Companies under court-ordered liquidation: what can you do with worthless securities in your portfolio?
As I have already discussed in previous issues, I regularly receive requests from clients wishing to transfer or close their securities account and who find it difficult to do so because their portfolio contains securities whose issuer is in court-ordered liquidation. My past intervention has resulted in some progress, in particular with regard to equity savings plans (PEA). Worthless securities can now be taken out of the PEA, without this constituting a withdrawal within the meaning of the tax regulations.[1] However, this is a recurring problem which continues to exist. Nevertheless, there are a few possibilities, as I will explain in this month’s case.
The facts
Mr. H. holds an ordinary securities account and wanted to withdraw a line of securities from it. The French issuer, company X., which was formerly listed and then delisted, had been placed in court-ordered liquidation many years earlier.
When his account keeper refused to do so without explaining why, Mr H. contacted me to ask the account keeper to remove the line in question.
The investigation
I contacted Mr H.'s account keeper, who began by informing me that, according to the information available at the time of his reply, the court-ordered liquidation proceedings against company X on 18 December 2009 were still under way.
In its reply, the account-keeper explained to me that although the decision to open liquidation proceedings had resulted in the zero valuation assigned to security X, it had in no way resulted in the withdrawal of the securities from Mr H's account. It added that such a measure could only be carried out when company X was dissolved following a decision to close the court-ordered liquidation on grounds of insufficient assets.
However, the account keeper insisted that it had not received any notification of such a decision to close the court-ordered liquidation, and noted that company X was still listed in the Trade and Companies Register (RCS).[2]
After a careful analysis of these answers, since the liquidation of company X had not yet been completed, I did not find it unusual that Mr X's account keeper was unable to remove this line from his portfolio.
However, I went back to the account keeper to ask whether it had received any information or instructions from Euroclear allowing the conversion of X shares to registered form.[3] This was because converting his shares to pure registered form would make it possible to remove the line from Mr H's securities account without waiting for the liquidation process to be completed, without any adverse tax consequences, and to avoid custody fees.
In reply to this request, the account keeper informed me that, after having taken the necessary steps, it had succeeded in registering the 7,500 X shares held by Mr H. in pure registered form, and sent me the relevant documents in support of this.
Recommendation
I informed Mr H of these facts and told him that, following my intervention, his request to delete line X from his ordinary securities account had been granted.
I also informed him, with regard to the deduction of his capital loss, that Article 150-0 D, 12 paragraph 2 of the General Tax Code authorises, by way of exception, i.e. without waiting for the closure of the liquidation operations, holders of an ordinary securities account, who are holders of securities of a company that is the subject of insolvency proceedings, to deduct their capital losses in advance from their capital gains of the same nature. This deduction may be made as of the year of the ruling declaring the court-ordered liquidation. Taxpayers who intend to opt for the early deduction of their capital losses must comply with the provisions of Article 74-0 G of the General Tax Code.[4]
Lesson to be learned
It should be remembered that the delisting of securities from Euronext and the fact that the securities are, in most cases, declared "worthless" are not sufficient on their own to allow the securities in question to be removed from a securities account. In fact, the securities can only be removed from clients' accounts when the company no longer has a legal existence, i.e. once it is dissolved following the termination of the court-ordered liquidation. Until such a time, which may last many years, the line is thus maintained in the portfolio, even if it is valued at zero.
Unfortunately, while waiting, some account keepers (TCCs) continue to charge custody fees and may refuse requests from the clients in question to close their account. I therefore recommend that, in the future, professionals spontaneously propose the various options that follow to their clients, without waiting for the Ombudsman to step in: retention of securities, withdrawal, transfer to the account keeper for a token sum of one euro, or conversion of the securities to pure registered form. pure registered form.
