The general insolvency regime is regulated by the following:

• Commercial Code: Section III, Articles 437 to 614, dealing with stay of payments and bankruptcy proceedings;
• New Insolvency Law: formally known as the Law of 7 August 2023 on the business preservation and modernisation of bankruptcy law (the “Law of 7 August 2023”); and
• Regulation (EU) 2015/848: Regulation of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the “EU Insolvency Regulation (Recast)”), which replaces the previous Regulation (EU) 1346/2000 for insolvency procedures opened after 26 June 2017.

Specific Insolvency Regimes or Provisions

In addition to the general framework, specific insolvency regimes or provisions exist for the following sectors.

• Credit Institutions and Financial Professionals: Law of 18 December 2015 covers resolution, recovery and liquidation measures for credit institutions and certain investment firms, as well as deposit guarantee schemes and investor indemnification (as amended).
• Insurance and Reinsurance Undertakings: Law of 7 December 2015 governs the insurance sector (as amended).
• Regulated Investment Funds and Fund Managers:
1. Law of 15 June 2004 relates to investment companies in risk capital (SICAR) (as amended);
2. Law of 13 February 2007 on specialised investment funds (as amended);
3. Law of 17 December 2010 pertains to undertakings for collective investment (UCIs) (as amended); and
4. Law of 23 July 2016 on reserved alternative investment funds (RAIFs) (as amended).
• Regulated Securitisation Vehicles and Affiliates: Law of 22 March 2004 governs securitisation (as amended)       

Bankruptcy (faillite)

Under Luxembourg law, bankruptcy is declared when a debtor fails to meet two crucial criteria: (i) the inability to pay its debts as they become due; and (ii) the loss of its creditworthiness. The debtor must file for bankruptcy within a month after the debtor becomes unable to pay its debts as they come due. However, this obligation to declare bankruptcy can be suspended from the moment a petition for judicial reorganisation is filed and lasts until the standstill expires.

Reorganisation Proceedings

Following the entry into force on 1 November 2023 of the Law of 7 August 2023, the following were established:

• out-of-court reorganisation (réorganisation par accord amiable); and
• judicial reorganisation (réorganisation judiciaire)

The purpose of the reorganisation proceedings is to preserve, under the control of the judge, the continuity of all or part of the assets and activities of the debtor. The debtor must establish that the continuity of its business is threatened at term.

The procedure can be opened for one of the following aims: (i) obtaining the agreement of the creditors to a reorganisation plan or (ii) the sale, by way of judicial decision, of the debtor’s assets and activities to one or more third parties.

Liquidation

Liquidation is not an insolvency procedure per se, meaning that Luxembourg has not included the liquidation procedure among Annex A of the EU Insolvency Regulation (Recast), 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).

Bankruptcy Trustee

A particular type of statutory officer appointed within a bankruptcy is the bankruptcy trustee (curateur). Bankruptcy trustees 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.

A bankruptcy trustee (curateur) oversees the debtor’s estate, ensuring the proper collection, sale and distribution of assets to creditors. Appointed by the court, these professionals work with the debtor’s management to maximise creditor recovery and maintain fairness and transparency.

Judicial Administrator

In reorganisation proceedings, judicial administrators aim to preserve the debtor’s business. Appointed by the court, judicial administrators manage or oversee the debtor’s reorganisation, ensuring the plan benefits creditors and supports business continuity.

Supervisory Judge

A supervisory judge (juge délégué) monitors insolvency and reorganisation proceedings, ensuring compliance with procedural requirements. In more complex cases, a creditors’ committee, formed with court approval, represents unsecured creditors’ interests and influences decisions. However, Luxembourg law does not provide for creditor committees outside those convened by the supervising judge, and such committees must be self-funded unless otherwise agreed with the debtor.

Creditors under Luxembourg law can be divided as follows.

• Creditors of the bankruptcy (créanciers de la faillite): these include the costs and expenses of the bankruptcy process itself, such as the fees of the bankruptcy trustee and procedural costs. They have the highest priority in payment.
• Preferred creditors of the bankrupt estate:
1. preferred creditors by law (créanciers privilégiés): this category includes statutory preferred creditors, such as employees owed certain debts and tax authorities; and
2. creditors with non-bankruptcy proof contractual or judicial security (Créanciers ayant une sûreté conventionnelle ou judiciaire): these creditors hold security interests (such as pledges or mortgages) but are subordinated to preferred creditors.
• Ordinary unsecured creditors (créanciers chirographaires): these are creditors without any security or special status and are paid pro rata from any remaining assets after higher-priority claims are satisfied.
• Shareholders: generally treated as subordinated creditors, shareholders are only entitled to any remaining surplus from the liquidation after all other creditor claims are satisfied, based on their shareholding proportion.
• “Bankruptcy-proof” secured creditors: creditors with security interests that fall under the Luxembourg Financial Collateral Law of 2005, such as those holding financial collateral or mortgages, are outside the bankruptcy estate. These creditors can enforce their rights independently of the bankruptcy proceedings and are not subject to the ordinary distribution and priority rules.

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):

• legal costs resulting from the bankruptcy proceedings;
• claims of the debtor’s employees (super-privileged claims – limited to the amount that would normally be due in the case of dismissal with notice from the date of the declaration of bankruptcy – and, where applicable, any outstanding salaries during the six months of work prior to the bankruptcy); and
• tax claims from public administrations.

Security Taken by Secured Creditors Over Real Estate Property in Luxembourg

In Luxembourg, the most common forms of security over real estate property include the following.

Mortgage (hypothèque)

A mortgage requires the following.

