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What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
The main source of insolvency legislation in the Grand Duchy of Luxembourg is Book III (Articles 437 to 532) of the Luxembourg Commercial Code, which contains provisions governing bankruptcy, the most commonly used insolvency proceedings in Luxembourg. The Commercial Code also contains provisions (Article 593 et seq) on the deferment or suspension of payments, a restructuring procedure which is rarely used in practice. The code’s provisions are supplemented by other – mostly recovery oriented – legislation, such as the Grand Ducal Decree of May 24 1935 on controlled management, as amended, and the Act on Composition with Creditors (April 14 1886), as amended.
Issues relating to jurisdiction and the recognition of insolvency proceedings commenced in other EU member states (with the exception of Denmark) are governed by the EU Regulation on Insolvency Proceedings (1346/2000).
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
Luxembourg is traditionally viewed as a creditor-friendly jurisdiction, in particular for secured creditors, due to the extensive and effective protection afforded by the Financial Collateral Act (August 5 2005). However, in practice many restructuring options are rarely used, mostly due to the difficulty of satisfying eligibility criteria which require the distressed business to hold sufficient assets, meaning bankruptcy is by far the most common insolvency procedure. The proposed amendments to the insolvency and restructuring regime currently being considered seek to establish more flexible restructuring and recovery options.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
Luxembourg does indeed have special insolvency rules for specific sectors, most notably credit institutions, certain types of investment firms and financial institutions under the Act on the Resolution, Reorganisation and Winding-up of Credit Institutions and Certain Investment Firms (December 18 2015). Special insolvency rules also apply to insurance and reinsurance undertakings and pension funds, certain other entities in the financial sector managing third-party funds, investment funds, venture capital investment companies and securitisation vehicles.
Are any reforms to the legal framework envisaged?
A bill amending and restating the statutory provisions on insolvency proceedings was presented to Parliament in February 2013 (Bill 6539 on Business Continuity and the Modernisation of the Bankruptcy Legislation). The bill is designed to facilitate the earlier detection of financial difficulties and thereby rescue and recovery. It provides new customised tools to help distressed companies continue their activities and protect stakeholders, notably by favouring restructuring over liquidation.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
The directors of a company which fails to meet its payment obligations must declare the company bankrupt at the clerk’s office of the competent district court within a month. If the directors fail to do so, they may be sued for negligent or fraudulent bankruptcy, both of which constitute criminal offences under Articles 573 to 578 of the Commercial Code.
Directors may be held personally liable for the company's bankruptcy and consequently its debts if the conditions set out in Article 495 of the code are met. In particular, the directors may be declared personally liable if they:
- pursued their own interests when acting on behalf of the company;
- disposed of the company's assets as if they were their own; or
- improperly pursued, for their own benefit, an operating deficit when it was clear that this would lead to a deferment of payments.
Moreover, the court may order the directors to bear all or some of the company's debts if their gross negligence contributed to the company’s insolvency (Article 495-1 of the Commercial Code).
If a shareholder actively interferes in the management of the company, a court may find that it was a de facto director of the company. In this case, the rules on directors will also apply to the relevant shareholder(s), who will face the same potential liability as the actual directors. In particular, shareholders acting as de facto directors may be declared personally liable if they:
- pursued their own interests when acting on behalf of the company;
- disposed of the company's assets as if they were their own; or
- improperly pursued, for their own benefit, an operating deficit when it was clear that this would lead to a deferment of payments.
Moreover, the court may order a shareholder(s) who acted as a de facto director to bear all or some of the company's debts, if their gross negligence contributed to the insolvency (Article 495-1 of the Commercial Code) and if the insolvency is considered fraudulent (Articles 573 to 578).
What defences are available to a liable director or parent company?
In order to avoid liability, directors must be able to demonstrate that they always acted in the company’s best interest and did not commit any wrongful acts, dispose of the company's assets as their own or pursue, for their own benefit or the benefit of related parties, a loss-making activity. They must also be able to show that they properly prepared and maintained the company's books and accounts and, in general, observed their statutory obligations (including the duty to file for bankruptcy within one month of when the company ceased to meet its payment obligations) and duties as directors.
The liability of a parent company is generally limited to its initial contribution to its subsidiary, provided that said subsidiary is a limited liability commercial company. However, it should be able to show that it did not interfere with the company's business and never participated in its management in lieu of the duly appointed directors.
