Luxembourg restructuring and insolvency law finally modernised

Introduced ten years ago as a response to the 2008 financial crisis, the bill of law on the preservation of undertakings and the modernisation of bankruptcy law (the “Bill of Law”) was finally adopted on 19 July 2023 after a long and eventful parliamentary process. Greatly inspired by Belgian law, it implements Directive (EU) 2019/1023 on restructuring and insolvency. Its main objective is to favour early restructuring and to avoid bankruptcy.

It will enter into force on the first day of the third month following its publication (exact date to be determined).
The most salient features of the Bill of Law are presented below.

1. Scope of application

The Bill of Law applies to :

  • natural persons who qualify as traders (commerçants),
  • commercial companies with legal personality: unlimited companies (sociétés en nom collectif, S.N.C), common limited partnerships (sociétés en commandite simple, S.C.S.), public limited companies (sociétés anonymes, S.A.), simplified joint stock companies (sociétés par actions simplifies, S.A.S.), partnerships limited by shares (sociétés en commandite par actions, S.C.A.), private limited companies (sociétés à responsabilité limitée, S.à r.l.), co-operative companies (sociétés cooperatives, S.C.O.P), European companies (sociétés européennes, S.E.),
  • special limited partnerships (sociétés en commandite spéciales, S.C.S.) – despite them not having legal personality,
  • civil companies,
  • artisans (the “In-Scope Entities”).

With the exception of:

  • credit institutions and investments firms as well as financial institutions subject to part I of the Law of 18 December 2015 on the failure of credit institutions and certain investment firms,
  • electronic money institutions and payment institutions,
  •  insurance and reinsurance undertakings,
  • UCIs, SIFs, SICARs and RAIFs,
  • central counterparties and central securities depositories,
  • authorised securitisation undertakings.

2. Detection of difficulties

The Minister of Economy is responsible for detecting In-Scope Entities facing difficulties. Once an In-Scope Entity has been identified as such, the Minister of Economy may invite it to discuss the state of its business and inform it of the available reorganisation measures. Moreover, at the request of the In-Scope Entitiy, the Minister of Economy may appoint a conciliator (conciliateur d’entreprise) to (i) assist the debtor in the preparation and conclusion of an out-of-court agreement with creditors, or (ii) obtain the creditors’ consent on a reorganisation plan, or (iii) achieve a business/asset transfer.

The Bill of Law also creates a specific unit (the Cellule d’évaluation des entreprises en difficulté), composed of members of various administrations, whose mission is to assess the relevance of initiating bankruptcy proceedings against debtors.

Finally, in case of serious breaches by an In-Scope Entity (or its management) of its obligations threatening the continuation of its business, the President of the Commercial Chamber of the District Court may appoint one or several agents at the request of the public prosecutor or any interested party. The missions of these agents may vary and will be decided by the judge. The parliamentary works however make it clear that such missions are meant to be limited in scope and in time. 

3. Agreement with creditors

A distressed In-Scope Entity may seek to reach an out-of-court agreement with all its creditors or at least two of them, with or without the assistance of a conciliator, for the reorganisation of all or part of its assets or activities. Such an agreement will remain unknown to other creditors, unless the debtor consents to its disclosure.

The debtor may request that such agreement be judicially homologated. Subject to the District Court finding that the agreement is made with a view of reorganising the debtor’s business or assets (and not just to favour one creditor over the others), the District Court homologates the agreement, which gives it direct enforceability and sets aside the application of certain statutory claw-back provisions. 

4. Judicial reorganisation procedure

An In-Scope Entity whose existence is threatened may petition for the opening of a judicial reorganisation procedure (the “JRP”) by the District Court.

The goal of a JRP is either:

  • to find an out-of-court agreement with creditors,
  • to reach a collective agreement with creditors on a reorganisation plan, or
  • to transfer of the debtor’s activity/assets by judicial decision.

The filing of a petition for JRP itself produces certain effects until the ruling of the District Court, including the impossibility for the debtor of being declared bankrupt of judicially dissolved and the impossibility to realize the debtor’s assets as a result of the exercise of an enforcement procedure.

The opening of a JRP necessarily implies the order of a stay (sursis) of a maximum initial duration of 4 months, with possible extensions up to a maximum of 12 months. This stay extends the effects attached to the filing of the petition and, inter alia, prevents further attachment measures in respect of stayed claims, which are essentially claims other than wage claims arising before the judgment opening the JRP.

During the JRP period:

  • the debtor may voluntarily pay a stayed claim (it is sufficient that the payment be necessary to the continuity of the business);
  • certain statutory claw-back provisions do not apply.

One key aspect of the JRP is that, notwithstanding any contractual provisions to the contrary, the petition for JRP or the opening of a JRP does not terminate current contracts nor the terms and conditions of their performance.

5. Modernisation of bankruptcy proceedings

Apart from several changes simply aiming at simplifying the liquidation process, the Bill of Law amends the Luxembourg Commercial Code in order to:

  • suspend the obligation to file for bankruptcy as of the filing of a petition for JRP up to the end to the stay.
  • introduce a strict six-months deadline for creditors to file their claim as from the opening of the bankruptcy proceedings.
  • amend the regime applicable to bankruptcy offences, the main change being the re-classification of the fraudulent bankruptcy offence as a misdemeanour instead as a felony in order to facilitate prosecution.

6. Discharge of debts

The Bill of Law introduces a new discharge of debts mechanism available to natural persons who qualify as traders and who have been declared bankrupt. The discharge affects the debts which have arisen prior to the opening of the bankruptcy proceedings. It may be refused or limited if the debtor has committed serious and characterized faults which have contributed to the bankruptcy.