A decade in the making
When the Luxembourg District Court (tribunal d’arrondissement) delivered its judgment on 23 December 2015 in the Hellas Telecommunications litigation, the case had attracted extraordinary attention, both for its international dimension – involving Luxembourg, the United Kingdom, Greece and the United States – and for the large sums at stake, with liability sought for up to approximately EUR 975 million plus interest. At its heart was a deceptively simple question: should dividend distribution rules apply to the redemption of convertible preferred equity certificates (“CPECs”)?
The District Court answered that question clearly and in the negative.
An appeal was promptly lodged against that judgment. On 1st June 2026, in a lengthy and highly anticipated ruling, the Luxembourg Court of Appeal dismissed the appeal brought by the liquidators of Hellas Telecommunications (Luxembourg) II SCA ("Hellas II") and confirmed, in all material respects, the conclusions of the first instance judges. The case may, however, yet reach the Court of cassation (Cour de cassation), which would be limited to reviewing points of law and would not revisit the factual findings made by the Court of Appeal.
A brief reminder of the facts
In 2005, a consortium of investors affiliated with or advised by two well-known international private equity firms (the "Sponsors") acquired the TIM Hellas group (later renamed WIND Hellas) through Hellas II, an acquisition financed in part through the issuance by Hellas II of CPECs in 2005 and 2006.
In June 2006, the Sponsors explored a sale of the group. Several potential acquirers expressed interest, but the bids received fell short of the Sponsors' own valuation expectations. Rather than proceeding with a sale, the Sponsors elected to restructure the existing shareholder debt by refinancing the CPECs through the issuance of third-party debt.
This gave rise to the central transaction in the litigation: the redemption, in December 2006, of a large number of the outstanding CPECs at a price exceeding their par value of EUR 1 each, thereby generating a substantial redemption loss for Hellas II. The redemption price was determined on the basis of the fair market value of the shares into which the CPECs could ultimately be converted and it was financed through the issuance of floating rate subordinated notes (the "Notes"), subscribed by third-party holders.
In February 2007, the Italian company Weather Investments S.p.A. acquired the entirety of the securities (shares and remaining CPECs) of Hellas Telecommunications (Luxembourg) S.à r.l., the parent entity of the group indirectly holding the equity interest in Hellas II and, ultimately, TIM Hellas.
In the subsequent years, the projections regarding the business evolution of TIM Hellas that had underpinned the sale to Weather Investments S.p.A. (and the CPECs redemption a few months earlier) did not materialise as planned, largely as a consequence of the global financial crisis in 2008 and, in particular, the Greek financial crisis, which inevitably impacted the telecommunications sector. Hellas II ultimately proved unable to service the Notes. It was placed under administration in the United Kingdom (where its centre of main interests had been transferred to) in late 2009 and subsequently into judicial liquidation in December 2011. It was in that context – and with some urgency, given that certain claims were on the verge of becoming time-barred – that the liquidators of Hellas II commenced proceedings later that same month, against the former CPEC holder, its general partner and the six individual managers of the latter, claiming restitution of the sums paid upon the CPEC redemption and damages.
Non-application of the dividend rules to a CPEC redemption
The most significant aspect of the Court of Appeal's ruling concerns the legal nature of CPECs under Luxembourg law and the consequences in terms of rules governing their redemption.
The liquidators of Hellas II argued that the CPEC redemption constituted a prohibited distribution of fictitious dividends, in violation of Articles 72-1 [now Art. 461-2] and 167 [now Art. 1500-6] of the Luxembourg law dated 10 August 1915 on commercial companies (the “1915 Law”). Those provisions restrict distributions to shareholders when the net assets of a company, as shown by its annual accounts, are or would become, as a result of such distribution, less than the amount of its subscribed capital plus non-distributable reserves.
The analytical framework for assessing the applicability of Article 72-1 of the 1915 Law was provided by the Hirmann judgment of the Court of Justice of the European Union (CJUE, Alfred Hirmann v. Immofinanz AG, 19 December 2013, Case C-174/12), in which the CJUE interpreted the underlying provisions of the second company law directive (directive 77/91/EEC of 13 December 1976, the “Second Directive”) and considered that "their purpose is to regulate only the legal relationships established between the company and its shareholders which derive exclusively from the memorandum and articles of association and that they are directed solely to internal relations within the company concerned".
