In 2018, there were 35,113 incorporated companies in Luxembourg, and between 2,500 and 3,500 new companies are incorporated each year. There has been a leap in the number of bankrupt companies, with a substantial 27.81% increase in bankruptcies in 2018 (1,195 bankruptcies) compared to 2017 (935 bankruptcies). Overall, the annual figure has steadily increased since the 1990s, with a first peak of 1,033 bankruptcies in 2013.
Although the number of new bankruptcies increased in most sectors compared to 2017 (among the production, construction, trade and services sectors), the construction sector continues to experience a decrease (-1.28% compared to 2017). The sector with the highest number of bankruptcies (882 bankruptcies, representing 73.81% of the total number of bankruptcies in Luxembourg in 2018) is the services sector. However, even if this figure remains high, it is stable. The trade sector also experienced an increase of 29.59% with 254 bankruptcies in 2018 compared to 196 in 2017.
The above figures are provided by Creditreform and the website of the Ministry of Justice (La justice en chiffres 2018).
For several years, Luxembourg legislators have expressed the wish to significantly amend the legislation on insolvency. On 26 February 2013, a draft bill no 6539 on business preservation and modernisation of the bankruptcy law (the Draft Bill) was presented, which is closely modelled on the Belgian insolvency law (especially the law on business preservation dated 31 January 2009). Since then, the Draft Bill has been amended a few times in consideration of the opinions of various state bodies, including the Council of State and the Chamber of Commerce. The Draft Bill aims to provide new tools favouring business reorganisations over liquidations.
Although the Draft Bill already represents a real change in Luxembourg insolvency law, the legislator should take this opportunity to implement the last European directive no 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventative restructuring frameworks, on discharge of debt and disqualifications, and on 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) – which should be implemented by the EU member states by 17 July 2021 at the latest.
Under current Luxembourg insolvency law, the insolvency procedures may be divided into:
Liquidation is not an insolvency procedure per se, meaning that Luxembourg has not included the liquidation procedure among Annex A of EU Regulation 2015/848 of 20 May 2015 on insolvency proceedings, where each member state mentions national insolvency proceedings corresponding to the definition of an insolvency proceeding, as defined by the Regulation, and which therefore enters into its scope. This liquidation procedure is more a sanction provided by Article L1200-1 of the law on commercial companies dated 10 August 1915, as amended, in case of a breach of this law. Proceedings can only be opened at the request of the public prosecutor. Alternatively, a shareholder can ask for judicial liquidation where there is a cause for liquidation on serious grounds (pour de justes motifs).
The framework of the above-mentioned general insolvency regime is regulated by:
In addition, specific insolvency regimes or provisions exist for:
As explained in 2.1 Overview of Laws and Statutory Regimes, the main distinction between insolvency procedures in Luxembourg is their purpose: either the reorganisation of the business or its winding-up. It should be stressed that although reorganisation procedures are available, these are outdated and are rarely admitted by the courts. The most common and widely used proceeding in Luxembourg is bankruptcy.
Some proceedings are opened solely on a voluntary basis, for example, stay of payments, composition with creditors and controlled management, and other, like bankruptcy proceedings, could be either triggered by the debtor or a third party (creditor, public-regulated agencies and public authorities such as tax administration).
Stay of Payments
The debtor must experience temporary liquidity problems which permit suspension of payments to their creditors for a given period of time (Commercial Code Article 593) because:
The merchant must file a petition describing the events on which the request is based on, an overview of the debtor’s assets and liabilities, and a list of the creditors, with the district court and the Supreme Court at the same time.
One or several experts will be designated by the district court to review the business of the merchant, and a judge will be appointed to supervise the operations. Within 15 days of the request, the supervising judge will make their report at a meeting on the date set by the president of the district court, during which creditors may declare the amounts of their claims and state whether they approve of, or reject, the request for stay of payments. Indeed, the approval of the majority of creditors, representing three quarters of the aggregate debts, is needed to allow suspension of payments.
The opinion of the district court is afterwards communicated to the Supreme Court, which should hand down its decision within eight days. If the stay of payments is granted, the court assesses the duration of the measure and appoints one or more commissioners to supervise the procedure.
For the duration of the proceedings:
A merchant of good faith may apply for a controlled management procedure if:
The competent district court will grant such procedure if it deems that controlled management will enable the recovery of the debtor’s business or improve the position of the debtor in respect of the sale of its assets (Luxembourg Grand-Ducal Decree of 24 May 1935, Article 1).
The application for controlled management proceedings filed by the merchant should include a list of the creditors and evidence that the prospects for reorganisation are realistic.
As for the stay of payments proceedings, a judge will be appointed to review the debtor’s business and prepare a report for the district court. If the debtor’s prospects for reorganisation (or orderly liquidation) appear feasible, controlled management will be granted, after the debtor’s explanation has been heard, and one or more commissioners will be appointed to submit a reorganisation plan or a plan regarding the realisation/distribution of the debtor’s assets. Otherwise, the only remaining possibility will be bankruptcy.
Between the opening of controlled management until the final decision of the court on whether or not to admit the request to be placed under controlled management, the enforcement rights of all creditors (even backed by a security) against the debtor’s assets are stayed.
The debtor is still in charge of running its business, but under the supervision of the commissioner(s), which means that the debtor’s decisions must necessarily be approved by the commissioner(s), otherwise they will be voidable (the commissioner may also introduce proceedings seeking the nullity of any abnormal transactions concluded during the look-back period). In case of dispute, the matter is settled by a decision of the court.