• A notarial deed: this establishes the mortgage in a formal and binding manner.
• Registration:
1. the notarial deed must be registered with the Administration de l’enregistrement et des domaines to establish its rank, except for the hypothèque occulte (hidden mortgage) of the state in inheritance cases; and
2. to be enforceable against third parties, the deed must also be registered with the Bureau de conservation des hypothèques in the judicial district where the property is located.
• Renewal: after ten years, the registration must be renewed to maintain enforceability against third parties.

Pledge over real estate (antichrèse)

While less common than mortgages, this pledge involves the following.

• Registration: similar to a mortgage, it must be registered with both the administration registry and the mortgage registry.
• Dispossession: the pledgor must relinquish possession of the property, which is held by the pledgee until the debt is fully repaid (eg, through rental income generated by the property).

Seller’s lien (privilège du vendeur)

Granted under Article 2103(1) of the Luxembourg Civil Code, this lien allows the seller of real estate to retain a preferential claim on the property until the full purchase price is paid.

Lender’s lien (privilège du prêteur de deniers)

As provided under Article 2103(2) of the Civil Code, this lien is available to lenders financing real estate acquisitions.

It must be included in a notarial deed and registered with both the administration registry and the mortgage registry for a ten-year enforceability period, renewable thereafter.

Security Over Tangible Movable Property

Tangible movable property includes assets with physical substance, such as trading stock, machinery, aircraft and ships (subject to specific rules for vessels exceeding 20 tons).

Pledges

• Types:
1. civil pledges (gage civil): governed by Articles 2073–2084 of the Civil Code; and
2. commercial pledges: governed by Articles 110–188 of the Commercial Code and supplemented by the Civil Code (eg, pledges over a going concern).
• Formalities:
1. the pledged asset must be out of the grantor’s possession;
2. for pledges over a going concern, registration with the Mortgage Registry is required;
3. civil pledges and pledges over a going concern must be documented in writing, whereas commercial pledges can be proven by any means under the Commercial Code; and
4. all pledges must be notified to and accepted by the debtor to be enforceable against third parties.

Transfer of ownership for collateral purposes

This involves transferring legal title to the lender as collateral. It may occur:

• directly to secure a debt; or
• through a fiduciary contract (contrat fiduciaire), which limits the lender’s exercise of ownership rights to the terms agreed in the contract.

Security Over Intangible Movable Property

Intangible movable property refers to assets such as financial instruments (eg, shares, bonds), cash, securities accounts and intellectual property (IP) rights (eg, patents, trademarks).

Financial instruments

Security can be granted by:

• pledging: governed by the Luxembourg Law of 5 August 2005 on financial collateral arrangements (as amended);
• transfer of ownership: for collateral purposes, similar to tangible property; and
• repurchase agreements (mise en pension): transfers of assets to secure obligations under specific or global repurchase agreements.

Intellectual property rights

• Transfers of title are enforceable against third parties if registered with:
1. the Benelux Office of Intellectual Property for trademarks and designs; or
2. the National Intellectual Property Patent Registry for patents.
• Pledges must be registered with both the administration and mortgage registries for third-party enforceability.

Bank accounts

Pledges over bank accounts must be:

• notified to the account bank; and
• subject to the same formalities as civil or commercial pledges to ensure enforceability against third parties.

Guarantees

First-demand guarantees (garanties à première demande)

These are “autonomous” securities, meaning the guarantor cannot invoke exceptions related to the original loan agreement.

The guarantee can be formalised as a letter or an agreement and is immediately enforceable against third parties without registration requirements.

Personal guarantees or suretyship (cautionnement)

These involve a guarantor committing to fulfil the borrower’s obligations in the event of default.

Outside formal proceedings, unsecured creditors can exercise rights such as attachment of assets (pre-judgment) and may retain the title of goods under retention of title clauses. They may also exercise set-off rights if the debtor owes them an obligation.

However, these rights may be limited once insolvency or reorganisation proceedings commence, as automatic stays can prevent unsecured creditors from unilateral enforcement actions.

The Law of 7 August 2023 introduced a framework for out-of-court arrangements (mutual agreement (accord amiable)), offering a strategic opportunity for commercial entities, businesspersons and civil companies to reorganise their financial and operational structures outside formal legal proceedings. These arrangements, rooted in the principles of early warning mechanisms, provide an efficient pathway for restructuring a debtor’s assets or business activities through agreements with at least two creditors ‒ avoiding public scrutiny and the complexities of court procedures.

A significant benefit of this mechanism is its resilience against bankruptcy. Transactions executed under the out-of-court arrangement remain valid even if the debtor later enters bankruptcy, although their enforcement is suspended upon the commencement of bankruptcy proceedings. Importantly, creditors participating in such arrangements are shielded from liability for failing to preserve the continuity of the debtor’s business.

The confidentiality of these proceedings is another critical feature. This discretion safeguards the debtor’s business reputation and operational stability, allowing reorganisation efforts to proceed without external interference. Additionally, court homologation ‒ available at the debtor’s request ‒ can grant legal enforceability to the arrangement, further solidifying its legitimacy.

Furthermore, a conciliator, appointed at the debtor’s request, plays a pivotal role in the success of out-of-court arrangements. Beyond facilitating the agreement’s formation, the conciliator provides guidance throughout the reorganisation process, ensuring a practical and sustainable implementation of the agreed terms.

As to the initiation of an out-of-court arrangement, the debtor must meet basic requirements, primarily involving the participation of at least two creditors. The reorganisation plan may target the restructuring of part or all of the debtor’s operations or assets. Once an agreement is reached, the debtor may seek court homologation. The court verifies that the arrangement aligns with the goal of business reorganisation before granting homologation, which cannot be appealed.

