A Q&A guide to restructuring and insolvency law in Luxembourg.
The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Restructuring and insolvency Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.
Common forms of security. The most common method of securing rights over immovable property is the contractual mortgage (hypothèque conventionelle).
Formalities. The obligor (débiteur) will grant a mortgage by means of a notarial deed (Article 2127, Luxembourg Civil Code) (Civil Code). A mortgage must be registered in the Luxembourg mortgage register (Article 2134, Civil Code).
Effects of non-compliance. In the absence of a notarial deed or proper registration or renewal with the Luxembourg mortgage register, a mortgage will not grant an effective preference right. Mortgages registered during the suspect period of a bankruptcy are void (Article 2134, Civil Code) (see Question 9, Challenging transactions).
Common forms of security. The most common forms of security granted over movable property (biens mobiliers) are the:
Pledge (gage). Creditors often use a pledge to secure their rights over movable property.
Financial collateral arrangements (garanties financières). These are very common in Luxembourg. They consist of:
pledges over financial instruments and claims;
transfers of title for security purposes (transferts de propriété à titre de garantie);
repurchase agreements (mises en pension); and
netting agreements (compensations).
These arrangements can apply to:
securities (bonds, shares, warrants and so on) held in any form (for example, bearer form, registered form or in an account);
money claims; and
cash or securities deposits.
The stay on enforcement which arises from bankruptcy, suspensions of payments and controlled management procedures does not affect financial collateral arrangements (see Question 6).
Formalities.
Pledge. A pledgor grants a pledge by means of a public or a private deed (Article 2074, Civil Code). Possession of the pledged assets must be transferred to the creditor for the security interest to become and remain valid and enforceable (Article 2076, Civil Code and Article 5, Law of 5 August 2005 on Financial Collateral Arrangements) (Financial Collateral Act). The method of transferring possession varies according to the type of asset. For example:
the pledgor transfers possession of bearer shares (actions au porteur) by delivering them to the creditor or an agreed third-party custodian;
the pledgor transfers possession of registered shares (actions nominatives) by registering the pledge in the shareholders' register (Article 5, Financial Collateral Act).
Financial collateral arrangements. The formalities required for financial collateral arrangements depend on the type of security granted:
Pledges over collateral. See above, Pledge;
Transfers of title for security purposes. The formalities are as follows:
the agreement transferring title must be in writing;
if the agreement relates to book-entry financial instruments (instruments financiers inscrits en compte), the financial instruments must be recorded in an account (inscription en compte) opened in the name of the transferee or a third-party custodian acting on its behalf (or be recorded as being owned by the transferee in an account opened in the name of the transferor). In this case, the transfer will be enforceable towards third parties at the time of recording. In relation to financial instruments which do not need to be recorded in an account (instruments financiers non-inscrits en comptes), collateral arrangements are binding and enforceable once the parties exchange consent. Despite this, the obligor of an assigned claim can validly discharge its obligation by performance rendered to the transferor, as long as it has no knowledge of the transfer of its obligation to the transferee.
Repurchase agreements. An agreement to purchase and repurchase certificated and uncertificated securities or liabilities must be in writing. The same recording formalities apply as for transfers of title for security purposes (see above, Transfers of title for security purposes);
Netting agreements. A netting arrangement can be set out in a specific agreement, or be included in an agreement which has a wider purpose (for example, a loan agreement).
Effects of non-compliance. If a pledge is not perfected through a legally-imposed notification or registration (onto a shareholders' register or into an account), the security interest will not exist (until it is perfected). However, the pledge will continue to bind the pledgor and the pledgee.
If the pledgor of financial collateral is declared bankrupt, the pledge is only effective if either (Article 21, Financial Collateral Act):
Perfection occurs before the court order opening the bankruptcy proceeding (either before the date the proceeding opening or on the date of that opening).
If the pledge was entered into on the date proceedings are opened but after the opening, the pledgee can prove that he could not reasonably know that a court order opening the bankruptcy proceeding had occurred earlier that day.
Creditors are categorised as follows:
Creditors of the bankrupt estate (créanciers de la masse). These are creditors that have a claim which arose after the bankruptcy order (see Question 6, Bankruptcy (faillite)). For example, this includes a bankruptcy trustee's fees (honoraires du curateur).
