Key Takeaways

• On 1 November 2023, the Luxembourg law of 7 August 2023 on business preservation and modernization of insolvency law (the Law) that was adopted on 19 July 2023 and published in the Official Journal of the Grand Duchy of Luxembourg on 18 August 2023, came into force.
• The Law has a dual objective of (i) modernizing Luxembourg insolvency law and (ii) implementing the European Union Directive 2019/1023 of 20 June 2019 on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency) (the 2019/1023 Directive).
• Below we provide a brief summary of the Law and highlight important things to know in relation to its entry into force.

Background

One of the two main objectives of the Law is to implement the 2019/1023 Directive, which itself aims to foster the proper functioning of the EU internal market and remove hindrances to the exercise of fundamental rights and freedoms, such as the free movement of capital and freedom of establishment. These hindrances are the result of variances in national laws and procedures that pertain to preventive restructuring, insolvency, debt discharge and disqualifications.

The other main objective of the Law is to modernize Luxembourg insolvency law, since, following the 2009 financial crisis, the view has been that a modernization of Luxembourg insolvency law and related regimes would be beneficial. Although the intention was to reform Luxembourg bankruptcy law pursuant to one law, the Luxembourg Parliament decided to prioritize the creation of a procedure of administrative dissolution without liquidation (dissolution administrative sans liquidation) and, as a result, the modernization of the Luxembourg insolvency law was split between the Law and the law of 28 October 2022 on the procedure of administrative dissolution without liquidation (dissolution administrative sans liquidation).

The Law implements new mechanisms and supportive measures to prevent distressed companies from systematically resorting to bankruptcy and aims to encourage distressed companies to continue their business activities. The Law also does away with certain outmoded proceedings. Lastly, the Law revises certain provisions related to bankruptcy within the Luxembourg Commercial Code and the Luxembourg Criminal Code.

Scope

The Law will apply to natural persons traders, commercial companies as defined in the law of 1915 on commercial companies, special limited partnerships (sociétés en commandite spéciales), craftsmen and civil companies.

The Law will not apply to credit institutions, other financial institutions, insurance and reinsurance institutions, undertakings for collective investment in transferable securities (UCITS), specialised investment funds (SIFs), reserved alternative investment fund (RAIFs), SICARs (sociétés d’investissement en capital à risque), central counterparts, central depositaries, pension funds organized by the law of 13 July 2005, pension funds organized by the law of 7 December 2015, securitization vehicles, payments and electronic currency institutions and law firms.

New procedures to identify and assist companies in difficulties

The Law emphasizes the prevention of the difficulties facing a company before it loses its creditworthiness and finds itself unable to make payments when they become due.

In this regard, a new procedure has been introduced:

• The Minister of the Economy (Ministère de l’économie, the Economy Minister) and the Minister for Small and Medium-Sized Enterprises (Ministère ayant les classes moyennes dans ses attributions, the SME Minister) will be responsible for identifying companies in financial difficulties who are likely to face difficulties in continuing their business operations. The Law requires that certain indicators and information, including annual accounts, debts due to public authorities and redundancies for economic reasons, are made available to the Ministers.
• The Law establishes a public body for the evaluation of distressed enterprises (cellule d’évaluation des entreprises en difficulté) (the Unit) that will, upon review of the indicators mentioned above, be allowed to convene a meeting with a company to obtain additional information on the state of its affairs and to inform the company about potential reorganization measures. The Unit will comprise a member from the Luxembourg social security authority (Centre Commun de la Sécurité Sociale), a member of the Luxembourg direct tax authorities (Administration des Contributions Directes), a member of the Luxembourg indirect tax authorities (Administration de l’Enregistrement, des Domaines et de la TVA), a member proposed by the SME Minister and a member proposed by the Economy Minister.

This procedure exists in addition to existing procedures. In the event that these procedures do not prevent a company from facing difficulties in paying its creditors, the Law introduces two additional anticipatory reorganization procedures to assist companies.

