The fiducie revival

Monday, 17 February 2014
Franck Cera discusses an alternative to the trust that has been making a comeback in Luxembourg.

Based on Roman law, the fiducie is the oldest in rem contract. Although widely used throughout history – one can think of the Crusaders using the fiducie as a way to manage their assets while being at war – it never developed the same usefulness and flexibility as its common-law counterpart, the trust. However, civil-law countries are taking a second look at the fiducie as an alternative to the trust and are using this mechanism in a wide range of situations. Luxembourg has been at the forefront of the revival of the fiducie since the implementation, in 1983, of a regulation regarding fiducie contracts and credit institutions. Since then, Luxembourg has gone one step further by enforcing the Law of 27 July 2003 approving the Hague Convention on the Law Applicable to Trusts and on their Recognition and setting out fiducie arrangements in Luxembourg (the Law).

The Law provides a legal framework for the fiducie, offering its potential users the luxury of legal certainty and allowing them to have the clearest idea as to what the notion of fiducie entails from a Luxembourg legal standpoint. It is worth mentioning, at this point, that a fiducie arrangement may be entered into outside the scope of the Law but that, as such, it will not benefit from its specific asset-protection rules.

Pursuant to article 5 of the Law, the fiducie is a contract by which ‘a person known as the settlor agrees with another person known as the fiduciaire that the latter will, within the obligations set out by the parties, become the owner of the assets forming a fiducie estate’. The main criterion of the fiducie is that, as opposed to the trust, it is a binding contract and, as such, cannot be formed unilaterally. This particular characteristic is part of the certainty package offered by the fiducie in that it de facto excludes unilateral acts.

In order to offer as much legal certainty as possible, the Law has limited access to the position of fiduciaire to the following:

  • Luxembourg or foreign credit institutions;
  • regulated investment firms (such as a regulated private portfolio manager);
  • investment companies with a fixed or variable share capital;
  • securitisation vehicles;
  • mutual funds or securitisation fund vehicles;
  • pension funds; and
  • insurance companies or public Luxembourg or international entities active in the financial sector.

Although the Law only refers to two participants in the fiducie arrangement, namely the settlor and the fiduciaire, more often than not a third party, known as the beneficiary, will also be involved. Similar to a trust, the beneficiary is the one who will benefit from the fiducie assets held by the fiduciaire; the settlor and the beneficiary may, in some cases, be the same person.

Another feature of the fiducie is the notion that the fiduciaire effectively becomes the owner of the assets forming the fiducie estate. Such transfer of ownership to the fiduciaire is without consideration and without prejudice to the limits set out by the parties in the fiducie agreement. Again this characteristic adds to the legal certainty offered by the fiducie and contrasts with the trust in that the scope of the rights of the trustee with regard to the assets settled in trust is not always clearly defined.

The fiducie contract can be terminated at any time if it has been entered into for an undetermined duration, or at the end of the fiducie contract if it has been entered into for a limited duration.

Legal framework

The fiducie contract in Luxembourg offers flexibility with regard to the nature of the assets that may be included in the fiducie estate and the geographical situation of the fiduciaire.

The fiducie estate may include any type of assets, located either in Luxembourg or in any other foreign jurisdiction. Similarly, the fiduciaire does not have to be physically located in Luxembourg to be within the scope of the Law but can also be located in any other foreign jurisdiction. A fiducie contract could be entered into with a foreign bank, notwithstanding the fact that such bank does not have a physical presence in Luxembourg or in the European Union.

The fiducie is a written contract and thus allows for easier enforcement against third parties. The fiducie contract will be enforceable against any third parties from the moment it is entered into, subject to:

  • specific formalities for the transfer of ownership of specific assets (e.g. real estate, aircrafts, ships, IP rights), and
  • the limitations of powers of the fiduciaire, as set out in the fiducie agreement itself.
  • the fiduciaire will be liable for its actions regarding the fiducie estate under two types of obligations:
  • the obligations of the fiduciaire set out in the fiducie contract, not those arising out of subsequent contracts entered into between the fiduciaire and third parties regarding the fiduciary assets. The fiduciaire shall abide by the obligations set out in the fiducie agreement and will therefore be liable towards the settlor, and
  • with respect to any actions undertaken in relation to the fiducie estate, i.e. the contracts it entered into with third parties.

This high level of responsibility ensures protection for the fiducie estate and the beneficiary’s rights.

However, protection of the fiducie assets goes beyond the potential liability of the fiduciaire. The asset protection offered by the fiducie contract is threefold and can be described as follows:

  1. Each fiducie agreement will give rise to a fiducie estate, legally segregated from the personal estate of the fiduciaire. This separation of estates and creation of a fiducie estate is the main criterion enabling a Luxembourg fiducie to be recognised under the Hague Convention mentioned earlier.
  2. The fiduciaire shall register the fiducie estate in dedicated accounts excluded from its own assets and accounting records and any operations affecting the estate shall be recorded off balance sheet.
  3. The fiduciaire shall comply with the instructions of the settlor (unless it has waived its right to instruct). This adds to the security offered to the settlor in as much as he remains actively involved in the management of the fiducie estate. This aspect of the fiducie contract contrasts with the trust, where the settlor will waive all his rights on the trust estate as soon as it is handed over to the trustee.

Uses for the fiducie

The fiducie can be used in a number of circumstances to accommodate almost any type of situation, ranging from shareholders’ agreements to complex transactions involving Islamic instruments.

The fiducie facilitates the enforcement of shareholders’ agreements with regard to voting rights or restrictions of share transfer. The transfer of shares to the fiduciaire will allow for better compliance with the shareholders’ agreement while enabling the settlor to retain its rights on dividends and voting rights by giving instructions to the fiduciaire. It will also be useful in creating stable blocks of shareholders by transferring the shares of several minority shareholders to a single fiduciaire and thus prevent the risk of fragmentation of influence and potential shareholder conflicts.

Another feature of the fiducie is its efficiency in transactions involving secured financing, so as to guarantee an obligation of the settlor towards the fiduciaire. It may be used to secure any kind of debt, whether future or already in existence, and there are no restrictions on the type of assets that can be used as security.

The fiducie is an ideal way of combining conventional financial instruments and operations with Islamic ones. For example, a regulated Luxembourg entity could issue Islamic instruments such as sukuks as fiducie assets or hold fiducie assets for the benefit of investors.

Finally, the fiducie may be used in situations such as inheritance planning, whereby the transfer of the estate to the fiduciaire will enable its allocation as per the settlor’s will or secure cash deposits.

Such variety of use clearly indicates that the Luxembourg fiducie presents substantial advantages in terms of flexibility and should be regarded as a viable alternative to its common-law counterpart, the trust. 

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Franck Cera

Franck Cera is a Partner at AMMC Law SA

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