Within the deadline fixed by the court, the commissioner(s) must elaborate either a reorganisation plan or a liquidation plan of the debtor’s assets. The content of this plan is notified to each creditor and published in the official gazette of the Grand Duchy of Luxembourg (Mémorial).
The vote of the creditors must then take place within 15 days of the notification and the publication:
Once the plan receives final approval, it will become binding upon the debtor and all creditors (whether they have been part of the agreement or not), and the debtor will regain control over its business; or
Composition with Creditors in Order to Avoid Bankruptcy
Composition with creditors (or scheme of composition) is a protective measure that enables merchants or commercial companies in financial difficulty to come to an arrangement with their creditors in order to avoid bankruptcy. The purpose of the composition agreement may also be the assignment of assets (concordat par abandon d’actifs). In that specific case, the debtor and creditor must appoint one or several persons, as liquidators, whose mission will be the selling of the debtor’s assets under the supervision of the delegated judge.
Only honest but unfortunate debtors may apply for such proceedings, which can be opened before or after the bankruptcy.
The request of the debtor must be submitted in writing to the district court (commercial chamber) with jurisdiction over the debtor’s place of residence. The request must include:
If the court deems the request admissible, it appoints a delegated judge (juge délégué) in order to investigate the debtor’s financial situation and establish a report within eight days. Either:
Creditors must be informed about the meeting at least eight days in advance. At the meeting, the judge exposes their report on the state of the debtor’s business, and the debtor presents the prepared scheme of composition to the creditors.
The creditors then declare the amount of their claims in writing and whether or not they agree to the proposed composition (creditors who are unable to attend the meeting can submit their claims to the court clerk within the week following the meeting and prior to the final deliberation). The composition can only be approved upon the agreement of the majority of the creditors, representing 75% of the total claims accepted definitively or provisionally. Secured creditors are unable to vote with regard to their claims, except if they waive their lien, pledge or mortgage.
At a second meeting, a judgment approving (or not approving) the composition is issued and, within three days, it is published in the auditorium of the court and newspapers.
Upon the approval of the composition with creditors:
The execution of the scheme of composition is examined every three months by the delegated judge. If the debtor’s situation has improved, the procedure will end and the debtor will have to pay all their creditors in full. In a case where the debtor is declared bankrupt within the six months following the termination of the composition procedure, the date of cessation of payments may be set as the date on which the petition for composition was filed.
When a merchant or commercial company can no longer be placed under controlled management, suspension of payments or seek a composition with its creditors in order to reorganise and continue its business activity, bankruptcy remains the only alternative (see 2.5 Commencing Involuntary Proceedings for other opening cases).
If a merchant or commercial company ceases payments and loses its creditworthiness (ie, is unable to raise new funds), it is regarded as being in a state of bankruptcy and must file a bankruptcy petition with the clerk of the competent court within one month from the date of cessation of payments.
The debtor petitioning for bankruptcy must provide the clerk with a written request containing the balance sheet of the business (or a note indicating the reasons why this cannot be submitted), the books and accounts held for business accounting purposes, and certain additional documents (such as a recent extract from the Trade and Companies Register, a statement of the assets and liabilities).
After hearing the debtor, the bankruptcy judgment will be handed down by the court and this will set the date of cessation of payments (this date may not be more than six months prior to the opening of the bankruptcy, this period constituting the hardening period). The bankruptcy trustee (curateur) and the supervisory judge of the procedure will also be appointed within the judgment declaring the bankruptcy.
The judgment mentions the newspapers where the bankruptcy must be published (this information is also available in the Luxembourg Business Register).
As of the date of the declaration of bankruptcy (it should be stressed that the effects of the judgment are retroactive and start at midnight on the day the bankruptcy is opened), the debtor no longer has the right:
The bankruptcy trustee represents the interests of the debtor, as well as representing the body of creditors, and administers the assets of the bankrupt party (an inventory of the assets must be prepared by the trustee). The trustee has the duty to manage the bankruptcy in the interest of the creditors, with all due diligence, under the supervision of the supervisory judge whose authorisation shall be requested by the trustee for certain transactions (eg, a sale of assets).
As mentioned above, the judgment declaring bankruptcy can set the period of cessation of payments by the bankrupt party to a date prior to the declaration of bankruptcy, which date cannot precede the date of the judgment by more than six months. The period between the cessation of payments and the declaration of bankruptcy is deemed a hardening period, or "suspect period" (période suspecte), during which certain acts performed by the debtor that could be detrimental to the rights of the creditors are deemed null and void (for more details, see 13 Transfers/Transactions That May Be Set Aside).
In principle, after the opening of the bankruptcy, creditors may not:
All creditors must file a claim with the clerk of the district court. During a hearing for the verification of the claims, the trustee, together with the bankruptcy judge, will decide whether the declared claim will be accepted or not (creditors whose claims have been rejected may refer to the district court for judgment).
The purpose of bankruptcy is the realisation of all assets held by the debtor, either by private contract or public auction, with the intention of satisfying the debtor’s creditors. The distribution of the proceeds among the creditors is based on their rank and occurs after the payment of the administrative costs and fees of the bankruptcy trustee. After all the proceeds have been distributed, the trustee may then file a motion to close the procedure (including a detailed report about the bankruptcy), which will then be decided by the court.
