Restructuring and Insolvency jurisdiction guide: Luxembourg

Bankruptcy (faillite): Following the entry into force on 1 November 2023 of the law of 7 August 2023 on business preservation and modernisation of bankruptcy:

• judicial reorganisation (réorganisation judiciaire)
• out-of-court reorganisation (réorganisation par accord amiable)

To note that judicial reorganisation and out-of-court reorganisations are not available to a number of supervised / regulated entities, such as (but not limited to) credit institutions and investment firms, insurance and reinsurance undertakings, and regulated investments funds.

Laws and regulations pertaining to controlled management (gestion contrôlée) and composition to avoid insolvency (concordat préventif de faillite) were repealed. These two procedures were rarely used and will not be discussed further in this paper.

Moratorium applicable in the context of out-of-court reorganisation (réorganisation par accord amiable)

• the reorganisation is proposed by a distressed debtor to two or more of its creditors. It aims at the reorganisation of the debtor's assets and activities pursuant the terms of a negotiated out-of-court agreement
• the debtor can request the court to open judicial reorganisation proceedings with a view to benefit from a moratorium in view of the conclusion of the out-of-court agreement
• in such case, the debtor will benefit from a moratorium set by the court which cannot be longer than 4 months, unless extended upon request and for a duration which cannot exceed 12 months in total

as a result of the moratorium:

1. no enforcement action may be taken against movable or immovable property during the suspension period, but with respect to the unsecured claims (créances sursitaires) onlyall attachment or garnishment proceedings brought by unsecured creditors (créanciers sursitaires) stop
   1. the debtor can suspend the performance of its obligations under existing agreements, except for employment contractspenalty clauses are unenforceable during the moratorium .and until the reorganisation plan has been fully implemented
   2. security interests governed by the law of 5 August 2005 on financial collateral arrangements [the Financial Collateral Law] remain enforceable
      
      

See below for more information on out-of-court reorganisation (réorganisation par accord amiable), judicial reorganisation (réorganisation judiciaire) and applicable moratorium

Bankruptcy (faillite)

A company is considered bankrupt when:

• it is unable to pay its debts as they fall due, which characterises a state of cessation of payments (cessation de paiements)
• has lost its creditworthiness (ébranlement de crédit). These are cumulative conditions: a balance sheet test is not sufficient under Luxembourg law to ascertain whether a company is legally in a bankruptcy situation

Judicial reorganisation (réorganisation judiciaire)

The purpose is to preserve, under the control of the judge, the continuity of all or part of the assets and activities of the debtor. The debtor must establish that the continuity of its business is threatened at term

The procedure can be opened for one of the following aims:

1. obtaining the agreement of the creditors to a reorganisation plan
   1. the sale by way of judicial decision of the debtor's assets and activities to one or more third parties
   2. benefit from a moratorium in view of the conclusion of the out-of-court agreement
      
      

Any further development on judicial reorganisation will be limited to the adoption of the reorganisation plan.

Bankruptcy (faillite)

• it can be initiated either by the company itself, by the court of the district where its registered office is located, or by a creditor of the company
• a receiver (curateur) in charge of the liquidation and a judge (juge commissaire) to supervise the proceedings are appointed by the court
• there is no specific time limits for a bankruptcy proceeding. The length of the procedure depends on the complexity of the bankruptcy. It typically lasts two to four years

Judicial reorganisation (réorganisation judiciaire)

• the debtor initiate the judicial reorganisation by way of an application to the court. As part of the application, the debtor must provide amongst others a statement of the facts showing that the continuity of its business is threatened at term, indicate the aim(s) for which the opening of the judicial reorganisation is requested, and provide a statement of measures and proposals to restore the profitability and solvency of the business, implement a possible social plan and satisfy its creditors
• the fact that the debtor may meet the criteria for bankruptcy does not preclude the opening and continuation of the judicial reorganisation
• the debtor prepares a reorganisation plan. It may be assisted by a judicial representative (mandataire judiciaire), who may be appointed by the court upon request of the debtor or a third party with a vested interest
• as a general rule, the reorganisation plan must be approved by a majority of the creditors within each class of unsecured creditors (créanciers sursitaires) and secured creditors (créanciers sursitaires extraordinaires), representing at least half of the claims within each class
• a cross-class cram down mechanism has been introduced in Luxembourg law allowing to secure a reorganisation plan that will bind dissenting creditor classes under specific circumstances.
• once homologated by the court, the reorganisation plan becomes enforceable against all affected creditors, subject to specific protections applicable to extraordinary affected creditors
• the length of the procedure varies depending on the specific timeframe for the moratorium set by the court, which cannot be longer than four months, unless extended upon request and for a duration which cannot exceed 12 months in total. The court can close the reorganisation proceedings when it becomes manifest that the debtor is no longer able to ensure the continuity of all or part of its business or assets

