Luxembourg: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Luxembourg.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    As regards securities over immoveable property, mortgages are the most common form of security. They may be granted in a legal, judicial or contractual manner. For the latter to be validly established, i.e. the contractual mortgage, it must be created through a notarial deed indicating the nature and situation of each immovable property over which the mortgage is granted and it must be granted for a certain amount determined by the notarial deed. The mortgage is rendered legally binding and effective against third parties through registration with the Luxembourg mortgage register in the district where the immovable property is located. The registration is valid for ten years and is renewable in unlimited ten years increments, provided that neither the underlying debt for which the mortgage was created nor the 10 year term itself, are extinguished.

    Non-compliance with the requirement of a notarial deed renders a mortgage invalid, and the courts can declare such a mortgage void at any time. Failure to register a mortgage in the Luxembourg mortgage register does not affect its validity, but results in the absence of an effective preference right for the creditor.

    As for movable property, financial collateral arrangements are the most commonly used form of security. These are agreements governed by the Law on Financial Collateral Arrangements dated 5 August 2005, as amended (Financial Collateral Law), implementing Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Arrangements Directive).

    Financial collateral arrangements under the Financial Collateral Law cover any pledge or assignment by way of security of financial instruments and receivables (including most types of shares and bonds). The Financial Collateral Law allows any party (even non-commercial, non-regulated parties) to grant or benefit from this kind of security, and provides extensive contractual freedom. This type of security is very cost effective, subject to few formalities (usually just a notification or a registration in a shareholder or bondholder register), easy to put in place and to enforce as well as “bankruptcy remote”.

    Non-compliance with the required formalities may lead to perfection not being made and the security not being enforceable towards third parties.

    Apart from financial collateral agreements, there are other less common types of securities over moveable property such as assignments by way of security, civil pledges and commercial pledges including the business pledge.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Enforcement of financial collateral security is quick and not very costly (except for valuation) and may be done out of court even in a bankruptcy scenario.

    Other security interests are more burdensome, time consuming and costly to enforce and will normally, in case of bankruptcy, require court involvement.

    The timing requirements that secured creditors are faced with will depends on the nature of the procedure in which they are involved.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    The substantive test for insolvency is where the commercial entity has both:

    • ceased payments and is unable to meet its commitments (cessation des paiements), i.e., the company cannot, or does not, fully pay its due, certain and liquid debts as they fall due; and
    • lost its creditworthiness (ébranlement de crédit), i.e., the company is unable to obtain credit from any source.

    If the court considers that these two criteria are met, it declares the company bankrupt and opens a bankruptcy procedure. Luxembourg law does not have the balance sheet or cash flow tests.

    The management of a company is required to file for bankruptcy (faillite) within one month from the date of cessation of payments. Otherwise, it could be held criminally and civilly liable.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    The bankruptcy proceedings (faillite) are the most common proceedings filed against commercial companies in Luxembourg. These proceedings aim at winding-up a company's assets in the best interests of the estate and its creditors.

    Once a bankruptcy procedure is opened, the directors/managers are removed from their functions and a bankruptcy receiver is appointed by the court to manage the bankruptcy estate. The receiver is responsible for realising the debtor's assets and distributing the proceeds to the creditors, under the supervision of a supervisory judge (juge-commissaire). Creditors have no control over the procedure and the appointment of the receiver or its actions.

    Individual legal actions by privileged and unsecured creditors against the debtor are suspended once the company has been declared bankrupt. Creditors must file a proof of claim with the court, nevertheless, "bankruptcy proof" secured creditors (for example, security receivers/assignees for security purposes under the Financial Collateral Law and mortgagees) can freely take enforcement action regardless of the bankruptcy proceedings.

    Bankruptcy proceedings are concluded by a judgment closing the proceedings.

