Much has already been written regarding one of Luxembourg’s most media-covered trials of the last few months, just as much for its international dimension and the huge amount at stake (the liability sought of the summoned parties is up to EUR 975 million), as for its impact on the Luxembourg financial market, by submitting for the first time to the Luxembourg courts the question of the nature of the hybrid instrument, the so-called CPEC (Convertible Preferred Equity Certificate): should a CPEC be treated as debt or equity?
CPECs subject to Luxembourg law are debt securities of a purely contractual nature.
In a judgment dated December 23rd 2015 (n° 1648/2015, docket n°145724 and 145725) in a case between the liquidators of the company Hellas Telecommunications II SCA and two investment funds, being the ultimate beneficiaries of the structure, the District Court of Luxembourg, sitting in commercial matters, ruled that "CPECs subject to Luxembourg law are debt securities (...) of a purely contractual nature (…). From an accounting and Luxembourg tax perspective, they are also considered as debt and booked as such on the liabilities side of the balance sheet”.
The answer of the Luxembourg judge to this question, which is of particular interest for the Luxembourg financial industry, can reassure Luxembourg financial players by confirming an analysis which is well-established in practice in both Luxembourg and other countries familiar with this type of instrument. This decision gives some comfort to an industry which is all too often unfairly condemned these days.
The judgment also addresses many other procedural and legal issues, such as the effects of the registration with the commercial register, the criteria of a new application, limitations applicable to the discharge given to managers, the distinction between relative and absolute nullity, between public policy provisions and provisions simply mandatory, the consequences of the failure to appoint a permanent representative under article 51bis of the Luxembourg company law, the concept of corporate interest, the distinction between subjective and objective due cause, the notion of fraud, or the organ theory. The richness and completeness of the topics concerned make this a major piece of jurisprudence for 2015, which has not ceased to be spoken about. Indeed, an appeal has just been lodged against this judgment which will in turn allow the Appeal Court to rule on this interesting question.