Luxembourg: Opening of a judicial reorganization procedure, any risk of abuse?

Mechanics of the judicial reorganization procedure

As soon as a petition for judicial reorganization is filed, the debtors benefit from a protective status: they can no longer be declared bankrupt, and ongoing foreclosure sales can be suspended.1

On the other hand, security interests granted under the 2005 law on financial collateral arrangements can continue to be enforced, even during the entire reorganization procedure.

The Act stipulates that the court must examine the petition within 15 days of its filing with the clerk's office, and rule by judgment within eight days of examining the application.2 Simply filing a petition for judicial reorganization therefore offers the debtor an initial stay of proceedings of 20 days on average.

If a judicial reorganization procedure is initiated, the court will set the duration of a second stay, which may not exceed four months, subject to an extension in exceptional circumstances. However, the total duration of the stay cannot exceed 12 months from the judgment granting the stay.3

During the stay, the debtor may not be declared bankrupt, subject to the debtor's own declaration, or be the subject of judicial or administrative dissolution proceedings without liquidation. No seizures may be made in respect of claims protected by the stay (defined by the Act as "secured claims"), and seizures made previously may be discharged. The debtor may also request that ongoing sales process following a seizure be suspended.4

Risk of abuse and legal safeguard

This favorable regime could encourage a debtor acting in bad faith to request the opening of judicial reorganization proceedings with the sole aim of benefiting from the stay, and thus blocking certain initiatives by unpaid creditors.

To this end, the Act stipulates that a petition for judicial reorganization has no suspensive effect if it is filed by a debtor that applied for such a measure less than six months earlier, unless the court rules otherwise.5

The Act also specifies that bankruptcy does not prevent the opening or continuation of judicial reorganization proceedings.6 A petition to open a judicial reorganization procedure can therefore be an obstacle to bankruptcy proceedings brought by an unpaid creditor. Among the petitions filed since the Act came into force, we find the case of a debtor that was summoned to bankruptcy only a few days before the petition was filed, a debtor who was summoned the day after the petition was filed and a debtor who was about to declare bankruptcy.

Early applications and court rulings

Opening of a judicial reorganization procedure

The Luxembourg District Court, sitting in commercial matters, has already been seized of approximately 10 applications for the opening of judicial reorganization proceedings. It has thus had the opportunity to rule on the application of the conditions for opening these procedures.

The aim of the judicial reorganization procedure is to preserve, under the judge's control, the continuity of all or part of the company's assets or activities.7 The procedure is initiated as soon as the business is jeopardized, in the short term or in the long term.8 However, the Act does not specify what is meant by "the business is jeopardized" so it is up to the judge to assess whether this condition has been met and whether the business can continue.

The court thus declared the opening of judicial reorganization proceedings for a debtor that was experiencing financial difficulties compromising its continuity, but that was in "advanced talks" with an investor:

"(...) In view of the intention signaled by the potential investor and insofar as the investments described by the latter, as well as by the Company in its petition, are such as to open up the prospect of profitable operation of the Company, in addition to allowing the payment of current creditors in full if not to a very large extent.9"

Similarly, the court agreed to initiate judicial reorganization proceedings for a debtor that, in need of liquidity, had a substantial order book and serious promises of orders, as well as working capital lines guaranteed by its sole shareholder10 .

The court also had to consider whether the debtor was acting in good faith. While noting that the debtor had failed to provide a complete list of creditors recognized or claimed as such in accordance with Article 13 of the Act; that the company's sole shareholder and manager had a current account in debt, the repayment of which would easily enable the company's debt to be discharged at the start of its bankruptcy petition; that a substantial dividend had been granted to the sole shareholder despite the existence of unpaid debts; and that the annual accounts had not been published within the legal deadlines, the court granted the opening of a judicial reorganization procedure, considering that "the opening of a judicial reorganization procedure is not, however, conditional on the debtor's good faith, whereas it requires above all that the continuity of the company is threatened.11"

Opening of a judicial reorganization through the transfer by court order

The opening of a judicial reorganization through the transfer by court order of "all or part of the business or its activities" is unusual in that it can be requested not only by the debtor, but also "at the request of the public prosecutor or by writ of summons from a creditor or any person with an interest in acquiring all or part of the business".12 This raises the question of a request for transfer to a competitor.

The court hearing this case recalled that:13

The Belgian and Luxembourg legislators wanted to avoid that persons driven by an illicit interest tending in particular to the dismantling of the company could act in forced transfer and that the interest of a competitor to acquire all or part of the company in order to reduce competition would not be legitimate in this context (see in this sense Alter, C. and PERSONNE4.), Z., "Section 4 - La réorganisation judiciaire par transfert sous autorité de justice," Insolvabilité des entreprises, 1e édition, Bruxelles, Larcier, 2019, p. 404-441, No. 340 and parliamentary works No. NUMERO11.

In this case, the court found that, although the party making the claim was a competitor: 

On the basis of the evidence in the file, there is no suspicion that it is acting with a purely anti-competitive aim and with a view to dismantling its competitor to its sole benefit. 

The court also found that the fact that it operates in the same field of activity as the debtor "confers legitimacy on it" and that "it therefore has the status of an interested third party." 

In the same case, the court specified that the question of whether the interested third party "actually has the financial capacity for the planned acquisition is assessed, where appropriate, at a later stage by the court-appointed agent," and that: 

It should be noted, however, that prior proof of the successful completion of the business transfer reorganization procedure by court order is not a condition for the opening of this procedure, and therefore does not constitute a criterion for the admissibility of an application to open such a procedure.

The first court rulings on judicial reorganization point to a large number of cases to come and that judges will have to counter the risk of abuse by applying the Act strictly, while keeping in mind the idea of "maintaining as far as possible a balance between the necessary protection of the debtor and the rights of creditors".14

1 Article 18 of the Act.

2 Article 20 of the Act.

3 Articles 20 and 33 of the Act.

4 Articles 25 and 26 of the Act.

5 Article 19 of the Act.

6 Article 19 of the Act.

7 Article 12 of the Act.

8 Article 19 of the Act.

9 Docket No. TAL-2023-09434

10 Docket No. TAL-2023-10048.

11 Docket No. TAL-2023-09252.

12 Article 55 of the Act.

13 Docket No. TAL-2023-09112.

14 Docket No. TAL-2023-09434, Docket No. TAL-2023-10048.