As stated at 3.1 Out-of-Court Restructuring Process, the out-of-court restructuring agreement, once homologated by the court, is given a legally enforceable status that allows it to bind both the debtor and participating creditors.

However, its binding effect is limited in scope and applies primarily to the parties who have agreed to participate in the restructuring. This means that the homologated arrangement can be invoked against these consenting creditors but does not automatically extend to all other creditors who may have claims against the debtor but did not participate in or agree to the restructuring.

Notably, the homologation process grants the agreement legal resilience in certain situations. For instance, if the debtor subsequently enters into bankruptcy, transactions executed under such agreement remain protected from standard claw-back actions that usually apply in bankruptcy cases, though the agreement’s execution may be paused during bankruptcy proceedings. This legal protection provides significant security to creditors involved in the restructuring by insulating the arrangement from certain insolvency risks.

Additionally, the terms of the agreement are not publicly disclosed, and third parties may only be informed of its content with the debtor’s explicit consent, preserving the confidentiality of the arrangement. As such, while the out-of-court agreement holds enforceable status among consenting creditors and the debtor, its application and effects do not extend to creditors who were not part of the agreement or to other third parties unless specific conditions allow for their involvement.

The Law of 7 August 2023 introduced significant reforms aimed at modernising bankruptcy law in Luxembourg. A cornerstone of this reform is the introduction of three new judicial reorganisation procedures, which aim to provide businesses with flexible mechanisms to address financial difficulties while preserving economic value and safeguarding employment.

These proceedings allow businesses to obtain a suspension (sursis) of payments, enabling them to restructure or transfer their operations effectively. The procedures are designed for the following purposes:

• Settlement Agreement (Accord Amiable): negotiating a mutual agreement between the debtor and creditors to restructure debts;
• Collective Agreement (Accord Collectif): securing creditor approval for a collective restructuring plan in accordance with Articles 38 to 45 of the New Insolvency Law; and
• Transfer by Court Order (Transfert par Décision de Justice): enabling the transfer of all or part of the debtor's assets or business operations to third parties under court supervision, as provided in Articles 55 to 67.

Since the Accord Amiable was previously addressed in 3.1 Out-of-Court Restructuring Process, this section focuses on the two other reorganisation procedures: Accord Collectif and Transfert par Décision de Justice.

Judicial Reorganisation by Collective Agreement (Accord Collectif)

The primary purpose of Accord Collectif proceedings is to allow financially distressed businesses to restructure their operations and debts under judicial supervision, with the agreement of creditors.

Initiation of Proceedings

The initiation of Accord Collectif proceedings may be requested by:

• the debtor or their legal representatives;
• creditors, provided they can demonstrate the debtor’s inability to meet payment obligations; and
• the State Prosecutor, particularly when the public interest is at stake.

This broad range of eligible initiators underscores the Law’s flexibility in addressing diverse financial crises.

Key Criteria

The principal criterion for initiating these proceedings is the debtor’s cessation of payments ‒ an inability to meet debt obligations as they fall due. However, the Law also allows pre-emptive action if insolvency is threatened but not yet realised. This provision facilitates early intervention, giving businesses the opportunity to avoid formal insolvency through proactive restructuring.

Both individual entrepreneurs and corporate entities can utilise these procedures, highlighting their applicability across a wide spectrum of business activities.

Application Process

To initiate proceedings, the debtor must submit an application to the court. This application typically includes:

• a statement of facts: a detailed explanation of the financial difficulties and the imminent or potential threat to the business’s continuity;
• objectives: a clear outline of the intended outcomes, such as restoring solvency, safeguarding jobs, or satisfying creditor claims; and
• proposals: specific measures to address financial difficulties, such as debt restructuring plans, operational changes, or asset sales.

Upon filing, the court appoints a delegated judge (juge délégué) to oversee the process. Key features of the proceedings include:

• access to information: creditors and other interested parties may access relevant documents, subject to confidentiality protections;
• suspension of limitation periods: filing suspends the statute of limitations on creditors’ claims; and
• Protective measures: pending the court’s decision, the debtor is shielded from bankruptcy declarations, judicial dissolution, and enforcement actions against their property, except in cases involving serious legal breaches (eg, under Article 1200-1 of the amended 1915 Law).

Judicial Reorganisation by Transfer by Court Order (Transfert par Décision de Justice)

This procedure focuses on ensuring the continuity of a business’s economic activities by transferring all or part of its assets to third parties. Unlike other reorganisation methods, it prioritises preserving viable operations under judicial supervision.

Initiation of Proceedings

A transfer by court order can be initiated:

• by the debtor, either in their initial petition for reorganisation or during ongoing proceedings; and
• by third parties, including creditors, the Public Prosecutor, or potential acquirers interested in the business or its assets.

Court-Appointed Agent

A court-appointed agent (mandataire de justice) is responsible for overseeing the transfer process. Their duties include:

• assessment and planning: evaluating the viability of the business or its components and preparing transfer proposals; and
• co-ordination: organising the sale or assignment of assets necessary for maintaining economic activities. This may include arranging mergers or other structural changes.

The court-appointed agent prepares one or more transfer projects and submits them to the delegated judge and debtor at least two days before the court hearing. The judge’s authorisation is required for the transfer to proceed.

Transfer Process

Once the court approves the transfer project:

• the court-appointed agent executes the transfer(s), ensuring compliance with legal and contractual obligations; and
• the scope of the transfer is determined either by the court or left to the discretion of the agent, who bears significant responsibility for balancing creditor interests with the business’s viability.