As mentioned above, only a bankruptcy procedure must be mandatorily commenced when a company has ceased making payments. Under Luxembourg law, this means that the company:
The director(s) or management body of the company should file a petition to have the company declared bankrupt within one month of the cessation of payments. Otherwise, they could be criminally sanctioned (such as with a fine or imprisonment) or professionally sanctioned (barred for a certain time from managing a business). In addition, if there is a delay in filing a petition for bankruptcy, and should the director(s) or management body be found to have committed other acts of mismanagement, they could be held civilly liable in tort and be ordered to bear part of, or all of, the assets' shortfall.
If the debtor is in a temporary cessation of payments with sufficient solvency to settle all its liabilities, it could petition the district court for a stay of payments. In such cases, all payments due to the creditors are suspended while the debtor is trying to restore its financial situation.
Within one month of the state of cessation of payments, or even after bankruptcy proceedings have been initiated against a debtor, the debtor may still file a petition with the district court for a composition with its creditors in order to avoid bankruptcy. This procedure, consisting of a voluntary arrangement between the debtor and its creditors, must be submitted for the approval of the district court in order to become binding on all creditors (only regarding the commitments taken by the creditors in such agreement).
Besides the debtor, bankruptcy proceedings can be initiated:
Under Luxembourg law, the state of cessation of payments should be distinguished from the notion of insolvency. A debtor is deemed insolvent when its liabilities are higher than its assets. Therefore, a debtor may be insolvent but not in cessation of payments if it has sufficient credit (and the opposite could also be true, meaning that a debtor could be solvent but in cessation of payments).
The general insolvency regime is adjusted for some specific entities such as:
Credit Institutions and Professionals of the Financial Sector
Voluntary procedures like stay of payment and controlled management are accessible for credit institutions or professionals of the financial sector and can be requested when those entities experience creditworthiness issues, or their authorisation by the financial authority has been temporarily withdrawn (law of 5 April 1993, as amended by the law of 18 December 2015 on resolution, recovery and liquidation measures of credit institutions and some investment firms, on deposit guarantee schemes and indemnification of investors).
When voluntary procedures fail, the law of 18 December 2015 provides for:
The district court will decide if the procedure is opened and which general rules of bankruptcy apply to it. In any case, the opening of compulsory liquidation proceedings leads de facto to the withdrawal of the authorisation granted by the CSSF.
Insurance and Reinsurance Undertakings
The laws of 6 December 1991 and 7 December 2015 on the insurance sector apply to insurers and reinsurers. Besides all the procedures available within the general insolvency regime (stay of payment, composition with creditors, controlled management and bankruptcy), and similarly within the special insolvency regime provided for credit institutions, a compulsory liquidation procedure can be opened for insurers and reinsurers at the request of the public prosecutor or the insurance regulating agent (Commissariat aux assurances).
Regulated Investment Funds and Regulated Securitisation Vehicles
The insolvency regime of such entities substantially mirrors the regime applicable to credit institutions and professionals of the financial sector and is limited to stay of payments and compulsory liquidation procedures. One difference is the fact that the withdrawal of the authorisation granted by the CSSF to the relevant entity will immediately trigger the stay of payments. Afterwards, a compulsory liquidation procedure may be commenced at the demand of the CSSF or the public prosecutor, but the investors have no right to request such opening.
A company managing funds or a securitisation entity responding to the general insolvency regime, is subject to the specific laws mentioned in 2.1 Overview of Laws and Statutory Regimes.
Apart from those described above, there are no other insolvency provisions relating to specific sectors.
Luxembourg insolvency law does not presently provide for any regulated consensual mechanism or out-of-court proceedings. Therefore, a consensual process, which, for example, could start with a standstill period in order to give time to the debtor, relies fully on the willingness of creditors to help the debtor face its financial difficulties. Nonetheless, the Luxembourg Chamber of Commerce may help to provide economic recovery measures (such as financial aid or a state guarantee) if a business finds itself in difficulties.
This is not relevant under Luxembourg insolvency law.
There is no “new money” privilege under Luxembourg insolvency law.
This is not relevant under Luxembourg insolvency law, as mentioned above in 3.1 Restructuring Market Participants.
This is not relevant under Luxembourg insolvency law, as mentioned above in 3.1 Restructuring Market Participants.
Security Taken by Secured Creditors Over Real Estate Property
In Luxembourg, the most common types of security granted over real estate property are:
The mortgage (hypothèque)
This requires a notarial deed and registration with the administration registry (Administration de l’enregistrement et des domaines) in order to take rank (except for the hidden mortgage – hypothèque occulte – of the state in case of inheritance). In order to be enforceable towards third parties, a mandatory requirement is the registration of the original notarial deed with the mortgage registry (Bureau de conservation des hypothèques) of the judicial district where the real estate is located. In the tenth year, the renewal of the registration (for another ten years) of the mortgage should take place in order to remain enforceable vis-à-vis third parties.
The pledge over real estate (antichrèse)
This is a type of security less commonly used by banks, which usually prefer mortgages. As the mortgage, this pledge must be written and registered with the administration registry and the mortgage registry. The dispossession of the pledgor perfects the security, and the pledgee will have possession of the real estate until total payment of its debt is completed (eg, by the collection of rent provided by the real estate).
The seller’s lien (privilège du vendeur)
This is provided by the Luxembourg Civil Code (Article 2103, 1°) and it gives the seller of real estate a lien on sold real estate until receipt of payment of the full purchase price.
