The following options are available in Luxembourg to companies in financial distress:
- bankruptcy (faillite/banqueroute) (Articles 437 to 592 of the Commercial Code);
- controlled management (gestion contrle) (Grand Ducal Regulation of 24 May 1934);
- a moratorium or suspension of payments (sursis de paiement) (Articles 593 to 614 of the Commercial Code); and
- a company voluntary arrangement (concordat) (Articles 508 to 527 of the Commercial Code).
In addition, the possibility of involuntary (court-ordered) windingup and liquidation (dissolution et liquidation) (Articles 1200-1 and 1200-2 of the Act of 10 August 1915 on commercial companies) is also worth mentioning.
Of the above options, the most commonly used procedure in Luxembourg is bankruptcy. Controlled management, suspension of payments and the company voluntary arrangement are rarely used in practice.
A company can be declared bankrupt if the following cumulative criteria are met: the company is:
- unable to pay its debts as they fall due; and
- unable to obtain credit.
Under Luxembourg law, bankruptcy is thus a liquidity rather than a solvency issue.
A company can be placed in bankruptcy:
- at the initiative of the company's directors;
- as a result of proceedings brought by an unpaid creditor; or
- by the court after having received information about the company's financial situation.
The district court of the place where the company's registered office is located when it becomes insolvent has jurisdiction to declare the company bankrupt.
The debtor is prevented from administering its assets as from the date of the adjudication in bankruptcy by the competent district court. All payments, transactions and acts made by the insolvent debtor as from the date of the adjudication in bankruptcy shall be deemed null and void.
In addition, certain acts and transactions carried out prior to the adjudication in bankruptcy, during the hardening period and within ten days prior to the start of this period, can be voided (such as transactions transferring property without reasonable consideration, payments by whatsoever means of debts that are not yet due, payments of debts by non-cash means and the granting of security for debts incurred prior of the start of the hardening period). The hardening period cannot be set more than six months prior to the date of the adjudication in bankruptcy.
In accordance with the Act of 5 August 2005 on financial collateral, secured creditors with qualifying collateral may enforce their security interests notwithstanding the bankruptcy.
This procedure may be used if a debtor is facing financial difficulties but has real prospects of either:
- reorganising and restructuring its debts and business; or
- realising its assets in the best interest of creditors, under the supervision of one or more court-appointed administrators.
Creditors that do not participate in the proceedings remain subject to the agreed reorganization plan and may not pursue their claims individually. It should be noted that this procedure, comparable to Chapter 11 in the United States, frequently ends in bankruptcy.
Moratorium or suspension of payments
This procedure is available to a debtor that is unable to meet its financial obligations due to unexpected events but, based on its balance sheet, has sufficient assets to satisfy its debts or could still rebalance its assets and liabilities. A moratorium allows the debtor to defer its payments until it is able to meet its financial obligations. A suspension of payments is typically used when the debtor is a financial sector professional.
Company voluntary arrangement
This is a court-supervised procedure, initiated by the company, to facilitate negotiation between the company and its creditors. The company must be acting in good faith and may not have suspended payments. Unlike controlled management, creditors that do not participate are not subject to the agreed reorganization plan and may pursue their claims individually.
The court can order, at the request of the public prosecutor, the winding-up and liquidation of a company that pursues activities which constitute a criminal offence or violate the provisions of the Commercial Code or the legislation regulating commercial companies, including the laws governing business licenses (e.g. the requirement to file annual financial statements on time).
Several developments in relation to Luxembourg insolvency law are currently in the pipeline, including a legislative proposal to reform the insolvency legislation in order to facilitate the earlier detection of financial difficulties and thereby rescue and recovery. The bill provides for new customized tools designed to help distressed companies continue their activities and to protect stakeholders, notably by favouring restructuring over liquidation.
Furthermore, following the adoption of the Preventive Restructuring Framework Directive, Luxembourg is required to transpose the provisions of the directive into national law. Once this has been done, debtors will have access to a preventive restructuring framework that allows them to restructure with a view to preventing insolvency. Indebted businesses will also have access to at least one type of procedure which can lead to a full discharge of their debts after a maximum period of three years.
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.