Public Registry Notice

The appointment of the court-appointed agent is publicly recorded in the Luxembourg Business Registry, ensuring transparency and facilitating stakeholder engagement.

Under Luxembourg law, reorganisation proceedings primarily adjust creditors’ rights, both secured and unsecured, while shareholders’ rights may also be impacted, especially in cases where these interests conflict with the reorganisation aims.

The reorganisation process typically requires that creditors, assembled as a collective, vote on the reorganisation plan.

Majority consent is usually required to proceed, although dissenting creditors may be subjected to a “cram-down” if deemed necessary to the plan’s success.

The value of claims against the debtor is determined through a formal verification process under judicial oversight, ensuring that creditors’ claims are assessed consistently with legal standards. Luxembourg law includes preventive restructuring measures, such as a stay on enforcement actions, which are particularly useful for granting the debtor time to negotiate terms with creditors.

Additionally, the court may appoint a restructuring specialist, often referred to as a “practitioner in the field of restructuring,” to oversee and facilitate negotiations. Dissenting creditors, while protected under the law, may be bound to the terms of the restructuring if a cross-class cram-down is applied, underscoring the court’s commitment to pursuing reorganisation where possible.

Lastly, new funds injected during the process may be granted priority, and these contributions may also be secured to encourage investment in the reorganisation effort, aligning with the broader objective of maintaining or restoring the debtor’s financial stability.

Timelines for reorganisation proceedings vary based on the complexity of the case, with distinct phases for negotiation, plan voting and the official conclusion, which may culminate in either a successful reorganisation or, if restructuring proves unfeasible, liquidation. Furthermore, the length of the proceedings varies depending on the specific timeframe for the moratorium set by the court, which cannot be longer than four months, unless extended upon request and for a duration which cannot exceed 12 months in total. The court can close the reorganisation proceedings when it becomes clear that the debtor is no longer able to ensure the continuity of all or part of its business or assets.

Throughout the restructuring process, the court maintains oversight through the reports submitted by the delegated judge.

If any issues arise ‒ such as the debtor no longer being able to continue its operations, or if the debtor provides incomplete or inaccurate information ‒ the judge may recommend the early termination of the procedure. In such cases, the court can decide to end the procedure prematurely and may declare the debtor bankrupt or order liquidation of the debtor’s assets. This step typically occurs if the court determines that the debtor’s financial situation is irreparable or that the debtor has not been forthcoming in providing necessary information.

If, however, the procedure reaches a point where a viable restructuring plan is agreed upon and successfully implemented, the court will issue a judgment to formally close the procedure. This marks the end of the restructuring process, and creditors will no longer be able to pursue claims as they are bound by the terms of the agreed plan.

In certain situations, either the debtor or the creditors may fail to adhere to the agreed terms of the restructuring plan. If this happens, the court has the authority to terminate the procedure early, lifting the suspension on creditors’ actions. This means creditors can resume legal actions to recover their debts. In extreme cases, failure to comply with the plan may lead to bankruptcy or liquidation of the debtor, as the reorganisation will no longer be deemed viable.

Once the procedure ends ‒ either by completion of the restructuring plan, early termination, or declaration of bankruptcy ‒ the court issues a final judgment. This judgment is published and communicated to the debtor and the creditors, ensuring that all parties are informed of the outcome. If the procedure has ended successfully, the debtor is granted the opportunity to continue operations under the new terms; if the procedure ends with bankruptcy, the debtor’s assets may be liquidated to satisfy outstanding claims.

The debtor may continue to operate their business under supervision during the proceedings, provided it is in line with the reorganisation objectives. This operational continuity is designed to preserve the business’s economic value and facilitate its potential return to viability.

Nevertheless, restrictions apply regarding the debtor’s use of assets, particularly those pledged as security for creditors. Any significant transaction or disposal of assets typically requires judicial approval or oversight from a court-appointed administrator to ensure that creditor interests remain safeguarded throughout the process.

Lastly, while under restructuring, the debtor has avenues to seek new funding, subject to court consent. The courts may prioritise this new funding over pre-existing claims to ensure the business has sufficient capital to complete the restructuring process. This flexible approach to funding underscores the Luxembourg courts’ commitment to providing businesses in distress with a viable path to recovery, balancing the protection of creditor interests with measures that support long-term stability and financial rehabilitation.

In restructuring proceedings, two key office holders play pivotal roles: the juge délégué (delegated judge) and the mandataire de justice (court-appointed agent). Their respective duties are essential to ensuring the smooth progression of the process and achieving the objectives set by the restructuring framework.

The Delegated Judge (Juge Délégué)

The juge délégué is tasked with overseeing the proper conduct of the restructuring proceedings. This role is typically entrusted to a judge with substantial experience in commercial law, and a thorough knowledge of the relevant legal framework.

The juge délégué acts as a supervisory authority, ensuring that all procedural requirements are met and that the interests of the stakeholders ‒ creditors, employees, and the debtor ‒ are respected. Beyond legal expertise, this position demands a high level of availability and engagement to address any emerging issues promptly. The juge délégué also liaises with other actors involved in the proceedings, including the court-appointed agent, providing guidance and approval where necessary to keep the process on track.

The Court-Appointed Agent (Mandataire de Justice)

The mandataire de justice is appointed automatically when a restructuring by transfer under court order is initiated. The agent’s appointment is published in the Luxembourg Business Registry to ensure transparency.

The primary responsibility of the mandataire de justice is to organise and execute the transfer or assignment of the debtor’s movable or immovable assets. These assets are identified as essential or beneficial for preserving all or part of the debtor’s economic activity.