The lender’s lien (privilège du prêteur de deniers)
Also provided by the Civil Code (Article 2103, 2°), this applies to lenders lending funds to finance the acquisition of real estate. This lien must be registered in a notarial deed with the administration registry, and with the mortgage registry in order to be opposable by third parties for ten years (renewable).
Security Over Tangible Movable Property
Tangible movable property could be defined as assets with physical substance which can be moved, such as trading stock, machinery, or aircraft and ships (for which, however, in the case of a weight of more than 20 tons, a specific kind of mortgage is applicable in accordance with the laws of 19 June 1966 and 29 March 1978). The most common forms of security are:
There are two types of pledges: civil pledges (gage civil) governed by the Luxembourg Civil Code (Articles 2073 to 2084), or commercial pledges governed by the Luxembourg Commercial Code (Articles 110 to 188) and, to some extent, the Luxembourg Civil Code (including the pledge over a going-concern).
For any pledges, either civil or commercial, the grantor of the pledge is not in possession of the pledged asset and the lien deriving from the pledge agreement will last as long as the pledged assets are held by the pledgee or by a third party designated as security agent or holder by the pledgee and the pledgor.
Civil pledges and pledge over a going concern must be in writing, contrary to commercial pledges which may be proved by any means provided by the Luxembourg Commercial Code. All types of pledges must be notified and accepted by the debtor in order to be enforceable against third parties. In addition, for a pledge over a going concern, the pledge must be registered with the Mortgage Registry.
The transfer of ownership for collateral purposes
This is where:
Security Over Intangible Movable Property
By contrast, intangible movable property refers to an item of individual value that cannot be touched or held, including financial instruments (shares, units, bonds, etc), cash or a securities account, intellectual property (IP) rights (patents, trade marks, designs and copyrights).
These could be (as defined by the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended):
The most common forms of security granted over IP rights
These are transfers of title (in order to be opposable by third parties, this transfer must be registered with the Benelux Office of Intellectual Property – for trade marks and designs – and with the Patent Registry of National Intellectual Property – for patents – or pledges (enforceable against third parties if registered at the Administration Registry and at the Mortgage Registry of the judicial district).
Pledges over bank accounts can be granted to the benefit of the pledgee, and must be notified to the account bank (in addition to the formalities described above for civil or commercial pledges, and required for the enforceability of pledged-against third parties).
First demand guarantees (garanties à première demande)
A first-demand guarantee is a "self-sufficient" security, which means that the guarantor cannot oppose any exceptions or exemptions derived from the initial loan agreement by the lenders, nor can the guarantee automatically be transferred with the initial loan agreement. The guarantee may take the form of a letter or an agreement. The guarantee is not subject to any filing requirements and may be enforceable towards third parties at the time of the letter or the agreement, as applicable.
Personal guarantee or suretyship (cautionnement)
A personal guarantee or suretyship is an accessory to a principal obligation, that is, the guarantor can oppose any exceptions or exemptions the lenders derive from the initial loan agreement and the security interest will automatically be transferred with the initial loan agreement as its accessory. The suretyship takes on the form of an agreement under private seal and becomes enforceable against third parties at the time of the agreement. The suretyship is not subject to any filing requirements.
Usually, secured creditors are entitled to enforce their security if the secured debt has become due and payable, and the debtor has failed to repay the debt.
The beneficiary of a pledge over a mortgage or a going-concern, whose claim has become due and payable, can serve a summons to pay and, without a judicial order, seize the pledged assets. However, enforcement is a court-driven process, and a court order is required for realisation by public auction or appropriation.
Regarding a transfer of ownership for collateral purposes, the creditor may, without prior notice, set off the remaining debt due against the transferred assets, if the secured debt is not repaid in full. If there is a remainder in relation to the collateral, the creditor must return the remaining assets to the debtor.
In relation to pledges over financial instruments governed by the Luxembourg law of 5 August 2005 on financial collateral arrangements, as amended, the pledgor has the right, when an agreed event of default has occurred, and unless otherwise agreed, to enforce without prior notice the pledge by appropriation, sale or compensation of the assets, unless the parties agree otherwise. The pledgor can also apply to the court to obtain a decision ordering the appropriation of the secured assets.
Generally, under Luxembourg insolvency law (which is creditor-friendly), the start of insolvency proceedings does not prevent the enforcement of security interests, especially security granted over financial instruments.
However, when the debtor is facing financial difficulties and is trying to reorganise its business, the granting of new security could be restricted and the enforcement of security can be temporarily stayed.
Stay of Payments
During the moratorium granted by the district court, no enforcement procedure can be brought against the debtor or its assets. However, the procedures of validation of attachments carried out on the assets of the debtor before the granting of the moratorium remain in place (Article 604 Commercial Code). The district court may withdraw the attachment, under certain circumstances and after having heard the debtor and its creditors, as well as the commissioner appointed by the court to supervise the procedure.
Without the permission of the commissioner appointed by the district court to supervise the procedure, the debtor cannot dispose of, pledge or mortgage their movable or immovable property (Article 603 Commercial Code).
The judgment opening a controlled management procedure automatically leads to a stay of enforcement regarding any mortgages, liens and pledges, between the filing of the petition for controlled management until the final decision of the court on whether or not such request is admitted (Luxembourg Grand-Ducal Decree of 24 May 1935, Article 3). The merchant cannot, without the permission of the commissioner appointed by the district court, dispose of, pledge or mortgage his movable or immovable property.
