Banking Litigation: Luxembourg

Introduction

Over the past few decades, Luxembourg has become one of the world’s leading international financial centres with a strikingly strong banking sector.

This steady growth is notably due to Luxembourg being particularly multicultural with an international workforce. A pragmatic approach of the legislator and the innovative minds of practitioners allow the legislation and practice to be rapidly adapted to the needs of the market, which makes Luxembourg attractive for international financial players.

A prominent example is the law of 5 August 2005 on financial collateral arrangements (the Financial Collateral Law), which allows a time-efficient enforcement of financial collateral arrangements such as pledges by the creditor or the security agent.

Another illustration is the special regime for personal guarantees granted in a professional context, introduced into Luxembourg law in 2020 as an alternative to the suretyship and the first demand guarantee.¹ The latter often comprises a risk of requalification into a suretyship, which is less favourable to the beneficiary of the guarantee. As a reaction to the market’s needs, Luxembourg has thus created the professional guarantee regime, which is characterised by its contractual freedom and its reliability.

Needless to say that a well-developed banking sector also means that banking litigation is always in motion. Furthermore, due to the international profile of most of the transactions carried out in Luxembourg, Luxembourg banking litigation often implies an international dimension, which adds a certain complexity to the matters brought before court.

Year in review

Recent cases

The bank’s duty to inform

A bank’s duty to inform and its scope are recursive topics before Luxembourg courts, notably as regards financial investments. The question of the existence and scope of an ancillary obligation to provide information and advice to a client without having concluded an investment advice contract or a management mandate is thus often raised.

In a decision of 7 March 2024, the Luxembourg Court of Appeal² recently confirmed that an ancillary obligation to provide information and advice on stock market orders exists for banks, even in the event of an 'execution only' instruction by the client (i.e., even in the absence of an investment advice contract or a portfolio management mandate).³ The information to be provided to the client relates to the financial terms of the transaction and to the risks of stock market trading in general. It does however, in principle, not cover the particular risks associated with a given transaction, the advisability of acquiring or not acquiring a given security, events and circumstances likely to have an influence on stock market prices, the quality of securities or the economy in general.

The scope of the obligation to provide information on risks varies nonetheless with the client’s knowledge and investment habits, as the Court of Appeal had already confirmed in 2022.⁴ Therefore, a more detailed risk warning needs to be provided to a non-specialised, non-professional client than to a sophisticated client. In its decision of 7 March 2024, the Court of Appeal, however, specified that being a non-professional client does not automatically mean that the client is not a sophisticated investor.⁵ Investors can become sophisticated over time but the bank has the burden of proof to demonstrate the experience acquired by the client and the fact that the information provided on risks was adequate.

Banks must thus be diligent in establishing the investor profiles of their clients, even in the absence of a management mandate or advice contract, and must provide all necessary information accordingly, in order to avoid liability for breach of duty to inform.

Liability for fraudulent transfers in the European Union

With the increase and sophistication of banking fraud, banks are increasingly facing liability claims by victims of fraud.

In a recent case, the Court of Appeal had to rule on the liability of the bank whose client was the beneficiary of a fraudulent transfer.⁶ The claimant blamed the beneficiary’s bank for not having refrained from crediting the beneficiary's account, even though it had been informed of the existence of the fraud. Referring to EU case law (CJEU, 2 September 2021, No. C-337/20), the Court stated that under the law of 10 November 2009 on payment services (the LSP), applicable to transfers between banks located in the European Union and thus applicable to this case, a bank cannot refuse, in principle, to execute an authorised payment order if all the conditions set out in the account agreement have been met. This means that a payment order cannot, in principle, be revoked once it has been received by the bank of the payer. Furthermore, under the LSP, each bank is only liable towards its own client. The beneficiary’s bank could thus not be held liable towards the claimant under the LSP.