Each option may have advantages and disadvantages, as summarised in the table below:
Option* | Advantages | Disadvantages |
|---|---|---|
Keeping of the securities in the portfolio | For an ordinary securities account: possibility of deducting the capital loss in advance pursuant to Article 150-O D, 12 para. 2 of the General Tax Code and subject to compliance with the procedure set out in Article 74-0 G of the same code. Special case of the PEA: no advance deduction. The capital gain or loss is assessed globally when the plan is closed and corresponds to the difference between: - the net asset value of the plan on the date of closure of the plan; - the amount of payments made into the plan since it was opened, excluding those relating to previous withdrawals or redemptions that did not result in the closure of the plan. | The line may be subject to custody fees until the closure of the court-ordered liquidation proceedings - unless the account keeper exempts clients from this, which is a good practice that is becoming increasingly common. In some cases, the line is not valued at zero but retains, many years later, its last valuation before delisting. If the account keeper nevertheless deducts fees, the AMF Ombudsman considers that the account keeper runs the risk of having such a fee challenged on the grounds that although the consideration may exist, it is illusory or derisory, since the securities are worthless (Article 1169 of the Code). Special case of the PEA: The presence of securities, even valued at zero, prevents the closure of the PEA, as long as they have not been withdrawn from the PEA. |
Withdrawal (or voluntary abandonment of securities by the client) | Allows the line to be removed from the portfolio and is therefore of interest in particular when the account cannot be closed precisely because the portfolio includes securities of an issuer under court-ordered liquidation | Withdrawal constitutes a definitive waiver of all rights to any present or future claim relating to the abandoned securities, including the allocation of a liquidation bonus and the possibility of a capital loss deduction. We strongly advise against such a withdrawal if the capital loss has already been deducted in advance. |
Transfer to the account keeper for a token amount of €1 | Solution negotiated by the Ombudsman for a case. Allows the line to be removed from the portfolio and is therefore of interest in particular when the account cannot be closed precisely because the portfolio includes securities of an issuer under court-ordered liquidation. Avoids having to create a securities account for this sole purpose and, having to pay custody fees, where applicable. Does not prevent the client from deducting capital losses if they have not already been deducted in advance. | There are no disadvantages, however, the solution is not accepted by all institutions and is examined on a case-by-case basis. |
Conversion of securities to pure registered form | The option of converting to pure registered shares automatically removes the securities of companies in liquidation from the client's portfolio, thus sparing clients from paying custody fees while safeguarding their interests in the event of compensation. Special case of the PEA: Pursuant to the Pacte Law (see Article L. 221-32 IV of the Monetary and Financial Code), securities of companies in liquidation can be withdrawn from PEAs free of charge, without affecting the possibility of making new payments or closing the plan. This provision allows the account keeper to subsequently convert the securities to pure registered shares, if the financial instrument account agreements so permit. | This procedure is conditional on the account keeper receiving a “Securities info” from Euroclear France to inform them of this specific operation. |
* Some of the options may be more complex to implement where foreign securities are concerned
[ 1 ] Equity savings plans: unlisted securities of a company in judicial liquidation may be withdrawn from the plan without entailing its closure
[ 2 ] RCS: The Trade and Companies Register is a database of all natural persons and legal entities engaged in commercial activity. All companies with a commercial activity must be listed in the RCS or face sanctions.
[ 3 ] Individual shareholders can choose to hold their shares either directly with the company (pure registered shares) or with a financial intermediary (administered registered shares or bearer shares)
Learn more: Registered or bearer? Choosing the best way to hold your shares
[ 4 ] "For the application of the provisions of Articles 12 and 13 of Article 150-0 D of the General Tax Code, taxpayers must attach to the special declaration of capital gains provided for in Article 74-0 F:
a) Either a copy of an extract of one of the decisions mentioned in the first paragraph of 12 of Article 150-0 D of the General Tax Code or in the second paragraph, if the option provided for in this paragraph is exercised, or a copy of one of the formalities ensuring the publication of these decisions under the conditions provided for in Article R. 62 1-8 of the Commercial Code, the provisions of which are applicable to the receivership procedures by virtue of Article R. 63 1-7 of the same code;
b) A copy of a document confirming the number of shares held on the date of the decision;
c) The amount of losses recorded as well as the information required to determine them. “
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