What due diligence should be conducted to limit liability?
In order to mitigate liability, directors must always be careful to act in the company's best interest, which means they must place the company's interest before their own when taking decisions. All managerial decisions must be to the company's benefit. Further, in defining corporate strategy, a director must act as a reasonably prudent person and should be careful:
- to manage the company's business in good faith and with due care, in a competent, diligent, prudent and active manner, in the company's interest;
- to respect the duties imposed by law and by the company's articles of association; and
- to do nothing which falls outside the company's corporate purpose.
Directors must also refrain from comingling their assets with those of the company. Directors which fail to meet the company’s payment obligations must, within one month, declare the company bankrupt at the clerk’s office of the competent district court. Although there is no shift of fiduciary duties in the vicinity of bankruptcy under Luxembourg law, this is the only way for the directors to avoid being sued for negligent or fraudulent bankruptcy.
Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
Immovable property can be secured by means of either a traditional (ie, non-possessory) mortgage or an antichrèse, a rarely used registered security interest which provides for possession of the real property by the mortgagee. A mortgage is created using a notarised or officially recorded instrument and rendered effective against third parties upon recordation with the mortgage register of the judicial district where the property is located. Registration is valid and enforceable against third parties for 10 years and can be renewed for subsequent 10-year periods, provided that neither the underlying debt for which the mortgage was created nor the 10-year term itself is extinguished. In the absence of renewal, the security interest will no longer be enforceable. In addition, an undertaking to mortgage is possible and can be effected using a private deed, without the involvement of a notary.
An antichrèse is created by means of a notarised instrument specifying the period for which it is granted. For the entire duration of this term, the creditor takes possession of the real property, which it must maintain in a good state of repair, but does not become the actual owner. Like a traditional mortgage, an antichrèse must be recorded with the relevant mortgage register. Security interests in movable property are created by means of a pledge under the Luxembourg Civil Code (ie, not the Financial Collateral Act, which governs the pledge of financial instruments and receivables). A pledge can be granted for most types of movable assets, either tangible or intangible, present or future, including fungible goods such as agricultural products. A pledge must form the object of a written agreement and the pledgee may not re-use the collateral; the perfection of a pledge of movable property requires the physical delivery of the assets by the pledgor to the secured creditor (or its representative) as pledgee. Given that physical possession is required to perfect a civil law pledge, a security interest in future assets will in principle be considered an undertaking to pledge (ie, an undertaking to deliver the subsequently acquired collateral for the purpose of granting a security interest). Such a promise will become an effective security interest only upon physical transfer of the collateral. Financial collateral arrangements derive from the EU Directive on Financial Collateral Arrangements (2002/47/EC), which was implemented by the Financial Collateral Act. They are now the most commonly used form of security in international financing transactions.
Financial collateral arrangements cover any pledge or assignment of financial instruments or receivables (including most shares and bonds). The act allows any party to grant or benefit from this type of security and provides for extensive freedom of contract. This type of security is extremely cost effective, subject to few formalities and easy to put in place and enforce. However, certain assets (eg, IP rights and immovable property) are specifically excluded from its scope. The advantage of these security arrangements is that secured creditors under the act are entitled to enforce their security interests without being frustrated by insolvency proceedings or an obligation to declare their claims to the trustee in bankruptcy. Security interests that fall within the act’s ring-fencing provisions are protected from Luxembourg or foreign insolvency proceedings arising due to the insolvency of a Luxembourg company. In addition, any applicable zero-hour rules, fraudulent conveyance provisions or clawback periods provided for by the general insolvency rules do not apply to financial collateral arrangements governed by the act.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In principle, secured creditors are considered to fall outside the scope of bankruptcy, which means that they can enforce their claims and do not have to wait for the distribution of the proceeds by the bankruptcy trustee.
For other creditors, the order of payment in bankruptcy is as follows:
- Creditors of the bankrupt estate (ie, bankruptcy expenses such as the trustee's fees and procedural costs) are given priority over all other claimants.
- Preferred creditors of the bankrupt estate, including lien creditors such as the tax authorities and other governmental services and employees, and creditors with non-bankruptcy remote contractual or judicial security.
- Ordinary unsecured creditors, which are paid pro rata out of the remaining proceeds, if any.
