In our January 2019 Newsletter we reported on a judgment rendered by the Luxembourg court of appeals (Cour d’Appel) (the “Court of Appeals”) on May 16th 2018 (No. 63/18, No. 39827) and published in the Journal des Tribunaux de Luxembourg (issue No. 60) on December 5th 2018, according to which the enforcement of a pledge by a pledgee cannot be subsequently declared null and void by a court, even if successfully challenged on the basis of the application of the general principle of law fraus omnia corrumpit (fraud invalidates everything) (the “2018 Case”).
The doors, having initially been closed by the Court of Appeals in 2018 Case, by depriving the pledgors the right to invalidate the enforcement actions performed by the pledgee under Article 11 of the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, (the “Collateral Law”), the Luxembourg Cour de Cassation (the “Supreme Court”), in a recent judgment rendered on February 14th 2019 (No. 27 / 2019, No. 4022), might have reopened them again.
The decision of the Supreme Court has been handed down in a case initially brought by the pledgor for restitution of all the shares appropriated by the pledgee in the enforcement of its pledge (governed by the Collateral Law) over these shares (the “2019 Case”). Both the Luxembourg Tribunal d’arrondissement (District Court) and the Court of Appeals found in 2019 Case that the lender had in fact induced the borrower, who was already in default under the existing unsecured facility agreement, to enter into a new secured refinancing facility which the lender accelerated right after it informed the borrower that the loan had been granted to it. As a result, lender’s actions constituted an “abus de droit”, i.e. an unlawful use of a contractual right.
Unlike the Court of Appeals, in 2018 Case, the Supreme Court decided, in 2019 Case, that the Collateral Law does not prevent a court from declaring void an appropriation of pledged assets by the pledgee and ordering the restitution of such assets to the pledgor if the enforcement of the pledge is tainted by an “abus de droit” or fraud. Given the authority of the Supreme Court, it is likely that this result will be the prevailing legal rule.
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