The victim of the fraud also requested the beneficiary’s bank to be held liable on a non-contractual basis for having transferred the funds from the beneficiary's account to a third-party account. The claimant, however, failed to prove under tort law the existence of a fault committed by the beneficiary’s bank. The Court indeed found that no wrongdoing could be attributed to the latter as it had, once informed of the fraudulent origin of the transfer order, blocked its client’s account and notified a recall request to the bank of the third party account. The beneficiary’s bank had done so before even receiving a copy of the criminal complaint made to the police and a recall request by the claimant’s bank.

Reactivity is thus the key word when receiving a notification of a potential fraud, whether such a notification is made in the required manner or not.

Attachments on settlement accounts

The Luxembourg Supreme Court⁷ has reaffirmed, in two decisions rendered on 28 September 2023, the prohibition of attachments on settlement accounts.⁸

Following a New York ruling in their favour against, notably, the Islamic Republic of Iran condemning the latter to the payment of damages, relatives and heirs of victims of the attacks on 11 September 2001 in the United States had proceeded to attachments for a total amount of more than US$3 billion on accounts held with a Luxembourg bank holding settlement accounts.

Attachments on such accounts are, however, prohibited by Article 111 (5) of the LSP. This Article, which is a public policy provision, aims at avoiding the blocking of the operations of a systemically important securities settlement system. Without the absolute and general impossibility of seizing settlement accounts, which the Supreme Court recalled, the international trading system would become much too vulnerable if not endangered.

This case law is thus particularly important in the protection of the clearing systems operated in Luxembourg and for the stability of international transactions.

Discretionary portfolio management

In the context of a discretionary portfolio management, the Court of Appeal was recently called upon by a client unsatisfied with the portfolio management. The client’s claims were rejected by the first judges, as he had not challenged the interim management report within the contractual deadline of 30 days.

The Court of Appeal, however, overturned the first instance judgment by stating that the failure to challenge the interim management report within the contractually set deadline may not deprive the client of the possibility of holding the bank liable in the event of a misconduct in the management of the portfolio.⁹

Banks are thus not protected against liability claims by their clients for whom they manage their portfolio on a discretionary basis simply due to the expiration of the contractual deadline for challenging an interim management report.

Non-execution of a redemption request

A decision of interest to all management companies and alternative investment fund managers of a Luxembourg mutual fund (FCP¹⁰) has recently been handed down by the Court of Appeal.¹¹

In June 2020, an investor had, within the contractual deadline, requested, for the net asset value (NAV) of September 2020, the redemption of its shares held in a sub-fund of the FCP. Several months later, in November 2020, the management company of the FCP informed the investors that the redemption requests for the September 2020 NAV would not be executed. The refusal was based on a provision of the private placement memorandum (PPM), allowing the management company absolute discretion in permitting redemptions. The investor challenged the non-execution of its redemption request before the Luxembourgish courts, which ruled in its favour.

The Court of Appeal, confirming the first instance ruling, held that:

1. an investor's redemption request cannot be refused after the contractual 90-day notice period prior to redemption day has elapsed; and
2. the refusal to execute the redemption requests had not been based on the provision of the PPM conditioning the payment of redemptions to the availability of funds, but on the provision regarding the absolute discretion of the management company in permitting redemptions. The management company could thus not invoke, in retrospect, a lack of liquidity to justify the non-execution of redemption requests.
   On behalf of the FCP (which lacks legal personality), the management company was condemned to pay the redemption price based on the September 2020 NAV plus interests.

Enforceability against the guarantor of the extension of the due date of the secured obligation

By a decision of 19 October 2023, the Court of Appeal reaffirmed well-established case law: the extension of the due date of the secured obligation granted by the creditor to the principal debtor cannot be imposed on the guarantor, as this would result in an extension of the duration of the guarantee granted and hence of the risk assumed.¹²

However, although such an extension of the due date is not enforceable against the guarantor, it does not release the latter of its obligation to guarantee the principal obligation. The guarantor has thus two options to achieve the release of its obligation and, if applicable, stop the incurring of interest:

1. take action against the debtor to force him to pay; or
2. pay the creditor on the original due date, who is obliged to receive the payment, and then take action against the principal debtor.