The reorganisation plan, or the plan regarding the realisation and distribution of the debtor’s assets submitted by the appointed commissioner(s), must take all the interests at stake equally into account (interests of creditors and of the merchant). Such plans must abide by the rank of pledges, liens and mortgages, as provided by the law (conventional forfeiture, termination and penalty clauses being inapplicable to the plans aimed at the reorganisation or realisation and distribution of assets).
Secured creditors remain entitled to enforce their security after the bankruptcy procedure is commenced.
Nonetheless, in the specific context of a composition with creditors procedure or winding-up arrangements (which could be requested during and sometimes after a bankruptcy proceeding), secured creditors will only be entitled to take part in the decision-making process during operations related to the procedure if they waive their mortgages, liens and pledges, in all or in part (in the latter case, their claim will be taken into account in the vote up to this waived portion).
The timeline for enforcing a secured claim with a lien or security will not be disturbed by the commencement of a bankruptcy proceeding in Luxembourg, and the procedure will remain the same as in the situation where the debtor is solvent. However, if the claim is filed within the bankruptcy proceedings and then challenged in court, the enforcement of the lien/security may be delayed while the procedure challenging the claim is pending.
Under Luxembourg insolvency law, no special procedures or impediments are applicable to foreign secured creditors (for insolvency proceedings that have occurred within several member states of the European Union, see 8 International/Cross-border Issues and Processes).
As described above, secured creditors remain entitled to enforce their security or lien in a bankruptcy (for example, the enforcement of their pledges, either on the cash or assets of the debtor). In addition, they also benefit from a better rank than unsecured creditors and specific rights attached to their security’s interest (such as retention rights).
As mentioned in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, during stay of payments or controlled management procedures, creditors are not entitled to payment or enforcement of their security. There is also a stay on proceedings.
In the course of bankruptcy, differences exist between:
Unsecured trade creditors do not have higher priority or right than other unsecured creditors.
All creditors, including unsecured creditors, are empowered to file a petition with the district court (commercial chamber) seeking the commencement of a bankruptcy proceeding against a debtor if they can demonstrate that the debtor is in cessation of payments.
Since the year 2000 (and the introduction of Article 467-1 of the Commercial Code), if the unsecured creditor is a supplier of goods and has stipulated a clause of retention of title in writing, they will be entitled to recover the delivered goods if full payment is not made by the bankruptcy trustee.
In the absence of an enforceable title, an unsecured creditor, whose debt is certain, liquid and due, may petition the president of the court of the residence of the debtor or of the attached third party in order to obtain authorisation for attachment proceedings. If the authorisation for attachment is granted, the attaching creditor serves the presidential order to the attached third party, which blocks the funds held by it on behalf of the debtor. The attachment itself mustthen be followed within eight calendar days by a court action filed at the initiative of the creditor (the attaching party) against the debtor in order to have the attachment validated. Unless such validation action is completed prior to the start of insolvency proceedings, the validation procedure pertaining to the attachment will be stayed during the reorganisation proceedings (stay of payments, controlled management, scheme of composition with creditors) and the bankruptcy proceedings. In the case of bankruptcy proceedings, the purpose of the procedure (if pursued by the bankruptcy trustee) will be to determine the amount of the claim of the attaching party (and not the payment, which could only occur within the distribution made by the trustee in the course of the bankruptcy).
Unsecured claims cannot be enforced if there is a stay of payments, which is the case while bankruptcy proceedings are pending. Usually, when payments are made during the enforcement of a reorganisation plan approved by the court, the unsecured claim will, in theory, be paid in accordance with the rank provided in the plan (on a pro rata basis). Otherwise, during the bankruptcy proceedings, taking into account the fact that there are usually none or few assets and other privileged claims, unsecured creditors will not usually be successful in the collection of their claims.
Under Luxembourg insolvency law, the opening of bankruptcy proceedings will not lead to the termination of the lease agreement. Nonetheless, as landlords have a preferential claim (Article 2102 Civil Code), the bankruptcy trustee will not be keen to increase the amount of privileged liabilities. Usually, the trustee will terminate the contract as soon as possible in order to avoid further costs for the proceedings.
Luxembourg insolvency law does not provide any special procedures or impediments applicable to foreign unsecured creditors, the principle being equal treatment between creditors (non-foreigners and foreigners).
All creditors should file their claim within the timeframe set by the declaration of bankruptcy (20 days from the day of the court ruling). In reality, claims are often filed after the date set by the court, as non-compliance with the timeframe will not cause them to be excluded from all rights in the bankruptcy if the claim is filed before the closure of the procedure (they will, however, not participate in the distribution of proceeds realised prior to the filing of their claim).
Except for claims considered as "out of estate of the bankruptcy” (this is mainly the case for the claim of the pledgee over a going-concern and the first registered mortgage creditor), the waterfall for the settlement of preferential claims in bankruptcy is as follows (before any payments of unsecured creditors):
Completing the above waterfall of payments, a distinction must be drawn depending on whether the claim concerns personal property or real property.
In the case of a sale of personal property (Article 2102 of the Civil Code), the waterfall of payments is continued as follows (this list is not exhaustive):
In the case of a sale of real estate property (Article 2013 of the Civil Code), the waterfall of payments is pursued in the following order (this list is not exhaustive):
As indicated in the section above, debts resulting from the cost of the bankruptcy procedure, employees’ claims (only for the sums of super-privileged and outstanding salaries earned during the six months of work before the bankruptcy, otherwise, the sums are considered to be unsecured claims) and claims of the administration have a top ranking in the waterfall of payments under Luxembourg insolvency law.
