On 19 July 2023, the Luxembourg Parliament adopted the long-awaited bill of law n°6539A on the preservation of undertakings and the modernisation of bankruptcy law (the “Law”,) implementing Directive EU 2019/1023 of 20 June 2019. The Law enters into force on 1 November 2023.

The main objective of the Law is to implement various procedures that will help undertakings in financial difficulties to avoid bankruptcy and preserve their business. Luxembourg legislation has not, to date, provided for business preservation procedures, the only option being to file for bankruptcy. The Law will substantially reinforce Luxembourg’s competitiveness, as it will proffer debtors and creditors additional options to consider in a distressed scenario.

Scope

Title 1 of the Law (measures to safeguard companies) applies to:

• traders (commerçants) who are natural persons;
• unlimited companies (sociétés en nom collectif, SNC), common limited partnerships (sociétés en commandite simple, SCS), public limited companies (sociétés anonymes, SA), simplified joint stock companies (sociétés par actions simplifiées, SAS), partnerships limited by shares (sociétés en commandite par actions, SCA), private limited liability companies (sociétés à responsabilité limitée, S.à r.l.), co-operative companies (sociétés coopératives, SCOP), European companies (sociétés européennes, SE);
• special limited partnerships (sociétés en commandite spéciale);
• craftsmen (artisans); and
• civil companies.

Early detection of debtors facing financial difficulties

The Minister for the Economy and the Minister for Small and Medium-sized Enterprises are responsible, for detecting in-scope debtors facing financial difficulties who are likely to jeopardise the continuity of their business. They may invite the debtor to obtain information on the state of its affairs and to inform them about the potential reorganisation measures.

To improve the detection of undertakings likely to be declared bankrupt, a special Evaluation Committee for Businesses in Difficulties (Cellule d’évaluation des entreprises en difficultés) is created, the members of which are designated by the Minister for the Economy from amongst the personnel of some of tax and social administrations.

Introduction of three new preventive reorganisation procedures

The Law provides for three new preventive reorganisation procedures:

Conciliation

The debtor requests that the Minister for the Economy or the Minister for Small and Medium-Sized Enterprises appoint a conciliator (conciliateur d’entreprise) to facilitate the reorganisation of all or part of its assets or its business.

Judicial Reorganisation

The purpose of a judicial reorganisation procedure is to preserve, under the supervision of a judge, the continuity of all or part of the assets or activities of the undertaking.

The opening of the judicial reorganisation procedure can pursue either of the following objectives:

• the debtor intends to obtain a suspension (sursis) in order to allow the conclusion of an amicable agreement;
• the debtor intends to secure the agreement of the creditors on a reorganisation plan (collective agreement); and/or
• the debtor intends to carry out a judicial reorganisation by transfer of all or part of the undertaking or its activities.

The application for judicial reorganisation may pursue a separate objective for each line of business or any part of the business.

As long as the District Court (tribunal d’arrondissement) has not ruled on the application for judicial reorganisation:

• the debtor may not be declared bankrupt or, in the case of a company, be subject to judicial dissolution (except that a company which pursues activities contrary to criminal law, or which seriously contravenes the laws governing commercial companies, may be wound up and liquidated by the District Court (tribunal d’arrondissement)) or be subject to administrative dissolution without liquidation; and
• no movable or immovable assets of the debtor may be realised further to the exercise of a general enforcement measure (voie d’exécution).

The judicial reorganisation is opened by a decision of the District Court (tribunal d’arrondissement) ruling on the application of the debtor if it can show that its business is jeopardised (mise en péril de l’entreprise), either in the short or in the longer term.

If this condition appears to have been met, the District Court (tribunal d’arrondissement) will declare the opening of judicial reorganisation and set the duration of the suspension period with respect to enforcement measures (voies d’exécution) (subject to certain exceptions) aimed at recovering debts. The maximum suspension period must, however, not exceed four (4) months after the decision to open the judicial reorganisation procedure (which, depending on the set-up, can be extended to a maximum of twelve (12) months). During this suspension period (i) no individual enforcement action of outstanding creditors (créanciers sursitaires) is permitted, and (ii) the debtor may not be declared bankrupt (except at its own initiative) or, in the case of a company, be subject to judicial dissolution or be subject to administrative dissolution without liquidation.

Notwithstanding any contractual provisions to the contrary, the petition for judicial reorganisation or the opening of a judicial reorganisation terminates neither current contracts nor the terms and conditions of their performance.

The enforcement of financial collateral arrangements falling within the scope of the Luxembourg act of 5 August 2005 on financial collateral arrangements, as amended (the Financial Collateral Act), is not affected and remains possible during this suspension period.

At any time during the suspension period, the debtor has the right to request that the District Court (tribunal d’arrondissement) amends the purpose of the judicial reorganisation procedure.

Reorganisation by mutual agreement (extrajudicial procedure)

Reorganisation by mutual agreement (accord amiable) is possible without prior filing by the debtor of a suspension (sursis). Reorganisation by mutual agreement (accord amiable) is a voluntary extrajudicial proceeding pursuant to which the debtor and at least two (2) of its creditors mutually agree to reorganise all or part of the assets or the business of the debtor.

The debtor is entitled to request the appointment of a business conciliator (conciliateur d’entreprise), whose mission is typically to prepare and facilitate the conclusion of the amicable agreement. Depending on the scope of its mission, the business conciliator can also assist with the performance of the amicable agreement.

Once the debtor and its creditors have reached an amicable agreement, the debtor applies to the District Court (tribunal d’arrondissement) to obtain a certification of the agreement. The District Court (tribunal d’arrondissement) will assess whether or not the purpose of the amicable agreement is to reorganise (all or part of) the debtor’s assets or activities to grant the certification which will render the amicable agreement enforceable.

Once approved by the District Court (tribunal d’arrondissement), the mutual agreement is enforceable and payments pursuant to it are enforceable against the insolvency estate even if they fall within the suspect period. This means, amongst other things, that these acts cannot be set aside or declared void even if the creditors were aware of the debtor’s state of cessation of payments.

The amicable agreement may only be disclosed to third parties if the debtor has given its express consent.

Amendments to the bankruptcy procedure

The Law introduces several amendments to provisions of the Luxembourg Commercial Code and of the Luxembourg Criminal Code related to the bankruptcy procedure (faillite):

• the bankruptcy procedure can also be initiated by the public prosecutor in addition to the debtor’s acknowledgement (aveu), a request from a creditor or the court’s own initiative;
• decriminalisation of the fraudulent bankruptcy (banqueroute frauduleuse), which will constitute a lesser offence (délit) and no longer a serious offence (crime);
• de jure and de facto managers or directors of a company may be held liable for simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse);
• the statutory obligation for managers or directors of a Luxembourg company to declare the cessation of payments (cessation des paiements) is suspended as from the filing of an application for judicial reorganisation and until the expiry of the suspension period as determined by the court;
• the list of persons who can be appointed as bankruptcy receiver (curateur) is extended;
• the repeal of certain obsolete insolvency procedures (namely controlled management (gestion controllée), composition with creditors (concordat préventif de la faillite) and moratorium or reprieve from payment (sursis de paiement)), which were almost never used in practice; and
• a discharge of debt regime is open to individuals who qualify as traders (commerçants) and who have been declared bankrupt.

For more information, please contact Cédric Bless, Nicolas Marchand or Thomas Biermeyer.