Building on that framework, the Court noted that for the liquidators to succeed in invoking a violation of Article 72-1 of the 1915 Law, they were required to demonstrate that the CPEC redemption constituted a distribution made to shareholders "in their capacity as subscribers to equity shares representing the share capital". On appeal, the liquidators abandoned their first instance claim that CPECs were strictly shares and instead contended that only the substance of the redemption transaction mattered – which they attempted to characterise as equivalent to a dividend distribution in favour of the shareholders.
The Court firmly rejected this approach, noting that while a classification of financial instruments based on their economic substance may be a well-established practice in tax law, the liquidators had failed to establish that such a substance-over-form classification would have any place in commercial law, where, absent simulation, legal reality must prevail.
Consistent with established doctrine, the Court confirmed that CPECs governed by Luxembourg law are debt instruments of a purely contractual nature, established outside any statutory provisions, which confer on their holders neither voting rights in the shareholders' meetings, nor any right to a share of the profits distributed by the company to its shareholders. Although they may, under certain conditions, be converted into shares – and are therefore frequently described as "hybrid" instruments – the Court classified them on the basis of their legal nature under commercial law, not their economic substance. The accounting and tax treatment of CPECs under Luxembourg law – where they are recorded as debt on the liabilities side of the balance sheet – was cited by the Court as further corroborating context. Crucially, the Court emphasised that as long as CPECs have not been converted into shares, they constitute debt, and the regime applicable to money loans applies.
It followed that the prohibition on the distribution of fictitious dividends, being clearly linked to distributions made to shareholders in their capacity as subscribers to equity shares representing the share capital, does not apply to CPECs, which are mere debt instruments. The CPEC redemption accordingly fell outside the prohibition of Article 72-1 of the 1915 Law.
The request by the liquidators, formulated in the alternative, to refer a preliminary question to the CJUE on the meaning of "distribution" under Article 15 of the Second Directive was declared without object. The Court held that since the Hirmann framework provided a clear and satisfactory answer and the CPECs had been confirmed to be debt instruments, the question of the definition of "distribution" in the context of Article 72-1 of the 1915 Law did not arise.
The Court further considered, in direct connection with its analysis under Article 72-1, the liquidators’ argument that the CPEC redemption constituted a fraud on the law. The liquidators characterised the transaction as an elaborate but artificial mechanism – involving the issuance of CPECs, the adoption of terms and conditions governing their redemption at market value, and the use of borrowed funds to finance the repurchase at a price far exceeding par – designed with the deliberate aim of circumventing the prohibition on distributions of fictitious dividends laid down in Article 72-1 of the 1915 Law. They submitted that the exceptionally abnormal nature of the resulting structure was itself indicative of a fraudulent intent.
The Court rejected the fraud argument on multiple grounds. Most fundamentally, it reasoned that since Article 72-1 of the 1915 Law had been found inapplicable to CPECs, there was no mandatory rule capable of being circumvented, and the constituent elements of fraude à la loi were therefore not met. Beyond that, the Court rejected any suggestion of fraudulent intent, pointing to the fact that the transaction had been conducted with full transparency: the Offering Memorandum for the Notes expressly disclosed that their proceeds would be used to repay the deeply subordinated shareholder loans (i.e. the CPECs), and that document was addressed to professional or at least well-informed investors. The Court found no concealment, no subterfuge, and no clandestine manoeuvre, and accordingly confirmed the rejection of the plea based on fraus omnia corrumpit.
Hellas 2’s insolvency was caused by other factors
Beyond the legal classification of CPECs and its consequences, the Court of Appeal made a series of important findings on the facts that proved equally fatal to the liquidators' claims.
The liquidators argued that the redemption was inherently wrongful because Hellas II had borrowed money to redeem the CPECs – a debt that it subsequently proved unable to service – and that this chain of events directly caused its insolvency and eventual liquidation. The Court rejected this reasoning comprehensively.
The Court had regard to extensive evidence: stress tests commissioned by the Sponsors, together with the expert analysis of a consultant, both concluding that the debt created by the CPEC redemption was sustainable at the time of its creation, and that it was reasonably foreseeable that Hellas II would have the resources necessary to pay its obligations as they fell due. The Court further noted that valuations of the Hellas group carried out by a number of major investment banks in mid-2006 supported the conclusion that the CPEC redemption price was prudent, rather than excessive or fanciful.