Creditors within the bankrupt estate (créanciers dans la masse). These are creditors that have a claim which arose before the bankruptcy order. They usually form the main body of creditors and can be either:
Secured creditors (créanciers titulaires d'une sûreté). There are two types of secured creditors:
Preferred creditors (créanciers privilégiés). These are creditors which hold either a special preferential right (privilège spécial) over a specific asset of the debtor (failli) (this type of creditor has the right to be paid directly from the proceeds of sale of this asset); or a general preferential right (privilège général) (this type of creditor has the right to be paid from the proceeds of sale of any of the debtor's assets);
Creditors with contractual or judicial security (sûreté conventionelle ou judiciaire). Unlike a preferential right which arises by law, this type of right arises from a contractual agreement or from a judicial decision. This type of creditor receives payment by enforcing this security (see Questions 1 and 3).
Ordinary unsecured creditors (créanciers chirographaires). These creditors have no security over the debtor's assets.
The order of priority of payments is as follows:
Creditors of the bankrupt estate.
Preferred creditors.
Ordinary unsecured creditors.
Shareholders, who are treated as subordinated creditors and receive any surplus from the liquidation (boni de liquidation), if any, in proportion to their shareholding.
If there is a conflict in relation to movable assets among preferred creditors with a special preferential right, these creditors are paid according to the following priority list (Article 2102, Civil Code):
Lessors' claims.
Pledgees' claims (unless the pledge is governed by the Financial Collateral Act).
Costs of preserving assets.
The unpaid price of equipment used in the debtor's industrial undertaking (établissement industriel).
Other preferential claims.
Preferred creditors with a general preferential right are paid according to the following priority list (Article 2101, Civil Code):
Legal fees incurred in creditors' interest.
Super-preferential employee claims. These are claims by the debtor's employees which relate to their last six months of employment, and any claims which relate to termination of employment contracts.
Employees' social security charges.
Tax authority claims.
Employers' social security charges.
Other preferential claims.
If the company's assets are not sufficient to pay the preferred creditors with a general preferential right, these creditors take precedence over the other creditors (including creditors with a special preferential right or with a mortgage).
Trade creditors often use the following mechanisms to secure unpaid debts:
Pledges (see Question 1, Movable property).
Personal guarantees (cautions). In this case, a third party guarantees that the obligor will meet its commitments. If the obligor does not perform its obligations, the guarantor provides payment to the creditor instead.
Netting clauses (clauses de compensation). This is an agreement between the parties to set off their respective claims. These clauses are particularly common in banks' general terms and conditions.
Reservation of title clauses (clauses de réserve de propriété). These clauses are included in sales agreements and allow the seller to keep title to the purchased goods until the purchaser has paid the full purchase price.
An unpaid creditor can bring an ordinary legal action against the obligor before the civil or commercial courts, seeking a judgment ordering the defendant to pay its debt.
In addition, faster procedures exist, which can be settled through summary proceedings. Subject to specific conditions, creditors can use these procedures when either:
The creditor is seeking an amount which does not exceed EUR10,000 (as at 1 March 2012, US$1 was about EUR0.7).
The obligor's liabilities are clear and not seriously disputable (sérieusement contestable).
In addition to purely national proceedings, creditors registered abroad can recover uncontested civil and commercial claims under a uniform procedure created by Regulation (EC) 1896/2006 creating a European order for payment procedure. The procedure does not require the presence of the claimant before the court.
In addition to netting agreements (See Questions 1 and 3) and judicial set-off (compensation judiciaire), Luxembourg law provides for mandatory set-off (compensation légale). This occurs automatically, without any agreement between the parties.
Mandatory set-off is only possible between claims which are mutual (réciproque), fungible, unquestionable (certaine), liquid (liquide) and payable/due (exigible). These requirements must be fulfilled before one of the creditors is declared bankrupt. Otherwise, it is not possible to claim this set-off unless the related claims are connected (connexe) (that is, the debts must consist of mutual liabilities (obligations réciproques) arising from the same indivisible cause (cause indivisible) (Luxembourg District Court, 15 February 2008, n° 110543)).