Statutory lien creditors are given priority over other secured and unsecured creditors, in addition to a general right of priority over the body of creditors. Such liens include claims by courts and insolvency officials, employees and the tax and social security authorities. The creditor may have either a special lien on a specific asset or a general lien on all of the debtor's assets.
The court-appointed trustee in bankruptcy first settles the costs and disbursements incurred in the context of bankruptcy (including the trustee's fees, all bankruptcy administration costs and all disbursements made in the interest of liquidation). In general, the priority of preferred claims in bankruptcy is as follows:
- legal expenses incurred in the interest of all creditors;
- employee claims;
- claims for social security contributions (owed by the employees);
- claims by the Luxembourg tax authorities;
- claims for social security contributions (owed by the employer); and
- claims for contributions to professional associations.
There is some uncertainty with regard to the priority of secured creditors under the Financial Collateral Act in connection with statutory liens or preferential rights.
Without prejudice to statutory claims or liens, priority will depend on the type of security and the date of perfection or registration applicable (ie, security under the act, general civil law security or mortgage).
In general, unsecured creditors are satisfied after:
- the holders of specific and general liens or preferential rights;
- mortgagees; and
They also rank behind the holders of securities granted under the act.
In addition, the obligations of unsecured creditors rank at least pari passu with all unsecured and non-subordinated obligations, with the exception of any rights of set-off or counterclaim (the principle of equal treatment of unsecured creditors with the same priority).
Finally, certain unsecured creditors may be given priority over other subordinated creditors due to subordination arrangements governed by foreign or Luxembourg law.
Can this ranking be amended in any way?
The ranking cannot, in principle, be changed. However, it is always possible to contractually subordinate one creditor to another if all parties agree to do so and the company is solvent. Such subordination arrangements will not necessarily be enforceable in bankruptcy or against third parties to the agreement. Luxembourg law regulates and expressly recognises contractual subordination between securitisation companies and their creditors and investors only.
What is the status of foreign creditors in filing claims?
Unsecured foreign creditors are treated the same as other (unsecured) creditors during insolvency proceedings. However, the insolvency judge may grant additional time to foreign creditors to file their claims. Such creditors are also required to elect their domicile at the clerk's office of the district court where insolvency proceedings are opened.
Are any special remedies available to unsecured creditors?
An attachment can be requested for the debtor’s movable or immovable assets before the opening of insolvency proceedings. After the commencement of insolvency proceedings, all rights of unsecured creditors and those of creditors with a non-possessory security interest are suspended.
In practice, a dispute relating to an attachment can take several months to resolve. If the underlying insolvency proceedings are adjudicated before a final judgment is rendered in the attachment proceedings, it will be virtually impossible to complete the attachment process and the relevant assets will be deemed to fall within the bankrupt estate.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
Aside from traditional legal actions and attachment, creditors may use set-off to secure unpaid debts.
Luxembourg law provides for different types of set-off:
- Contractual set-off occurs when parties agree to set off their respective claims.
- Judicial set-off may be ordered by a court in the framework of legal proceedings between parties with mutual claims.
- Statutory set-off occurs through the operation of law without any specific agreement between the parties being required.
In principle, none of the three types of set-off is possible once insolvency proceedings have begun, except for contractual set-off of connected claims (ie, those arising from mutual obligations and from the same contract). However, netting and set-off arrangements covered by the Financial Collateral Act are protected from insolvency proceedings and may take effect in accordance with their terms, as part of a financial collateral or netting agreement.
The following mechanisms may also be used by creditors to secure payment:
- a retention of title clause, which allows an unpaid seller to retain title to the goods sold (non-fungible movable assets) until the purchaser has paid the purchase price in full; and
- a right of retention, which allows a creditor to keep the debtor’s goods for as long as its due and payable claim remains outstanding.
Is trade credit insurance commonly purchased in your jurisdiction?
Credit insurance to protect a company's cash flow against payment default by customers is frequently used by companies trading in Luxembourg. Many insurance companies offer trade credit insurance at the local level. In addition, the Luxembourg Export Credit Office insures exporters' risks associated with international business transactions and investments abroad. Such products are mainly used for markets outside the Organisation for Economic Cooperation and Development area.
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.
