Corporate insolvency & restructuring report 2021: Luxembourg
Armel Waisse, Laurent Henneresse and Christophe Molitor, Molitor Avocats à la Cour
A s with the rest of the world, the Covid-19 pandemic has been affecting the operation of companies registered in Luxembourg in multiple ways. With new challenges lying ahead, and the health and economic crisis dragging on for much longer than what was expected in spring 2020, Luxembourg has adopted a pragmatic and flexible approach to support the local economic stakeholders and limit their prospects of facing insolvency. The efficacy of the numerous aids, guarantees, moratoria and other measures implemented and constantly reviewed by Luxembourg is demonstrated by the fact that there has not been a dramatic increase of businesses filing for bankruptcy so far.
In practice, businesses which were directly impacted by the various restrictions imposed by the Luxembourg government assessed whether they were eligible to benefit from the various state aids and measures offered by the state and whether this would be sufficient to keep them afloat until full resumption of their economic activities would be permitted. Aside from resorting to this safety net, the initiatives taken by businesses are manifold. Where possible, existing contracts with various stakeholders have been renegotiated or terminated. Force majeure and material adverse change (MAC) clauses have been invoked to suspend existing contracts.
Further to the relative success of the vaccination campaign and the full reopening of businesses, some state aids terminated, and businesses regained more control over their destiny, which underlines the importance of efficient management and the anticipation of economic challenges. In contrast to most European countries, which imposed full lockdown for several months, Luxembourg emphasised the importance of preventative measures to combat Covid-19 (for instance, by implementing extensive large scale testing) and allowed for some businesses (such as shops) to remain open almost all throughout the second half of 2020 and 2021, which mitigated the negative impact of the pandemic in specific sectors.
The most commonly initiated insolvency proceeding in Luxembourg is a bankruptcy proceeding, which aims to realise a debtor’s assets and distribute the proceeds to the creditors in accordance with the order of priority as defined by law.
Where the two cumulative conditions for bankruptcy are not met yet – namely, cessation of payment and impairment of creditworthiness – a debtor, which must qualify as a merchant (commerçant) or be a commercial company, may apply for one of the three available alternative insolvency proceedings. Depending on the severity of the financial difficulties, these are: the suspension of payments (sursis de paiement); controlled management (gestion contrôlée); or scheme of composition with creditors (concordat préventif de faillite).
In practice, the benefits of alternative insolvency proceedings are rarely granted by courts as the applicable legal conditions are seldom fulfilled. This generally leaves judges with little option but to conclude that the applying company is bankrupt. Initiatives such as the bill of law No. 6539 on the preservation of companies and the modernisation of bankruptcy law (Insolvency Bill) and Directive (EU) 2019/1023 of June 20 2019 (Directive (EU) 2019/1023) are expected to endow Luxembourg with more flexible and effective reorganisation tools. However, the likely timing for the adoption of these new rules remains uncertain and the deadline for implementation of Directive (EU) 2019/1023 (which was July 17 2021) has passed.
Until these impending reforms are enacted, a more consensual approach, based on dialogue between a debtor and its creditors, should be sought to implement contractual debt restructurings where there are reasonable prospects of salvaging a distressed undertaking; however, if both the conditions of bankruptcy are met, a debtor is obliged to file for bankruptcy after expiry of the moratorium granted until December 31 2021 by the Luxembourg legislator as part of the Covid-19 measures.
This market dynamic means that the majority of published insolvency judgments in Luxembourg relate to bankruptcies. Since the Luxembourg private law system derives from both French and Belgian law, Luxembourg judges tend to refer to case law in these countries. International contractual restructurings also give rise to very few court cases in Luxembourg, moreover with legal issues at stake often relating to the enforcement of security interests governed by the law of August 5 2005 on financial collateral arrangements, as amended (the 2005 Law).
Bankruptcy proceedings are governed by Articles 437 ff. of the Luxembourg Commercial Code.
“Luxembourg offers three alternative insolvency proceedings.”
The Luxembourg court must declare a debtor bankrupt if it is a merchant (commerçant) or a commercial company and the two following cumulative conditions are met: the debtor has ceased to make payments and its creditworthiness is impaired.