Recent legislative developments

Modernisation of Luxembourg’s bankruptcy law

On 1 November 2023, the new reorganisation law of 7 August 2023 (the Reorganisation Law) entered into force. The Reorganisation Law notably repealed obsolete insolvency procedures and introduced new reorganisation measures, while implementing the EU Insolvency Directive 2019/1023.

Without entering into the details of this new law, which creates, generally speaking, a more favourable framework for creditors, the following points may be noted:

1. Creditors will be informed of the financial difficulties of the debtor at the opening of the reorganisation proceedings, at the latest, which will allow them to try to negotiate a solution to avoid the debtor’s bankruptcy.
2. Notwithstanding any contractual provisions to the contrary, creditors cannot terminate ongoing contracts due to the application for, or the opening of, judicial reorganisation proceedings. However, contractual provisions allowing a termination justified by other events remain effective, despite the application or opening.
3. The enforcement of collateral arrangements subject to the Financial Collateral Law is, in principle, not impacted by the Reorganisation Law. However, regarding the enforcement of a pledge, it must be ensured that it is not conditional on the execution modalities of the credit agreement, whose debt is secured by the pledge, since ongoing contracts are being maintained. The granting of the stay of individual enforcement actions does, however, not preclude the application of set-off clauses by close-out resulting from set-off agreements subject to the Financial Collateral Law.
4. During the stay of individual enforcement actions against the debtor, creditors may proceed against co-debtors and guarantors, as they do not benefit from the stay.¹³ 

Reporting obligations for payment service providers

Following the adoption of the Central Electronic System of Payment (CESOP)¹⁴ Law on 26 July 2023, payment service providers (PSPs), including credit and payment institutions, which are established in Luxembourg, must (since 1 January 2024) keep records of the cross-border payments that they process and their beneficiaries as well as report the collected data to the Luxembourg tax authorities on a quarterly basis.¹⁵

Distributed ledger technology

A recent example of the innovative legal landscape in Luxembourg referred to above is the Blockchain III Law of 15 March 2023. This Law introduced the possibility of using distributed ledger technology (DLT) in relation to financial collateral agreements, allowing parties to use recent technological innovations within a framework of legal certainty.¹⁶

Non-performing loans

On 15 July 2024, Luxembourg parliament adopted the law on non-performing loans (the NPL Law).

The NPL Law notably transposes, without any gold-plating, the EU directive 2021/2167 on credit servicers and credit purchasers.

The NPL Law also creates a new type of PFS,¹⁷ the credit servicer, who manages and enforces the rights and obligations related to a NPL¹⁸ on behalf of the credit purchaser. The credit servicer will be regulated by the Luxembourg authority in charge of the surveillance of the financial sector, the Luxembourg Financial Sector Supervisory Commission (CSSF).¹⁹

Without going into the details of the NPL Law, it might be interesting to note that a credit purchaser located outside of the European Union needs to appoint an EU representative. The NPL Law also has General Data Protection Regulation (GDPR) implications, as credit institutions need to provide information to potential buyers 'in accordance with' the GDPR.²⁰

With this new NLP Law, Luxembourg positions itself favourably in the market for NPLs with promising outlooks for Luxembourg asset management companies.²¹

Interim measures

Under Luxembourg law, a creditor can request a variety of interim measures. We will be focusing on attachments (saisie-arrêts), as they are the most commonly used seizure measure in Luxembourg and of particular interest to banks. Attachments operate as a 'freezing order' in the hands of third parties, which are most often banks. These third parties are then involved in interim measures proceedings as the third party debtor, although they have no interest in the dispute between the creditor and its debtor.

