Considering that both criminal and civil sanctions apply to the board of directors or managers of a Luxembourg commercial company for failure to declare bankruptcy in proper time, it is essential to determine exactly when the requirements for bankruptcy are met.

This question is of particular importance considering further that the provisions of the Luxembourg Commercial Code may seem confusing when read literally and in isolation as to whether the period commences from the date of cessation of payments (cessation des paiements) alone, or the date of both the cessation of payments (cessation des paiements) and loss of creditworthiness (ébranlement du crédit) (i.e., the cumulative criteria for bankruptcy).

As a company may be in cessation of payments by missing any single payment, but may still be in a state of creditworthiness where it is negotiating with its creditors for financing to remedy its financial position, it is crucial to understand (1) the criteria for bankruptcy and their interpretation, (2) the effect of the determination of cessation of payments, and (3) the impact of continued creditworthiness when determining the cessation of payments.

1. Criteria for bankruptcy

A commercial company is considered bankrupt when (i) it has ceased payments and is unable to meet its commitments (cessation des paiements), and (ii) its credit is exhausted (loss of creditworthiness, ébranlement du crédit)1. These two conditions must be met cumulatively on the day of the bankruptcy adjudication by the Luxembourg Commercial Court.

1.1 Cessation of payments

Cessation of payments is not clearly defined in the Luxembourg Commercial Code. It is understood as the situation where the debtor cannot fully pay its determined, liquid and receivable debts (créances certaines, liquides et exigibles) and/or where the debtor cannot cope with the normal charges and operating expenses such as rent, wages, tax and social security contributions2. Although such situation is typically proven through an unsatisfied executory judgment, a creditor does not need an executory judgment (titre exécutoire) to file its debtor for bankruptcy3.

The Luxembourg Commercial Court has held that the non-payment by a debtor of a single determined, liquid and receivable debt can be sufficient to adjudicate a company bankrupt provided the other conditions of bankruptcy are met4. Whether the non-payment of a single debt is sufficient to be considered as cessation of payments will depend on the factual position of the debtor and the extent of such unpaid single debt.

By means of example, a company could well be in cessation of payments on missing an interest payment to its creditors, and would then need to consider whether the second part of the test is met to declare bankruptcy.

1.2 The disappearance of creditworthiness

The loss of creditworthiness is understood as the refusal by trade or business partners or even the tax and social security authorities to continue to deal with the company on a credit basis (i.e. refusal by creditors to grant delays of payments or to provide additional funding to the company).

The credit of the debtor is also deemed to be exhausted if the cessation of payments is such that the state of the company's business does not inspire any confidence to equity or debt providers, and the company's activity is thus frozen. In that case, the loss of creditworthiness can be seen as the impossibility for a debtor to obtain new money in order to pay its debts (i.e., in order to put an end to the cessation of payment).

By means of example, a company could have lost its creditworthiness because no other party is willing to transact with the company on a credit basis, but to the extent it has not as yet missed a payment, it may not as yet have met the first criteria for bankruptcy.

2. The importance of the date of cessation of payments

The district court sitting in commercial matters of the location of the debtor's principal place of business (typically, its registered office) is competent to adjudicate a company bankrupt, either (i) upon declaration of the debtor within thirty days of the cessation of payment (aveu) (the Declaration), (ii) at the request of one or more creditors (assignation), or (iii) automatically on its own motion (faillite d'office).

The date of the cessation of payments is of crucial importance:

  • for determining the suspect period running from the date of the cessation of payment (as determined by the Court) to the judgement declaring the bankruptcy proceeding open, having an impact on the validity of the acts made by and on behalf of the debtor during that period (2.1);
  • for determining whether civil liability arises (2.2); and
  • for determining whether criminal liability arises (2.3).

2.1 The suspect period –The start date of effective cessation of payments is decided by the Court before declaring the bankruptcy proceedings open1. Such period, namely the "suspect period" (période suspecte), must fall within a time frame which is limited to six months before the declaration of bankruptcy by the Court.

Certain payments made, as well as other transactions concluded or performed, during the suspect period are subject to cancellation by the Court upon proceedings instituted by the receiver(s)2.

2.2 Directors' Civil Liability –Civil liability cases can be introduced by the receiver(s) (curateur(s)) appointed by the Court against the insolvent debtor's former board of directors or management.

The following three main aspects of civil liability of directors should be considered having regard to the absence of or delay in the Declaration within one month of the date of cessation of payments set by the Court:

  • Contractual liability towards the debtor on the grounds of breach of mandate and misconduct in management3;
  • Civil liability towards the debtor and third parties on the grounds of infringements of the Corporate Law or the debtor's articles of association4; and
  • Civil liability on the grounds of general principles of torts5.

2.3 Directors' Criminal Liability – The date of cessation of payments is particularly important from a criminal liability perspective as an insolvent person and its directors in the case of a commercial company can be declared as being in a state of simple bankruptcy (banqueroute simple) when such person has not made petition for bankruptcy within one month of the company's cessation of payments6. The Luxembourg Criminal Code sanctions simple bankruptcy (banqueroute simple) by an imprisonment of one month to two years7. A fine between EUR 500 and EUR 30,000 can also be imposed for (a) those who in the interest of the bankrupt concealed, hid or shielded some of the property of the bankrupt person, and (b) those who have fraudulently submitted during the course of the bankruptcy either fictitious or exaggerated debts, in their own name or through another person8.