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
Debtors can opt to reorganise through controlled management, a composition with creditors or a deferment of payments. However, these three procedures are rarely used in practice, primarily due to the requirement that the debtor hold sufficient assets at the start of the proceedings and, in some cases, the high thresholds of consent required by law.
Restrictions on the use of these procedures apply to certain undertakings in the financial sector which are subject to special insolvency and reorganisation rules, such as credit institutions and certain investment firms, professionals managing third-party funds, insurance and reinsurance undertakings, pension funds and regulated securitisation vehicles. Special rules also apply to regulated investment funds and fund managers.
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
A debtor facing financial difficulties which does not meet the conditions for bankruptcy may apply for controlled management. The debtor's management is placed under the control of one or more commissioners appointed by the court. This procedure is intended to allow the debtor to meet its liabilities and requires that the debtor’s situation indicate the possibility of recovery. Alternatively, a plan can be established to realise the debtor’s assets.
Pursuant to Article 1 of the Grand Ducal Decree of May 24 1935, controlled management is available only when:
- the debtor's creditworthiness is undermined or the full performance of its obligations is jeopardised; and
- the procedure would allow either the reorganisation of the debtor’s business or the orderly realisation of its assets.
In addition, in order to be eligible for controlled management, Luxembourg case law requires the debtor to act in good faith.
In practice, few applications for controlled management are granted and most procedures, once opened, are converted into bankruptcy. The procedure is highly formalistic and is rarely requested by debtors.
Composition with creditors This procedure is designed to allow a debtor in financial difficulty to enter into an agreement with its creditors in order to avoid bankruptcy.
In order for a composition with creditors to be approved, the debtor must:
- be unable to meet its liabilities or suffer from a lack of creditworthiness; and
- be unfortunate and acting in good faith.
The second requirement is not defined in the law and is thus assessed by the courts on a case-by-case basis. Pursuant to case law, a debtor shall be considered unfortunate where it is not considered responsible for the situation that resulted in its financial difficulties. A debtor shall not be considered to be acting in good faith where it, or its directors, concealed assets or knowingly pursued a loss-making activity.
Deferment of payments This procedure is available to a debtor that is unable to face its financial obligations due to unexpected events but, based on its balance sheet, has sufficient assets to pay its debts or can balance its assets and liabilities. A deferment of payments can be granted only where the debtor’s financial situation indicates that improvement is possible.
A deferment of payments may be granted only where:
- due to extraordinary and unforeseen circumstances, the debtor is forced to cease paying its debts on a temporary basis; and
- based on its balance sheet, the debtor has sufficient assets to pay both principal and interest to all its creditors.
This option is rarely used in practice.
How are restructuring plans formally approved?
Under controlled management, a restructuring plan is drawn up by one or more commissioners appointed by the court, following the court’s assessment of the feasibility of reorganising the debtor’s business or liquidating its assets in an orderly manner. The plan must be approved by a majority of creditors, representing at least half the debtor’s liabilities. The plan must then be approved by the court and published.
A composition with creditors will be approved by the court where a majority of creditors representing three-quarters of the debtor’s liabilities adhere to the debtor’s proposal.
A deferment of payments may be entered into only where a majority of creditors (in number), whose claims amount to at least three-quarters of the total outstanding debt, approve the debtor’s request. In addition, the application for a deferment of payments must be approved by both the competent district court and the Superior Court of Justice.
What effects do restructuring procedures have on existing contracts?
The rights of creditors are suspended during controlled management proceedings and the debtor may not dispose of its assets without the commissioner’s prior approval. No payments, in any form, can be made unless authorised by the commissioner(s).
In the case of a composition with creditors, the court’s decision to appoint an investigating magistrate to examine the debtor’s financial situation automatically results in a stay of all subsequent acts of enforcement against the debtor’s assets. However, this procedure does not affect claims by the tax authorities, those secured by a lien, mortgage or pledge, and personal maintenance claims.
However, the debtor’s assets cannot be subject to enforcement proceedings during a deferment of payments. The deferment does not extend to certain privileged claims, such as those for taxes and other charges levied by public authorities, claims by lien creditors and secured creditors, as well as personal maintenance claims.
What is the typical timeframe for completion of restructuring procedures?
There is no typical timeframe for restructuring procedures under Luxembourg law. The duration of the proceedings will therefore depend on the complexity of the debtor's situation and the timetable set by the court.
What is the extent of the court’s involvement in restructuring procedures?