The court then proceeds with the appointment of one or several trustees in bankruptcy (curateurs) whose office is carried out under the review of a designated supervising judge. The trustee in bankruptcy must represent the interests of the insolvent estate as well as those of the creditors. Its mission is defined by law and consists, among other things, in: (i) initiating claw-back actions and actions for avoidance; (ii) realising the assets of the debtor; (iii) verifying the existence and extent of the claims against the insolvent estate; and (iv) proceeding with the distribution of the assets of the bankrupt according to the priority rules defined by law.
Bankruptcy proceedings commence either once a debtor files for bankruptcy – a debtor must do so within one month after the date of cessation of payments; after the presentation of a petition for bankruptcy by one or several creditors; or ex officio by the court, upon request from the Luxembourg State Prosecutor office. The company’s management is deprived of managing the debtor’s assets once bankruptcy proceedings have commenced.
When the debtor’s situation is not yet irremediably compromised, it can turn to one of the three alternative insolvency proceedings, depending on the severity of his financial situation. However, as mentioned above, while these legal procedures exist on paper, they are rarely used in practice owing to the relatively stringent thresholds imposed by the conditions to which they are subject. Further, failure of any of the three alternative insolvency proceedings will almost invariably lead to bankruptcy.
Luxembourg offers three alternative insolvency proceedings.
The first is the suspension of payments (sursis de paiement), whereby the court orders suspension of payments of a distressed debtor for a limited period. The benefit of such a measure is reserved to a debtor that is forced to temporarily cease payments due to an unforeseen event and which presents sound evidence of its financial capacity to meet its liabilities in future. This procedure, which does not apply to certain debts and preferential claims, requires the approval of a majority in number of creditors that together represent 75% of outstanding unsecured debts.
The second is controlled management (gestion contrôlée), which aims at either reorganising the business of the debtor or realising its assets under the supervision of the court and of court-appointed commissioners. This procedure is available to debtors that (i) act in good faith and (ii) have lost their creditworthiness or are experiencing difficulties in fulfilling their payment obligations but do not meet the cumulative conditions for bankruptcy. If the debtor passes the preliminary steps of the procedure, court-appointed commissioners are entrusted with the preparation of a reorganisation plan or, as the case may be, an asset distribution plan. The plan is in turn submitted to the creditors. If a majority in number of all creditors representing more than 50% of the debtor’s liabilities so consent, the plan will be presented to the court for final approval.
The third is a scheme of composition with creditors (concordat préventif de faillite), which aims at finding an agreement between a debtor and its creditors in a last-ditch attempt to avoid a declaration of bankruptcy. Unlike the two other proceedings, a scheme of composition is only available to the debtor that already meets the two cumulative conditions for bankruptcy (is virtually bankrupt). The agreement between the debtor and the creditors must be approved by a majority in number of the creditors representing 75% of the debtor’s unsecured liabilities. Thereafter, if the court ratifies it, the arrangement will be binding on all unsecured creditors and those secured creditors who waived their rights of priority to become parties thereto.
There are no group-specific insolvency procedures under domestic law. However, Regulation (EU) 2015/848 of May 20 2015 on insolvency proceedings, as amended (Insolvency Regulation) contains a number of rules on the cooperation and communication between insolvency practitioners acting for insolvent entities of the same group.
Directors of a company facing financial difficulties should be wary of not committing any actions for which they may potentially be held liable (criminally, contractually and/or in tort), should the company be declared bankrupt. In particular, directors should file for bankruptcy within the one-month deadline starting on the date of cessation of payments, as soon as the two cumulative conditions for bankruptcy are met (account being taken of any extension of the deadline owing to Covid-19, as briefly mentioned above and highlighted below). In addition, they should refrain from performing any acts which would be void or voidable further to the exercise by the trustee in bankruptcy of any clawback action or action for avoidance.
