In this client alert we outline the practical approach taken in Luxembourg for companies and unregulated investment funds facing liquidity issues resulting from government lockdowns in response to the COVID-19 outbreak.
In the current environment, to reduce the risk of becoming insolvent, businesses and funds need to address cashflow while continuing to pay ongoing expenditures. Without support for cashflow disruptions, any Luxembourg company or partnership that (i) is unable to pay its debts as they fall due and (ii) is unable to raise funding to satisfy its payment obligations (i.e., credit is not available to it) is insolvent and its management must file for bankruptcy within one month from the company / partnership becoming insolvent. The flipside to this rule under normal circumstances is that any creditor of any such company / partnership may petition the courts for the ailing entity to be declared bankrupt, to the extent such creditor has reasons to believe that it is insolvent.
A company’s bankruptcy can extend to a board member when such director or manager in their own interest and in an abusive manner, pursued an unprofitable business activity which was predestined to lead to bankruptcy. This sanction remains and should act as a buffer to avoid potential abuse. For this purpose, the foreword of the bill also specifies that the inadmissibility of the petition by a creditor should only be possible for businesses experiencing financial distress as a result of the COVID-19 pandemic.
A grand ducal regulation was adopted on 25 March 2020 (and amended on 1 April 2020) whereby the deadline for filing within one month of the satisfaction of the two cumulative criteria set out above to deem any business / fund insolvent was suspended for the duration of the state of crisis. In addition, all procedural deadlines for the introduction of first instance proceedings (procedure en première instance) before the courts are now postponed by (i) two months after the end of the state of crisis for deadlines ending during such state of crisis and (ii) one month from its expiry date for deadlines ending within one month from the end of the state of crisis.
To further support the continuation of the operations of businesses and investment funds in Luxembourg, a new bill has been submitted (n°7552) on 6 April 2020 pursuant to which a moratoria is put into place, so that any petition by a creditor to declare the bankruptcy of its debtor be declared prohibited by being declared inadmissible and the deadline for the obligation to file for an admission of bankruptcy by the bankrupt entity itself is suspended.
The new bill helps relieve temporary liquidity crises and/or operational difficulties, and at the same time, it does not exempt management of all its duties to stakeholders, thus limiting a risk of abuse.
As a rule, management of any bankrupt commercial company or partnership may be subject to claims based on additional liability grounds, such as, for example, (i) the extension of a bankrupt entity’s bankruptcy to a board member in certain circumstances, (ii) the joint liability for the bankrupt entity’s debts when there were serious and blatant faults (fautes graves et caractérisées) for which management is accountable, (iii) the prohibition to carry out activities and (iv) the “banqueroute simple”, which is a misdemeanor and “banqueroute frauduleuse” which is a felony under Luxembourg criminal law.
The suspension is merely an option granted to businesses in Luxembourg, left to the discretion of management. This is because the rationale behind this relief is to (i) keep viable businesses and funds going during the COVID-19 pandemic and (ii) avoid a wave of bankruptcies as soon as the state of crisis is lifted. It is not, therefore, an authorization to delay insolvency for businesses and funds that do not have expectations to recover, thus preserving the right balance for entities facing difficulties triggered by the pandemic without setting up measures that would allow the management of an ailing insolvent business to continue to trade ultimately at the expense of its stakeholders. The management of any entity struggling before the state of crisis would have to consider carefully its position in the current circumstances and act accordingly.