The state offers support for distressed businesses that have employees. The Labour Code (Code du travail) sets out several measures that both:
Aim to maintain employment where possible.
Provide for financial assistance by the state.
These measures may, for example, involve structural or cyclical unemployment (chômage structurel ou conjoncturel) or the adoption of an employment safeguard plan (plan de maintien de l’emploi). Depending on the implemented measure, the state support can range from the financing of employees' training to the payment of part of the employees' salaries.
Objective. The aim of a bankruptcy procedure is to realise the debtor's assets and pay its creditors through the recovered assets. Bankruptcy rules apply to any sole trader (commerçants) and any company which has its domicile in Luxembourg (Article 440, Code of Commerce).
Initiation. Bankruptcy is a court procedure. Companies and sole traders are declared bankrupt by a Commercial District Court (Tribunal d'Arrondissement siègeant en matière commerciale), or by the Court of Appeal giving a ruling on a Commercial District Court decision.
The procedure can be instigated (once the substantive tests are met (see below, Substantive tests)) in one of the following ways:
Creditor's petition. A creditor serves a bankruptcy writ (assignation en faillite) on the company or sole trader to appear before the Commercial District Court.
Company's initiative. A company's directors or a sole trader must instigate bankruptcy proceedings within one month of the debtor having met the relevant substantive tests (see below, Substantive tests), if this has not already been done (Article 440, Luxembourg Code of Commerce (Code of Commerce)). They must ask for an appointment with the Commercial District Court clerk office (greffe) and provide the court with the company's accounting documents, including its balance sheet.
Court initiative. The court itself may take the decision to start bankruptcy proceedings, based on its own observations, or on information provided by the public prosecutor's office, debtors or third parties. In this situation the court should invite the debtor's management to a court hearing to explain its financial situation. It is possible for the court to start bankruptcy proceedings without taking this step (for example, to avoid dishonest directors becoming informed of the situation and therefore having the opportunity to hide most of the company's assets). In this case, the bankruptcy order must set out the reasons for the lack of a hearing (Article 442, Code of Commerce).
Substantive tests. A debtor is bankrupt, and therefore the bankruptcy procedure can be instigated, if both of the following conditions are present (Article 437, Code of Commerce):
Cessation of payments (cessation de paiements). The debtor has ceased its payments. Cessation of payments is a technical term which means that the debtor is unable to pay its due and payable liabilities (dettes liquides et exigibles). The debtor's financial problems must be more than temporary and be significantly likely to jeopardise its commercial activities.
However, the debtor does not have to have stopped all its payments. In fact, the non-payment of one significant debt may be sufficient (Court of Appeal decision number 22752, 10 March 1999).
The accounting insolvency test (fewer assets than liabilities) is not always relevant. When a debtor fails to pay all or part of its liabilities, there may be a cessation of payments even if its assets have a higher value than its liabilities (Court of Appeal decision number 15508, 28 January 1998).
Impaired ability to raise credit (ébranlement des crédits). Any of the debtor's creditors, suppliers and fund providers have refused to grant credit (additional funds or payment terms) to the debtor due to its financial problems (Commercial District Court decision number 31/85, 1 June 1985).
A bankruptcy trustee (curateur) must obtain the formal approval of the supervisory judge (juge commissaire) (see below, Conclusion) to take certain actions, for example:
Selling depreciating assets (Article 477, Code of Commerce).
Reaching a settlement on behalf of the debtor (Article 492, Code of Commerce). This action also requires the consent of the court.
Supervision and control. Once the court makes a bankruptcy order, the court appoints a supervisory judge who supervises the bankruptcy (Article 463, Code of Commerce).
Bankruptcy does not allow for debtor-in-possession management. From the date of delivery of the bankruptcy order, only the bankruptcy trustee can act on behalf of the order and may, in specific circumstances, be authorised to carry on the debtor's business (see Question 10).
Protection from creditors. The bankruptcy results in a stay on individual legal action and on enforcement proceedings (see below, Conclusion).
