Investment vehicle liquidator: a sought-after expertise has been saved
Investment vehicle liquidator: a sought-after expertise
Voluntary liquidation is a common business management decision concerning various types of investment vehicles at the end of an investment lifecycle. This phase is very often a challenge for management who are typically operating vehicles as a going concern and who are also more geared towards launching new products. During this phase, specific legal, operational, and financial aspects must be considered, as well as their timing.
The solvent/voluntary liquidation process is governed by the Articles 1100-1 to 1100-15 of the amended and renumbered Law of 10 August 1915 on commercial companies and by the laws applicable to each type of investment vehicle (UCITS1, funds of Part II of the Law of 17 December 2010, SIF, RAIF, SICAR, etc.). For a fonds commun de placement (FCP), which has no legal personality, its management company automatically assumes the role of liquidator. However the latter can contractually transfer its responsibilities by appointing a professional liquidator. By analogy with funds established in a corporate form, the liquidation will be guided by the Law of 10 August 1915 and the relevant investment vehicle laws aforementioned.
According to the provisions of the law, the shareholders must vote for liquidation during a general meeting held before a Luxembourg notary. Should it be required, the same shareholder’s meeting may also appoint a CSSF-accredited liquidator. The liquidator may be a company, in which case the physical representative of the company for the liquidation purpose will need to be accredited as well.
Depending on the degree of regulation, a supervisory authority may accept that only a well-seasoned and reputable liquidator be appointed. Unregulated entities can appoint any person or company, which, in the case of an investment vehicle, may be a shareholder, a director, or the management company.
There are multiple reasons for management to require a third-party specialist to be appointed as liquidator—therefore, in what situation is it advisable to rely on a professional liquidator?
At the same time, the motivation can depend on a wealth of different factors, from liquidity to complexity. So what should management of an investment vehicle ask themselves when submitting their liquidation proposal to the approval of the shareholder(s)? Initial steps could be answering the following:
How liquid are the assets in the portfolio to be disposed of?
Typically, selling illiquid assets is a lengthy process which requires time and enhanced due diligence. The liquidator must formalize that the sale is made in the best interest of the shareholders while keeping in mind the running operating costs of the structure. Those sales are sometimes over the counter, therefore AML/KYT2 and solvency checks are required. Also, a full legal review of the sales agreement should be carried out to protect the shareholders of the investment structure. The liquidator must also be able to demonstrate due care in this process in case of shareholders’ complaints.
How complex is the structure of the holding company?
The complexity of the holding structure and the localization of the portfolio investments can affect the time, resources, and specific knowledge needed to complete the liquidation.
Sometimes the structure is such that between the top investment structure and the concerned asset there are intermediate legal entities (SPVs, HoldCo, LLPs) that must be liquidated in order to distribute the proceeds up to the top investment structure and pay back the shareholders. As these situations often concern multiple jurisdictions, it can, in turn, raise cross-border tax topics and bring additional complexity to the liquidation process.
What time and/or resources does the ManCo or director have available to handle the liquidation?
In some instances, the liquidation of a UCITS with a liquid investment portfolio can be straightforward, providing that all compliance and legal duties have been carried out adequately during the life of the investment vehicle. Yet, producing the liquidator’s report, paying creditors, terminating contracts, ensuring last filings, communicating with the regulator (CSSF), the Trade and Companies Register, organizing the general assembly of shareholders, and following up with all stakeholders can be time-consuming and is a different experience from running the investment strategy during the UCITS “active” life.
Management should consider whether they want to invest the time into the end-of-life of an investment vehicle while still focusing on their core business and future projects.
Is the ManCo or director willing to take on the responsibilities of the liquidation for a long period of time?
The liquidator remains liable for a period of five years after the closure of the liquidation. In addition, the liquidation process itself can sometimes last for a longer period than initially anticipated for different reasons:
- Difficulty to dispose of illiquid assets or recover the proceeds from an underlying investment structure;
- Undisclosed information uncovered after the appointment of the liquidator (e.g. litigation or guarantees issued by the fund);
- Non-compliant regulatory (FATCA, Common Reporting Standard, etc.) or tax filings (cross-border, VAT, etc.), requiring amendments or corrective actions; and/or
- Blocked accounts in the shareholders’ register holding back the payment of the liquidation bonus distribution.
Finally, cash management is critical and time-consuming. Every invoice received by the investment vehicle requires validation by the liquidator to ensure adequate use of the financial resources.
In addition, should the provision for creditors be under-estimated, excessive distributions could be made to the shareholders. If this situation leads to a lack of liquidity preventing the investment vehicle from paying its creditors, the liquidator will bear primary responsibility to cover the costs for whichever legitimate invoice being received even after the completion of the liquidation.
In what situation is it advisable to appoint a director or the management company of the investment vehicle?
If the investment vehicle is unregulated (SPVs, HoldCos, etc.), the due diligence typically required by an incoming liquidator will often render the appointment of a professional liquidator too expensive. However, the professional liquidator can be appointed as an advisor to assist incumbent management in the liquidation process, with all formal liquidator responsibilities then borne by the ManCo or director.
In conclusion, the voluntary liquidation of an investment vehicle can be a smooth process if a series of steps are carefully planned, anticipated, and the right skillset is on-boarded.
However, hiring a professional liquidator will give peace of mind to management. They can be assured that every angle of the liquidation process has been duly looked at with a proper follow up of the day-to-day operations by an experienced team.
Deloitte’s liquidation services offering allows management to free-up time and instead focus on their day-to-day business while our dedicated team handles the liquidation process thanks to:
- Our liquidation team’s successful completion of more than 100 solvent voluntary liquidation mandates of regulated entities with assets under management exceeding EUR 600 million;
- The winding-down of several complex investment structures operating through multinational jurisdictions;
- Our significant liquidation experience in the banking, fund, private equity, and insurance industries for companies that that are still supervised by regulators during the liquidation phase;
- Our substantial track record of realizing assets of all sizes and types, including expertise in the sale of illiquid assets;
- Our expertise in coordinating legal proceedings for asset recovery purposes; and
- Our international Deloitte network which we can use to quickly address cross-border issues.
From your first thoughts surrounding an exit through to completion, we can offer our assistance by creating a detailed step-by-step plan that considers all organizational aspects and addresses the relevant challenges and risks beforehand. By considering current market changes, regulatory transformations, and the globalization of the market, we can help you navigate the liquidation of your company.
1 Undertakings for Collective Investment in Transferable Securities as per EU Directive 2009/65/EC
2 Anti-money laundering/know your transaction