4)LCC. 24)Article470-5(1)(6)LCC. 25)STEICHEN,A., Précisdedroitdessociétés ,6 th ed.,2018,p.399. 26)Inaccordancewitharticle437oftheLuxembourgCommer- cialCode,acommercialentityisbankruptwhen(i)ithasceased itspayments( cessationdespaiements )and(ii)itscreditisexhausted ( ébranlementducrédit ).Thefailuretopayasingleundisputed,cer- tain, liquid and due debt is in principle sufficient to satisfy the first criteria, and courts often tie the loss of creditworthiness to the debtor’s cessation of payments (since one’s failure to pay its debtsastheybecomeduewouldlogicallynotinspiretrustineq- uity, debt or commercial partners). See also A-M. Nicolas, O. Marquais, CommonstrugglesfacedbyinternationalcreditorsinLux- embourg bankruptcy proceedings , International Insolvency & Re- structuringReport2021/22,availableat :https://lc.cx/h5oYm4 27) For example a paying agent may need to issue voting and blockingcertificatesallowingthenoteholderstoparticipateand vote. 28)Article66NCPCprovidesthat“ wherethelawpermitsorneces- sitydictatesthatameasurebeorderedwithouttheknowledgeofaparty, this party shall have an appropriate remedy against the decisionwhich adverselyaffects it. ” 29) T. Hoscheit, Le droit judiciaire privé auGrandDuché de Luxem- bourg ,2 e ed,PaulBauler2019,no.1493page786. 30) CA, 8December 2021 ; CA, 16 february 2022, noCAL-2022- 00150. 31)CA,17avril2023. 32)TAL(réf.),22may2020,TAL-2020-03229durôle. 33)Article1165oftheLuxembourgcivilcode. 34) CA, 8 mai 2019, Pas. 39, p. 536; Cass. 14 janvier 2021, N. 03/2021. 35)Thisislogicalsincethisactionseekstoincreasethesizeofthe debtor’sestate.However,itmaybearguedthatclaimswhichare not purely monetary may be pursued if they have, as a direct consequence,toallowassetsofmonetaryvaluetoenterintothe debtor’sestateforthebenefitofcreditors. 36)TAL,22 janvier2020,15/00097.