To proceed to a conservatory attachment (i.e., when the creditor does not dispose of an enforceable title), the creditor requests, within ex parte proceedings, the authorisation of the Luxembourg judge to proceed to the attachment. In the event that the judge grants the authorisation, the creditor notifies the attachment order to the third party by bailiff. In principal, Luxembourg courts only order interim measures on assets located in their jurisdiction.²²

The attachment immediately renders the seized assets unavailable: the entire assets owed by the bank to the debtor are seized, even if they exceed the creditor’s claim.²³

The creditor must inform the debtor of the attachment and bring against him an action for the validity of the attachment within eight days of its execution.

Within eight days of the service of the writ for validity to the debtor, the creditor must serve a confirmation of this writ to the bank. If the creditor fails to do so, the attachment cannot be validated and the seized assets become available again, until the bank receives the aforementioned confirmation.²⁴

Banks always comply with attachments, as the law provides that if the third party debtor does not comply with the attachment order, it will become the direct debtor and will be liable for the actual debtor’s obligations towards the creditor.

The debtor may challenge the attachment by seeking the withdrawal or limitation of the order.

Once the attachment has been validated by a first instance court, the creditor will request an affirmative declaration from the bank relating to whether the bank is or is not a debtor of the creditor’s debtor and if so, for which amount. The principle of banking secrecy does not apply to the affirmative declaration.

Regarding case law, the Luxembourg first instance court recently confirmed a well-established jurisprudence regarding the third party debtor: the judges reasserted the impossibility of executing an attachment on an indirect debtor of the creditor’s debtor.²⁵ This notably means that an attachment cannot be executed on assets of which the creditor’s debtor is only the economic beneficiary.²⁶ In order not to violate banking secrecy, banks should, however, await a judgment on the validation and the summons for affirmative declaration before revealing whether they are a debtor or not of the creditor’s debtor.

Furthermore, the judges of the Luxembourg first instance court, in another recent decision, restated certain aspects of the affirmative declaration that the third party debtor needs to make to the court and the creditor regarding its capacity as debtor of the creditor’s debtor and the origins and amount of the debt.²⁷

First, this declaration may be made even after expiry of the time limit set by the judge and as long as no definitive decision has been rendered against the third party debtor, which would hold him liable for the actual debtor’s obligations towards the creditor.

Second, in the event that the third party debtor states not being and never having been a debtor of the creditor’s debtor, it is up to the creditor to provide evidence that could cast doubts on the accuracy of the third party debtor’s declaration. It is only then that the third party debtor needs to prove the rightness of their declaration. If the third party does not provide any proof, they will be condemned to pay the creditor as if they were the actual debtor. This would also be the case for false declarations.

Privilege and professional secrecy

A lawyer’s professional secrecy applies in Luxembourg to all information about the client and the client's affairs of which the lawyer is informed by their client or of which the lawyer becomes aware, regardless of the source of the information (e.g., advice, correspondence, notes and name of clients) and the area of practice (e.g., litigation, corporate and tax).²⁸ The professional secrecy applies to qualified lawyers registered at the Luxembourg Bar, as opposed to in-house counsel.

A limit to professional secrecy stems from the Anti-Money Laundering and Countering the Financing of Terrorism Law (the AML/CFT Law) under which a lawyer who knows, suspects or has reasonable grounds to suspect that money laundering or terrorist financing is taking place, has taken place or has been attempted, is obliged to inform the President of the Bar.²⁹ Under the AML/CFT Law and in the limited cases provided for by this Law, a lawyer is also obliged to provide information to the financial intelligence unit, at its request.³⁰ The AML/CFT Law, however, only applies to legal services in scope of the Law, which is not the case for litigation cases.

Given the role of Luxembourg as a financial centre in international transactions, attempts have been made by national and foreign authorities to get access to such information by targeting not only financial services providers but also other actors, such as lawyers. A number of the targeted lawyers have, however, successfully questioned these attempts and convinced national courts to request a preliminary ruling from the Court of Justice of the European Union (CJEU). The recent ruling of the CJEU in case No. C-432/23,³¹ regarding a request for the exchange of information addressed to a Luxembourg law firm by the Spanish tax authorities,³² further comforted privilege and professional secrecy in Luxembourg. The CJEU held that the protection of professional secrecy also covers legal advice and necessarily guarantees the secrecy of that advice, both as regards its content and its existence. In addition, the Court stated that the special protection of professional secrecy extends without distinction to all areas of law. This is a landmark decision for lawyers and the protection of their professional secrecy.