The scope of the transfer is either determined by the court or left to the discretion of the mandataire de justice, who bears the significant responsibility of assessing the viability of the business ‒ or portions thereof ‒ to be transferred. The agent’s expertise in evaluating economic and operational factors is critical, as the court itself typically lacks the technical and commercial knowledge required for such decisions.

To fulfil their mandate, the mandataire de justice develops one or more transfer proposals, which may be prepared simultaneously or in succession. These proposals must be submitted to both the juge délégué and the debtor at least two days before the court hearing at which the agent seeks authorisation to implement the proposed transfer(s). Once the court approves the plan, the agent is empowered to carry out the transfer(s).

In Luxembourg, the reorganisation proceedings under the Law of 7 August 2023 allow for flexible and confidential proceedings for companies in distress.

This process can involve both in-court and out-of-court procedures, each providing certain protections and avenues for creditors and shareholders to enforce or defend their rights. The New Insolvency Law aims to balance the interests of distressed businesses with those of their creditors.

• Shareholders play a secondary role in reorganisation process. In Luxembourg’s reorganisation procedures, they typically retain ownership unless otherwise specified by a court-ordered transfer. However, their rights may be diluted, especially if the reorganisation requires significant changes to the company’s capital structure. Shareholders generally cannot disrupt the reorganisation process, and their ability to retain any ownership depends on the success of the restructuring and the availability of surplus assets after satisfying creditors’ claims.
• In Luxembourg, secured creditors generally hold significant power due to the priority of their claims on specific collateral. In the context of reorganisation proceedings, as the Law is very recent, no case law exists yet.
• Unsecured creditors, meanwhile, typically rank lower in priority and are paid from the remaining assets after secured creditors are satisfied. However, they may have influence through collective agreements or voting on reorganisation plans. The Law also permits unsecured creditors to object to or negotiate terms, though these rights do not usually allow them to unilaterally block the process.

Regarding claims trading, it is generally assumed ‒ given that this has not yet been contested due to the recent nature of restructuring proceedings in Luxembourg ‒ that the general provisions of the Luxembourg Civil Code allow for the transfer of claims during restructuring. However, such transfers may need to be properly documented and notified to the debtor to ensure their enforceability. Specific disclosures or approvals for claim transfers will also depend on the circumstances and any contractual or court-imposed restrictions.

Liquidation can broadly be divided into voluntary liquidation and compulsory liquidation, with each type subject to specific initiation criteria, requirements for initiating parties, and the category of entities involved. In both voluntary and compulsory liquidation, a liquidator must be appointed to manage the assets and liabilities of the company. This actor takes on significant responsibilities, such as collecting debts, realising assets, and ensuring fair distribution to creditors or partners. In voluntary liquidation, the liquidator is chosen by the shareholders or partners, while in compulsory liquidation, the court generally appoints the liquidator.

Voluntary Liquidation

Voluntary liquidation applies exclusively to corporate entities. Unlike compulsory liquidation, it is not an insolvency procedure, and thus, individuals and sole traders do not fall within its scope. There is no formal obligation to initiate voluntary liquidation unless specified in the company’s articles or if the company’s continued existence is untenable under financial distress. However, if the company can no longer pay its debts, shareholders or directors may instead consider compulsory liquidation, usually initiated through bankruptcy proceedings.

It typically applies when a company’s shareholders or partners decide to dissolve the entity, often due to the cessation of its business activities or because it has fulfilled its purpose. Dissolution requires formal shareholder or partner approval, generally through a resolution passed at an extraordinary general meeting. For public limited companies (sociétés anonymes, SAs) and partnerships limited by shares (sociétés en commandite par actions, SCAs), the meeting must be held with a quorum representing at least half of the company’s capital for the initial meeting, though a second meeting can be convened with no quorum requirement. A two-thirds majority vote of present or represented capital is necessary for approval. In limited liability companies (sociétés à responsabilité limitée, SARLs), general partnerships (sociétés en nom collectif, SENCs), and limited partnerships (sociétés en commandite simple, SECSs), a three-quarters majority from partners representing half of the share capital is required.

Compulsory Liquidation

Contrarily, this kind of liquidation is a court-mandated process typically initiated when a company is insolvent, unable to meet its debts, or has lost its creditworthiness. While voluntary liquidation focuses on dissolving an entity that may still be solvent or has no major financial distress, compulsory liquidation primarily seeks to manage the orderly dissolution of insolvent entities, with greater court involvement to protect creditor interests and address unpaid liabilities systematically. This procedure ensures creditors’ rights are prioritised through judicial oversight and may result from a creditor’s petition or a debtor’s own declaration of bankruptcy.

Compulsory liquidation is generally restricted to corporate entities. However, bankruptcy laws in Luxembourg can apply to individuals engaged in commercial activities, meaning sole proprietors or independent merchants could also be subject to compulsory liquidation under insolvency proceedings, depending on their financial structure and liabilities.

The court may commence compulsory liquidation when a company demonstrates its inability to continue operations due to insolvency, which is determined by two main factors: cessation of payments and loss of creditworthiness. Unlike voluntary liquidation, compulsory liquidation is guided by the principles of bankruptcy law, which imposes specific solvency standards on entities. When a company is unable to meet its financial obligations, liquidation proceedings can be initiated to preserve creditors’ rights and achieve fair distribution of the company’s remaining assets.