New anticipatory reorganization procedures

1. An out-of-court reorganization, a so-called amicable conciliation (réorganisation par accord amiable) pursuant to which a company can aim to negotiate a payment plan with two or more of its creditors, with the goal of reorganizing all or a portion of its assets or operations. To facilitate this, the company can request the appointment of a business conciliator (conciliateur d’entreprises) to help the parties reach agreement. The company then needs to petition the District Court sitting in commercial matters (Tribunal d’arrondissement siégeant en matière commerciale) to certify the agreement. If the court certifies the agreement, it becomes enforceable and claw-back provisions will not apply, even if the creditors were aware of the company's cessation of payments. The agreement will continue to be enforceable in the event of subsequent bankruptcy, even if it was concluded during the claw-back period (période suspecte).
2. Three new in-court reorganization procedures:
   1.  the collective agreement procedure (accord collectif), where a company or several companies can propose an agreement for the reorganization of all or part of the company/companies assets or its/their activities to at least two of their creditors. This agreement is confidential and must be approved by the court. The debtor can ask for the designation of a business conciliator (conciliateur d’entreprises) to assist with the execution of the provisions of the agreement.
   2. the court-ordered payment suspension procedure can be requested by a company to suspend certain debts (concluded prior to the opening of such procedure) and allow the company to conclude an agreement with its creditors. This procedure is the court-ordered version the amicable conciliation (which is an out-of-court procedure). The maximum duration of a court-ordered payment suspension is six months, and to avoid recurring proceedings, a company that has already applied for and obtained a court-ordered payment suspension is prevented from making further request for suspension during a period of three years from the date of the end of the suspension, unless the company requests the total or partial transfer of its business or activities.
   3. the court-ordered transfer procedure which is a procedure initiated either by the company or the State public prosecutor. All or part of the assets or the business of the company are transferred, by court order, to one or several third-party purchasers. The court appoints a legal representative to organize the transfer. This procedure is voluntary and involves employees and employee’s representatives (if any). The legal representative should (i) identify the purchase offer(s) that ensure(s) the continued employment of the most employees and (ii) present the various offers to both the company and the court. The court is required to approve the transfer and notify the legal representative who shall proceed with the approved transfer.

Modernization of the insolvency law and bankruptcy procedure

The Law abolishes the following three types of insolvency procedures that have not been used due to their complexity, their duration and the number of persons that they involve:

1. the composition with creditors (concordat préventif de la faillite).
2. the moratorium or suspension of payments (sursis de paiement).
3. the controlled management (gestion contrôlée).

The Law also amends certain provisions of the Luxembourg Commercial Code and of the Luxembourg Criminal Code that are related to the bankruptcy procedure (faillite).

The most significant amendments are the following:

1. a bankruptcy procedure can be initiated by the public prosecutor without the intervention of the company or its debtors - as it was the case before the entry into force of the Law.
2. suspending the directors of a Luxembourg company from the statutory obligation to declare the cessation of payments from the date of filing of an application for judicial reorganization and until the expiry of the suspension period as determined by the court.
3. extending the offences of both simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse) to also apply to the company’s de jure and de facto managers.
4. decriminalization of fraudulent bankruptcy (banqueroute frauduleuse), which will now constitute an offence (délit) and no longer a crime (crime).

Conclusion

The Law introduces many changes and procedures, which should assist companies that are faced with economic difficulties. In addition, preventing bankruptcy can help creditors obtain some if not all amounts due to them. Consequently, the Law has been largely welcomed by companies and their creditors alike.

In practice, the entry into force of the Law should normally not require amendments being made to existing contractual arrangements. However, it may be the case that the Luxembourg insolvency wording or terminology used in future contractual arrangements may require slight amendment to reflect the changes implemented by the Law.

The authors thank trainees Lydia Chemini and Gauthier Van Gysel for their assistance in the preparation of this article.