On 1st November 2023, the new Luxembourg law of 7 August 2023 on the continuation of businesses and modernisation of insolvency law (the "Law") enters into force.
This long-awaited reform implements Directive 2019/1023 to introduce a modern restructuring regime, with out-of-court and court supervised mechanisms to protect companies in distress. The Law is expected to provide more flexible and effective measures for businesses under financial stress and their creditors, making Luxembourg an attractive jurisdiction for restructurings.
This new legislation is inspired by the Belgian regime which has proved efficient since its entry into force in 2009. While the future will reveal how the Law will be applied, today the toolbox exists to make Luxembourg a place for (international) restructurings.
Overview of the new procedures
The Law introduces a mix of in and out of court procedures, being:
(i) a conciliation procedure (conservatory out of court measure);
(ii) a mutual agreement procedure (out of court or in court if a stay is requested by the debtor);
(iii) a judicial restructuring procedure (procédure de réorganisation judiciaire), including (each in court):
a. the application for a stay of payment;
b. the collective agreement procedure; and
c. the transfer of assets procedure.
Conciliation
The Minister of Economy or the Minister for Small and Medium-Sized Enterprises (as applicable) may, upon a debtor's request, appoint a company conciliator (conciliateur d'entreprise) to facilitate the reorganisation of part or all of the debtor's business.
The request for appointment of a conciliator is not subject to specific formalities and the debtor may propose the name of the potential conciliator. The scope and duration of the conciliator's mission is decided by the Minister(within the framework of the debtor's request). The mission of the conciliator may be terminated by the debtor or the conciliator by informing the relevant Minister thereof.
Note that a conciliator may also be appointed in the context of a judicial restructuring procedure (and the opening of a judicial restructuring procedure does not automatically terminate the appointment of the conciliator).
Mutual agreement (accord amiable) – out of court
This out of court procedure allows the debtor to propose to at least two of its creditors a mutual agreement (accord amiable) on a payment plan relating to the reorganisation of all or part of its assets or activities.
To facilitate the conclusion of the mutual agreement, the debtor may request the appointment of a company conciliator (conciliateur d'entreprise), which may also participate in the supervision of the performance of the mutual agreement. To be enforceable, the mutual agreement must be approved (homologation) by the court.
If a bankruptcy is declared notwithstanding the mutual agreement, the mutual agreement remains enforceable, even if concluded during the hardening period (période suspecte).
A debtor may also apply to the court for a stay of payment to facilitate the negotiation of a mutual agreement, in which case an application must be made to the court (in accordance with the procedure described below)
Judicial restructuring procedure (procédure de réorganisation judiciaire)
The debtor can apply to the court to request, in each case for the purpose of preserving the continuity of the activities of the debtor under supervision of the judge:
(i) a stay of payment (sursis) to negotiate a mutual agreement;
(ii) a collective agreement (accord collectif); or
(iii) the transfer of assets by court order (transfert par décision de justice).
The request can be made with a different purpose for each business of a group or part of a business. The debtor may also, at any time during the proceedings, request a switch in the procedure previously requested.
a. Stay of payments (sursis)
Obtaining a stay of payments (sursis) may be applied for to allow the conclusion of a mutual agreement (accord amiable). The stay (sursis) may not, in principle, be longer than 4 months (unless extended up to a maximum of 12 months in total). A debtor that has already benefited from a stay will no longer be able to request one for a period of 3 years unless it requests the total or partial transfer of its assets or activities as part of the procedure.
The stay (sursis) suspends all payments on debts incurred prior to the application. As long as the suspension period is in effect, no enforcement of the debtor's claims may be continued or exercised on its assets; no seizure of assets may be made and no individual enforcement measure is allowed.
The debtor may also, during the stay (sursis), suspend the performance of its contractual obligations if the restructuring so requires (except for employment contracts and successive performance contracts).
During the stay (sursis), a debtor may not be (i) declared bankrupt (except on its own initiative), (ii) dissolved judicially (except for criminal activities or serious violations of the laws governing commercial companies) or (iii) be subject to administrative dissolution without liquidation
If the debtor is declared bankruptcy after the expiration of the stay (sursis), claims arising during the period of stay (sursis) will be considered as debts of the bankruptcy estate (and thus have no priority), but the commitments may still be enforced.
b. Collective Agreement (accord collectif)
The collective agreement is a detailed plan for a maximum period of 5 years proposed by the debtor addressing the debtor's current financial situation and the proposed remedies. The plan, which may include asuspension of payment for a maximum period of 24 months, is submitted to the votes of the creditors concerned (subject to specific rules with respect to voting and majorities per classes of creditors) and must be approved (homologation) by the court (upon which the plan shall become enforceable).
In the event of non-compliance with the plan, a creditor or the public prosecutor may request that the plan be repealed.
The provisions relating to the stay (sursis) will apply as from the filing for the judicial restructuring procedure.
c. Transfer by court order (transfert par décision de justice)
The transfer by court order (transfert par décision de justice) allows all or part of the assets or activities of the debtor in financial stress to be transferred by court order. This procedure may be initiated by the company in financial stress or directly by the public prosecutor.
If the transfer is initiated upon request of the public prosecutor, a legal representative (mandataire de justice) shall be appointed by the court and shall be responsible for organising the transfer of all or part of the assets or activities to ensure the continuity of these (or part of them) and the preservation of employment by one or more third-party buyers. To do so, he will be able to obtain a payment suspension and he will have to identify the offer that best meets these objectives. Finally, to proceed with the transfer, the legal representative (mandataire de justice) will have to obtain the approval of the court.
The provisions relating to the stay (sursis) will apply as from the filing for the judicial restructuring procedure.
Other points of attention
Impact on the Financial Collateral Regime
The special protection of guarantee arrangements under the Luxembourg Law of 5 August 2005 on financial guarantee arrangements (as amended, the "Financial Guarantee Act") will not be affected by the Law. The applicability of any guarantee under the Financial Guarantee Act or netting or netting arrangements will therefore not be affected by the stay (sursis). Similarly, the application of financial guarantee agreements under the Financial Guarantee Act will not be affected and will remain possible during the stay (sursis).
Amendment concerning bankruptcy
The Law also impacts certain aspects of the bankruptcy regime in Luxembourg. Bankruptcy proceedings, which may be initiated by the debtor's admission or at the request of a creditor or on the court's own initiative, may now also be initiated by the public prosecutor.
The filing of an application for judicial reorganisation suspends the statutory obligation to declare the cessation of payments until the expiry of the stay (sursis). Furthermore, the list of persons who are qualified to be appointed as bankruptcy trustee is extended. And a debt relief scheme is introduced in the event of the bankruptcy of individual traders.
Fraudulent bankruptcy (banqueroute frauduleuse) is reclassified as an offence (délit), which is intended to facilitate prosecution. The offences (délits) of simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse) apply to the directors (administrateurs) of the debtor (de facto or de jure managers or directors of a company may also be held liable).
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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