Luxembourg: The Asset Tracing And Recovery Review - 6th edition - Luxembourg Chapter 2018

Last Updated: 25 October 2018
Article by François Kremer and Ariel Devillers

I OVERVIEW

Luxembourg is a civil law jurisdiction and has experience in fraud cases. Its entities are often involved in international groups of companies, making Luxembourg vulnerable to company fraud and other fraudulent schemes that make use of complex legal set-ups. Its mature banking and funds industry also attracts white-collar crime. Some major international frauds, such as the Madoff scandal, have hit the Grand Duchy, and many fraud cases have been tried before the courts in Luxembourg.

II LEGAL RIGHTS AND REMEDIES

Claimants will have to rely on a wide range of criminal and civil remedies to conduct successful proceedings for recovery or compensation. Although the Criminal Code (CrimC) and other statutes regulate certain peculiar cases of fraud, there is, strictly speaking, no specific compensation for fraud victims other than restitution of the victims' defrauded property and the common civil liability rules to recover damages.

I Civil and criminal remedies

Civil remedies

A fraud victim will usually pursue compensation through a liability suit for the recovery of damages that have been caused by an act of wrongdoing. A claimant will be required to establish an act of wrongdoing (or fault), damages and causality.

Fraud victims can use contractual liability and tort2 to allege, inter alia, breaches of contract, contractual fraud3 and serious misconduct. In some cases, an abuse of right4 may also support a fraud claim.

If the fraud was carried out by directors of a company in which the victim is a shareholder, the claimant may choose to base its liability suit on the provisions for directors' liability of the amended Law of 10 August 1915 on commercial companies (LCC) if it can show corporate mismanagement or a violation of the LCC, accounting rules or the company's articles of incorporation. In most cases, the company will have to file suit. In a société anonyme, a société européenne, a société en commandite par actions and a société par actions simplifiées, it is possible for a shareholder or a group of shareholders holding at least 10 per cent of the voting rights to bring shareholder derivative suits against company directors.

A claimant is only entitled to lawful, certain, direct and personal damages. Punitive and symbolic damages are generally excluded. If the suit is based on a breach of contract, the alleged damages should also have been foreseeable at the time of conclusion of the contract. Other civil-law remedies can be used to recover fraud amounts. A victim can, for example, initiate a de in rem verso action (unjust enrichment) to claim restitution and compensation. It will have to demonstrate, inter alia, that it cannot rely upon any other remedy to recover the amounts sought.5

Another option is to claim recovery of undue payments6 if the fraud involved any form of payment.7 Interest and other amounts yielded in this respect may also be claimed back if the payee acted in bad faith.

One final remedy is to have a contract voided based on contractual fraud or on the legal maxim fraus omnia corrumpit, in which case restitution may be claimed.

Criminal liability

Under Luxembourg law, both natural persons and legal entities can be held criminally accountable, and there are a number of fraud schemes that are considered offences according to the CrimC and other statutes.

Abuse of trust and swindle are commonly employed. Abuse of trust8 can serve to establish a fraud claim if the fraud was performed by dissipating or misappropriating certain things that were given through the abusing of trust. If the fraudster cheated someone out of his or her property while employing fraudulent means, he or she may be accused of swindle.9 As concerns corporate finance, Article 1500-3 LCC considers that anyone who caused payments, subscriptions, share acquisitions, bonds subscriptions or acquisitions of any other kind of corporate title through fraudulent means is guilty of swindle.

The offence of misuse of corporate assets, which is the act of directors misusing the corporate estate in their personal interest, is a specific form of abuse of trust.10 According to Luxembourg case law, it should be established, inter alia, that the directors knowingly used the assets or the credit of the company for personal gain contrary to the corporate interest.11 Directors can also be criminally liable for committing an abuse of power or a misuse of their votes where they used their influence to the detriment of the corporate interest for personal profit.12

Fraud victims might also wish to direct their claims against the persons who were directly or indirectly involved in the fraud by filing a complaint for aiding and abetting.13 Concealing things obtained through a criminal offence is also considered a fraud,14 and victims can rely on this offence to claim compensation from the persons who aided the fraudster by concealing the product of the fraud.