In controlled management proceedings, the court’s intervention is required in several instances. Before granting the application for controlled management, the court will appoint a judge to examine the state of the debtor’s affairs in order to determine the prospects for reorganisation. If the court finds, based on the judge's report, that reorganisation is feasible, it will grant a petition for controlled management and place the debtor's management under the control of one or more commissioners. Once the restructuring plan is approved by the debtor's creditors, it must also be approved by the court. If the debtor’s financial situation improves, a request for rehabilitation must be submitted to the court, which can then decide whether to release the debtor from controlled management.
In the case of a composition with creditors, the court appoints a judge to examine and report on the debtor’s financial situation. Based on this, the court decides whether the conditions to grant the application are fulfilled. If the court rules that the procedure should continue, the court-appointed judge will oversee the general meeting of creditors and the composition procedure.
When a debtor requests a deferment of payments, the court appoints a judge to examine its business. If the deferment is granted, the court will appoint one or more commissioners to oversee and control the debtor’s operations for the remainder of the proceedings.
What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
In controlled management, creditors must approve the restructuring plan. Following the appointment of a supervisory judge, all subsequent acts of enforcement against the debtor’s assets are suspended. Creditors can initiate proceedings against the debtor but are not permitted to enforce any court orders. This applies to both secured and unsecured creditors (with the exception of collateral holders under the Financial Collateral Act which may enforce their rights notwithstanding controlled management).
In the case of a composition with creditors, the creditors are called to a meeting. The application must be approved by a majority of creditors representing three-quarters of the debtor’s liabilities. The appointment of a supervisory judge stays all subsequent acts of enforcement against the debtor’s assets, except for those by collateral holders under the Financial Collateral Act.
In a deferment of payments, creditors’ rights are suspended for the duration of the proceedings. However, the deferment can be revoked at the request of one or more creditors (or commissioners) where the debtor:
- has committed fraud or acted in bad faith;
- has violated the prohibition on paying unsecured creditors during the deferment period fixed by the court; or
- has insufficient assets to pay its creditors.
Under what conditions may dissenting creditors be crammed down?
In the context of controlled management, once the reorganisation plan has been approved by a majority of the debtor’s creditors holding at least half its liabilities and ratified by the court, it shall be binding on all creditors including dissenting creditors and secured creditors (with the exception of collateral holders under the Financial Collateral Act). Creditors that abstain from the vote are deemed to consent. However, the reorganisation plan must take into account all interests at stake and comply with the rules on the priority of liens and mortgages.
In the context of a composition with creditors, the proposal is binding on dissenting creditors once ratified by the court. Secured creditors which voted in favour of the proposal are deemed to have waived their security rights.
In the context of a deferment of payments, non-consenting unsecured creditors are bound by the deferment, whereas secured creditors and certain lien creditors are unaffected by the procedure.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
Directors and shareholders play a limited role in restructuring procedures, since the debtor is generally not allowed to dispose of its assets without the consent of the commissioners or the court.
In controlled management, the debtor's management is placed under the supervision of court-appointed commissioners who do not replace the directors but rather exercise control over their actions. From the time commissioners are appointed, directors may not borrow money, receive funds or grant pledges or mortgages on the debtor’s behalf without the commissioners' consent.
In the case of a composition with creditors, directors are not divested of their functions, but any act of disposal requires the consent of the supervisory judge.
In a deferment of payments, the debtor is unable to dispose of its assets in any way without the consent of the court-appointed commissioners.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
In principle, it is possible to achieve restructuring outside formal rescue and recovery proceedings. Where the debtor faces difficulties but is not yet required to file for bankruptcy, the parties are free to contractually restructure the debt. However, no creditor can be forced to accept such informal restructuring and various liabilities can survive realisation of the assets (or the entire business).
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
Pursuant to Articles 445 and 446 of the Commercial Code, the insolvency judge can invalidate payments and other transactions entered into or performed during the clawback period further to a motion by the trustee in bankruptcy. This concerns transactions occurring after the date of the debtor’s cessation of payments, as determined by the court, possibly extended to six months and 10 days before entry into bankruptcy.
The transactions and acts referred to in Article 455 of the code are:
- transactions transferring property without reasonable consideration;
- the payment, by any means, of debts that are not yet due and the payment of due debts by means other than cash, bills of exchange, cheques and promissory notes; and
- the grant of security for debts contracted before the start of the clawback period.