Compulsory liquidation can be initiated by multiple parties: creditors, who may file for bankruptcy if they are owed debts the company cannot pay; the company’s management, which is obligated to initiate proceedings if it is apparent the company cannot fulfil its obligations; or, in some cases, the public prosecutor. Management has a duty to file for bankruptcy within a specific period once it becomes clear the company is insolvent, to avoid wrongful trading liability. Failure to do so may result in legal consequences for directors, who can be held personally liable for the company’s debts if they fail to act responsibly.

The liquidation process formally begins when the company resolves to dissolve, typically requiring an extraordinary general meeting convened by the company’s management. This meeting, which must be held in the presence of a notary, enables shareholders to decide on dissolution and approve liquidation by the required voting thresholds, depending on the type of company. In public limited companies (sociétés anonymes, SAs) and partnerships limited by shares (sociétés en commandite par actions, SCAs), at least half of the company’s capital must be represented in the first meeting; otherwise, a second meeting is called, where a two-thirds majority of attendees can decide on dissolution. In limited liability companies (sociétés à responsabilité limitée, SARLs), general partnerships (sociétés en nom collectif, SENCs), and limited partnerships (sociétés en commandite simple, SECSs), the decision requires approval from partners representing three-quarters of the capital, with more stringent requirements possible if specified in the articles of association.

Upon approval, a liquidator is appointed by the general meeting, responsible for overseeing the liquidation. The liquidator’s role is to represent the company throughout the liquidation, which includes ceasing trading activities and notifying relevant authorities about the proceedings. The liquidator then takes over the company’s assets and liabilities, conducting an inventory and preparing a balance sheet to establish the company’s financial standing.

The liquidator’s primary responsibilities are to recover and realise the company’s assets to settle its debts. This can involve collecting receivables, selling assets, and potentially even continuing limited business operations temporarily if it would better serve the liquidation process. For example, the liquidator may, under certain conditions, secure loans or issue commercial paper, provided such actions benefit the estate and do not unfairly disadvantage creditors. The liquidator’s powers may be modified according to the articles of association or by resolutions passed at the time of appointment.

The distribution of assets follows a strict hierarchy: creditors must be treated equally, with priority given to specific claims, such as those related to wages, taxes, and secured debts. Regardless of their maturity, all claims must be addressed, even if they were not yet due on the date of liquidation. If creditors fail to respond to requests from the liquidator, any unclaimed amounts are deposited with the Deposits and Consignments Fund (Caisse des dépôts et consignations). Once all obligations are met, any residual assets are distributed to the partners or shareholders, subject to tax obligations.

To conclude liquidation, the liquidator prepares final liquidation accounts, which are then submitted to the general meeting of shareholders or partners for approval. The meeting also appoints internal auditors to validate the liquidation accounts. Following approval, the liquidator is formally released from their duties, and the final steps include specifying where company records will be stored for five years, as required by law. The company’s dissolution is then registered with the Trade and Companies Register (RCS), which updates the company’s status to “in liquidation” or “removed,” marking the official end of its legal existence.

Liquidation procedures in Luxembourg may conclude through various avenues, contingent upon the debtor’s asset realisation and the extent of creditor satisfaction achieved.

One primary outcome is the complete liquidation of the debtor’s assets. In this case, the debtor’s assets are sold, and the proceeds are distributed according to established priority rules. Secured and preferential creditors are paid first; if sufficient funds remain, unsecured creditors (créanciers chirographaires) may also receive a portion of the distribution. These remaining assets are allocated among unsecured creditors according to their priority ranking. Once the full distribution process has been executed, the court may officially close the liquidation, thereby ending the legal existence of the debtor.

In instances where funds are insufficient to satisfy ordinary creditors fully, the liquidation procedure may conclude differently. Here, the juge-commissaire ‒ the judge overseeing the liquidation ‒ may declare that the available assets do not suffice to meet the unsecured creditors’ claims. The judge supervises the asset realisation process, organises creditor meetings if necessary, and manages any arising concerns over the distribution process. Upon confirming asset insufficiency, the juge-commissaire may authorise closure of the liquidation, thereby concluding the proceedings on the basis that no further distributions can be made to satisfy ordinary creditors. This type of closure underscores the statutory priority of claims, ensuring that secured and preferential claims are addressed first.

The New Insolvency Law, moreover, provides for the reopening of liquidation proceedings should previously unknown assets come to light after the procedure has concluded. Under Article 536-5 of the Commercial Code, if new assets are discovered post-closure, the public prosecutor has the authority to petition the court to reverse the closure. Upon reopening, the court appoints a judge-commissioner and additional liquidators, as necessary, to manage these newly identified assets. The liquidation process then resumes in a manner similar to the initial proceedings, prioritising the distribution of the new assets among the creditors.

Lastly, Luxembourg’s legal framework grants the public prosecutor the ability to intervene in liquidation proceedings where fraudulent or unlawful activities are suspected. In such cases, irrespective of the debtor’s insolvency status, the prosecutor may petition for the company’s dissolution and liquidation to ensure compliance with criminal or commercial regulations. This judicial intervention applies to both domestic and foreign companies operating within Luxembourg, thereby reinforcing corporate accountability and alignment with national legal standards.

In a liquidation context, shareholders generally lose any control over the company and typically have no say in the process. Their position is subordinate to all creditors, and they are entitled to any remaining assets only after all creditors have been paid. In practice, shareholders rarely receive assets in liquidation, given that creditors are prioritised.

Secured creditors maintain a high-priority status, which enables them to enforce their rights against the specific assets pledged as security. Luxembourg’s Commercial Code stipulates that secured creditors can pursue their claims directly against collateral without being significantly impacted by the liquidation’s collective nature. Any pre-existing liens and securities on assets are honoured, and the automatic stays that apply in restructuring may not restrict secured creditors in liquidation unless specified by the court.