There is no specific proceeding under Luxembourg insolvency law aimed at the financial restructuring or reorganisation of the debtor.
As described in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, the only procedure which could lead to a financial restructuring or reorganisation plan of the debtor’s debts is controlled management (gestion contrôlée), which is rarely used.
This procedure is:
The opening of controlled management proceedings leads to the stay of enforcement rights of all creditors (even backed by a security) against the debtor’s management until the final decision of the court on whether or not the request to be placed under controlled management is accepted.
The debtor remains in charge of running its business but under the supervision of the commissioner(s) (remunerated by the debtor). In that respect, the commissioner(s) must attend the meetings of the board of directors or management board, or call a meeting of the board.
Most of the decisions of the debtor must necessarily be approved by the commissioner(s) otherwise they will be voidable, such as:
The reorganisation plan must be communicated to all the creditors and to the known joint and several co-debtors and guarantors.
As of the date of communication of the plan or publication with the Trade and Companies Register, the creditors have 15 days to inform the court of their approval or opposition to the plan. The plan can only be approved by the court if more than half the creditors, representing more than half of the liabilities, have approved it.
There are no mechanisms of cram-down or cram-up of dissenting creditors under Luxembourg insolvency law, but abstention from voting is deemed to be approval of the plan.
A creditor is able to assign its claims to a third party after the opening judgment of a controlled management (except when such assignment specifically requires, by virtue of a contract, the approval of the debtor). In order for the assignee to take part in the proceedings, it is recommended that the court and commissioner(s) should be informed in advance of the assignment.
There are no specific provisions in Luxembourg insolvency law with respect to reorganisation of a corporate group, as the notion of a corporate group is not acknowledged by Luxembourg law. In theory, if the registered offices of all the companies in the group are located in the same jurisdiction (either Luxembourg or Diekirch), an administrative measure of consolidation of the insolvency proceedings may be requested by the companies (if this measure is deemed as good administration of justice by the court).
See 6.2 Position of the Company for the restriction of the use or sale of a company's assets by the debtor placed in controlled management.
The sale of assets must necessarily have been authorised by the commissioner(s) and the acquired assets will be free and clear of claims.
Without their express consent, secured creditor liens and security arrangements cannot be released through the controlled management procedure.
There is no priority for new money in the framework of Luxembourg insolvency law. However, such financing may still be secured by assets of the company, upon the authorisation of the commissioner(s), including by assets encumbered by pre-existing secured creditor liens/security.
In controlled management, the debtor must provide a list of all its creditors, the amount of its debts and a detailed list of its assets.
The proposed draft of a reorganisation plan must respect the ranking of privileges and securities of all creditors which will be bound by the plan. In the case of controlled management, the commissioner(s) must ensure that contractual clauses concerning expiration, resolution and penalties are invalid in relation to the plan.
The judgment approving the reorganisation plan is binding upon the merchant and his/her/its creditors, as well as on the co-debtors and guarantors.
Based on the principle of equal treatment of creditors, the opening of bankruptcy proceedings prohibits the payment of any creditor’s claim. Therefore, mandatory, legal or conventional set-off of debts, which were not certain, due and payable before the opening of the bankruptcy, is not allowed after the opening of the bankruptcy or during the hardening period. Indeed, one effect of the judgment declaring bankruptcy is that all undue debts become due.
Apart from debts that exist prior to the bankruptcy and become due because of it, exceptions exist for:
Netting agreements with respect to claims or financial instruments are now allowed by the Luxembourg law of 5 August 2005 on financial collateral arrangements (Article 18) and such agreements remain enforceable regardless of the opening of Luxembourg or foreign insolvency proceedings against the defaulting party.
In the case of failure to comply with the reorganisation plan, the debtor should file a petition in order to commence bankruptcy proceedings.
Existing equity owners may only be entitled to receive dividends if the distribution is not prohibited by the plan and will not compromise the chances of recovery of the company.
As explained in 2.1 Overview of Laws and Statutory Regimes and 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, some proceedings are solely opened on a voluntary basis, for example stay of payments, composition with creditors and controlled management. Such proceedings aim at the reorganisation of the debtor in order to protect its business. Refer to 2.2Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for more information on the conditions, procedure and effects of such proceedings.
On the basis of a formal decision taken by the shareholders or partners of a commercial company, it is also possible to voluntarily cease trading.
Common causes for dissolution are:
The decision to dissolve the business marks the beginning of the liquidation process. One or more liquidators will then be appointed, who will be responsible for the full liquidation process until the final general meeting which concludes the liquidation proceedings. Once the procedure is closed, the company is struck off the Trade and Companies Register.
Dissolution may not occur without liquidation unless all the shares are held by one party. Liquidation entails combining the corporate assets or, where applicable, the debts, of the partners.
The managers/directors or members of the management board must convene an extraordinary general meeting to rule on the dissolution of the company. This general meeting must take place in the presence of a notary.
For the decision to liquidate the company to be considered valid, in the case of:
The general meeting will appoint the liquidator(s) and decide on the method of liquidation. If no liquidator is appointed, the persons in charge of managing the company before its liquidation will be considered the liquidators.