Compensation for victims will occur through the standard rules on civil liability (i.e., a claim for damages). The wrongdoing will be shown by demonstrating the criminal offence. Compensation can either be sought before the criminal courts by becoming a civil party to criminal proceedings, or by requesting damages from the civil courts through civil proceedings. In the latter case, the claimant's civil action can only progress once the criminal proceedings are concluded. A victim can always fall back on the civil courts for compensation if it began by filing a claim for damages with the criminal courts, but once the victim has initiated proceedings to claim damages before the civil courts, it can no longer become a civil party to the criminal proceedings.15

ii Defences to fraud claims

A number of defences can serve to resist fraud claims in court. It will generally be argued that the conditions required for a successful fraud claim have not been established. The fraudster will usually try to have the suit dismissed on allegations that certain formal requirements for bringing a lawsuit have not been met or are defective. Often, defendants will try to argue that the claimant has no standing or authority to sue. In this particular context:

  1. case law considers that shareholders are not creditors of a company and that they cannot therefore resort to creditor remedies (such as the derivative claim or the actio pauliana);
  2. defrauded shareholders are only allowed to act individually against directors if they can show that they suffered strictly personal damages that have not been sustained by the company as a whole (i.e., by all the shareholders);
  3. directors that have been discharged for the financial year during which the alleged misconduct occurred are usually immune to liability claims from the company;
  4. mutual fund (an investment fund organised as a contractual vehicle) has no legal personality, meaning that proceedings can only be brought by (and against) its management company acting in that capacity; and
  5. according to current case law, a claimant cannot bring a contractual claim against a defendant with whom it has no direct contractual relationship, unless it can show that it is indirectly linked to the defendant via a group of contracts through which property is transferred.16

A defendant to a fraud claim can make the suit disappear entirely by arguing that the limitation period has expired. Liability claims are normally covered by the common 30-year statute of limitation,17 but the commercial 10-year limitation period may apply18 where the relevant acts are commercial in nature or hybrid commercial–civil acts.

A five-year statute of limitation applies to liability suits against directors.19 The Court of Appeal has, however, held that the common limitation period of 30 years applies to a compensation claim where fraud or a criminal offence was committed by the directors.20 Under Luxembourg criminal law, offences are categorised according to their sentencing tariffs and frauds are either crimes or felonies. Where the fraud is a crime, it can no longer be prosecuted if 10 years have passed since the fraud was committed.21 If the fraud is a felony, it should be prosecuted within five years.22

Footnotes

1 François Kremer is a partner and Ariel Devillers is a senior associate at Arendt & Medernach.

2 Article 1134 or 1382 and 1183 of the Civil Code (CC). A fraud victim cannot bring both a claim for tort and a claim for breach of contract simultaneously. It can, however, make a primary and a separate secondary claim (conditional upon the first claim being dismissed).

3 Article 1116 CC.

4 Article 6-1 CC.

5 Olivier Poelmans, Droit des obligations au Luxembourg, p. 324 et seq., Nos. 256–261.

6 Article 1376 CC.

7 'Undue' means that no prior claim was mature, or if a prior claim did exist, the payer paid anyone but his or her creditor, or that the payee received a payment from anyone but his or her own debtor.

8 Article 491 CrimC.

9 Article 496 et seq. CrimC.

10 Article 1500-11 LCC.

11 David Giabbani, L'abus de bien sociaux: état de la jurisprudence, JurisNews Droit pénal et procédure pénale Vol. 1 – No. 3/2012.

12 Article 1500-11 LCC.

13 Article 66 CrimC.

14 Article 505 CrimC.

15 Georges Ravarani, La responsabilité civile des personnes privées et publiques, 3rd edition 2014, No. 1390, p. 1298.

16 Pascal Ancel, Contrats et obligations conventionnelles en droit luxembourgeois, e-pub, No. 1049 et seq.

17 Article 2262 CC.

18 Article 189 ComC.

19 Article 1400-6(4) LCC.

20 CA, 5 November 2013, No. 539/13 V, JTL 2014, No. 33, p. 78.

21 Article 637 of the Code of Criminal Procedure (CCP).

22 Article 638 CCP.

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