Length of procedure. The duration of bankruptcy proceedings depends on each case, but will last at least six months.
Conclusion. Once the court makes a bankruptcy order:
The directors of the bankrupt company (or the sole trader) are dismissed and can no longer manage the company or act on its behalf. Any payment or act performed by a debtor's management after a bankruptcy order is automatically void (Article 444, Code of Commerce).
The court appoints a bankruptcy trustee. In practice, this is often a Luxembourg attorney. The bankruptcy trustee, who must act in the creditors' interest, is responsible for recovering and realising the debtor's assets to pay the creditors. The bankruptcy trustee is entitled to represent the debtor as well as the creditors as a whole. For example, the bankruptcy trustee represents the debtor when claiming payment of the debtor's claims. In addition, it acts on behalf of and in the benefit of creditors when taking legal action to set aside transactions made by the debtor (see Question 9).
All individual legal actions against the debtor are suspended (Article 452, Code of Commerce). If creditors wish to claim payment, they must file a proof of claim (déclaration de créance). The bankruptcy trustee can, however, choose to continue some legal proceedings launched against the debtor before the bankruptcy order, if this could help recover the debtor's assets.
Ordinary creditors and creditors which hold a general preferential right (see Question 2) cannot launch or continue any enforcement proceedings (mesure d'exécution forcée) against the debtor (Article 453, Code of Commerce). Creditors which hold a special preferential right over movable assets (see Question 2) are also bound by this restriction, until their claims have been verified by the bankruptcy trustee and the supervisory judge (Article 454, Code of Commerce).
However, the stay on enforcement does not apply to:
pledges, because pledged assets are considered to be outside a debtor's estate (hors masse) (Article 542, Code of Commerce);
financial collateral arrangements (Article 20, Financial Collateral Act); and
mortgages.
See Question 1.
Agreements which the debtor concluded before the bankruptcy order continue to be enforceable. However, certain agreements terminate (for example, employment contracts) or could be terminated (for example, insurance contracts) due to the bankruptcy.
The bankruptcy order stops the terms of payment of the debtor and accelerates the maturity of its liabilities (Article 450, Code of Commerce).
Interest no longer accrues on ordinary claims (Article 451, Code of Commerce).
After bankruptcy closes, the bankruptcy trustee's duties are terminated. However, the company is not formally dissolved. In principle, the debtor's management could continue to run the business, and creditors could take enforcement proceedings against the creditor's new assets. In practice, however, this rarely happens.
Objective. A suspension of payments aims to give the debtor breathing space to pay its current liabilities and safeguard its business. In practice, it is not commonly used.
The procedure can apply to any company, sole trader or owner of an industrial undertaking (établissement industriel), which is domiciled in Luxembourg (Articles 594 and 614, Code of Commerce).
Initiation. A debtor initiates a suspension of payments by filing a petition with the Commercial District Court clerk office.
Substantive tests. A court may grant a suspension of payments to a debtor if all of the following apply (Articles 593 and 599, Code of Commerce):
Extraordinary and unprecedented events mean that a suspension of payments is necessary.
It appears from the debtor's balance sheet that the creditors will eventually be paid in full or at least that the debtor's insolvency is temporary rather than prolonged.
Most of the debtor's creditors approve the suspension of payments. The court only agrees to a suspension of payments if this is approved by a majority in number of the ordinary creditors holding 75% of the debtor's outstanding liabilities.
Supervision and control. The debtor continues to manage its own business, but a court-appointed administrator (commissaire) must approve most transactions (Articles 600 and 603, Code of Commerce).
Protection from creditors. The suspension of payment results in a stay on enforcement proceedings (see below, Conclusion).
Length of procedure. There is no set time limit for a suspension of payments. The court sets a schedule which depends on the particular circumstances.
Conclusion. During the suspension of payments, ordinary creditors cannot open enforcement proceedings against the debtor or its assets (Article 604, Code of Commerce). This stay on enforcement does not extend to preferred creditors, or to creditors which are secured by mortgages, pledges or financial collateral arrangements. The debtor continues to manage its own business under the supervision of a court-appointed administrator (see above, Supervision and control).