Unsecured creditors have a lower priority and are generally paid after secured creditors. However, they may still enforce rights like retention of title or set-off, subject to liquidation rules. While they have limited means to challenge or disrupt liquidation, they may file claims to the estate and participate in creditor meetings where applicable.

Luxembourg’s approach to international restructuring and insolvency law combines domestic legal provisions with EU regulations, notably the EU Insolvency Regulation (Recast), particularly regarding cross-border insolvency proceedings within the EU.

As a member of the EU, Luxembourg applies EU regulations that influence domestic law. Thus, the EU Insolvency Regulation (Recast) provides a uniform framework for determining the jurisdiction and applicable law for insolvency proceedings within the EU, as outlined below.

• Main proceedings: governed by the law of the jurisdiction where the COMI is located (eg, Luxembourg if the COMI is established there). For companies, this is generally their registered office.
• Secondary proceedings: these can be initiated in another member state where the debtor has an establishment. Luxembourg law will apply to assets located within Luxembourg in such cases.

Under Luxembourg law, insolvency and restructuring proceedings are generally governed by the territoriality principle. This means that Luxembourg law applies to insolvency proceedings initiated in Luxembourg courts, provided that the debtor has sufficient ties to Luxembourg. As explained, the primary connecting factor is the debtor’s centre of main interests (COMI), a concept derived from EU law (eg, the EU Insolvency Regulation (Recast)).

The criteria for the COMI in Luxembourg is:

• registered office: the debtor’s registered office is presumed to be its COMI unless proven otherwise;
• principal place of business: if the debtor conducts the majority of its operations in Luxembourg, this can establish Luxembourg as the COMI; and
• stakeholder engagement: where creditors, employees, and other stakeholders predominantly interact with the debtor in Luxembourg, this further supports Luxembourg jurisdiction.

When the COMI is established in Luxembourg, its laws typically govern both procedural and substantive aspects of restructuring or insolvency proceedings.

In accordance with the EU Insolvency Regulation (Recast) (which replaces and recasts the previous EU Regulation 1346/2000 of 20 May 2000), insolvency proceedings opened in one member state are automatically recognised in all other member states, including Luxembourg, provided the debtor’s COMI is located within the EU. This automatic recognition streamlines cross-border insolvency management within the EU.

For insolvency proceedings originating outside the EU, the situation is different. Luxembourg case law provides that a non-EU insolvency judgment can have universal effect in Luxembourg, but only under certain conditions. Specifically, such judgments must first be recognised through exequatur proceedings in Luxembourg to enforce any measures relating to assets located in Luxembourg. This process involves:

• verifying jurisdiction: ensuring the foreign court had jurisdiction according to Luxembourg’s conflict of jurisdiction rules;
• defending procedural rights: confirming that the rights of defence of the debtor or other parties involved were respected;
• respecting public policy: ensuring that recognition does not contravene Luxembourg’s international public policy (ordre public); and
• preventing legal circumvention: confirming that Luxembourg law has not been circumvented (known as fraude à la loi).

Recognition of UK Insolvency Proceedings Post-Brexit

Since the United Kingdom’s withdrawal from the EU, English insolvency proceedings are no longer subject to the automatic recognition granted under the EU Insonvency Regulation (Recast). Instead, they are treated as judgments from a third country. Consequently, English insolvency judgments seeking to enforce measures in Luxembourg now require the exequatur procedure, similar to any non-EU insolvency judgment.

Within the EU, the courts operate under the EU Insolvency Regulation (Recast), which aims to facilitate co-ordination and co-operation between the courts of different member states. This Regulation determines jurisdiction based on the debtor’s COMI, and insolvency proceedings are automatically recognised and enforced within the EU, allowing for smoother cross-border co-operation.

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 Insolvency Regulation (Recast)).

The New Insolvency Law does not provide any special procedures or impediments applicable to foreign 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. However, foreign creditors must ensure they follow Luxembourg procedures for lodging claims in the insolvency proceedings, and they may face additional complexities, such as the requirement for translation of documentation or fulfilling specific procedural formalities.

Managers of a Luxembourg company are generally required to perform their duties in the best interests of the company. While managers are not ordinarily held personally liable for the debts incurred by the company, exceptions arise where their actions ‒ or inactions ‒ cause harm to the company or third parties.

General Liability

Managers may be held liable in the following circumstances:

• contractual liability: when managers fail to act prudently and diligently, causing damage to the company through breaches of their contractual obligations under company law or internal governance rules; and
• tort liability: when their negligent or wrongful actions cause damage to third parties, leading to personal liability under tort law.

Liability in Bankruptcy

In the context of bankruptcy, managers face heightened scrutiny and may be held civilly or criminally liable for their actions leading up to and during the insolvency process.

Criminal liability for negligent or fraudulent bankruptcy

Managers may be subject to criminal penalties if they fail to file for bankruptcy within one month of the company’s cessation of payments.

Additional criminal liability may arise in cases of fraudulent activities, such as misrepresentation, embezzlement or deliberate asset stripping.

Liability actions by the bankruptcy trustee

The bankruptcy trustee (curateur) may initiate actions against managers who have contributed to the company’s bankruptcy through their fault or misconduct.

Specific Cases of Managerial Liability in Bankruptcy

The court may impose severe penalties or liabilities on managers in the following situations.

Fault contributing to bankruptcy

If a manager’s serious fault or misconduct has significantly contributed to the company’s insolvency, the court may prohibit them from engaging in any commercial activity or holding positions as a manager, director, auditor or similar role in any company.