Banks may also oppose professional secrecy to disclosure orders. As regards disclosure proceedings in general, the Luxembourg approach is fundamentally different to common law procedures, insofar as disclosure proceedings are subject to very strict conditions. Their scope is limited to the production of documents that need to be precisely determined.³³ The disclosure proceedings can thus not be used as means for a 'private raid' or 'fishing expedition'.

Luxembourg law distinguishes between:

1. the disclosure order of documents requested in the context of proceedings on the merits pending before a court; and
2. the disclosure order arising from an autonomous procedure before the summary judge, the sole aim of which is to have the documents released, in view of initiating a dispute on the merits.

Disclosure orders can be obtained against the person or entity that the claimant considers to be in possession of information or documents that are relevant to the outcome of the pending or future dispute, whether it is a party or a third party (notably banks and trustees).

However, as stated above, the obligation of professional secrecy, including the legal professional secrecy, can constitute a lawful impediment or a legitimate obstacle to the disclosure of evidence. Specifically, Luxembourg case law requires that the requested measure does not allow the claimant to infringe any legal requirement or violate any fundamental freedom or ethical rule such as professional secrecy. When assessing a request aimed at the production of documents, the judge must perform a balancing test and take into account the consequences that the requested measure will have on both the claimants and respondent’s interests. It must not be a way of interfering in matters that the claimant is normally not supposed to know about.³⁴

Furthermore, the professional secrecy of banks and financial institutions does not apply when they are requested to comply with Luxembourg authorities requests, such as those related to money laundering and terrorist financing investigations as well as criminal investigations in general. Banks and financial institutions also have a duty to inform the Financial Intelligence Unit (FIU) when they know, suspect or have reasonable grounds to suspect that money laundering, an associated predicate offence or terrorist financing is being committed, or has been committed or attempted.

In a case where the former client of a bank requested the production of a declaration of suspicion allegedly reported to the FIU, the judge held that the 'no tipping off' rule anchored in the AML/CFT Law is a serious challenge preventing the admissibility of the request.³⁵

Jurisdiction and conflicts of law

As banking litigation mainly relates to contractual liability, jurisdiction and conflicts of law are often governed by clauses on the choices of forum and law. However, this does not mean that Luxembourg courts and practitioners are not confronted with complex questions relating to these legal issues, notably in the context of cross-border transactions, international financing and enforcement measures.

By way of an example, as regards the law applicable to tort liability of the corporate bodies of a company or a bank towards third parties, it appears that Luxembourg judges apply the lex loci delicti (as opposed to the lex societatis). The Court of Appeal has ruled that the liability of the directors of a foreign company, who were accused of having provided false information on the basis of which the claimants had subscribed shares in the company, was subject to Luxembourg tort law, as the shares had been offered for subscription in Luxembourg.³⁶

Sources of litigation

Luxembourg is the largest investment fund centre in Europe and the second largest worldwide after New York, and as such, a frequent source of litigation by and against banks or other financial service providers is related to investment funds. The liability of professionals, such as custodian banks, fund managers or portfolio managers, and the liability of their directors are some of the banking litigation matters brought before the courts of Luxembourg.

Furthermore, clients unsatisfied by the outcome of their investment regularly try to hold their bank liable by invoking a breach of its duty to inform and advise (for a recent example, see above).

Finally, due to the assets (whether securities or cash) that banks hold on behalf of their clients, they are often involved in proceedings for interim measures as third party debtor to which an attachment order has been served.

Exclusion of liability

Under Luxembourg law, provisions excluding or limiting liability are in principle valid, in accordance with the principle of contractual freedom.