When a suspension of payments ends, the stay on enforcement is terminated and the debtor's directors can begin running the business again.
The procedure can apply to any company, sole trader or owner of an industrial undertaking (établissement industriel), which is domiciled in Luxembourg (Articles 594 and 614, Code of Commerce).
Objective. The aim of controlled management is to give the debtor breathing space, so that it can either:
Restructure its business.
Sell off its assets and pay its creditors.
The procedure can apply to any company, sole trader, notary or owner of an industrial undertaking which is domiciled in Luxembourg (Articles 1 and 18, Grand Ducal Decree of 24 May 1935) (Decree).
Initiation. The steps to open the process are as follows (Decree):
The debtor files a petition with the Commercial District Court clerk office.
The court decides whether to reject or provisionally accept the petition (a rejection is likely if the court believes that controlled management will not improve the debtor's position).
If the court provisionally accepts the petition, it appoints a judge to draft a report on the debtor's financial situation.
The court looks at these findings, hears the debtor again and decides whether or not to proceed with the controlled management.
Substantive tests. Controlled management is available for good-faith debtors that have temporary problems raising credit or meeting their commitments, provided that this does not constitute a cessation of payments (see above, Bankruptcy (faillite): Substantive tests).
The court must agree to start controlled management and approve the administrator's plan (see below, Conclusion). The court can only issue an order approving the plan if more than 50% in number of the creditors representing more than 50% in value of the debtor's liabilities approve the plan.
Supervision and control. The debtor can manage its business, but the administrator must approve most transactions.
Protection from creditors. Controlled management results in a stay on enforcement proceedings (see below, Conclusion).
Length of procedure. There is no set time limit for a controlled management. The court sets a schedule which depends on the particular circumstances.
Conclusion. Once the controlled management procedure opens:
The court appoints one or more administrators.
The administrator drafts a restructuring plan (plan de reorganisation) (which aims to reorganise the debtor's business with a view to its continuation after the procedure) or a plan of realisation and distribution of assets (plan de réalisation et de répartition des actifs) (which aims to facilitate the controlled sale of the debtor's assets with a view to paying creditors).
The administrator delivers the plan to the creditors and to the court, and publishes it in the Luxembourg Gazette if the debtor is a company. The creditors must indicate their approval or disapproval of the proposed plan within 15 days of its circulation. The court approves or rejects the plan (after having heard the debtor once again). The court can only approve the plan if the requisite creditor consent has been given (see above, Consents and approvals). After its approval by the court, the plan becomes binding on the debtor, its creditors, its joint co-obligors (codébiteurs solidaires) and its guarantors (cautions). If the court rejects the plan, it may reject the controlled management petition or allow the administrator to draft a new plan within a set time period. The debtor and its creditors can appeal against these court decisions within eight days of their delivery or publication.
Creditors cannot open enforcement proceedings against the debtor (Article 3, Decree). This applies to ordinary creditors and secured creditors (even creditors secured by pledge, unless the pledge is a financial collateral arrangement), but not to creditors secured by financial collateral arrangements (Article 20, Financial Collateral Act) (see Question 2).
The administrator can take action against the debtor's directors (see Question 8).
Once the court has approved the administrator's plan, the stay on enforcement ends and the debtor's directors can take over its management again, either to continue operations or liquidate the company (depending on the type of plan proposed) (see above, Initiation).
The procedure can apply to any company, sole trader, notary or owner of an industrial undertaking which is domiciled in Luxembourg (Articles 1 and 18, Decree).
This is an obsolete procedure which requires the support of a majority in number of ordinary creditors holding 75% of the debtor's outstanding liabilities. It aims to avoid the bankruptcy of a debtor which has become insolvent for reasons other than fraud or negligence.
The procedures listed above do not apply to:
Professionals in the financial sector.
Insurance companies.
These companies are subject to specific insolvency procedures, which are similar to the procedures listed above, but are less regulated by law and provide the court with more flexibility.
Creditors play a significant role when a suspension of payments or controlled management procedure starts. Creditors' consent is required for these procedures. See Question 6, Suspension of payments (sursis de paiements) and Controlled management (gestion contrôlée).
