Luxembourg Modernises Its Insolvency Legislation
On 19 July 2023, the parliament of the Grand Duchy of Luxembourg (Luxembourg) passed bill no. 6539A into law (the New Insolvency Law), marking a significant milestone in the movement to modernise and enhance the competitiveness of Luxembourg’s insolvency framework. The bill has been under discussion for a number of years and aims to curtail the use of bankruptcy as an insolvency solution in favour of the preemptive preservation or reorganisation of financially distressed companies. It implements Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks into national law.
The New Insolvency Law has come into force on 1 November 2023 and introduces novel preventative options for financially distressed companies, both in and out of court, for the avoidance of bankruptcy. Further, the New Insolvency Law discards several facets of the Luxembourg insolvency framework, which had become seldom used and commonly regarded as obsolete, thereby effecting a broader reform of the framework.
The New Insolvency Law applies to the following entities:
- Commercial company types with legal personality including, among others, (i) public companies limited by shares (société anonyme), (ii) corporate partnerships limited by shares (société en commandite par actions), (iii) private limited liability companies (société à responsabilité limitée) and (iv) common limited partnerships (société en commandite simple); and
- Special limited partnerships (société en commandite spéciale), akin to the LLP used under common law.
The New Insolvency Law does not impact regulated entities subject to special insolvency regimes, including, in particular:
- Credit institutions and investment firms;
- Insurance and reinsurance undertakings;
- Payment institutions and electronic money institutions;
- Securitization undertakings issuing financial instruments to the public on a continuous basis; or
- Investment funds (e.g. UCITs, SICARs, RAIFs, SIFs).
OUT-OF-COURT REORGANISATION BY MUTUAL AGREEMENT
Under the New Insolvency Law, a distressed company may, on a voluntary basis, request the appointment of a conciliator (conciliateur d’enterprise) named by the minister for the economy or the minister for small and medium-sized enterprises (depending on their competency) for the purpose of facilitating the conclusion of an amicable reorganisation of some or all of the company’s assets or businesses with either all of its creditors or at least two of its creditors (an Amicable Agreement).
If an Amicable Agreement is reached, the distressed company may apply for the agreement’s certification by the district court sitting in commercial matters (Tribunal d’arrondissement siégeant en matiére commerciale). Such certification will grant an enforceable character to the Amicable Agreement and make any transactions contemplated by the Amicable Agreement unavoidable, even if they fall—should the distressed company ultimately file for bankruptcy—within the suspect period (that is, the period between the actual date of cessation of payments1 and the starting date of the bankruptcy proceeding). Prior to the court’s certification of an Amicable Agreement, it will verify that the purpose of that Amicable Agreement is indeed to reorganise all or part of the distressed company’s assets or activities. A certified Amical Agreement is neither subject to publication or notification nor is it, as an out-of-court agreement, subject to appeal.
The instrument of an Amicable Agreement can provide a forum for confidential negotiations between the debtor and its creditors and prepare a prenegotiated plan of reorganisation. Even if no consensus is reached, this process can help to build the majority required to achieve a court-recognised collective agreement.
JUDICIAL BANKRUPTCY PREVENTION PROCEDURES
As an alternative to the out-of-court reorganisation, a distressed company may seek to preserve the continuity of all or part of its assets or activities under the supervision of the court via a new toolkit of judicial reorganisation proceedings. These tools consist of:
A Court-Recognised Collective Agreement
A distressed company may wish to reach a collective agreement (accord collectif) with some or all of its creditors on a reorganisation plan. A reorganisation plan that properly depicts the company’s current financial situation and lays out its proposed solutions may be submitted to the court for judicial recognition. Upon approval, this collective agreement carries with it the key benefit of enforceability, under certain circumstances, on dissenting classes of creditors.
A Court-Ordered Stay of Payments
As a distressed company pursues a solution to its financial situation, whether in court or through extrajudicial Amicable Agreement, it may petition the court for a temporary stay (sursis) of payments on its debts to buy time for the negotiations of an Amicable Agreement. A temporary stay of this kind may not exceed an initial term of four months (which can be extended to a maximum of 12 months).
A Court-Ordered Transfer of Assets
At a distressed company’s election or by the initiative of the public prosecutor,2 the court may be petitioned to order the transfer of some or all of the distressed company’s assets. The transfer process is overseen by a court-appointed legal representative, who seeks offers from third-party buyers and is responsible for presenting the distressed company and the court with the offers received. Judicial approval of the legal representative’s selected offer must be granted before the transfer may take place.
A debtor seeking to avail itself of one of these tools has to submit a petition to the court (i) describing the facts on which the request is made and upon which, in the company’s view, the continuity of its business is threatened; (ii) indicating the objective(s) for which it requests the initiation of the given procedure; and (iii) providing a list of documentation required for the application’s assessment or, in the case that any requested documents cannot be provided, a note giving detailed reasons for the impossibility. While an application for any of the forms of judicial reorganisation is pending, the debtor may not be declared bankrupt nor be judicially dissolved. Finally, no realisation of property, movable or immovable, may take place before the court has ruled on any such petition.
