Financial assistance prohibition as set out in the Luxembourg Companies Law not applicable to PLLCs

Reference is made to our previous regulatory finance update of 25 March 2021  where we discussed the approval of the bill of law (No 7791) which intended to remove an uncertainty regarding the application of the financial assistance prohibition to private limited liability companies incorporated under Luxembourg law (S.à r.ls).

Uncertainty regarding the application of the prohibition to private limited liabilities companies in the past

In this respect it is worthwhile recalling that among Luxembourg practitioners there has always been the common understanding that the financial assistance prohibition foremost applies to Luxembourg public limited liability companies (sociétés anonymes) including European companies (sociétés européennes) and corporate partnerships limited by shares (société en commandite par actions). This is clearly spelled out in article 430-19 of the Luxembourg Companies Law which provides that such companies are not allowed to, directly or indirectly, advance funds, extend loans or provide security with the aim to facilitate the acquisition of the companies' own shares by a third party.

However, as discussed in our previous regulatory finance update another article in the Luxembourg Companies Law relating to the prohibition of financial assistance, i.e. article 1500-7 (2), proved ambiguous since it stipulated that penalties, such as prison terms and/or fines, could be imposed on any person who, in their capacity as a director, auditor (commissaire), manager (gérant) or member of the supervisory board of a company, engages in the above mentioned activities with respect to not only the acquisition or provision of a pledge of the company’s own shares (actions) but also of the company's units (parts sociales).

The references to "parts sociales", despite being in contrast to the explicit wording of article 430-19, triggered the question whether the financial assistance prohibition would after all also have to be applied to private limited liability companies and not only to public limited liability companies.

New Luxembourg law of 6 August 2021 removing references to units in article 1500-7 (2) of the Luxembourg Companies Law

The new law, which entered into force on 16 August 2021, has now effectively ended this discussion by removing all references to "parts sociales" in article 1500-7 (2) making it clear that the prohibition of financial assistance does not apply to the managers of an S.à r.l. The law thus also confirms Ashurst Luxembourg's legal position on the question in the past who has been advising its clients accordingly ever since the former wording of article 1500-7 (2) was introduced by the law of 10 August 2016.

Consequently, one can conclude that financial assistance is in general not prohibited for Luxembourg private limited liability companies. However, any such financial assistance activities undertaken by private limited liability companies will still have to be assessed on a case-by-case basis taking into consideration the corporate interest of the company involved and other general Luxembourg corporate law principles applying to S.à r.ls and their management bodies.