    The procedure typically lasts between one and three years but can be significantly longer, depending on the complexity of the case.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    In general, the priority of preferential rights in the bankruptcy is as follows (without limitation):

    • legal expenses incurred after the opening of an insolvency proceeding in the interest of all the creditors;
    • certain employee claims;
    • social security contributions (part to be paid by the employees);
    • claims in favour of Luxembourg tax authorities;
    • social security contributions (part to be paid by the employer); and
    • contributions to professional associations.

    Shareholders are treated as subordinated creditors unless they have other contractual arrangements in place as creditors. Luxembourg law does not recognise the concept of equitable subordination.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    The debtor’s pre-insolvency transactions can be affected by insolvency procedures if they were concluded during the hardening period or “période suspecte”. Such period runs from the moment of the cessation of payments to the date of the declaratory judgement of bankruptcy, though the exact date of the cessation of payment is fixed by the court at a maximum of 6 months and 10 days before the opening of the bankruptcy procedure.

    Certain payments made, as well as other transactions concluded or performed during the hardening period can then be subject to cancellation by the court on proceedings initiated by the bankruptcy receiver. The following transactions must be set aside or declared null and void upon request by the bankruptcy receiver:

    • contracts entered into by the insolvent company, if its obligations in such contracts are significantly more onerous than the obligations of the other party (similar to transaction at an undervalue risks in English law);
    • the payment of debts that have not fallen due;
    • any payment made in kind (eg. asset transfer) by the insolvent company in respect of debts that are due (excluding cash and negotiable instruments);
    • the granting of a security interest for antecedent debts (ie. for post consideration); and
    • the payment of certain debts that have fallen due entered into during the hardening period (or the ten days preceding it).

    Additionally, certain payments made for matured debts, as well as other transactions concluded for consideration, during the hardening period are subject to cancellation by the court if they were concluded with the counterparty’s knowledge that the company was insolvent at the time.

    Finally, the insolvency receiver may, without any limitation in time, challenge any transaction or payment made in fraud of the creditors’ rights.

    There are a few statutory exceptions to the rules governing the hardening period.

    • Security interest qualifying as financial collateral agreements may be enforced at any time, notwithstanding the insolvency procedures (except in cases of fraud);
    • Special provisions govern the insolvency of an assignor when future claims are assigned to a securitisation undertaking.
  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    A formal financial reorganisation can be made through controlled management (gestion contrôlée), composition with creditors (concordat préventif de faillite) or suspension of payments (sursis de paiement).

    Suspension of payments (sursis de paiement)
    The procedure of suspension of payments allows a commercial company who faces temporary liquidity difficulties to subject itself to the procedure until its financial liabilities can be met.
    The debtor can apply for a suspension of payments by filing a request with the district court and the Superior Court of Justice. This procedure cannot be initiated by creditors.

    The debtor will only be eligible for the procedure if:

    • the debtor's temporary financial difficulties are due to extraordinary and unexpected circumstances and the debtor has sufficient means to pay off all its creditors.
    • The debtor is in a situation where re-establishment of a proper balance between assets and liabilities appears likely.

    The court can grant a temporary stay, either immediately or at a later stage of the procedure. The suspension from payments requires the consent of a majority of creditors representing 75% of the debtor's liabilities and the approval of the Superior Court of Justice.

    The court order appoints one or more commissioners (commissaires) to supervise the management of the company during the suspension of payments period.

    Controlled management (gestion contrôlée)
    A commercial company may also apply for controlled management, which may be used, either:

    • to reorganise and restructure its debts and business; or
    • to realise its assets in the best interest of creditors.

    This procedure cannot be initiated by creditors and may only be initiated where the debtor files an application before the district court sitting in commercial matters. To be eligible, the debtor must be acting in good faith and demonstrate that its creditworthiness is impaired, that it is facing difficulties meeting all of its commitments and that creditors are pushing for enforcement procedures. More than 50% of the creditors (in number) representing more than 50% in value of the debtor's debts must approve the plan, which must in turn be approved by the court.

