The strong protection of secured parties under pledge agreements governed by the Luxembourg law of August 5th 2005 on financial collateral arrangements, as amended, (the “Collateral Law”) has been further reinforced by the Luxembourg court of appeal (Cour d’Appel) (the “Court”), which confirmed in a judgment rendered 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 that the enforcement of a pledge agreement by way of a private sale cannot be reversed even if successfully challenged in court.
The Court gave its judgment in a situation where the appellant party being the insolvency receiver (curateur de la faillite de la société) (the “Appellant”) contested the legal validity of a share purchase agreement by which the pledgee sold the shares of the pledged company (the “SPA”) for a price of 4 euros (in total). Firstly, the Appellant invoked the inapplicability of the Collateral Law to this SPA for not qualifying as a collateral arrangement itself. Secondly, it further claimed that the SPA concluded for a very low price (vil prix) was fraudulent, which should make the SPA null and void under i) Article 445 of the Luxembourg Code de commerce applicable to insolvency proceedings, or ii) Article 931 of the Luxembourg Code civil related to donations, or finally iii) the general principle of law fraus omnia corrumpit (fraud invalidates everything).
Based on this factual matrix, the Court held:
- firstly, that the exemption from the provisions of the Code de commerce applicable to insolvency proceedings (in particular the hardening period rules) provided for by Article 20 (4) of the Collateral Law applies not only to collateral arrangement governed by the Collateral Law (such as a pledge agreement) but also to any action taken to enforce the collateral arrangement, such as the SPA in the case at hand;
- secondly, that the general rules on nullity of contracts are not applicable to actions covered under the Collateral Law;
- thirdly, that even if the enforcement of the pledge agreement by way of a private sale does not take place under the normal commercial conditions (conditions normales du marchés i.e., market value) as it must under Article 11 b) of the Collateral Law, the only remedy available is damages and not nullity, even in case of fraud.