Criminal law and directors Interview with Jean-Luc Putz (Arendt & Medernach)
Civil liability is most often at the front of directors’ mind when considering their legal obligations, but they should also not forget criminal law. In the opinion of Jean-Luc Putz, a partner with Arendt, there is an an established and continuously increasing willingness to prosecute economic misdemeanors, and directors could be liable. ILA have a training course planned on this topic.

The threat of criminal prosecution is especially likely in a Luxembourg context as an aspect of litigation between shareholders, said Jean-Luc. “A shareholder might not agree with a decision, and decide to view it through the lens of a criminal misuse of company assets, or other such infringements of the 1915 law on commercial companies,” he commented. 

While this option is used relatively infrequently in the Grand Duchy, prudent directors should be aware of the potential implications, particularly when dealing with international group structures. Jean-Luc highlighted three possible broad scenarios.

Fictious dividends

It is a criminal offence to distribute fictious dividends. “This means paying out money the company does not have due to a lack of real profits,” he said. The law requires profit to be made in the relevant financial year, taking previous losses into account and that legal and statutory reserves have been built up sufficiently. Only then can dividends be paid. For example, taking out a loan to pay shareholders is clearly forbidden.

There is a grey area with interim dividends, which are allowed under the 1915 law when paying dividends in advance from profits which will accrue in the future. “But there are very strict rules you have to follow, with the profits needing to be likely and at least partially realised,” Jean-Luc explained. While a relatively rare, technical offence, he noted that disputes of this nature can arise when there are disputes between shareholders. He noted that this is a different question than that of “hidden dividends” which might be paid in an attempt to dodge taxes. 

Misuse of corporate assets

The misuse of corporate assets or voting rights is another broad area liable for criminal action. “The first condition is that the action must be contrary to the interests of the company or expose the company to an unjustified risk,” Jean-Luc said. This has particular relevance when considering intergroup financing, as assets in one company cannot always be moved freely to another entity in the group, even if they have the same shareholders. “From a criminal law perspective, every company is an individual legal person and should be protected as such,” he said. 

Yet in practice, financial strategy is often defined at group level. Sometimes intragroup financing is permitted, with criminal law permitting group interests to be taken into account if there is a common financial interest. “However, these transactions must not be badly unbalanced, they must carry a fee to the receiving company, and they should not put the health of the company at risk,” said Jean-Luc.

“Such relationships also need to take changing circumstances into account,” he said. ”An arrangement that once was mutually beneficial may no longer be so.” A case-by-case assessment needs to be made. “Judges don't question strategic decisions, but they look to see if an obvious wrong decision did not bring a return,” he added.

Payment of excessive wages

Payment of excessive wages can also leave board members liable if they have power over their own remuneration. Put simply, if fees are received there has to be an economic justification for it, and this value must be demonstrated. “Again, it’s a case-by-case assessment: what work is being done, what are the director’s qualifications, what is the state of the company’s financial health, what are market conditions – all these factors come into play.” Criminal offences arise if pay is out of proportion.