The number of companies declared bankrupt in Luxembourg has increased tremendously since 2009, reaching a record number of 1,026 in 2012. According to the Luxembourg authorities, this situation is mainly due to the current legislation, which is obsolete and no longer suited to modern financial difficulties.
In 2009, the Luxembourg government decided that the creation of appropriate tools for companies in financial distress was extremely important, especially in the post-crisis period, and decided to tackle this subject.
Bill No. 6539 on business continuity and modernisation of the bankruptcy legislation (the "Bill") was issued on 26 February 2013 by Justice Minister Francois Biltgen.
1. Objectives of the Bill
Although it is impossible to prevent bankruptcies in a competitive market, the purpose of the proposed legislation is to allow the detection of financial difficulties at an earlier stage and thereby facilitate rescue and recovery. The Bill is intended to provide new, customized tools to help distressed companies continue their activities and protect stakeholders (e.g., employees), notably by favouring restructuring over liquidation.
2. Guiding principles of the Bill
The Bill is based on four guiding principles, largely inspired by the Belgian Business Continuity Act of 31 January 2009.
Preventive measures. The objective is to avoid recourse to bankruptcy each time a company experiences financial difficulties. The Bill defines warning signals to allow the 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 also 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 (e.g., outstanding tax and social security liabilities, pending lawsuits, etc.). Such information will be gathered by two separate public entities, the Secrétariat du Comité de conjoncture (Secretariat of the Economic Committee), which plays a central role in out-of-court reorganisations, and the Comité d'évaluation des entreprises en difficulté (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 (i.e., 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);
- the conclusion of an agreement with certain creditors (out-of-court proceedings);
- the conclusion of a collective agreement enforceable against all creditors for the purpose of reducing debt or deferring settlement (judicial proceedings);
- reorganization under court supervision in order to ensure business continuity (judicial proceedings);
- a court-ordered extension of the deadline for payment in order to achieve: (1) an agreement with one or more creditors, (2) a collective agreement enforceable against all creditors, or (3) reorganization 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 paiements(suspension of payments), which are rarely used in practice.
Remedial measures. These types of 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. Indeed, such good faith entrepreneurs will no longer be "held personally liable for the outstanding debts of the failed business" after the close of (personal) bankruptcy proceedings.
Coercive measures. Such 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 administrativedissolution 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 it wishes to take over, provided its choice is based on objective technical, economic or organisational reasons.
3. Main changes introduced by the Bill
The Bill will introduce many changes to the current 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 (i) it has mismanaged the business and its acts (ii) lead to the bankruptcy.
- The Bill abolishes the distinction between simple and fraudulent bankruptcy, establishing a single offence pursuant to Section 438 of the Commercial Code. This section will decriminalise bankruptcy, which will become a misdemeanour, thus resulting in more efficient proceedings.
- A Centrale des Bilans (Central Balance Sheets Office) will be established in order to gather information allowing the identification of financially distressed companies. This information will be centralised by theSecretariat of the Economic Committee and assessed by the Cellule d'évaluation des entreprises en difficulté (CEvED) (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 inter alia to restore the distressed company's financial situation. Debtors will be able to propose this possibility to one or more creditors.
- Finally, an administrative dissolution procedure without liquidation will be introduced in order to lower costs. It should be noted that this procedure will not be available to businesses that still have employees.
4. Status update
The last update on the Bill was the opinion issued by the Chambre des Fonctionnaires et Employés publics(Office for Civil Servants and Public Employees) on 13 October 2014. Currently, the Conseil d'Etat (Council of State) is discussing the Bill and is expected to issue an opinion in the next months.