Undertakings on behalf of companies in the process of incorporation – recent Luxembourg case law

On 12 January 2021, the Luxembourg court of appeal rendered a decision underlining the conditions under which companies that were not incorporated at the time an agreement was entered into were bound by commitments undertaken by a parent company on their behalf under the Companies Law provision relating to commitments on behalf of companies in the process of incorporation[1] and under the Civil Code provision relating to undertakings on behalf of a third party (“promesse de porte-fort”)[2].

In the case at hand, parties entered into an agreement named “research mandate” (“mandat de recherche”) (the “Mandate Agreement”) according to which company A (“Company A”) “and any company directly or indirectly controlled by Mr. F.”, requested company B (“Company B”) inter alia to research building land in view of the construction of real estate properties against an advance and fixed fees due when obtaining the building permits.

Company B, through its advisor and bankruptcy receiver (Company B having been declared bankrupt in the meantime), sent formal notices requesting the payment of the fees due in accordance with the terms of the Mandate Agreement.

In the first instance proceedings, the bankruptcy receiver summoned not only Company A but also companies D1 and D2, affiliates of Company A, which owned the land further to various restructurings (the “Development Companies”), despite those entities not being incorporated at the time of the entry into the Mandate Agreement.

On 16 November 2018, the court of first instance acknowledged that the Development Companies were not incorporated at the time the Mandate Agreement was entered into by Company A and considered that those did not exist legally or in fact. In addition, the court ruled that the mere fact of mentioning the possible creation of a not otherwise defined company is not sufficient to force those companies to take over obligations undertaken in the past by a third party.

Before the court of appeal, the bankruptcy receiver of Company B argued that the Development Companies were in the process of incorporation at the time of the entry into the Mandate Agreement. The court replied that the provision relating to the possibility for Mr. F. to be substituted “by any company directly or indirectly controlled by Mr. F.” does not evidence the incorporation nor the pre-existence of those entities.

In addition, the court reminds that a company in the process of incorporation is not automatically bound by obligations undertaken on its behalf when it is incorporated, but needs to take over those commitments. The court concluded that therefore, Mr. F.’s commitment is to be analysed as an undertaking on behalf of a third party (“promesse de porte-fort”).

The court of appeal explained that such commitment involves an explicit guarantee by the promising party to perform or to ensure the performance of the main engagement by a third party. If a company, once incorporated, ratifies tacitly or explicitly the transactions carried out by the undertaking party, this ratification shall terminate any personal obligation of the latter, as if the newly incorporated company had undertaken the commitments from inception.

The bankruptcy receiver of Company B argued that the Development Companies did take over the commitments of Company A by purchasing the building land and paying an advance on the fees, to which the court of appeal replied that there was no evidence of the Development Companies’ intention to reprise the obligations of Company A towards Company B under the Mandate Agreement and that the ratification of Company A was not established by these factual elements.

This decision highlights the importance of proper drafting of the contractual provisions aimed at including commitments for companies in the process of incorporation and the conditions relating to the takeover of such commitments when a party has undertaken those on their behalf.

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[1] Article 100-17 of the law of 10 August 1915 relating to commercial companies, as amended.

[2] Article 1120 of the Luxembourg Civil Code.