Commencement of a bankruptcy entails immediate suspension of all individual enforcement actions which creditors have initiated against the debtor. A similar suspension applies when a court has approved the opening of the initial phase of the procedure for controlled management (with the appointment of a judge to investigate the debtor’s state of affairs) or the conclusion of a scheme of composition with creditors (but in the latter case, only vis-à-vis the unsecured creditors and preferential or secured creditors who have foregone their preferential right or security to cast a vote regarding the approval of the scheme). In the event of a suspension of payments procedure, the court can grant a temporary stay during the investigation phase.
As a matter of principle, any contracts in existence at the date of the bankruptcy, other than staff employment contracts, will remain in force, unless: (i) they are declared null and void by a court further to the exercise of a claw-back action/action for avoidance by the trustee in bankruptcy; or (ii) they contain an automatic termination clause in the event of insolvency of one of the parties. Nevertheless, the trustee in bankruptcy may exercise a cherry-picking right and elect to terminate the contracts that he considers as unprofitable for the bankrupt.
Priority, dissenters, asset sales and clawbacks
The order of priority of creditors in the distribution of a bankrupt entity’s assets is defined by law and cannot be varied by the trustee in bankruptcy or by the court.
The claims of secured creditors will be satisfied with the proceeds resulting from the sale of the assets, which were the subject-matter of the security interest. If funds obtained from the sale are insufficient, the unsatisfied part of the claim will rank equally and compete with those of unsecured creditors. In addition, collateral subject to the 2005 Law remain enforceable according to their terms despite the existence of insolvency proceedings. The same observation can be made in relation to mortgages over the bankrupt’s assets.
The order of priority for other creditors is as follows:
Claims incurred as a result of the bankruptcy, which arose after the bankruptcy commences (créances de la masse), including judicial expenses, and fees and expenses of the trustee in bankruptcy, debts to the treasury (for example, corporate taxes, income tax, etc.), and salary debts;
Preferential claims (for example, certain employee claims, claims secured by a security interest other than financial collateral or a mortgage);
Ordinary unsecured creditors (which can include claims arising from unsubordinated shareholder loans); and
If the funds are insufficient to satisfy all claims in full, they will be distributed pari passu (namely, on a pro rata basis). Any funds remaining after satisfaction of all claims, are distributed among the shareholders of the bankrupt company.
Luxembourg bankruptcy rules do not allow creditors to be crammed down, since the entitlement of creditors over the assets of the bankrupt is strictly regulated by law. As far as alternative proceedings are concerned, court-approved reorganisation plans, liquidation plans and arrangements are binding on all creditors that are required to comply with these instruments by effect of law, even if they voted against their implementation.
Luxembourg insolvency law does not provide for an accelerated or otherwise preferential form of asset sale. Pursuant to the Luxembourg Commercial Code, the sale of a bankrupt’s assets is performed by the bankruptcy receiver with the prior consent of the delegated judge, or as the case may be, the competent court.
When exercising any claw-back action or action for avoidance which is prescribed by law, the trustee in bankruptcy can request the court to nullify agreements or actions which are void or voidable pursuant to Articles 445 to 448 of the Luxembourg Commercial Code. Accordingly, pursuant to Article 445, specific actions shall be null and void if they took place during the hardening period (i.e. a maximum period of six months prior to the date of the bankruptcy judgement) or 10 days preceding such period (such as any disposals of assets without consideration, or any payments of debts which have not fallen due). Moreover, by virtue of Article 448, all acts and payments made at any time by the bankrupt to defraud its creditors may be declared null and void, if the trustee in bankruptcy can establish complicity of a third party (who can be a creditor) as well as the reality of prejudice caused to the (other) creditors.
However, it is worth noting that some contracts, such as those subject to the 2005 Law or the law of July 10 2020 on professional payment guarantees (the PPG Law) are bankruptcy remote.
Some regulated entities in Luxembourg (such as credit institutions and insurance undertakings) are subject to special insolvency and restructuring regimes and are therefore not subject to the ordinary insolvency proceedings existing in Luxembourg. Nevertheless, the applicable laws can authorise the competent court to apply the rules of bankruptcy or as the case may be, only the rules on liquidation of bankruptcy to the winding-up of the regulated entity.