Gross negligence and shortfall of assets

If a manager is found guilty of gross negligence leading to bankruptcy and the company’s assets are insufficient to cover creditors’ claims, the court may hold the manager personally liable for the outstanding debts of the company.

Personal misuse of the company

When managers use the company for personal interests at the expense of its financial health, including treating the company’s assets as if they were their own and continuing a loss-making activity for personal gain, knowing it would inevitably lead to bankruptcy, the court may declare the managers personally bankrupt, making them liable for the company’s debts and disqualifying them from future business roles.

As explained at 7.1 Duties of Directors, directors can be personally liable if they fail in their duties, either individually or collectively, depending on the situation.

The liability grounds include neglecting the mandate, misconduct in management, and any fault or negligence causing damages to the company or its stakeholders.

Liability can extend to individual creditors, not just the company, especially in cases like selective payments that unfairly favour certain creditors over others. Luxembourg law requires directors to file for bankruptcy within one month of the company’s cessation of payments; failure to do so incurs liability. Creditors may bring claims directly against directors if their actions caused personal losses to those creditors.

Officers, including supervisory board members, also bear responsibilities for oversight, particularly in financially distressed scenarios. They must monitor the company’s financial state actively and ensure that board discussions cover potential risks and restructuring options.

They should also ensure their actions align with the company’s best interest to avoid liability. Supervisory board members or other officers can be liable for failure to execute their supervisory duties or for negligence in oversight, particularly if their inaction contributes to financial losses.

Directors and officers may face additional risks, such as civil disqualification from holding future directorships, particularly if they breach their fiduciary duties or fail in their statutory obligations. Criminal liability may also arise if misconduct is found, especially in cases involving fraud or gross negligence. In certain cases, shareholders or lenders who interfere with management decisions can be deemed “de facto directors” and face liability if their actions result in harm to the company or its creditors.

In Luxembourg, the suspect period (referred to as the période suspecte) is a legally defined timeframe preceding a declaration of bankruptcy during which certain acts performed by the debtor that could harm creditors’ rights are subject to scrutiny. Typically, this period extends up to six months prior to the bankruptcy declaration.

Extension of the Suspect Period for Fraudulent Intent

The suspect period can be retroactively extended if there is evidence of fraudulent intent (fraude) by the debtor. Such an extension may be applied, for instance, in cases where the debtor deliberately acted to prejudice creditors, including:

• hiding or transferring assets to place them beyond creditors’ reach; and
• making preferential payments to certain creditors to favour them over others.

The exact start date of the suspect period is not fixed but is determined by the court. This is based on the debtor’s cessation of payments (cessation des paiements), which marks the point when the debtor is deemed insolvent. The cessation date is critical, as it retroactively sets the anchor for identifying actions that fall within the suspect period.

Acts Automatically Deemed Null and Void

Certain actions performed by the debtor during the suspect period are automatically null and void without requiring further proof of intent. These include the following.

Disposal of assets

• Transactions involving movable or immovable assets where the debtor:
1. transfers such assets without receiving any consideration (eg, gifts or free transfers); or
2. disposes of assets for a consideration that is significantly lower than their fair market value, thereby diminishing the estate available to creditors.

Premature payments of non-due debts

• Any payments made toward debts that were not yet due, regardless of the payment method (eg, cash, assignment of rights, sale, offsetting debts through reciprocal obligations).

Non-cash payments for due debts

• Payments made for debts that were already due but settled using methods other than cash or commercial paper (eg, by barter or asset transfers).

Granting of mortgages or other security interests

• The creation of mortgages, pledges or other rights in rem to secure debts that were contracted before the cessation of payments.

These provisions are intended to prevent actions that unfairly prioritise certain creditors or deplete the debtor’s estate to the detriment of the collective body of creditors.

Acts Not Automatically Null and Void

Other actions during the suspect period are not automatically invalid but may be declared null and void by the court under specific circumstances, as set out below.

Payments to creditors with knowledge of insolvency

• Payments made by the debtor for validly due debts or other transactions during the suspect period may be invalidated if the recipients or other counterparties knew or should have known that the debtor had ceased payments and was insolvent.

Registration of rights of lien

• Rights of lien or other security interests that were validly acquired and registered before the declaration of bankruptcy are generally protected.
• However, any liens registered after the bankruptcy declaration may be subject to invalidation, particularly if they prejudice creditors’ rights or violate the principle of equal treatment.

Legal and Practical Implications

The rules governing the suspect period serve several essential purposes:

• protection of creditors: preventing unfair treatment by ensuring that no creditor gains undue advantage during the insolvency process;
• preservation of the estate: safeguarding the debtor’s assets to maximise recovery for the collective pool of creditors; and
• deterrence of fraudulent behaviour: discouraging debtors from engaging in suspicious transactions that could harm creditors before a bankruptcy filing.

The suspect period and related provisions are fundamental to maintaining the fairness and integrity of bankruptcy proceedings in Luxembourg. By invalidating prejudicial acts, the New Insolvency Law seeks to ensure that creditors’ claims are handled equitably and in accordance with legal priorities.

Claims to annul transactions that violate insolvency principles can be initiated by the appointed insolvency administrator or trustee, who acts on behalf of the creditors. While individual creditors may have limited rights to bring such actions directly, the administrator can file claims to reverse preferential or fraudulent transactions within the designated look-back period.

If the claim to annul a transaction succeeds, the property or its cash equivalent is typically returned to the insolvency estate, benefitting all creditors rather than any individual. This mechanism allows the administrator to recover assets for equitable distribution among creditors, reinforcing the integrity of the insolvency process.