Purpose of the amendment
The draft law 7791, submitted to the Luxembourg Parliament (Chambre des Députés) on 16 March 2021 (“Draft Law”) aims to clarify whether the rules regarding financial assistance contained in the Luxembourg law of 10 August 1915 relating to commercial companies, as amended (“LSC”) shall apply to private limited liability companies (“SARL”).
Article 430-19 of the LSC currently includes a prohibition for a company to “directly or indirectly, advance funds or make loans, or provide security with a view to the acquisition of its shares by a third party” except under certain restrictive conditions.
This article applies to public limited liability companies (“SA”) and corporate partnerships limited by shares (“SCA”) whereas no similar provisions have been provided in the LSC regarding the SARL. However, Article 1500-7 (2) of the LSC providing for criminal sanctions in case of violation of the provisions regarding financial assistance refers not only to the company’s shares (actions) of an SA but also to the corporate units (parts sociales) of an SARL.
Such reference to corporate units (parts sociales) in Article 1500-7 of the LSC has given rise to confusion and created legal uncertainty as to the possible applicability or not of the financial assistance rules to the SARL. Indeed, some practitioners have argued that such rules were not applicable to SARL in the absence of any specific provisions in the LSC and bearing in mind that criminal sanctions must always be interpreted restrictively, while others favoured a more conservative approach arguing that the financial assistance was prohibited for the SARL on the basis of criminal provisions of Article 1500-7 (2) of the LSC.
The question is not neutral in terms of practical implications. If financial assistance rules are indeed applicable to the SARL, this would mean that no SARL could grant loans or secure the acquisition of its shares by a third party without complying with the strict conditions laid down in article 430-19 of the LSC. Otherwise, the management of such SARL may be criminally liable for non-compliance with these rules.
Clarification provided in the Draft Law
The Draft Law aims to put an end to the on-going legal debate triggering uncertainty on the applicability of the financial rules to the SARL.
In the explanatory statement and commentary to the Draft Law, it is mentioned that the reference in Article 1500-7 (2) of the LSC to corporate units (parts sociales) is a mere error, which shall be rectified. In fact, during the reform of the LSC in 2016 it was initially proposed to extend the financial assistance rules to SARL, which is why the reference to corporate units (parts sociales) was included in the text of Article 1500-7 (2).
Finally, although such proposal of extension to SARL of financial assistance rules has been rejected, the authors of the law omitted to delete the corresponding reference in Article 1500-7 (2) of the LSC. Therefore, it is proposed to amend Article 1500-7 of the LSC and delete any reference to corporate units (parts sociales).
If adopted by the Luxembourg Parliament (Chambre des Députés), the proposed amendment will finally provide the much needed answer to the question of applicability of financial assistance rules to the SARL. In the meantime, legal practitioners will likely already rely on the Draft Law as sufficient grounds for concluding that financial assistance provisions are not applicable to the SARL.