As a matter of principle, governmental or regulatory institutions do not have a say on the manner in which insolvency proceedings are conducted, since oversight of these procedures lies with the judicial courts. However, special powers are vested in Luxembourg regulators in relation to winding-up or reorganisation of certain regulated entities.
Luxembourg law does not contain specific provisions regulating cross-border aspects of insolvency cases.
Nevertheless, the Insolvency Regulation, according to which principal insolvency proceedings must be opened in the EU member state where the debtor’s centre of main interests (COMI) is situated, allows for secondary insolvency proceedings to be commenced in any other EU member state where the debtor has an establishment. The effects of these secondary proceedings are limited to the territory of that member state and do not have to be liquidation proceedings.
The Insolvency Regulation also creates obligations of exchange of information and cooperation between (i) the insolvency practitioners in the main and secondary insolvency proceedings and (ii) the courts having ordered, or having to decide on, the commencement of such proceedings. The Insolvency Regulation also authorises the opening of group coordination proceedings for insolvent entities belonging to the same group, for which a coordinator is appointed.
The advantage of the Insolvency Regulation is that it allows automatic recognition and enforceability of judicial insolvency decisions in the other EU member states. In contrast, while the existence of non-EU insolvency decisions is generally recognised in Luxembourg, any related enforcement actions be taken in Luxembourg (for example, in relation to assets of the foreign bankrupt) are subject to the prior obtaining of the exequatur of the foreign decision.
If the COMI of a foreign debtor is located in Luxembourg, Luxembourg insolvency law should apply. By effect of Insolvency Regulation, main insolvency proceedings may be commenced in Luxembourg.
Creditors have generally taken a pragmatic approach towards their professional debtors. For instance, rather than enforcing claims immediately, they have granted moratoria or consented to renegotiate debts where the debtor’s financial situation was not impaired before the outbreak of Covid-19 and showed prospects of improvement upon resumption of economic activities.
Six Luxembourg banks also committed to offer a six-month moratorium on the repayment of loans granted before April 18 2020 to small and mid-size enterprises (SMEs), self-employed and liberal professionals, provided they met certain conditions. The moratoria, which totalled approximately 4.5 billion as at the end of 2020, had to take effect before June 30 2020 and gave several businesses a lifeline. Some landlords also renounced the payment of some rents in order to help their commercial tenants to get back on track.
In order to support companies and individuals impacted by Covid-19, Luxembourg quickly adopted a ‘stabilisation package’ in March 2020, which comprises various laws and regulations. These measures are reviewed regularly in light of the situation in order to ensure that they are adequate and consistent with the evolution of the pandemic.
While some initiatives have been discontinued after businesses were allowed to reopen and vaccination programme ramped up, other regimes were prolonged or adapted to support certain economic sectors. Among those are repayable state aid owing to temporary financial difficulties linked to the Covid-19 crisis, which can be requested until November 1 2021. Moreover, the state-guarantee scheme for 85% of the total amount of eligible loans granted by participating Luxembourg banks has been periodically extended and is currently due to run until December 30 2021. The Luxembourg government reported that for the time being, no state guarantee had to be enforced and that the scheme was relatively little used owing to the efficacy of the other public measures offered by the state.
Another important measure concerning Luxembourg insolvency laws is the suspension of the mandatory one-month deadline, imposed on merchants and directors of commercial companies to file for bankruptcy, which is available until December 31 2021.
Finally, a Covid-19 working scheme (chômage partiel) for staff was implemented and maintained until June 30 2021. The scheme allowed undertakings to take employees concerned off the payroll. Alongside this measure was the introduction of two new mutually exclusive state aids for specific sectors, namely (i) an aid for ‘costs not covered’ (i.e. costs other those covered by the Covid-19 working scheme, other non-repayable state aids and insurance indemnities), which is currently covers the period ending on October 31 2021, and (ii) a recovery aid (aide de relance), which could be granted for the period running up to June 30 2021.
As a general note, businesses should be performing a review of their existing contracts to ensure that any force majeure clause expressly encompasses epidemics such as Covid-19. In addition, MAC clauses should now be more systematically inserted in contracts and cover sanitary crises in order to allow parties to vary or terminate their contractual obligations, since there is no end in sight yet to the Covid-19 crisis on a worldwide scale.