3. Determination of the date of cessation of payments: impact of continued creditworthiness

A difficulty for board members when determining whether to declare bankruptcy arises from the fact that the Luxembourg Commercial Code refers to the sole date of cessation of payments (the first limb of the cumulative test only) as the starting point of the one-month period during which the directors of an insolvent company have a duty to file for bankruptcy. This despite the fact that the test for bankruptcy is cumulative and a company cannot be declared bankrupt without the cumulative requirements of the test being fulfilled. It is a valid defence to a bankruptcy declaration that the company has not as yet lost its creditworthiness. On an isolated reading of the Commercial Code it would appear as if the one-month period commenced already on cessation of payments. Consequently, a board which has missed a payment or series of payments, but is in continuing negotiations with its creditors or other parties willing to fund the company may have a difficulty in determining when the one-month period commences.

3.1 The intrinsic link between the cessation of payments and creditworthiness

In Luxembourg, unless otherwise determined, cessation of payments is presumed to be the date of the bankruptcy order, which order should only be granted on the cumulative requirements for bankruptcy being met1.

Using a comparative approach with French law, a French debtor is in cessation of payments when it cannot pay its debts as they fall due out of its available assets2. Article L.631-1 of the French Commercial Code specifies that a debtor establishing that it benefits from credit lines and moratoriums from its creditors allowing it to settle its current liabilities with its available assets is not in cessation of payments. This is an important distinction to Luxembourg law, for which the creditworthiness appears (at first glance) to be distinguished from the state of cessation of payments. An approach similar to the French law position appears to be followed by the Luxembourg legislator in article 437 of the Luxembourg Commercial Code, setting out the cumulative criteria for bankruptcy. Yet, the Luxembourg legislation does not link clearly the creditworthiness element in the determination of a debtor's state of cessation of payments. The applicable section of the Luxembourg Commercial Code references solely cessation of payments for commencement of the one-month period.

It is the view of the authors that although not clearly stated in the Luxembourg Commercial Code, negotiations with creditors (i.e., creditworthiness) must logically delay the date of cessation of payments. Where negotiations are taking place with a creditor whose payment has been missed, the very fact that such creditor accepts to negotiate with a company shows that it is not imposing payment, thus accepting a delay of payment3. This view further applies to the position where the creditor whose payment has been missed is not the same party as the persons with whom the company is negotiating further credit or financing. It is the view of the authors that a company cannot be in cessation of payments when it has not as yet lost its creditworthiness.

The view of the authors is supported by the fact that the Court can only declare a debtor bankrupt once both conditions set out in article 437 of the Luxembourg Commercial Code (i.e., cessation of payment and loss of creditworthiness) have been met. The starting point of the suspect period, as well as the starting point of the duty to file for bankruptcy should be understood to be a moment where the bankruptcy could have been declared (i.e., where both conditions set out in article 437 of the Luxembourg Commercial Code were fulfilled). It would be inconsistent with the cumulative test for bankruptcy to consider that a Declaration need be made based only on the inability of the debtor to pay a debt that is determined, liquid and receivable debt (créance certaine, liquide et exigible).

The Belgian Cour de Cassation has confirmed on several occasions that when it establishes the cessation of payments, the Court must find that the debtor ceased its payments in a persisting manner and that its credit is lost4. It has also held on multiple occasions that both notions are inextricably linked as the cessation of payments can been regarded as the consequence of a loss of creditworthiness5.

It is further the view of the authors that a restrictive interpretation of the notion of cessation of payments for the commencement of the one-month period alone, would negate the core purpose of EU insolvency regulations and the recent general development of preventive measures and pre-insolvency proceedings in order to allow viable entities to be turned around and return to a going concern status6.

In conclusion, it is the view of the authors that the provisions of article 440 of the Luxembourg Commercial Code (being the commencement of the one-month period for declaring bankruptcy from the date of cessation of payments), must not be read restrictively and in isolation but should be read in conjunction with article 437 of the Luxembourg Commercial Code (being the cumulative test for bankruptcy). This means the cessation of payments for the sake of calculating the one-month period for declaration of bankruptcy (subject to criminal sanction) can only occur once a company has lost its creditworthiness and does not occur on missing a payment or series of payments alone.

Footnotes

Point 1

1. Art. 437 of the Luxembourg Commercial Code

2. Trib. arr. Luxembourg, 4 March 1998

3. Cour d'appel (Luxembourg), 11 March 2015

4. Trib. arr. Luxembourg 14 January 1972, Pas. 22, 306

Point 2

1. Art. 442 of the Luxembourg Commercial Code

2. Art. 445, 446 and 448 of the Luxembourg Commercial Code

3. Art. 441-9§1 of the Luxembourg law of 10 August 1915 on commercial companies, as amended (the Corporate Law)

4. Art. 441-9§2 of the Corporate Law

5. Art. 1383 and 1383 of the Luxembourg Civil Code

6. Art. 574 of the Luxembourg Commercial Code

7. Art. 489 of the Luxembourg Criminal Code

8. Art. 490 of the Luxembourg Criminal Code

Point 3

1. Art. 442 of the Luxembourg Commercial Code

2. Art. L. 631-1 et seq. of the French Commercial Code

3. Principes de droit commercial, Gand, Van Rysselberghe & Rombaut, 1934, T. III, §1199, p.51

4. Cass., 16 May 2008, J.L.M.B., 2008, 1219

5. Cass. 2 December 1963, Pas., 1964, I, 346

6. Commission Recommendation of 12 March 2014 on a new approach to business failure and insolvency; Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.