    Composition with creditors (concordat préventif de faillite)
    This procedure aims at avoiding bankruptcy by allowing a debtor facing financial difficulties to negotiate a settlement or a rescheduling of its debts with its creditors. The renegotiated terms of the debts must then be approved by the district court. This procedure is initiated through a filing with the district court sitting in commercial matters and cannot be initiated by creditors. To be eligible, the debtor must either be, unable to meet its engagements or have lost all creditworthiness and must additionally be deemed unfortunate and acting in good faith, the appreciation of which is subject to the court’s discretion. To be successful, the application requires the consent of a 75% majority of the creditors, must meet the legal provisions and must not be deemed contrary to the public interest or the interests of the creditors by the court.

    None of the above rescue proceedings would affect the enforcement by creditors of security qualifying as financial collateral arrangements. These proceedings are rarely used by Luxembourg companies as they are lengthy, costly and lack flexibility.

  8. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    Neither in bankruptcy nor in controlled management proceedings is the debtor entitled to borrow money or grant a guarantee or security. Such operations require the authorization of the court and will be decided upon by the receiver.

  9. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    Bankruptcy: contracts will automatically continue (except for intuitu personae contracts and contracts whereby bankruptcy is a termination event) following the opening of a bankruptcy proceeding. The receiver cannot, in principle, reject or disclaim a contract after the judgment opening the insolvency proceeding and must comply with its terms. However, upon establishing that it is in the interest of creditors, the Insolvency Officer may request that the insolvency judge terminates an agreement to which the debtor is a party.

    Controlled management: once placed under controlled management, the debtor cannot, without the commissioners' prior approval and under penalty of nullity, dispose of its assets or take any actions, including granting mortgages, making commitments or payments, borrowing money or receiving funds. The commissioners can also compel the company to perform a given action.

    Composition with creditors: during the proceedings and up to the date of the ratification of the composition, the debtor cannot dispose of its assets, grant mortgages or make any commitments without the authorisation of the delegate judge. Once the plan is adopted, the debtor must act within the frame of the latter.

    Reprieve from payments. The debtor cannot, without the commissioners' prior approval, dispose of its assets or take any actions, including granting mortgages, making payments, borrowing money or receiving funds.

  10. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    Assets may only be sold with the prior consent of the relevant practitioner/court. There is no credit bidding process provided under Luxembourg law and a receiver would not be entitled to sell assets that are owned by or secured in favour of a third party, without that party’s approval.

  11. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    Under Luxembourg law, the directors of a company may generally be liable for (i) the non-execution of their mandate, (ii) any misconduct in the management of the company's affair and (iii) any damages caused by their fault or negligence (torts).

    Not filing for bankruptcy within this timeframe constitutes serious misconduct, which could lead the court to recognize the director’s civil or criminal liability and to order the directors to bear all or part of the debts of the company.

  12. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    In addition to the general grounds of civil liability for breach of fiduciary duties, a director can be held liable for the company's debts. Legal and de facto directors/managers of a bankrupt company can be held personally liable for the company's outstanding debts if the bankruptcy results from serious and blatant faults for which they are accountable, such as entering into transactions completely out of proportion to the company's financial capabilities and which lead to its bankruptcy. Such claims can only be brought by the company's bankruptcy receiver(s) within three years following the court judgment establishing all outstanding receivables.

    The parent entity (domestic or foreign) of a commercial company can be held liable to fully pay-up shares which it has subscribed for. It can also be exposed to liability if it has acted as a de facto manager or if the creditors can successfully demonstrate that the parent entity and the bankrupt company should be considered as one and the same party, in particular because of a co-mingling of assets.

    Subsidiaries of a bankrupt group company might also bear exceptional or additional liabilities where the court considers that the group company would bear excessive risks disproportionate to its net assets and financial position and takes the view that such company would never have taken such risk as a fully independent entity. For such additional liabilities to be incurred by the subsidiaries it would have to be shown that those subsidiaries were compensated by present or future financial benefits.

