Following the Madoff scandal, financial centres, including
Luxembourg, have had to face the consequences of the now
world-famous fraud. These consequences were initially mostly
In Luxembourg, several investors sued the custodian (UBS) of
the LuxAlpha and LuxInvest funds, which were solely invested in
Madoff funds, rather than going through the fund's liquidators,
appointed by the court.
In a very recent decision, the court ruled that the
investors were not entitled to individually seek compensation
directly from the custodian, UBS. We will briefly review this
decision and will also refer to other two LuxAlpha judgments of
the same day.
The main issue of this ruling is the question of plaintiffs'
capacity to sue, which was, according to the court, missing in
the cases at hand. The condition of capacity was considered on
The March 4 2010 decision raised the problem of judicial
liquidation. First, the court examined the capacity to sue in
light of the bankruptcy of the investment companies LuxAlpha
and LuxInvest. The court starts by reminding us that to file a
lawsuit, it is necessary to have the capacity and the interest
to sue. However, the two notions should be kept separate.
Indeed, a person may have a direct and personal interest in
bringing a lawsuit, but not the capacity to act. This is why it
is necessary to distinguish the nominative lawsuit for which
only certain categories of persons can sue, from the common
lawsuit which are opened, in principle, to all.
This issue was raised as LuxAlpha was declared to be in
judicial liquidation in April 2009, after the writ of summons
was served (on March 2009). In case of judicial liquidation,
the court-appointed liquidator represents the company as well
as the investors and creditors; as this is expressly stated in
the liquidation judgment of LuxAlpha.
Consequently, only the liquidators of a company may file
lawsuits in case of bankruptcy, for damages sought for a
collective harm (ie, a harm suffered by all shareholders
collectively as a consequence of harm suffered by the
In such a situation, the question arising is whether the
single investor or shareholder sue. Shouldn't only the
liquidators be enabled to sue to recover damages suffered
principally by the company in the name of all shareholders and
To determine the admissibility of the lawsuit, the court
took into consideration the date the writ of summons was served
upon the defendants.
In this judgment, as the writ was served prior to LuxAlpha
entering into judicial liquidation, the investors claim was
declared admissible, as no collective suit was at possible at
Nevertheless, the court held that plaintiffs had to justify
that their lawsuit could be considered as independent from the
one company, as represented by the liquidator being able to
file (ie, proving that a separate personal and individual
damage was suffered by the plaintiffs alone, which was not the
same as the one suffered by all shareholders).
The other two mentioned decisions deal with a writ of
summons served after the bankruptcy was filed.
For service of summons that occurred after a bankruptcy is
filed, the court expressly indicates that lawsuits, filed in
the aim of recovering the company's assets and related to a
collective damage, are exclusively the responsibility of the
liquidators, so that the shareholder can only file lawsuits
which are external to the bankruptcy procedure and do not aim
to recover damages suffered by all other shareholders in the
The plaintiffs, on their side, claimed they had a direct
action on the basis of article 36 of the law of 20 December
2002, unrelated with Luxembourg corporate law, and which would
therefore not be the object of a distinction between individual
lawsuits and corporate lawsuits.
The decision of March 4 2010 and the December 2002 law on
collective investment funds have far-reaching consequences. The
court examined in the same judgment if the shareholder had a
right to file a direct action based upon article 36 of the
December 20 2002 law against the custodian. The direct action
could be defined as the possibility for a creditor to request
the payment of the debt of his debtor directly from the debtor
of his debtor.
The first indication the court gave is that a direct action
constitutes a sui generis mechanism, which must be
expressly indicated by the legislator to be legitimate.
Because the law of December 2002 is adapted from the
European directive 85/611/CE, the court examined the Luxembourg
statute in light of the European Directive to see if there were
any discrepancies. According to the latter, mutual funds should
be distinguished from investment companies.
The European Directive for mutual funds states in article 9
that the custodian can be held liable, directly or indirectly,
through the management company. The law of 2002 states that the
management company is competent to question the custodian's
liability. If, after an injunction of a shareholder, the
company remains inactive, the shareholder may act against the
However, in regards to the investment company, such as a
Sicav, article 36 of the law of 2002 indicates that the
custodian is responsible, according to the laws of Luxembourg,
to the shareholders of the damages they suffered due to the
non-fulfillment or the wrongful execution of his
This law, (which refers to the laws of the country where the
investment company has its head office) contains nearly the
exact same words as the European Directive, even though the
Luxembourg law is a little more restrictive as the bad
execution must be wrongful.
