Bringing a class action under European law, a legal quirk
How to protect yourself from certain unforeseen risks when investing in crowdfunding? The subject is vast and the problems multiple: one of the risks as an investor in a crowdfunding platform is that of the insolvency of the platform or the investment.
Platform insolvency” means that the equity crowdfunding platform, as a company, does not have sufficient cash flow to repay its debts, including debts to investors. Since it is the intermediary in many cases, such as in crowdlending , this can significantly affect the distribution of interest on the loan. On the other hand, the insolvency of the investment means that the project whose capital contributor participated in the financing is no longer able to pay off its creditors, and the investment is lost. In these two cases, it is necessary to have legal guarantees in order to be able to take action against the platform in the event of damage: knowing how to protect oneself from losses in the event of insolvency becomes a necessity.
Variable national solutions: the example of French law
Yet solutions exist. In France, for example, any insolvency can be broken by legal action, which is a way of forcing the debtor to pay his debt. In the event of insolvency, even partial, the platform can be the subject of collective proceedings, which is a judicial measure aimed at guaranteeing the continuation of the company’s activity and maintaining employment, while ensuring that the rights of creditors are respected.
Among the various procedures, the most widely used is that of judicial liquidation, which is opened when the debtor is in a situation of “collapse of payments and whose recovery is manifestly impossible” (article L640-1 du Code de commerce français).
Liquidation has a particularly significant impact on the company as it means that the company’s finances cannot be restored (Cour de Cassation, Chambre commerciale, du 8 juillet 2003, 00-13.627), which is particularly the case when a company is in a situation of cessation of payment, meaning that it is in “impossible to meet the liabilities due with its available assets“. In this situation, the company can no longer meet its debts and the procedure will organise the end of the debtor’s activity; therefore, it is appropriate to ask: How, as an investor, can you obtain the reimbursement of your claim when the debtor is insolvent? As soon as the judicial liquidation is pronounced, a procedure aiming at paying off the creditors is put in place. However, this action plan will affect the creditors of the company in liquidation by limiting their power to act. The main aim is to be able to pay the creditors at the end, an objective which the Belgian judges have managed to transcribe perfectly by defining the liquidation of a company as all the operations which tend to pay the creditors, using the company’s assets and distributing any residue among the partners (Cas. 8 May 1930, Pas., 1930, I, p. 202). But liquidation is not always the best solution.
First of all, it implies the freezing of the debtor’s liabilities, i.e. the debtor is prohibited from paying creditors whose claims arose before the opening of the judgment. Also, as a creditor of the platform, the investor will have to declare his claim in order to hope to be paid. This means that any creditor can no longer pursue his debtor individually.
Also during these collective proceedings, a creditors’ representative is appointed who has a monopoly on action: the liquidator; he acts on behalf of and in the interest of the creditors (Article L641-4 of the Commercial Code). He will receive the damages which will be distributed among the creditors, as a matter of principle the distribution is carried out by respecting the order of the privileges: the unsecured creditors will only be paid when the privileged creditors have been paid. It is therefore necessary to ask how a creditor can provide guarantees in order to benefit from the status of preferred creditor.
During the judicial liquidation procedure, creditors remain subject to their contractual obligations. Indeed, as a matter of principle, “The co-contractor must fulfil its obligations despite the debtor’s failure to perform commitments prior to the opening judgment. The failure to perform these commitments only gives rise to a right for the benefit of creditors to be declared as a liability”(Article L641-11-1 of the French Commercial Code and Article 175 of the Belgian Companies Code). This means that you remain subject to your obligations under the contract in the same way as if the liquidation proceedings had not been initiated, e.g. the investor must pay all the funds he had committed to deliver to the platform; however, certain assumptions are admitted to terminate the contract by right.
But the French Court of Cassation has admitted that, the situation in which the co-contractor expressly manifests his will not to terminate the contract and the judicial liquidator does not oppose it leads to legal effects. (Cour de cassation, civil, Commercial Chamber, 17 February 2015, 13-17.076).
In principle, “The judgment closing a judicial liquidation for lack of assets does not cause creditors to recover the individual exercise of their actions against the debtor” (Article L643-11 of the French Commercial Code). However, there are hypotheses that make exceptions to this rule, so it is worth considering how the individual action may be exercised and in what situations. This is particularly the case when “When the claim originates from an offence for which the debtor’s guilt has been established or when it relates to rights attached to the creditor’s person“; but the criminal chamber of the French Court of Cassation has come to clarify in a judgment of 6 April 2016 that when the claim originates from an offence for which the debtor’s guilt has been established, the recovery of the exercise of the individual action takes place only after the closure of the judicial liquidation proceedings.
Class actions in crowdfunding : rare but usefull
When it comes to crowdfunding, platforms that go bankrupt are a common occurrence. In France in 2018, the Unilend platform was declared insolvent, meaning that it no longer had the capacity to settle its debts. This situation can happen to any professional and to any participatory finance platform, so it is necessary to take measures to limit the consequences of this situation but also to avoid it.
However, no collective action has been taken and the company has undertaken to reimburse each of the investors. It can be seen that legal proceedings are not systematic and that it may be worthwhile to consider out-of-court proceedings when legal proceedings do not correspond to the interests of the investors. Out-of-court proceedings are a mechanism for parties to a dispute to assert their rights without going to court: knowing the interests at stake, such as financial means or the need for confidentiality, is therefore necessary to determine whether an out-of-court settlement of the dispute would be more appropriate.
In recent years, class actions against crowdfunding platforms have increased, especially at European level. In January 2020, 2 crowdfunding platforms, Envestio and Kuetzal, went into receivership. At present, the trial is still ongoing but investigations have revealed that they were fraudulent platforms. The Kuetzal collapse is said to have affected more than 550 people and to represent €3 million in liabilities. Envestio is said to have affected more than 1,800 people who are claiming €10 million from the company.
A class action was launched. The companies are established in Estonia, so they are subject to Estonian law. In addition to being subject to a law that is not that of their country of origin, investors must contact the Estonian authorities and join a collective action based in Estonia, thus in a language that is not their mother tongue.
Une solution issue du droit européenne déjà disponibles pour les class actions
To address these issues, a European regulation that came into force in 2017 was put in place with a view to regulating company insolvency. It facilitated access to proceedings for litigants by setting up a form allowing them to contact the authorities in charge of the procedure directly and to have all the necessary information concerning the insolvency proceedings in progress. This regulation leaves a wide margin of manoeuvre to litigants: it is possible to open a single main proceeding with a universal vocation and one or more territorial secondary proceedings. However, certain conditions must be met in order to open secondary territorial proceedings, for example the insolvent debtor must have a permanent establishment in that other Member State, and conditions must also be met concerning the person who can initiate the proceedings. However, as a matter of principle, the insolvency proceedings must be opened “in the territory of which the centre of the debtor’s main interests is situated”, so it is necessary to determine what that territory is. Moreover, the Regulation provides that the courts opening the insolvency proceedings must contact the creditors affected by the insolvency proceedings.
<However, it does not standardise the law of the Member States of the Union on the issue of collective proceedings, for example, the deadlines and procedures to be followed differ from one State to another. It provides that the competent court is the one that opens the proceedings, which is a fundamental concept because the applicable law will be that of the place where the proceedings are opened. Similarly, this regulation provides for the possibility of opening a main procedure for all the injured creditors or several territorial secondary procedures. It will therefore be necessary to determine which procedure is the most suitable for your situation.
Eternoscorp remains available to assist you in any recourse against a debtor company in receivership.