The Court further noted that the sustainability of the debt was confirmed by events that followed its creation in December 2006 – all of which pointed in the same direction. In February 2007, Weather Investments decided to acquire the Hellas group for an equity consideration implying an enterprise value higher than the enterprise value on the basis of which the CPEC redemption price had been set two month earlier: that decision, the Court found, would certainly not have been taken had Weather considered that there was a real risk it would need to refinance the Notes. At the same time, the change of ownership triggered the contractual change-of-control provisions entitling the holders of the Notes to demand early redemption – yet they chose not to exercise that right; on the contrary, they consented to waive the change-of-control redemption provisions altogether, a further demonstration of their confidence in the ability of Hellas II to service the debt. The Court held that the sale to Weather in February 2007 itself broke any causal link that might otherwise have existed between the debt created in December 2006 and the opening of insolvency proceedings against Hellas II in November 2009: from the date of that sale, the defendants no longer bore any responsibility for the management of Hellas II's affairs, and the realisation of the financial projections that had underpinned the transaction was no longer in their hands.
In short, the liquidators having failed to establish a direct causal link between the alleged faults of the defendants and the damage claimed, their liability claims could not succeed, whether on the basis of contractual liability, the foreseeability of the damage at the time the debt was created not having been established, or on the basis of tort liability.
The discharge (décharge): a broad and effective waiver of liability claims
Alongside its findings on causation, the Court of Appeal confirmed a further, autonomous ground that would in any event have barred Hellas II's action against its general partner and sole manager: the discharge (décharge) granted by the general shareholders’ meeting in July 2007.
The general meeting, after adopting the annual accounts, votes by special resolution on the discharge of the management body. The Court recalled that the vote on discharge constitutes a ratification by the general meeting of the managers' conduct and has, as its essential effect, to preclude any subsequent exercise of the actio mandati – the action in contractual liability by which a principal holds its agent to account – against the discharged organ. In substance, the discharge amounts to a waiver by the company of its right to seek compensation for any damage caused by the management acts covered by it. As the Court endorsed, following established doctrine, “the injured party may always renounce its right to claim compensation, and, by that fact, any action to that end” (P. Wauwermans, Manuel pratique des sociétés anonymes, 3rd ed., 1921, n° 719).
The Court of Appeal confirmed – endorsing the first instance judges – that the scope of an effective discharge is broad. It bars the actio mandati whether the action is grounded in mismanagement or in faults of regularity consisting in a violation of the law or the articles of association. Crucially, the Court held that this principle applies regardless of the gravity or nature of the fault, and even where a violation of a rule of public order subject to criminal sanction is in issue: provided the general meeting acts with full knowledge of the circumstances, it may validly waive its right to invoke the liability of its management body. The only condition for validity is that the discharge be genuinely informed. In other words, the annual accounts must not contain omissions or false statements that would conceal the true position of the company.
On the facts, Hellas II’s general meeting held in July 2007 had specifically been informed of the loss for the financial year 2006 and of its origin in the CPEC redemption. The discharge was accordingly given with full knowledge of the actual situation of the company and of the management acts carried out and was held to be fully enforceable against Hellas II.
The liquidators' liability claims were also directed against the six individuals who composed the management board of the corporate manager. Before the first instance court, the liquidators argued that the discharge granted to the corporate manager could not extend to those individuals. The District Court rejected this argument, applying the organ theory (théorie de l'organe): since the individual managers had acted as the organ of the corporate manager, their acts were legally the acts of the corporate manager itself, and the discharge necessarily extended to them for all acts performed in the exercise of their functions. The Court of Appeal did not need to revisit that reasoning. It dismissed the claims against the individual managers on the same ground as those against all other defendants: the liquidators had failed to establish the direct causal link required between the alleged faults and the damage claimed. As the Court held, the liquidators could therefore not succeed in their claims – whether on the basis of contractual or tort liability – against any of the defendants.
Significance and outlook
The Court of Appeal's ruling is the most authoritative judicial statement to date on the legal treatment of CPECs under Luxembourg law. By confirming, at the appellate level, that CPECs are debt instruments to which the rules on dividend distributions do not apply, and by anchoring that conclusion firmly in the Hirmann framework of the CJUE, the Court has provided the Luxembourg financial market with the highest level of legal certainty yet achieved on this question.
For practitioners active in the Luxembourg structured finance and private equity markets, the ruling provides confirmation that the well-established market practice of treating CPECs as debt instruments rests on firm judicial foundations at both first instance and appellate level.
A further appeal to the Court of Cassation remains however possible.
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