According to the plaintiff's arguments, since the European
Directive remains silent on whether the lawsuit should be
direct or indirect, each European country has to give to the
shareholders the possibility to file a direct action against
The court disagreed, considering that the European
Directive's omission should not be interpreted in such a way.
The custodian is also liable towards the investment company
according to the laws of the country of the latter. And the
shareholder's lawsuit against the custodian is also subject to
this law and especially to the corporate laws of this
But does Luxembourg law allocate such a direct action to
shareholders of investment companies? For this issue, the court
refers to the mechanism of the direct action which requires two
conditions to be fulfilled for such a lawsuit to be
- The holder of the action must be the creditor of the main
- The sub-debtor must be the debtor of the main
The court, making reference to a French ruling of the
Highest Court of Appeal (Cour de Cassation, Civ Chamber 1, 2
October 2002), rules that a shareholder only has a financial
right to receive dividends and is not a creditor of the
investment company. Consequently, no direct action is possible
against the custodian.
The decision of 4 March 2010 and the problem of the ut
singuli action is also critical. In such a situation are
there available remedies to the shareholders against third
As the court reminds us, general corporate law should apply
to Sicavs as long as it is not derogated by the 2002 law. In
the two other decisions of the same day, the court added that
the restrictions brought to the shareholder's right to sue are
linked either to his capacity as shareholder, or to the
collective proceedings underway.
However, shareholders are not entitled to exercise a legal
right vested with the company. Indeed, no one can plead for
someone else without a valid power of attorney. Consequently, a
difference should be made between a damage suffered
individually by one or a few shareholders, and a corporate
The latter should result in a lawsuit filed by the company
itself, further to a favourable vote by the General
Indeed, no law allows the single shareholder to file a suit
by himself, for a damage suffered by the company, in case the
managers remain inactive.
While drawing up the draft of the Luxembourg law, two
respected Belgian scholars, Mr Nyssens and Corbiau specifically
excluded such a possibility in limited liability companies.
Such a possibility is on the contrary available in France and
However, the shareholder still has the opportunity to file a
lawsuit for an individual and personal damage suffered by him
(ut singuli). According to certain scholars, the
individual damage which can be compensated is the one that
impacts the shareholder's assets directly and which at the same
time doesn't affect the assets of the company, or impoverish
Consequently, the admissibility of such an ut
singuli lawsuit is conditioned by the proof of a personal
damage by the single shareholder, and case law even makes it
compulsory to prove this separate damage.
In the present litigation, the damage suffered is the loss
of value of the shares of the investment company. The court
qualifies this damage as a damage suffered by the company
itself, the prejudice suffered by the shareholder being only a
corollary of the corporate damage. Consequently, the lawsuit is
inadmissible as it should be the object of a corporate lawsuit
filed by the company itself. The court here refers directly to
French case law.
"Regarding the additional damage, ie, the damage inflicted
to the applicant's image due to the publication in the press,
the court considers that in addition to proving a personal and
individual prejudice, the shareholder has to prove a causal
link between the alleged damage and the alleged faults."
Luxembourg courts refer, in such a situation, to the theory
of the appropriate causality: the damage should be the direct
consequence, the necessary continuation of the fact and the
harmful act. For this, the causal chaining should be examined:
if an event interfered in the chaining, a breach intervened,
and the damage could not be repaired, it becomes indirect.
According to the court, the announcements in the press and
the revelation of the scandal caused the alleged additional
damage to the applicant. However, the latter doesn't prove that
this prejudice is individual and personal and, consequently,
separate from the one suffered by the company. Moreover, the
applicant doesn't prove that this prejudice has a direct causal
link with the alleged faults of the defendants. Therefore, this
particular claim has been declared inadmissible.
These judgments are issued by the commercial court. As such,
they are by law subject to appeal, which would be heard by the
Court of Appeals.
About the author
Fabio Trevisan qualified in Luxembourg in 1993, New
York in 1993 and Milan in 2001. He has degress from
MCJ, NYU School of Law, 1992 ; Laurea in
Giurisprudenza, Università degli Studi, Milan,
Trevisan's specialist practice areas include
construction and real estate, general commercial,
litigation and arbitration.
Trevisan has been a partner at Bonn Schmitt Steichen
since 2001. He was made an associate in 1993. He speaks
fluent English, French and Italian.
The firm is a member of Lex Mundi.
Bonn Schmitt Steichen
22-24, rives de Clausen L-2165 Luxembourg Mailing: BP522
Tel: +352 45 58 58 Email:firstname.lastname@example.org