A company's management plays a role in its restructuring or insolvency procedure, by assisting the court-appointed administrator. For example, directors provide accounting information and so on, to an administrator or bankruptcy trustee.
Direct and indirect shareholders can be very active in restructurings, but they do not play an official role. Their role generally consists of supporting the company's management and the court-appointed administrator, and suggesting measures which may improve the debtor's funding or provide a chance for creditors to be paid.
There are specific rules on directors' liability that apply in the case of a company's insolvency. The directors' liability rules that are specific to bankruptcy can be applied in two ways:
Court-ordered bankruptcy extension.
Court-ordered debt contribution action.
In addition, these rules do not exclude ordinary management liability regulation.
A bankruptcy trustee can use all three types of legal action. An administrator appointed under a controlled management procedure can, subject to prior court authorisation, use ordinary management liability rules, but cannot claim bankruptcy extension or debt contribution. An administrator of a suspension of payments cannot use any of these actions.
The court can decide that a company's directors should bear all or part of its debts if the directors' serious misconduct (faute grave et caractérisée) has led to either:
The company becoming insolvent.
The company's liabilities significantly increasing.
If the debtor company is managed by several directors, this measure should only apply to directors who have acted wrongly.
Examples of serious misconduct include:
Continuing an unprofitable business (Commercial District Court case number 480/2003, 20 June 2003).
Not filing for bankruptcy within one month of the relevant substantive tests being met (Commercial District Court case numbers 71584, 71677 and 73039, 12 February 2003) (see Question 6, Bankruptcy (faillite)).
Any assets and damages obtained by the bankruptcy trustee from a debt contribution action are included in the bankrupt estate and are used to pay creditors.
This rule is extended to appointed and shadow management. Therefore, it can be invoked against any parent company or beneficial owner of the insolvent company which manages the company instead of its appointed directors.
A bankruptcy trustee can petition the court to declare an insolvent company's directors bankrupt and have the bankruptcy of the insolvent company extended to the directors' own bankruptcy. The court will order this bankruptcy extension against each director who personally meets either of the following conditions (Article 495, Code of Commerce):
The director personally meets the conditions for bankruptcy (this means that it has suspended its payments and is unable to raise any credit (see Question 6, Bankruptcy (faillite): Substantive tests).
The director has:
caused the company to act in his personal interest;
used the company's assets for his personal purposes; or
carried on a loss-making business in his personal interest.
If the court orders bankruptcy extension, the director's bankruptcy includes the director's liabilities and those of the insolvent company.
This rule is extended to appointed and shadow management. Therefore, it can be invoked against any parent company or beneficial owner of the insolvent company which manages the company instead of its appointed directors.
This measure is less common than a debt contribution action and legal action based on ordinary management liability rules.
These rules are governed by the Law of 10 August 1915 relating to commercial companies as amended (Companies Act), and distinguish between two types of liability in relation to managers of sociétés anonymes and sociétés à respnsabilité limitée:
Liability for non-performance of ordinary management duties.
Increased liability for breach of the Companies Act or the company's articles of association. In this case, the directors can be jointly and severally liable to the company and third parties for the damage which their breaches caused.
A bankruptcy order (or a later Commercial District Court decision) identifies a suspect period (période suspecte) (Article 442, Code of Commerce). This period starts on the date of the onset of cessation of payments and ends on the date of the bankruptcy order.
In principle, the suspect period cannot last longer than six months. However, if the debtor is declared bankrupt:
Within six months after the closing of a suspension of payments, the suspect period is deemed to have started on the date on which the petition for suspension of payments was filed (Article 613, Code of Commerce).
Within six months from the court approval of the administrator's plan, or from the court decision rejecting the controlled management petition, the court can schedule the suspect period as starting up to six months before the date on which the petition for a controlled management procedure was filed (Article 17, Decree).
In practice, except when a suspension of payments or controlled management procedure has previously been started, courts often set the suspect period start date at just under six months before the bankruptcy date order.
The court may, at the request of the bankruptcy trustee (and under very specific circumstances at the request of the administrator appointed under a controlled management procedure), declare the following agreements which were concluded during a suspect period (or the preceding ten days) void (Articles 445 and 446, Code of Commerce):
Asset transfers for no consideration or for a value which is lower than their true market value.
