An AIFM may be bound by a redemption order accepted by an unauthorised employee - and the redeeming investor becomes a creditor once payment falls due.
In a significant ruling for the Luxembourg investment funds industry, the Cour de cassation on 27 March 2025 upheld the decision of the court of appeal that the doctrine of apparent authority (Mandat apparent) can bind an AIFM to a redemption order accepted by an unauthorised employee, and that an investor who legitimately relied on that acceptance becomes a fund creditor once the payment deadline passes unpaid.
Background
The case arose from a redemption request submitted on 18 June 2020 by a foreign investor (the "Defendant") seeking to exit a specialised investment fund (the "SIF") governed by the Luxembourg law of 13 February 2007 on specialised investment funds, managed by a Luxembourg AIFM acting as gérant commandité (the "Claimant"). The District Court of Luxembourg had ordered the AIFM to pay the Defendant the amount representing the value of the redeemed units; the Court of Appeal confirmed that judgment.
The redemption request was submitted in accordance with clause 2.6 of Part II of the fund's Private Placement Memorandum, and was found to have been validly accepted by the AIFM - execution being due by end of October 2020 at the latest - giving rise to a claim for USD 8,887,407.26 plus late payment interest under Chapter 1 of the Luxembourg law of 18 April 2004 on payment deadlines and late payment interest (the "2004 Law"), running from 31 October 2020. The AIFM refused payment and challenged the decision.
The doctrine of Mandat apparent confirmed in a professional context
The AIFM raised four of its five grounds of cassation against the Court of Appeal's application of the Mandat apparent doctrine under Articles 1984 and 1998 of the Civil Code.
Under Article 1984 of the Civil Code, a mandate arises when one person empowers another to act on their behalf; it is formed upon acceptance by the mandatee. Under Article 1998, the mandator is bound by acts within the scope of authority given and is only bound beyond that scope to the extent of express or tacit ratification.
The Mandat apparent doctrine, developed by case law, qualifies the strictness of Article 1998(2) on grounds of equity and legal certainty. Under it, an entity may be bound vis-à-vis a third party when that third party could legitimately believe, considering the circumstances, that the person with whom it contracted had authority to bind the entity.
The AIFM's core argument was that the doctrine has a strict and narrow application , when the third party is a professional investor, requiring not only legitimate belief but also an absence of excusable error in failing to verify the agent's authority. The Cour de cassation rejected both grounds, holding that the submissions did no more than contest the Court of Appeal's sovereign assessment of the factual and evidentiary elements - an assessment within the exclusive power of the judges on the merits and beyond the Cour decassation's review.
This confirms a principle well established in Luxembourg case law: the sole condition for applying the Mandat apparent doctrine is the third party's legitimate belief in the agent's authority (Cour d’appel, 18 March 1993, No. 13 502). The professional status of the third party is one factor in the factual assessment; it does not create an autonomous legal barrier to the doctrine's application.
This position also aligns with the Court of Appeal's own formulation, as cited with approval:”both the quality of the parties and the factual circumstances authorised [the Defendant] not to verify further the reality or extent of the authority to represent [the AIFM]."
The investor/creditor distinction
The fifth ground raised a distinct and important issue under Article 11(1)(f) of the Luxembourg law of 12 July 2013 on alternative investment fund managers (the "AIFM Law"). That provision requires AIFM managers to always treat all AIF investors fairly and prohibits preferential treatment of any investor unless disclosed in the fund's management regulations or constitutional documents.
The AIFM argued that ordering payment to the Defendant amounted to preferential treatment over other investors in the same position. The Cour de cassation dismissed this ground: having established as a matter of fact that the redemption had been accepted and that payment should have been made before November 2020, the Court of Appeal was entitled to conclude that, due to the non-payment at that date, the Defendant no longer held the status of investor but had acquired that of creditor of the investment fund.
This distinction carries major practical consequences. The equal treatment principle under Article 11(1)(f) of the AIFM Law protects investors as investors. Once a valid redemption is accepted and the redemption proceeds become due and unpaid, the former investor steps out of the fund's investor pool and into the position of an ordinary creditor. Its claim is no longer subject to fund liquidity constraints, equal treatment rules, or the pro rata treatment applicable to investors - it is governed by ordinary debt law, including the late payment interest regime under the 2004 Law.
The Court of Appeal had articulated this clearly: "in November 2020, [the Defendant] is no longer an investor but a creditor of the Fund".
Next steps
Fund managers should promptly review their internal delegation and authority frameworks to ensure that only duly authorised personnel handle redemption requests and confirmations.
Where a redemption has been validly accepted, payment must be made within the contractual deadline. Overdue amounts may accrue late payment interest under the 2004 Law from the due date.
For investors, a validly accepted redemption order that goes unpaid gives rise to a debt claim governed by ordinary law, regardless of the fund's liquidity position.
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