When doing business with a Luxembourg company in financial distress, the counterpart should be aware that certain transactions are at risk.
Doing business with a bankrupt Luxembourg company
A bankrupt Luxembourg company is automatically deprived from the administration of its assets. All transactions must be entered into by the receiver in bankruptcy acting in the name and on behalf of the bankrupt company.
The bankruptcy judgment is made public by different means (publications in newspapers and in the official gazette, filing with the trade register). Therefore, a simple due diligence performed on the Luxembourg company should in principle reveal that it is bankrupt and should prevent anyone from doing business with such company directly.
Doing business with a Luxembourg company during the hardening period
The transactions which are particularly risky are the ones entered into by a Luxembourg company before it has been declared bankrupt. During the so-called "hardening period" some transactions are void by operation of law and others may be annulled by the court.
The hardening period (in French, "période suspecte") is the period prior to the bankruptcy judgment starting the date as from which the Luxembourg company is deemed to have been insolvent. Such period is determined with retroactive effect by the court in the bankruptcy judgment and can go back six months prior to the date of such judgment.
Transactions which are void by operation of law
The following transactions entered into by a Luxembourg company during the hardening period (and up to ten days before) are void by operation of law:
- •any transfers of property without any or without reasonable consideration
- •any payments, made by whatever means, of a debt which was not yet due
- •any payments, other than in cash or commercial paper, of a debt which is due
- •any mortgages or pledges granted over the company's assets, as security for pre-existing debt
These transactions shall be annulled by the court upon request of the receiver in bankruptcy. The effects of the nullity are far reaching. The fact that the other party involved was not aware of the financial situation of the Luxembourg company, is irrelevant.
Transactions which may be annulled by the court
Any other transaction may also be annulled by the court if (i) entered into during the hardening period (ii) while the other interested party (beneficiary of the payment, counterpart, etc.) was aware of the fact that the Luxembourg company was insolvent (in French, "en cessation de paiement"). The receiver in bankruptcy has the burden of proof to establish that the other party was aware of the financial situation of the Luxembourg company. It will be at the court's discretion to decide whether or not the transaction is null and void.
Further, mortgages recorded during the hardening period (and up to ten days before) may be declared void by the court if more than fifteen days have passed between the date on which the mortgage was granted and the date on which the mortgage was recorded with the mortgage office.
Exception for financial collateral arrangements
Since the implementation by Luxembourg of the Collateral Directive in 2005, financial collateral arrangements are protected against certain risks related to bankruptcy and other insolvency proceedings. Accordingly, the above provisions on the nullity of certain transactions entered into during the hardening period do not apply to pledges over financial collateral, security assignments, repo's and netting agreements.
More particularly, pledges over financial collateral granted by a Luxembourg company during the hardening period in order to secure a pre-existing debt, will not be automatically annulled by the court. This exemption covers pledges over receivables and pledges over financial instruments (which term is to be interpreted in the broadest way and includes among others shares, bonds, UCI units, debt instruments, deposit certificates).
Finally, all transactions entered into fraudulently against the other creditors' interest are null and void, irrespective of the date on which such transactions are entered into by the Luxembourg company.