It should be noted that the New Insolvency Law provides for a high level of flexibility in the employment of these proceedings, permitting them to be applied for and eventually employed according to varying strategies for each of a company’s businesses or parts of businesses.
No Impact on Financial Collateral Arrangements and Professional Payment Guarantees
The law of 5 August 2005 on financial collateral arrangements, as amended, and the law of 10 July 2020 on professional payment guarantees have positioned Luxembourg as an attractive and creditor-friendly jurisdiction for cross-border transactions.
Financial collateral arrangements (such as pledge agreements or netting arrangements) have always been unaffected by any kind of (national or foreign) insolvency proceedings. Likewise, unless agreed otherwise between the parties, a professional payment guarantee remains in place, despite any kind of (national or foreign) insolvency proceedings opened against the debtor in favour of which the payment guarantee is given.
The New Insolvency Law maintains the safe-harbour rules for financial collateral arrangements and professional payment guarantees so that no procedure under the New Insolvency Law affects in any way the validity or enforceability of a financial collateral arrangement or a professional payment guarantee. In particular, a court-ordered temporary stay of payments (as described above) does not prevent a creditor from the enforcement of a financial collateral arrangement governed by Luxembourg law.
Innovations for the Early Detection of Financial Difficulties
Endowing the measures introduced by the New Insolvency Law with the greatest preventative effect requires the timely identification of companies having a heightened risk of insolvency. To that end, the New Insolvency Law tasks the minister of the economy and the minister for small and medium-sized enterprises with the collection of information, specific to their respective spheres of responsibility, to be used in the detection of companies in financial difficulties whose likelihood of continuity is doubtful.
To make use of this information for early warning purposes, the New Insolvency Law conceives of a special Evaluation Committee for Businesses in Difficulties (Cellule d’évaluation des entreprises en difficulté) which will be comprised of five members designated by the minister of the economy from among the ranks of the VAT Authority (Administration de l’Enregistrement et des Domaines), the Direct Tax Administration (Administration des Contributions Directes), the Social Security Authority (Centre Commun de la Sécurité Sociale) and other main public administrators (the Special Committee).
The Special Committee, whose details of operation will ultimately be set down and governed by a Grand-Ducal Regulation, will serve to assess the appropriateness for an in-scope entity to file for bankruptcy.
Stronger Checks Against Abuses of the Bankruptcy Framework
The New Insolvency Law amends the bankruptcy provisions of the Luxembourg commercial code and the Luxembourg criminal code with a view towards stronger deterrence of fraudulent bankruptcy filings (banqueroute frauduleuse).
Firstly, fraudulent bankruptcy is reclassified from its former status as a crime to an offence (délit), which, despite at first glance signalling softness on bankruptcy fraud, is ultimately intended to streamline the prosecution of such incidents.
Secondly, the scope of the offence of fraudulent bankruptcy (as well as the benign simple bankruptcy (banqueroute simple)) is now broadened to cover not only the debtor’s directors but also its de facto directors.
The New Insolvency Law introduces additional regulations to implement the New Insolvency Law’s preventative measures into practice, namely the suspension of the statutory obligation for a distressed company to voluntarily file for bankruptcy,3 along with the suspension of any realisation of assets pursuant to any general enforcement measure (voie d’exécution), from the time of the company’s application for a judicial reorganisation up to a point in time determined by the court on a case-by-case basis, along with the empowerment of the public prosecutor to initiate bankruptcy proceedings.
Similar to the United States with its Chapter 11 proceedings and the United Kingdom with its restructuring schemes, Luxembourg has now reformed and revamped the range of options available to debtors in financially distressed situations and provides viable alternatives to a bankruptcy.
Luxembourg thereby joins other EU member states, such as Germany with its so-called StaRUG proceedings,4 having recently modernised their bankruptcy law framework.
While it remains to be seen to what extent the new toolbox introduced by the New Insolvency Law will be used by the players in the Luxembourg economy, the New Insolvency Law is a welcome and much sought-after development, which should enable Luxembourg to increase its attractiveness for restructurings in a number of different scenarios and should preserve the popularity of the double Luxco structure.
1 As a general rule, this date may be no more than six months prior to the opening of bankruptcy proceedings.
2 Prosecutor is responsible for prosecuting criminal cases and representing the interests of society in civil litigation.
3 The 30 days deadline to file for bankruptcy once the two cumulative conditions of cessation of payments and loss of creditworthiness are met is suspended as long as the judicial reorganisation is ongoing.
4 Unternehmensstabilisierungs- und -restrukturierungsgesetz of 22 Dezember 2020 (BGBl. I S. 3256), as amended.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.