Out-of-court reorganisation (réorganisation par accord amiable)

• the reorganisation is proposed by a distressed debtor to two or more of its creditors
• it aims at the reorganisation of the debtor's assets and activities pursuant the terms of a negotiated out-of-court agreement
• the debtor can request the court to open judicial reorganisation proceedings with a view to benefit from a moratorium in view of the conclusion of the out-of-court agreement
• the out-of-court agreement can be homologated by the Luxembourg courts, giving it enforceability
• the out-of-court agreement is confidential
• in case of subsequent bankruptcy, avoidance rules generally applicable to bankruptcy will not apply to homologated out-of-court agreements and other actions taken for the performance thereof, except for:

1. transactions at an undervalue
   1. security granted to secure obligations incurred before the security contract was entered into (see the Avoidance Transactions section for more information)
      
      

• creditors party to the out-of-court agreement will not be liable towards the debtor, other creditors or third parties in the case the out-of-court agreement did not succeed in preserving the continuity of part or all of the debtor's business
• if the debtor so requests, a conciliation officer (conciliateur d'entreprise) may be appointed in order to assist with the preparation, negotiation and performance of the out-of-court agreement

Bankruptcy (faillite)

• the receiver (curateur) administrates the winding-up of the insolvent company under the supervision of the judge-commissioner (juge commissaire)

Judicial reorganisation (réorganisation judiciaire)

• the debtor remains in control of its assets and the day-to-day operation of its business

Bankruptcy (faillite)

• the insolvency judgement has the effect of stopping all attachment or garnishment proceedings brought by creditors (except for those benefiting from a security interests governed by Financial Collateral Law), although creditors may still commence or continue court proceedings against it

Judicial reorganisation (réorganisation judiciaire)

• upon application to the court for the opening of the judicial reorganisation: no realisation of movable and immovable property may take place after having obtained enforcement
• upon adjudication by the court of the judicial reorganisation: the debtor benefit from a moratorium set by the court, which cannot be longer than four months, unless extended upon request and for a duration which cannot exceed 12 months in total
  as a result of the moratorium:

1. no enforcement action may be taken against movable or immovable property during the suspension period, but with respect to the unsecured claims (créances sursitaires) only
   1. all attachment or garnishment proceedings brought by unsecured creditors (créanciers sursitaires) stop
   2. the debtor can suspend the performance of its obligations under existing agreements, except for employment contracts
   3. penalty clauses are unenforceable during the moratorium and until the reorganisation plan has been fully implemented
      
      

• security interests governed by the Financial Collateral Law remain enforceable
• post-homologation moratorium: an additional suspension of the exercise of extraordinary affected creditors' rights for a period not exceeding 24 months may be provided under the reorganisation plan. This suspension is without prejudice to the payment of interest that is contractually or legally due on extraordinary affected claims. Any deferral or waiver of such interest will required the individual consent of the concerned the extraordinary affected creditors

• compulsory liquidation can be ordered by the court if a Luxembourg commercial company has:

1. either has pursued illegal activities, or has seriously infringed the provisions either of the Luxembourg commercial code or the provisions of the Luxembourg law on commercial companies
   1. upon the request of a shareholder, or a group of shareholders, if it is established that such shareholder has a solid ground for this request. This is typically the case when a conflict between shareholders creates a permanent paralysis of the corporate bodies of the company
      
      

• the public prosecutor can request the manager of the Luxembourg Trade and Companies Register to proceed with the administrative dissolution without liquidation (dissolution administrative sans liquidation) of a commercial company which has no employee, no assets and either has pursued illegal activities, or has seriously infringed the provisions either of the Luxembourg commercial code or the provisions of the Luxembourg law on commercial companies

Bankruptcy (faillite)

• main purpose is to realise the assets of the debtor and to distribute the proceeds to the creditors
• the survival of the company is not the main objective
• upon the closing of the bankruptcy proceedings, the company is in principle dissolved, unless its assets were sufficient to meet all its debts (principal, interest and costs) as part of the distribution process – in such case, the company may, upon request, obtain rehabilitation (réhabilitation) by the Luxembourg High Court (Cour supérieure de justice). The bankruptcy is then closed, and, provided the company has not been definitively struck off, it may resume the conduct of its business

Judicial reorganisation (réorganisation judiciaire)

• main purpose is to preserve, under the control of the judge, the continuity of all or part of the assets and activities of the debtor

Bankruptcy (faillite)

• yes, the receiver can, with the authorisation of the court, sell all or part of the company’s business, either by public auction or private contract. While “prepack” sale is not available in Luxembourg, in certain circumstances (depending on the facts and the structure), a similar result can be achieved through the enforcement (by way of private sale or out-of-court appropriation) of a Luxembourg law pledge

Judicial reorganisation (réorganisation judiciaire)

• yes, one of the possible aims of the judicial reorganisation is to proceed with the sale by way of judicial decision of the debtor's assets and activities to one or more third parties