    A bankruptcy receiver can seek general tort damages from certain third parties that committed a fault that lead to the bankruptcy or damage to the bankruptcy estate. Courts have recognised the validity of such actions against banks, accountants and auditors. A bank can, for instance, be held liable where it has misleadingly maintained the appearance of solvency of the debtor or where it has abruptly rescinded a credit facility.

  13. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    No, directors and other stakeholders remain liable for previous actions and decisions. They can be held liable either by the receiver or, in certain cases, by individual creditors. Certain guarantors of the debtor’s debt can be released.

  14. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    Insolvency proceedings within the scope of the Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings, as amended (Insolvency Regulation), which basis jurisdiction over the center of main interest (COMI) of the company, will be automatically recognised and enforced in Luxembourg without further review of the substantive matters adjudicated thereby or re-examination of the merits of the case.

    Save for cooperation duties in the context of European insolvency proceedings, there is no specific duty for the Commercial Court and the receiver to cooperate with foreign courts and officers, in case of cross-border insolvency proceedings. Luxembourg private international law recognizes the principle of universality and unicity of insolvency proceedings. As a consequence, Luxembourg courts may recognize and, in principle, do recognise foreign proceedings without the need for a further order for enforcement of the award, provided that such foreign proceedings do not conflict with a domestic insolvency proceeding and provided the conditions for recognition of foreign judgments are met:

    • The judgment must be rendered by a competent court;
    • Due process must be complied with;
    • The foreign court must have applied the appropriate Luxembourg conflict of law rules;
    • The foreign judgment must not contravene Luxembourg public policy;
    • The foreign insolvency law which has been applied must have extra-territorial scope.

    Luxembourg courts generally hold that courts in the jurisdiction of the principal establishment of the company have jurisdiction to decide on matters of insolvency regarding that company. In Luxembourg, there is no recognition of jurisdiction based on the localisation of assets or any other connection with a jurisdiction.

    Case law states that there can only be one single insolvency proceeding. However, under the Insolvency Regulation, secondary proceedings can be opened in any Member State.

  15. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    Luxembourg courts generally hold that courts in the jurisdiction of the principal establishment of the company have jurisdiction to decide on matters of insolvency regarding that company. In Luxembourg, there is no recognition of jurisdiction based on the localisation of assets or any other connection with a jurisdiction.

    Insolvency Regulation, a foreign debtor whose COMI is located in Luxembourg, may enter into restructuring or insolvency proceedings in Luxembourg.

  16. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    Under Luxembourg law, there is no recognition of the concept of group. Each company within a group structure is considered to be a separate legal entity (except if the conditions for piercing the corporate veil are met). Hence, the insolvency of a parent company does not automatically lead to the insolvency of its subsidiaries.

  17. Is it a debtor or creditor friendly jurisdiction?

    Luxembourg is generally perceived as a secured creditor friendly jurisdiction, especially in light of the very wide implementation under Luxembourg law of the Financial Collateral Arrangements Directive.

  18. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    The Luxembourg state provides for certain schemes of support for distressed businesses with employees. In particular, businesses can ask, under certain conditions, to benefit from "part-time" unemployment schemes (chômage partiel), which are designed to avoid redundancies.

    State support is available to local businesses in general and in particular in certain strategic branches, but not specifically to distressed businesses.

  19. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    Rescue proceedings in Luxembourg are not very much used as they are considered too costly and burdensome.

    On 1 February 2013, the government filed a draft bill No. 6539 on the preservation of business and modernisation of bankruptcy law. This draft bill includes various preventive, repressive, restorative and social provisions which aim to reduce, or at least stabilise, the recent increase of bankruptcies in Luxembourg.

    The draft bill was heavily criticised by the Council of State (Conseil d'Etat) as lacking efficient processes, providing for complex procedures and creating new duties on court officers, raising questions regarding feasibility and practicability. The bill is currently being redrafted.