Opinion on the Application of Article 228 of the Alternative Investment Funds Act

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Opinion of Hanfa regarding the legal status of the assets of a fixed-term AIF after the expiration of its term Request for Opinion Hanfa has been asked about the legal status of the assets of a fixed-term AIF after the expiration of its term, in cases where the entire assets of the AIF are not liquidated before the termination of the AIF.
Opinion
Hanfa, at its Management Board meeting on 18 February 2021, adopted the following opinion:
The termination of a fixed-term AIF is governed by Article 228 of the Alternative Investment Funds Act (Official Gazette Nos. 21/18 and 126/19, hereinafter: AIFA), regardless of whether specific assets that have not been liquidated or distributed to investors in accordance with the AIF rules (if so stipulated by the AIF rules) exist at that time.
Article 228, paragraph 1 of the AIFA stipulates that for an AIF established for a fixed term (in this case, FGS), the termination date is determined in its rules. The AIFA (Article 228, paragraph 3) further stipulates that the AIF Manager must pay out investors in a fixed-term AIF within no later than seven days after the termination of the AIF, unless otherwise determined by the AIF rules and prospectus where applicable. This provision takes into account the specifics of fixed-term AIFs, as well as the fact that for such funds, the AIF Manager is aware of the termination date, and the AIF Manager, exercising the care of a competent professional, is obliged to plan divestment, i.e., exit from realized investments in accordance with such term, as more detailed within the rules of the specific AIF.
It is noted that, depending on the specific situation of an individual AIF, the AIF Manager has mechanisms to extend the term of the AIF, or to initiate liquidation proceedings before the termination date, with the consent of the Trustee Committee. This takes into account the possibility that the AIF Manager may not be able to fulfill its obligations under Articles 228, paragraphs 2 and 3 of the AIFA within the initially stipulated period.
If liquidation of the AIF is not initiated, and the AIF Manager does not fulfill the aforementioned obligation within the stipulated period (whether initial or extended), Article 283, paragraph 1, point 82, and Article 284, paragraph 1, point 48 of the AIFA provide for administrative liability of the AIF Manager. The prescribed penalty for this administrative offense ranges from 200,000.00 to 500,000.00 HRK for a more serious offense, and from 50,000.00 to 100,000.00 HRK for a lighter offense. In such cases, the AIF Manager is considered to have acted contrary to the mandatory provision of the AIFA. The failure of the AIF Manager's obligations towards investors and/or the AIF constitutes, in addition to acting contrary to the AIFA, a breach of contractual relations, which the AIF Manager and investors resolve through an agreed mediation procedure (if so stipulated by the AIF rules) or in civil proceedings before the competent commercial court. In cases where the AIF Manager has not fulfilled its duty under Articles 228, paragraphs 2 and 3 of the AIFA, it is noted that Article 94 of the AIFA on the liability of the AIF Manager for damages may also apply, depending on whether investors consider that such damage has occurred. Namely, the AIF Manager is liable to the AIF and investors for the proper and conscientious performance of activities prescribed by the AIFA, regulations adopted on the basis of the AIFA, AIF rules, or prospectus where applicable. In such cases, Articles 17 to 20 of the Regulation on Compensation of Investors and/or the AIF apply, including provisions on the obligation of the AIF Manager to prepare a compensation plan and submit it to Hanfa without delay. Regarding the question concerning the legal status of potentially unliquidated assets of an AIF after the expiration of its term, we highlight the following. In accordance with the fiduciary relationship under Article 84, paragraph 1 of the AIFA existing between the AIF Manager and each investor in an AIF without legal personality, the AIF Manager is obliged to fulfill its duty under Articles 228, paragraphs 2 and 3 of the AIFA and pay out investors. If this obligation is not fulfilled in the manner and within the period stipulated by the AIFA, investors have a mature claim against the AIF Manager for such payout, in accordance with the aforementioned provisions of the AIFA, and satisfaction or fulfillment of such performance, if disputed (non-fulfillment, partial fulfillment, debtor's delay regarding the subject performance), can be achieved through an agreed mediation procedure (if so stipulated by the AIF rules) or by lawsuit in civil proceedings before the competent commercial court. Until this claim is satisfied (whether amicably or by a court decision), the status of AIF assets (after the expiration of the AIF term) in the context of property and obligation relations is not explicitly regulated by the provisions of the AIFA. However, the AIFA generally stipulates that
assets constituting the AIF, i.e., AIF assets and rights constituting AIF assets, are held in joint ownership by all investors in the AIF. Namely, Article 84, paragraph 4 of the AIFA provides that an investor in an AIF acquires, based on the investment contract and a share, the status of co-owner over things, rights, and claims belonging to the joint separate assets of the AIF. We note that a thing (asset), in accordance with Article 57, paragraph 1 of the Property and Other Real Rights Act (Official Gazette Nos. 91/96, 68/98, 137/99, 22/00, 73/00, 146/08, 38/09, 153/09, 143/12, 152/14; hereinafter: PRRRA), is in joint ownership when undivided property exists with ownership of two or more persons (co-owners) who all have shares in it, but the size of their shares is not determined, regardless of whether it is determinable. This would be the case for AIF assets, considering that the size of investors' shares in the AIF is determined, while the size of shares or ownership of each investor in a specific individual item of AIF assets is not determined, but is determinable. We also note that the PRRRA regulates that "a thing may be in joint ownership only on the basis of law." If the term of the AIF is not extended, and the AIF Manager has not fulfilled the requirement under Articles 228, paragraphs 2 and 3 of the AIFA and has not paid out investors, and AIF assets are unliquidated, the termination of the existence of the AIF does not change the fact that assets of an AIF without legal personality do not belong to the AIF Manager, are not part of its assets, liquidation or bankruptcy estate, nor can they be subject to enforcement for the satisfaction of a claim against the AIF Manager, all in accordance with Article 86, paragraph 1 of the AIFA. The provisions of the AIFA do not imply that unliquidated AIF assets, upon termination of the term of the AIF, by operation of law would transfer into the ownership of the AIF Manager, particularly in cases where the AIF Manager has not fulfilled its obligation to repurchase shares from investors. Hanfa notes that regarding the disposal of assets and relations among interested parties from the moment of expiration of the AIF term, i.e., among others, the provisions of the PRRRA and the Obligations Act apply (one of the fundamental principles of obligation relations is the principle of freedom to regulate obligations), and investors have relevant legal instruments of the PRRRA and Obligations Act available, which can be realized by agreement between investors or through judicial means, and which are of decisive influence on the legal status of potentially unliquidated assets of the Fund after the expiration of its term. 2