Recognition of foreign insolvency proceedings

• a formal recognition (exequatur) is required in order to give effect to the enforcement measures contained in a foreign judgment in relation to assets located in Luxembourg EU cross-border insolvency proceedings
• the powers of an insolvency office holder appointed by the courts of the jurisdiction where the debtor has its centre of main interests are recognised as part of main proceedings without any further formalities

Immovable property

• mortgage over real estate (hypothèque)

Movable property

• pledge (gage) of moveable assets
• pledge (gage) and transfers of ownership as a security (transfert de propriété à titre de garantie) granted on financial instruments (eg. shares) and claims (eg. bank accounts, receivables) governed by the Financial Collateral Law
• pledges over a going concern (gage sur fonds de commerce)

Bankruptcy (faillite)

An insolvency judgement has the effect of stopping all Attachment or garnishment proceedings. However, the stay of enforcement does not apply to Luxembourg law security interests (like pledges) governed by the Financial Collateral Law.

Judicial reorganisation (réorganisation judiciaire)

• upon application to the court for the opening of the judicial reorganisation: no realisation of movable and immovable property may take place after having obtained enforcement
• upon adjudication by the court of the judicial reorganisation: the debtor benefit from a moratorium and as a result:

1. no enforcement action may be taken against movable or immovable property during the suspension period, but with respect to the unsecured claims (créances sursitaires) only
   1. all attachment or garnishment proceedings brought by unsecured creditors (créanciers sursitaires) stop
      
      

• security interests governed by the Financial Collateral Law remain enforceable. Practitioners ensure enforcement does not depend solely on acceleration (which itself may be suspended) and include a separate enforcement trigger linked to the filing for or opening of bankruptcy or judicial reorganisation proceedings

• insolvency receiver
• super-privileged employees (last 6 months’ wages with a maximum of six times the minimal social salary)
• employees’ contribution to social security (from salary)
• taxes
• employer’s contribution to social security
• lessor and pledgor and special secured debts
• unsecured debts

Following contracts are automatically null and void if concluded during the hardening period (période suspecte) (i.e. up to less than six months and 10 days before the judgment opening the insolvency proceeding):

• transaction at an undervalue
• payment made in respect of debts that are not yet due
• in-kind payment made in respect of debts that are due
• security granted to secure obligations incurred before the security contract was entered into

Additionally, a clawback is always possible via "Actio pauliana" / revocatory action:

Any action taken by a debtor that is fraudulent with respect to its creditor(s) and caused them a damage, is not enforceable against such creditor(s)

For such revocatory action to be successful, the creditor(s) must prove that:

• the creditor’s claim is determined
• the creditor’s claim existed prior to the fraudulent payment
• the debtor acted in an attempt to defraud creditors. This involves proving that management acted fraudulently and jeopardised the company’s creditworthiness by recommending the declaration of a dividend or by declaring an interim dividend

The threshold to prove fraud is high and depends on the specific facts and circumstances surrounding the dividend declaration. It involves:

• • an objective element (i.e. an act that impoverishes the debtor)
  • a subjective element (i.e. the debtor had the intent or at least the knowledge that the action taken caused a damage to the creditors)

• the fraudulent payment is likely to endanger the company’s creditworthiness, thereby causing a damage to creditors
• an additional condition is that if the fraudulent act involved a third party for consideration, the creditor must show that the third party was an accomplice, which can even be established by presumption

Extension of a company’s bankruptcy to a manager

• Bankruptcy can be extended to any legal or de facto director who either:

1. has entered into commercial transactions for their own account or benefit while acting under the corporate veil
   1. disposed of the company’s assets as if they were their own
   2. pursued a loss making business activity in their own interest and in an abusive manner

Debt contribution action

• Legal and de facto managers of a bankrupt company can be held personally liable for the company’s outstanding debts, in whole or in part and, jointly or severally, if the bankruptcy results from serious and obvious faults (fautes graves et caractérisées) for which they are held accountable

Criminal liability: negligent bankruptcy (banqueroute simple)

• “Simple” bankruptcy convictions are, for example, failing to declare the company bankrupt in accordance with the legal provisions or not keeping regular accounting records

Criminal liability: fraudulent bankruptcy (banqueroute frauduleuse)

• Fraudulent bankruptcy convictions are, for example, fraudulently embezzled or diverted part of the company’s assets or partly or entirely removed the books or accounting documents, or fraudulently removed, deleted or altered their contents

Legal and de facto managers of a bankrupt company who have committed serious offences or breaches of duty which have contributed to a company’s bankruptcy can be prohibited from carrying out any commercial activities or being appointed as a director, manager, statutory auditor, independent auditor or any similar position which includes the power to represent a company, for a period ranging from one to 20 years. This prohibition is automatically applicable to directors sentenced for negligent bankruptcy or fraudulent bankruptcy