In addition, payments and transactions made by the debtor following its cessation of payments can be declared void if creditors, when dealing with the debtor, knew that it had ceased making payments. The court shall assess whether a creditor had prior knowledge of the debtor’s financial condition on a case-by-case basis.
The insolvency judge may also invalidate any civil law security granted during the clawback period and any mortgages or liens registered more than 15 days after the entry into existence of the security right.
In addition, any transaction or payment made in violation of creditors’ rights can be set aside by the court, regardless of when it occurred (including before the clawback period).
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
In bankruptcy, after reviewing the report drawn up by the supervisory judge and hearing the trustee in bankruptcy, the court can order that the debtor’s business be carried on temporarily by the trustee in bankruptcy or a third party under the trustee's supervision. The trustee shall request the court’s authorisation to continue trading if this is in the interest of all creditors. A continuation of activity may result in liability for the trustee in bankruptcy, which will need to assess the cost of pursuing the activity as well as whether insurance covers such management.
Stakeholder and court involvement
To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
If continued, the business of a bankrupt debtor is entrusted to a trustee in bankruptcy. Other stakeholders, such as creditors, directors and shareholders, do not in principle have a role to play, although the trustee may appoint third parties to conduct the debtor's business under its supervision.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
There are no specific provisions of Luxembourg law addressing this issue, but taking out new loans and granting security is not prohibited when the trustee in bankruptcy considers this to be in the interest of the bankrupt estate, subject to court approval. However, since the purpose of bankruptcy is to realise the debtor's assets, trustees do not usually borrow new funds or grant security as doing so would increase the debtor’s liabilities. If granted, such financing enjoys special priority, with the same ranking as insolvency expenses.
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
Employment contracts are terminated automatically upon the entry into bankruptcy unless the court decides that the company should continue trading, in which case employment contracts can be maintained. Employees of a bankrupt company are entitled to:
- salary for the month in which the adjudication in bankruptcy is rendered and for the following month; and
- compensation amounting to 50% of their monthly salary corresponding to the notice period to which they are entitled.
The salaries and wages owed to employees for the last six months of work and all compensation due as a result of termination of the employment contracts, up to an amount equal to six times the minimum reference salary, must be paid before any payments can be made to secured creditors.
As mentioned above, employee-related claims have privileged status in bankruptcy and rank before claims for social security contributions and taxes.
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
Foreign insolvency proceedings will in principle be recognised in Luxembourg, provided that the criteria pertaining to the centre of main interests (COMI) (as defined in the EU Insolvency Regulation (1346/2000) were taken into account upon the opening of the proceedings. According to Luxembourg case law, foreign proceedings against a Luxembourg debtor shall be recognised provided that the debtor's centre of main interests is within the jurisdiction of the foreign court. The foreign judgment must comply with the requirements of due process and must not violate Luxembourg public policy.
The regulation provides for automatic recognition in Luxembourg of any judgment opening insolvency proceedings handed down by a court of an EU member state (with the exception of Denmark) which has jurisdiction pursuant to Article 3 of the regulation (ie, the centre of the debtor’s main interests is located in the foreign court’s jurisdiction).
Winding up foreign companies
What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
Foreign companies whose place of central administration, place of effective management and COMI is considered to be in Luxembourg may be subject to Luxembourg bankruptcy proceedings.
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
The Luxembourg case law in this area is based on the case law of the European Court of Justice. Pursuant to the EU Insolvency Regulation, there is a rebuttable presumption that the debtor’s COMI is situated where its registered office is located.
In a 2008 judgment, the Luxembourg Court of Appeal found that the COMI of a company governed by Luxembourg law was located in France, focusing primarily on the place where the company exercised its business and managed its client relationships, rather than the place where it conducted administrative activities, such as the place where board meetings were held.
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
With the exception of the duty to cooperate in the context of European insolvency proceedings, there is no specific duty to cooperate with foreign courts. The Luxembourg courts are traditionally favourable to cooperation in cross-border insolvency matters, as confirmed by the high-profile cross-border insolvencies which took place during and after the last financial crisis involving Luxembourg members of international financial groups (ie, those involving Lehman Brothers, Bernie Madoff, Kaupthing Bank, Landsbanki and Espirito Santo).