As soon as the company ceases trading, the managers/directors or, failing this, the liquidator must declare the cessation of trading to the various official bodies in order to cancel any existing permits/registrations (business permit, social security, VAT, taxes, trade register, etc).
Tasks and responsibilities of the liquidator(s)
Once the dissolution has taken place, the liquidator(s) will represent the company and will be responsible for carrying out its liquidation. The liquidator(s) takes control of the company and the management board/board of directors relinquishes its powers.
The liquidator must recover (ie, collect) funds owed to the company and realise (ie, sell) the dissolved company’s assets in order to be able to pay off the company’s debts and distribute any remaining funds to the partners/shareholders. To this end, liquidators may in particular:
The liquidator is also responsible for acting as the company’s legal representative.
Concluding liquidation proceedings
At the end of the liquidation, but before concluding proceedings, the liquidator must produce the liquidation accounts. An ordinary general meeting of shareholders/general meeting of partners must then be convened in order to approve these accounts. A date will be set for the final general meeting, at which the liquidation proceedings will be declared closed. A notary does not need to be present.
Compulsory liquidation is usually ordered following an application by the public prosecutor. Compulsory liquidation can be ordered by the court if a commercial company subject to Company Law has pursued illegal activities, or has seriously infringed the provisions of, among other things, the Commercial Code, the domiciliation law or Company law.
There are three possible situations in which the court can order the compulsory liquidation of a company:
The judgment ordering the liquidation marks the beginning of the liquidation procedure and provides for the appointment of an official liquidator. The liquidator is responsible for all the liquidation operations until the judgment closing the liquidation procedure. Once the procedure is closed, the company is struck off the Trade and Companies Register.
In most cases, compulsory liquidation will be ordered following an application by the public prosecutor. The latter can request that the court orders the dissolution/liquidation of any Luxembourg company that:
Where the infringements are deemed sufficiently serious, the court may order the liquidation of the company. The court will then appoint a liquidator and set the conditions for the liquidation.
Where the dissolution/liquidation is requested by a shareholder/partner, the latter must lodge a request for liquidation with the district court (Tribunal d’arrondissement) in the jurisdiction where the company is established. If the court accepts the reasons cited, it will order the liquidation of the company. The court will then appoint a liquidator and set the conditions for the liquidation.
Tasks and responsibilities of the liquidator(s)
Following the judgment ordering the liquidation, the liquidator(s) must:
Concluding liquidation proceedings
The judge can then pronounce the judgment closing the liquidation procedure.
During such proceedings, the designated liquidator(s) will be in charge of negotiating, executing and authorising the sale of assets of the business. The acquired asset will be free and clear of claims and liabilities.
This is not applicable under Luxembourg law, as there is no statutory plan in such proceedings.
This is not applicable under Luxembourg law.
The notion of corporate group is not acknowledged by Luxembourg law, but the opportunity to appoint the same liquidator in all the companies of a group may be contemplated.
In both voluntary and compulsory liquidation proceedings, there are no specific rules for the organisation of creditors or the formation of committees.
Liquidators do not need any authorisation from the court for the use or sale of company assets during a voluntary or compulsory liquidation. However, depending on the content of their mission (stipulated within the articles of association or within the decision in which they were appointed), the liquidators may have to obtain authorisation from the shareholders’ assembly to dispose of the assets of the company under liquidation process.
In accordance with EU Regulation 2015/848 of the European Parliament and of the Council dated 20 May 2015 on insolvency proceedings (replacing and recasting the previous EU Regulation 1346/2000 of 20 May 2000), if an insolvency proceeding is opened in another member state, it will automatically be recognised within the other member states (and in Luxembourg) if the “centre of main interest” (COMI) of the debtor is located in the EU.
Likewise, a foreign judgment declaring an insolvency proceeding will have universal effect in Luxembourg provided that there is a reciprocity agreement with the country where the insolvency proceedings have been opened. If not, the foreign judgment must first be recognised in Luxembourg through exequatur proceedings in order to give effect to the enforcement measures contained within the foreign judgment in relation to assets located in Luxembourg.
The EU Regulation 2015/848 introduces new co-operation rights between EU courts, including the possibility to enter into protocols or other arrangements with courts of other EU member states. Apart from this, Luxembourg courts have not entered into any protocol or arrangement with any other foreign courts.
However, when the assets of a debtor are located in Luxembourg, ancillary insolvency proceedings may be opened in Luxembourg if the main insolvency proceedings are pending in another EU member state (in accordance with the provisions of EU Regulation 2015/848).
Under Luxembourg private international law, insolvency proceedings opened in Luxembourg have extra-territorial effects. The EU Regulation 2015/848 on insolvency proceedings provides the main rules determining the jurisdiction and the governing law in cross-border cases within the EU.
Under Luxembourg insolvency law, there are no specific rules concerning foreign creditors. However, the EU Regulation provides a standard claim form for creditors wishing to file a claim in any member states.
A particular type of statutory officer appointed within a bankruptcy is the bankruptcy trustee (curateur). In a controlled management, depending on the complexity of the business, one or several commissioners (commissaire) will be appointed by the court.
In a controlled management procedure, the commissioner(s) have extended rights of supervision and control over all the operations of the debtor. They draw up an inventory of the debtor’s assets, and a statement of its assets and liabilities. They must prescribe the measures required both in the interests of the debtor and creditors, and cancel all fraudulent acts or payments of creditors. Finally, they are responsible for establishing a recovery or restructuring plan.