However, they become invalid in cases of fraud, serious misconduct or when they affect an essential obligation of the contract, rendering the latter void of substance.³⁷ For serious misconduct to be characterised, a reprehensible behaviour needs to be proven, going beyond the simple fact of having failed to comply with the contractual obligations.³⁸ Abusive clauses are also prohibited.³⁹

Regarding not the exclusion or limitation of liability but the adjustment of the period during which a bank’s liability can be sought, the Luxembourg first instance court recently reaffirmed the possibility for banks to reduce the limitation period.⁴⁰ In this case, the limitation period was reduced contractually to two years (it being noted that under Luxembourg general law, the limitation period is 10 years).

Regulatory impact

Under Luxembourg law, the liability of banks is a matter of common civil liability law.⁴¹ It is predominantly a contractual liability and only exceptionally a liability in tort.

Regarding the regulatory impact on these civil liabilities, Luxembourg case law has known a new development in the past decade. Since two decisions of the Court of Appeal of 25 February 2015 and of the Supreme Court of 26 March 2015, claimants may support their claim for damage by proving the bank’s failure to comply with a professional standard.⁴²

However, a breach by a bank of a professional standard does not automatically lead to compensation. The claimants need to prove the following:

1. the breach of the professional standard constitutes a contractual fault or a fault in tort; and
2. there is a causal link between this fault and the alleged damage.⁴³

This is not an easy task and the above-mentioned turnaround in case law has ultimately not led to a major increase in the number of decisions that find a bank liable.

As regards regulatory developments, other than the Luxembourg legislator, the CSSF is very active and regularly publishes and updates its guidelines and regulations on matters regarding the banking and financial sectors. Compliance with laws and regulations is assessed during on-site visits carried out by the CSSF, which also has sanctioning powers. The most recent example is the revocation of Banque Havilland’s licence by the European Central Bank following a request for withdrawal by the CSSF.⁴⁴ The CSSF had fined that same bank in 2018 for €4 million for compliance failings with its AML/CFT Law.⁴⁵

Furthermore, clients of professionals subject to the supervision of the CSSF may file complaints with the latter under the CSSF Regulation No. 16-07 relating to out-of-court complaint resolution. According to the CSSF, the complaints that it receives often relate to the following:

1. transactions executed on behalf of the bank clients by a proxy, the client not having been aware of the extent of powers given to the proxy;
2. clients who were victims of fraud;
3. compensation for early repayment of mortgage loans; or
4. the defective or non-execution of investment instructions.⁴⁶

In one such case, the client criticised his bank for not having spontaneously sold, at his instruction, his securities, which downgraded following a significant decrease of their rating.⁴⁷ According to the bank’s website, a client holding securities that were downgraded would be authorised to transfer them. The complainant interpreted this information as an obligation of the bank to sell such securities at his request. The CSSF, however, found that the client’s right to transfer downgraded securities did not imply an obligation for the bank to find a buyer for these securities and thus rejected his request. The CSSF considered the following:

the client had been informed of the risks associated with the financial instruments at issue;
the client had declared himself an experienced investor; and
no management or investment advice contract had been concluded between the client and the bank.

Outlook and conclusions

The increasing complexity of international transactions and the multiplication of laws and regulations, on national, EU and international levels, will undoubtedly lead to a multiplication of complex litigation, notably regarding funds and the parties involved, including banks. The influence of the GDPR and consumer protection regulations, as well as environmental, social and governance regulations, will certainly also have a greater impact on banking litigation.

Furthermore, as the development of Luxembourg as an international financial centre will continue to grow in the coming years, the legislative and regulatory landscape will evolve accordingly and hopefully continue to contribute to this development. It is to be expected that Luxembourg remains creditor friendly, an attribute essential to the Luxembourg market.

This article was written by Partner Elisabeth Omes and Associate Lena Hoss and was reproduced with permission from Law Business Research Ltd. This content was first published in Lexology In-Depth: Banking Litigation - Edition 8 (Banking Litigation: Luxembourg - Lexology). For further information, please visit [In-Depth - Lexology].