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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
Under Luxembourg law, three procedures can be used to wind up and realise the assets of a Luxembourg company – bankruptcy, voluntary liquidation and judicial or involuntary liquidation. Unlike bankruptcy, liquidation does not fall under the strict definition of insolvency proceedings. Voluntary liquidation is, in principle, used to wind up solvent companies for various reasons (eg, to distribute assets to shareholders, upon expiry of the company’s term of existence), whereas judicial liquidation – which is governed by Articles 203 and 203-1 of the Companies Act (August 10 1915) – is initiated when there is a material breach of the act by the company. Since these procedures are unrelated to solvency, they are not discussed further here.
Bankruptcy is available to traders (ie, commercial companies governed by the Companies Act) as well as other persons, including natural persons, qualifying as traders due to the fact that they conduct a commercial activity within the meaning of the Commercial Code.
Restrictions on bankruptcy apply to certain undertakings in the financial sector which are subject to special insolvency rules, such as credit institutions and certain investment firms, certain professionals managing client funds, insurance and reinsurance undertakings, pension funds and regulated securitisation vehicles. Special insolvency procedures apply to regulated investment funds and fund managers, although there is no general carve-out rendering these entities ineligible for bankruptcy.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
Bankruptcy is the only procedure used exclusively to wind up insolvent companies under Luxembourg law. The objective of bankruptcy is to realise the assets of a debtor which is unable to pay its debts and has lost its creditworthiness, in the best interest of its creditors.
Bankruptcy is available to a debtor which:
- can no longer pay its debts as they fall due; and
- can no longer raise credit.
Both of these conditions must be met in order to qualify for bankruptcy.
Bankruptcy proceedings may be initiated by the debtor or one or more of its creditors filing an application for bankruptcy with the competent district court. Bankruptcy can also be initiated by the court in certain circumstances. In each case, bankruptcy proceedings are judicial proceedings, and there are no structural or regulatory differences that are contingent on the party which initiated them, save for the debtor's potential liability for late filing for bankruptcy. Indeed, when the conditions for bankruptcy are met, the debtor is required to file for bankruptcy within one month from the time it stops making payments. Failure to do so can result in criminal liability and/or civil liability for the debtor’s directors.
How are liquidation procedures formally approved?
A company can be declared bankrupt only by the court with jurisdiction over the matter. The court will assess whether the requirements for bankruptcy have been met and declare the debtor bankrupt or reject the application if the conditions for bankruptcy are not fulfilled.
What effects do liquidation procedures have on existing contracts?
As a general rule, contracts continue following the opening of bankruptcy proceedings. The bankruptcy trustee is nevertheless required to make sure that the continuation of certain contracts is favourable to the bankrupt estate. For instance, the performance of certain obligations, such as payment for goods by the debtor, requires the consent of the supervisory judge appointed by the court. Pursuant to Article 450(1) of the Commercial Code, liabilities which are not yet due and payable on the date that the debtor enters bankruptcy are accelerated. Interest on unsecured (contractual or statutory) claims ceases to accrue.
What is the typical timeframe for completion of liquidation procedures?
Luxembourg law does not provide for a time limit for the completion of bankruptcy proceedings. The average duration of such proceedings is between one and three years. However, more complex bankruptcies can take longer.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
If the court finds that the conditions for declaring the debtor bankrupt are fulfilled, it will appoint a bankruptcy trustee to manage the debtor’s affairs in bankruptcy and represent the interests of the debtor’s creditors. The trustee is supervised by a judge appointed by the court. The trustee plays the leading role in bankruptcy proceedings but can take certain actions, such as immediate realisation of perishable assets, with the prior approval of the supervisory judge only, while other actions, such as the sale of immovable assets, require court authorisation. The trustee in bankruptcy is responsible for acting in the best interest of the debtor as well its creditors.
What is the extent of the court’s involvement in liquidation procedures?
Bankruptcy proceedings are subject to judicial oversight and are conducted under the supervision of a judge appointed by the court. The court must approve the petition or application to open bankruptcy proceedings and is involved throughout the proceedings (eg, determining the conditions for the sale of certain assets, ruling on certain motions against the trustee's decisions, approving the performance of certain contracts by the debtor, authorising the pursuit of a business activity following entry into bankruptcy). Finally, once all proceeds have been distributed, the court – further to a motion by the trustee in bankruptcy – rules on the close of the proceedings and the liquidation of the debtor's assets.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
In bankruptcy proceedings, the trustee in bankruptcy plays the deciding role, under the supervision of the court. Although creditors may initiate bankruptcy proceedings and have the right to challenge certain decisions and actions by the trustee, their involvement remains limited. The start of bankruptcy results in the immediate suspension of proceedings against the debtor, meaning that creditors must exercise their rights by filing a claim with the trustee in bankruptcy. Certain secured creditors may, in principle, proceed with enforcement, subject to the priority rules.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
The powers of directors and other members of the debtor’s management body cease upon the appointment of the bankruptcy trustee.
Upon the opening of bankruptcy, shareholders are deemed subordinated creditors of the company and shall not interfere in its management. Directors remain in place but are prohibited from representing the debtor company or acting on its behalf.
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