In bankruptcy proceedings, the bankruptcy trustee represents the interests of the debtor (who is not entitled to run his/her/its business), as well as those of the creditors, and administers the assets of the bankrupt party (an inventory of the assets must be prepared by the trustee). The trustee has a duty to manage the bankruptcy with all due diligence, under the supervision of a judge whose authorisation shall be requested by the trustee for certain transactions (eg, sale of assets). The trustee can be held liable for their management of the bankruptcy.
Statutory officers are appointed by the court and, in practice, they are usually selected from a list of attorneys registered with the Bar of Luxembourg and Diekirch. In a controlled management, the commissioner(s) may also be a creditor(s) (Luxembourg Grand-Ducal Decree of 24 May 1935, Article 12).
In Luxembourg, the most commonly used insolvency proceeding is bankruptcy; attorneys are therefore most typically employed as advisers.
Depending on who is employing the attorneys and the scope of their mission, they may be both employed and paid by the shareholder(s) of the debtor company, but represent in court the bankruptcy trustee who is defending the interests of the bankrupt company in a dispute. Or, they can act for and be paid by creditors of the bankrupt company in order to maximise the collection of their debts.
No authorisation or judicial approval is required for such employment. In addition, the court may appoint experts within the reorganisation proceedings, if needed.
Attorneys should advise clients in compliance with their ethical rules. When a debtor is facing financial difficulties, the role of the attorneys is to provide guidance and assess the judicial framework required by the debtor’s situation.
In insolvency law matters, the competent jurisdiction in Luxembourg is the commercial chambers of the district court. Alternative dispute resolution modalities are not used at all in Luxembourg insolvency law matters.
In the case of a dispute arising during insolvency proceedings, however, if the parties have previously agreed to arbitrate their dispute under a valid and enforceable arbitration clause, they may employ arbitration. Nevertheless, cost might be an issue as the bankruptcy of the company implies that it does not have sufficient cash.
See 11.1 Utilisation of Mediation/Arbitration on this point.
If arbitration agreements have been entered into prior to the opening of insolvency proceedings, such agreements remain valid. However, arbitration proceedings can only be initiated to determine the amount of a possible claim (if arbitration proceedings are initiated against the bankrupt company). Payments would then be made only on the basis of the aforementioned waterfall, see 5.8 Statutory Waterfall of Claims.
The New Code of civil procedure covers provisions related to arbitration (Articles 1224 to 1251) and mediation (Articles 1251-1 to 1251-24).
Priority is given to the arbitration agreement with regard to the appointment of arbitrators. However, if nothing is provided in the agreement, the New Code of civil procedure provides that three arbitrators shall be appointed, each party appointing its own arbitrator and the two appointed arbitrators appointing the third arbitrator.
If an issue is encountered in the appointment of an arbitrator (eg, a party fails to appoint an arbitrator), the president of the district court shall hand down an order appointing such arbitrator.
There are no specific rules in the New Code of civil procedure governing who can serve as an arbitrator, but an arbitrator/mediator should disclose any conflict of interest they may have.
In principle, managers are generally required to perform their duties in the best interests of the company, and the managers of a Luxembourg company are not liable for the debts incurred by that company. However, managers may be held liable if they failed to act in a prudent and diligent manner and caused damages to the company (contractual liability) or to third parties (tort liability).
In the context of a bankruptcy, managers may be criminally liable for negligent or fraudulent bankruptcy when they have failed to file bankruptcy within one month from the date of cessation of payments by the company.
The bankruptcy trustee may also initiate liability actions against the managers, when:
During bankruptcy proceedings, only the bankruptcy trustee can bring liability actions against managers responsible for fault and negligence described above (see 12.1 Duties of Directors).
Chief restructuring officers are not used in the Luxembourg insolvency market.
Luxembourg precedents have defined de facto directors as the persons who have taken over the decision-making power that belongs to persons responsible for management (duly appointed directors) and effectively exercised this power, even with the consent of the latter; or the persons who have insinuated themselves into the corporate organs and taken, without any restraint, binding decisions for the company. Luxembourg case law does not differentiate between de facto and shadow directors, who will have the same responsibilities as a legally-appointed director of the company.
Shareholders' liability is limited to their contribution to the company.
Certain acts performed by the debtor during the suspect period (also called the hardening period and defined in 13.2 Look-back Period) that could be detrimental to the rights of the creditors are automatically deemed null and void.
Other acts, however, are not automatically deemed null and void:
Finally, regardless of the date on which they occur, all acts or payments made fraudulently to creditors, ie, carried out by the debtor in full knowledge of their prejudicial impact on other creditors (eg, by decreasing the estate, by not respecting the preferential ranking of claims, etc) are deemed null and void.
These rules pertaining to the hardening period do not apply to financial guarantee contracts or future claims assigned to a securitisation entity.
The hardening period is the period between the date of cessation of payments (this date cannot precede the date of the judgment by more than six months) and the declaration of bankruptcy by the opening judgment.
An action seeking the annulment or declaration of invalidity of a transaction by the court may only be initiated by the bankruptcy trustee, representing the creditors, or – where applicable – by the commissioner(s).
Valuations are not used in the Luxembourg insolvency market; therefore this section is not relevant in the framework of Luxembourg insolvency law and the practice of this law.
See 14.1 Role of Valuations.
See 14.1 Role of Valuations.