Introduction
Objectives
Guiding principles
Main changes
Status

Introduction

The number of companies declared bankrupt in Luxembourg has increased tremendously since 2009, reaching a record of 1,026 in 2012. According to the authorities, this situation is mainly due to the existing legislation, which is obsolete and no longer suited to modern financial challenges.

In 2009 the government concluded that the creation of appropriate tools for companies in financial distress was vital, especially in the post-crisis period, and decided to address this issue.

Bill 6539 on business continuity and modernisation of the bankruptcy legislation was issued on February 26 2013 by Justice Minister Francois Biltgen.(1)

Objectives

Although it is impossible to prevent bankruptcies in a competitive market, the purpose of the proposed legislation is to allow for the detection of financial difficulties at an earlier stage and thereby facilitate rescue and recovery. The bill is intended to provide new, customised tools to help distressed companies to continue their activities and protect stakeholders (eg, employees), notably by favouring restructuring over liquidation.

Guiding principles

The bill is based on four guiding principles, largely inspired by the Belgian Business Continuity Act of January 31 2009.(2)

Preventive measures
The objective is to avoid recourse to bankruptcy each time a company experiences financial difficulties. The bill sets out warning signals to allow for early identification of struggling companies. Once identified, such companies can request and take preventive restructuring measures without having to introduce formal bankruptcy proceedings. The preventive measures include voluntary tools to preserve and reorganise business activities while taking creditors' rights into account.

Various indicators will be used to determine whether a company is experiencing financial difficulties (eg, outstanding tax and social security liabilities and pending lawsuits). This information will be gathered by two separate public entities: the Secretariat of the Economic Committee, which plays a central role in out-of-court reorganisations, and the Distressed Businesses Evaluation Committee, which will analyse, on behalf of its public authority members, whether a bankruptcy petition is appropriate.

The reorganisation possibilities to be made available to distressed companies include both out-of-court and in-court (judicial) proceedings, adapted to the size of company, and are largely voluntary (ie, applicable at the request of the struggling company). The possibilities are:

  • conciliation – the struggling business can request the Secretariat of the Economic Committee to appoint a conciliateur (business arbitrator) (out-of-court proceedings);
  • conclusion of an agreement with certain creditors (out-of-court proceedings);
  • conclusion of a collective agreement enforceable against all creditors for the purpose of reducing debt or deferring settlement (judicial proceedings);
  • reorganisation under court supervision in order to ensure business continuity (judicial proceedings); and
  • a court-ordered extension of the deadline for payment in order to achieve:
    • an agreement with one or more creditors;
    • a collective agreement enforceable against all creditors; or
    • reorganisation under court supervision (judicial proceedings).

These measures are intended to replace the current proceedings – such as the concordat préventif de faillite (composition with creditors), gestion contrôlée (controlled management) and sursis de paiement (suspension of payments) – which are rarely used in practice.

Remedial measures
These measures are intended to give a second chance to natural-person entrepreneurs who are performing their activities in good faith and to contribute to the creation of an environment conducive to a fresh start. Such good-faith entrepreneurs will no longer be "held personally liable for the outstanding debts of the failed business"(3) after the close of (personal) bankruptcy proceedings.

Coercive measures
These measures are intended to prevent bad-faith entrepreneurs from simply abandoning their business and starting another one. The idea is to decriminalise bankruptcy in order to render proceedings seeking an order to contribute to the company's assets (action en comblement de passif) or a trading ban more efficient. The bill also provides for the creation of specific proceedings for administrative dissolution without liquidation aimed at eliminating 'empty shells' in a timely and efficient manner by avoiding formal bankruptcy proceedings.

Employment-related measures
These measures are intended to contribute to the preservation of jobs through business restructuring. The measures include provisions on employee information and consultation. Under the bill, as a matter of principle all rights and obligations resulting from employment contracts are transferred by operation of law to the purchaser of the distressed company's assets. However, the bill allows the purchaser to choose the employees that it wishes to take over, provided that its choice is based on objective technical, economic or organisational reasons.

Main changes

The bill will introduce many changes(4) to the existing legislation, which can be summarised as follows:

  • The bill will reinforce creditors' rights through harmonisation of the requirements to call for bankruptcy – the debtor can be denied the exercise of its rights if it has mismanaged the business and its actions lead to the bankruptcy.
  • The bill will abolish the distinction between simple and fraudulent bankruptcy, establishing a single offence pursuant to Section 438 of the Commercial Code.(5) This section will decriminalise bankruptcy, which will become a misdemeanour, thus resulting in more efficient proceedings.
  • The Centrale des Bilans (Central Balance Sheets Office) will be established in order to gather information allowing for the identification of financially distressed companies. This information(6) will be centralised by the Secretariat of the Economic Committee and assessed by the Cellule d'évaluation des entreprises en difficulté (financially distressed companies assessment unit).
  • The position of trustee in bankruptcy will be formally recognised as a separate legal profession. A list will be compiled of all accredited trustees in bankruptcy, who need not necessarily be lawyers.
  • Debtors will be able to request judicial reorganisation by way of settlement. The purpose is (among other things) to restore the distressed company's financial situation. Debtors will be able to propose this possibility to one or more creditors.
  • An administrative dissolution procedure without liquidation will be introduced in order to reduce costs. This procedure will not be available to businesses that still have employees.

Status

The latest update on the bill was the opinion issued by the Office for Civil Servants and Public Employees on October 13 2014. The Council of State is currently discussing the bill and is expected to issue an opinion in the coming months.

For further information on this topic please contact Greet Wilkenhuysen or Romain Sabatier at NautaDutilh Avocats Luxembourg by telephone (+352 26 12 29 1) or email (greet.wilkenhuysen@nautadutilh.com or romain.sabatier@nautadutilh.com). The NautaDutilh Avocats Luxembourg website can be accessed at www.nautadutilh.com.

Endnotes

(1) Both Belgium (the Business Continuity Act of January 31 2009) and France (Articles L.621-1 to L.626.35 of the Commercial Code, introduced by the Act of July 26 2005) have passed similar legislation.

(2) Y Baden, J Delvaux, F Goergen, Y Hamilius, P Millim, A Prüm, D Ruppert and A Schmitt, Les procédures collectives au Luxembourg, Larcier, 2014, 11-36 ; C Dumont, "Projet de loi 6539 relative à la préservation des entreprises et portant modernisation du droit de la faillite: une lueur au bout du tunnel?", ACE, September 2013, 29 ; P Beissel and S Binard, "Insolvency Law, Policy and Procedure – Luxembourg", The International Insolvency Review, October 2013, 269.

(3) Id.

(4) L Vandenberghe, "La banqueroute au Luxembourg ", presentation of March 18 2014, 14.

(5) Abolishing current Article 577 on fraudulent bankruptcy.

(6) Documents such as judgments and notifications of economic redundancies or amounts owed to the social security and tax administrations will be consolidated in one place.

The authors wish to thank Ester Tshimuanga for her contribution to this update.

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