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EU top Court affirms freedom of establishment

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EU top Court affirms freedom of establishment

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(LUXEMBOURG) - An EU Member State cannot impose mandatory liquidation on firms that transfer their registered office to another state, the EU's top Court affirms in a ruling upholding freedom of establishment under EU law.

The transfer of the registered office of such a company, when there is no change in the location of its real head office, falls within the scope of the freedom of establishment protected by EU law, the European Court of Justice ruled on Wednesday.

The case concerned Polbud, a company established in Poland. When an extraordinary general meeting of shareholders decided in 2011 to transfer the company's registered office to Luxembourg, this made no reference to a transfer to Luxembourg of either the place where Polbud's business is managed or of the place where that company's business is actually carried out.

On the basis of that resolution, the opening of a liquidation procedure was recorded in the Polish commercial register and a liquidator was appointed.

The Polbud registered office was transferred to Luxembourg in 2013. Polbud became 'Consoil Geotechnik Sàrl', a company under Luxembourg law. Further, Polbud lodged an application at the Polish registry court for its removal from the Polish commercial register. The registry court refused the application for removal. Polbud then brought an action against that decision.

In its judgment, the European Court stated, first, that EU law extends the benefit of freedom of establishment to all companies or firms formed in accordance with the legislation of a Member State and having their registered office, their central administration or principal place of business within the European Union. That freedom includes, in particular, the right of such a company to convert itself into a company or a firm governed by the law another Member State.

In this case, freedom of establishment therefore confers on Polbud the right to convert itself into a company incorporated under Luxembourg law, provided that the conditions for its incorporation laid down by the Luxembourg legislation are satisfied and, in particular, that the test adopted by Luxembourg to determine the connection of a company or firm to its national legal order is satisfied.

Further, the Court holds that a situation in which a company formed in accordance with the legislation of one Member State wants to convert itself into a company under the law of another Member State, with due regard to the test applied by the second Member State in order to determine the connection of a company to its national legal order, falls within the scope of freedom of establishment, even though that company conducts its main, if not entire, business in the first Member State. The Court recalls, in that regard, that the fact that either the registered office or real head office of a company is established in accordance with the legislation of a Member State for the purpose of enjoying the benefit of more favourable legislation does not, in itself, constitute an abuse. Accordingly, the decision to transfer to Luxembourg only the registered office of Polbud (that transfer not affecting the real head office of that company) cannot, in itself, mean that such a transfer does not fall within the scope of freedom of establishment.

Secondly, the Court observes that, although it may in principle transfer its registered office to a Member State other than Poland without the loss of its legal personality, a company incorporated under Polish law, such as Polbud may, under Polish law, obtain the removal of its name from the Polish commercial register only if it has been liquidated. In that regard, the Court notes that, under Polish law, the process of liquidation extends to the completion of current business, recovery of debts owed to the company, performance of its obligations and sale of its assets, satisfaction or securing of its creditors, submission of a financial statement on the conduct of that process and an indication of where the books and documents of the company in liquidation are to be deposited.

The Court holds that, by requiring the liquidation of the company, the Polish legislation is liable to impede, if not prevent, the cross-border conversion of a company. That legislation therefore constitutes a restriction on freedom of establishment.

Such a restriction may, in principle, be justified by overriding reasons in the public interest, such as the protection of the interests of creditors, minority shareholders and employees. However, the Polish legislation prescribes, in general, mandatory liquidation, there being no consideration of the actual risk of detriment to those interests and no possibility of choosing less restrictive measures capable of protecting those interests. In the Court's view, such a requirement goes beyond what is necessary to achieve the objective of protecting the above-mentioned interests.

Finally, as regards the argument of the Polish government that that legislation is justified by the objective of preventing abusive practices, the Court holds that, since a general obligation to implement a liquidation procedure amounts to establishing a general presumption of the existence of abuse, such legislation is disproportionate.

Judgment in Case C-106/16 Polbud - Wykonawstwo sp. z o.o.

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