Mortgages or pledges to secure the debtor's previously existing liabilities.
Payments of unmatured debts.
Payments of matured debts other than by cash or bill of exchange (effet de commerce).
Payments of matured liabilities or other transactions for valuable consideration (acte à titre onéreux), if the fund's recipient was aware of the company's cessation of payments.
In addition, a bankruptcy trustee can also challenge fraudulent payments made by a debtor, even if these payments occur before the suspect period, by carrying out a revocatory action (action paulienne) (Article 448, Code of Commerce). The following three conditions must be met (Court of Appeal decision, 17 December 2008):
Fraud by the debtor.
Complicity of the party receiving the fraudulent payment.
Damage suffered by creditors due to the fraudulent payment (and consequent reduction in the value of the debtor's assets).
An administrator appointed under a controlled management procedure can also take this revocatory action.
The setting aside of a transaction may have an impact on third parties who have acted in bad faith or benefited from a free-of-charge transaction (Cass. of 9 January 1890, Pas. 1890, I, 59; www.legicorp.lu, Des effets de la faillite). For example, a sub-purchaser is considered as acting in bad faith if he was aware that the seller, who was financially distressed, sold the initial purchaser assets at a value lower than the true market value. If the initial sale is set aside at the bankruptcy trustee's request, the sub-purchaser could therefore be obliged to return the assets to the debtor (CLOQUET, A., Les Novelles, Larcier, Bruxelles, 1985, p. 752, no. 2612) (Article 2279, Civil Code). This could also apply if a third party receives assets as a gift from the purchaser, irrespective of whether the third party knew about the debtor's financial situation.
In a bankruptcy, the debtor's management is dismissed and the debtor usually ceases trading (see Question 6, Bankruptcy (faillite): Conclusion).
In specific circumstances, where it was in the creditors' interest, courts have allowed a debtor's business to continue because:
It was likely that the bankruptcy order would be reversed (Luxembourg District Court decision number 40352, 29 March 1991).
Continuing the business would mean that raw material could be converted into finished goods, which are easier to sell (Luxembourg District Court decision number 48239, 13 May 1998).
Subject to court approval, a company may carry on its business during a bankruptcy through (Article 475, Code of Commerce):
The bankruptcy trustee.
A third party acting under the supervision and responsibility of the bankruptcy trustee.
During a controlled management or a suspension of payments, the debtor can manage its business, but the special court-appointed administrator must approve most transactions beforehand (see Question 6, Suspension of payments (sursis de paiements): Conclusion and Controlled management (gestion contrôlée): Conclusion). Once a court has provisionally accepted a controlled management petition and the judge begins drafting a report (see Question 6, Controlled management (gestion contrôlée): Conclusion), the debtor needs the judge's final written approval before carrying out most of its business transactions, until the court's definitive decision with regards to the acceptance or rejection of the controlled management petition (Article 3, Decree).
There are no particular implications relating to existing intellectual property licences.
Luxembourg law does not contain specific provisions in relation to the financing of distressed companies. Fund providers, particularly parent companies, sometimes agree to grant a loan to restoring the financial situation of their subsidiaries. There is no special priority given to the repayment of this funding. The lender's claim will be considered as being either within the estate or of the estate (see Question 2), depending on when the loan occurs (that is, before or after the opening of the insolvency proceedings).
As an EU member, Luxembourg must apply Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) and Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Regulation).
In line with the Insolvency Regulation, Luxembourg courts recognise insolvency orders delivered by courts of other EU member states, and these orders have the same effect that they would have in their original jurisdiction. This automatic recognition may not apply where its effect would be manifestly contrary to Luxembourg public policy.
In addition, some judgments from other EU member state courts, which do not formally open insolvency proceedings but are issued in the context of insolvency, may be automatically recognised. For example:
An order issued in the context of a debt contribution action (Article 25, Insolvency Regulation).
An order based on ordinary management liability rules (Article 34, Brussels Regulation) (CJCE, 22 February 1979, Gourdain/Nadler, aff. C-133/78, Rec. 1979, p. 733).