To date, there have been no permanent legislative changes concerning insolvency and restructuring which are directly linked to the Covid-19 crisis. However, the pandemic has hastened the passing of some laws which facilitate the granting of credit in Luxembourg. These include the PPG Law, which creates a new type of personal guarantee. A key feature of this guarantee is that it remains valid despite the existence of domestic or foreign insolvency proceedings or reorganisation proceedings over the guaranteed debtor.
Luxembourg has yet to transpose Directive (EU) 2019/1023, which aims to improve the effectiveness of different national regulations on preventive restructuring, insolvency and debt remission. Another pending reform is the Insolvency Bill, which is inspired by Belgian business insolvency legislation and prioritises (where practicable) the preservation/reorganisation of a debtor’s business, rather than its winding-up.
Although the latest figures show concrete signs of V-shaped recovery of the Luxembourg economy and the state revenues are higher for the first half of 2021 than in the corresponding periods in 2020 and 2019, the number of bankruptcies and judicial liquidations ordered by Luxembourg courts has slightly increased between January and June 2021 in comparison to the first six months of 2019 and 2020. It remains to be seen whether or not this trend in the opening of bankruptcy cases in Luxembourg will be confirmed in the second half of 2021, with state aids being progressively phased out as the health situation gradually normalises.
Although the economic challenges caused by the Covid-19 pandemic have been somewhat kept under control thanks to the measures taken by Luxembourg, this unprecedented crisis has highlighted the importance to go ahead with the modernisation of insolvency law. This area of law has generally been seen as rather lagging behind, when compared with Luxembourg business and finance laws, which are generally known for their innovative features and the flexibility they provide to businesses and investors. The introduction of new legal tools would also give formal support to the insolvency practitioners who generally keep on exploring new ways to help companies become solvent again.
Another trend that has been observed in court decisions published over the past decades and which may become more popular after the suspension of the obligation to file for bankruptcy expires, is the shifting of COMI by Luxembourg entities to other jurisdictions whose insolvency systems afford more flexibility to salvage businesses.
The Luxembourg market is also expected to experience a surge in out-of-court debt restructuring deals and the restructuring of international groups will be granted by courts located in jurisdictions offering efficient mechanisms to avoid bankruptcy/winding-up. More often than not, these transactions will involve the enforcement of financial collateral governed by the 2005 Law as it is common for cross-border groups to include Luxembourg companies in their corporate structure. In addition, the use of financial collateral arrangements, coupled with the recent creation of a new type of flexible guarantee under the PPG Law, could also have a positive effect on the granting of credit to businesses, since these efficient tools allow lenders to somehow limit the credit risk to which they are exposed.
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Molitor Avocats à la Cour
T: +352 297 2981
Armel Waisse is a partner at Molitor specialising in dispute resolution, banking and finance with recognised expertise in corporate and financial law disputes including insolvency matters.
Armel is ranked in the legal directories for her litigation skills, and strategical approach to procedural matters. She is also a lecturer at the University of Luxembourg and Luxembourg Bar School. She speaks English and French.
Armel graduated with a master’s degree in private law from the University of Strasbourg.
Molitor Avocats à la Cour
T: +352 297 2981
Laurent Henneresse is a counsel at Molitor and has expertise in banking, finance and restructuring. He is a dual qualified lawyer in Luxembourg and England & Wales (non-practising solicitor) and has over 10 years of experience in Luxembourg.
Laurent specialises in financing, investment management and restructuring and insolvency. He speaks English, French, Dutch and Italian.
Laurent is a law graduate of UCLouvain and holds a LLM in international business law from University College London (UCL).
Molitor Avocats à la Cour
T: +352 297 2981
Christophe Molitor is currently undertaking an internship as a junior associate at Molitor, working primarily in banking and finance.
Christophe completed a master’s degree in corporate law from the University Panthéon-Assas (Paris II) and the University of Humboldt in Berlin. He is a LLM candidate at University of California, Berkeley School of Law.