Finally, to perform enforcement proceedings on the basis of insolvency orders originating in the EU, a bankruptcy trustee can use the simplified exequatur procedure set out in the Enforcement Regulation.
Luxembourg also recognises insolvency orders from non-EU jurisdictions, without applying the principle of comity, provided that all of the following conditions are met:
The court which made the order had jurisdiction to hear the case.
The proceedings were properly conducted.
No fraud is involved.
The order complies with Luxembourg and international public policy.
This automatic recognition is based on the Luxembourg rule of automatic recognition of judgments relating to status and legal capacity of persons. Therefore, it is unlikely that a judgment issued by a non-EU jurisdiction against directors of an insolvent company could benefit from this mechanism.
To enforce an insolvency order from a non-EU jurisdiction, it is necessary to obtain a Luxembourg exequatur court order declaring that the insolvency order is enforceable in Luxembourg.
As Luxembourg has to apply the Insolvency Regulation, it recognises concurrent proceedings in another EU jurisdiction. In those circumstances, there will be a main procedure (opened by courts of the member state within the territory in which the centre of a debtor's main interests is situated), and possibly one or more secondary proceedings (opened by courts of other member states within the territory in which the debtor possesses an establishment). Any secondary proceedings are restricted to the debtor's assets which are located within the territory of the member state which opened these proceedings.
Luxembourg is bound by EU legislation (see above, Recognition). However, Luxembourg has not implemented the UNCITRAL Model Law on Cross-Border Insolvency 1997.
Foreign creditors can file their proof of claim in a Luxembourg bankruptcy, in the same way as Luxembourg-based creditors unless the Insolvency Regulation provides otherwise. In addition, any non-EU creditor must specify a service address (élection de domicile) in Luxembourg-City.
Legislative commissions have been reviewing a number of Luxembourg bankruptcy provisions. Drafts of the proposed reforms have been prepared, but no formal bill has been submitted to the law-making bodies.
In Claes v Landsbanki Luxembourg SA (Claes), the Luxembourg Court of Cassation (Cour de Cassation) consulted the Court of Justice of the European Union (CJEU) about both:
Whether Directive 98/59/EC on collective redundancies (Collective Redundancies Directive) could apply in cases of automatic termination of an employment contract due to the employer's insolvency.
If it can apply, whether the liquidator must comply with the duties and actions imposed on the employer in cases of collective redundancy.
In its decision of 3 March 2011, CJEU decided that both:
Articles 1 and 3 of the Collective Redundancies Directive must be interpreted as applying to a termination of an employer company's activities due to insolvency. This is regardless of the fact that, in the event of such a termination, national legislation provides for the termination of employment contracts with immediate effect.
Until the insolvent company's legal personality has ceased to exist, the obligations under Articles 2 and 3 of the Collective Redundancies Directive must be fulfilled. These obligations must be carried out by either the company's:
management (if it is still in place), even it if only has limited powers of management;
liquidator, if the company's management has been entirely taken over by the liquidator.
This decision is in line with another CJEU decision of 12 October 2004.
In practice, this case law forces any bankruptcy trustee or judicial liquidator to comply with the Luxembourg legislation implementing the Collective Redundancies Directive in all cases where an insolvent company employs seven employees or more.
Specifically, the trustee will need to negotiate a redundancy programme with the employees. Therefore, this case law has a significant impact on the duties of liquidators and bankruptcy trustees, as well as the financial rights of employees whose employers become insolvent.
Taking the Claes ruling into account, an ad hoc commission has drafted a proposal for several legal adjustments. A bill is expected to be submitted to Parliament in 2012.
T +352 297 298 1
F +352 297 299
E laurent.fisch@molitorlegal.lu
W www.molitorlegal.lu
Qualified. Luxembourg Bar, 1993
Areas of practice. Insolvency; restructuring; corporate; finance.
Recent transactions
T +352 297 298 1
F +352 297 299
E sylvie.denayer@molitorlegal.lu
W www.molitorlegal.lu
Qualified. Luxembourg Bar, 2007
Areas of practice. Insolvency; restructuring; litigation; finance.
Recent transactions
