Answer ... A formal financial reorganisation can be effected in Luxembourg through suspension of payments (sursis de paiements), controlled management (gestion contrôlée) or composition with creditors (concordat préventif de faillite). These proceedings tend to be lengthy and costly, and lack the desired flexibility; as a result, they are seldom used by Luxembourg companies.
Note further that none of the following rescue proceedings will affect the rights of a secured creditor benefiting from a security under the Collateral Law.
Suspension of payments: This procedure, which can be initiated only by the debtor, allows a commercial company which faces temporary liquidity difficulties to avail itself of a stay until its financial liabilities can be met. An application for suspension of payments is made by filing a request with the district court and the Superior Court of Justice in Luxembourg.
A suspension of payments will be granted only 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; and
- the debtor is in a situation where it appears likely that it can re-establish a proper balance between its assets and liabilities.
The court has the power to grant a temporary stay either immediately or at a later stage of the proceedings. However, a suspension of payments requires:
- the consent of a majority of creditors representing at least 75% of the debtor’s liabilities; and
- the approval of the Superior Court of Justice.
This is not, per se, a debtor in possession proceeding and the relevant court order will appoint one or more commissioners to supervise the management of the company during the suspension of payments period.
Controlled management: A commercial company may also apply for controlled management, the purpose of which can be either:
- to reorganise and restructure its debt and business; or
- to realise its assets in the best interests of its creditors.
This procedure cannot be initiated by creditors and may be initiated only where the debtor files an application before the district court sitting in commercial matters. To be eligible for controlled management, the debtor must be acting in good faith and must demonstrate that:
- its creditworthiness is impaired;
- it is facing difficulties in meeting all of its commitments; and
- its creditors are contemplating enforcement proceedings.
For an order for controlled management to be granted, more than 50% of the creditors (in number) representing more than 50% of the debtor’s outstanding debts must approve the plan, which in turn must be approved by the court, and any reorganisation plan must take into account all interests at stake and comply with the ranking of privileges and mortgages. The approved reorganisation plan will consequently be binding on all creditors, including dissenting creditors, and creditors that abstain from voting are deemed to have consented.
Composition with creditors: This final formal restructuring procedure available under Luxembourg law aims to avoid bankruptcy by allowing a debtor facing financial difficulties (but not yet meeting the criteria for insolvency) to negotiate a settlement (in whole or in part) or a rescheduling of its debts with its creditors. Having successfully renegotiated the terms of its debts with its creditors, the debtor must then apply to the district court sitting in commercial matters for approval of the arrangement.
To be eligible for a composition with creditors order, the debtor must:
- be deemed by the court (at its absolute discretion) to be unfortunate and acting in good faith; and
- be unable to meet its obligations; or
- have lost all creditworthiness.
Moreover, to succeed, the application:
- requires the consent of 75% of the creditors;
- must meet the legal provisions; and
- must not be deemed by the court to be contrary to the public interest or the interests of the creditors generally.
The approval of a composition by the court makes it compulsory for all participating creditors. However, in practice, the benefits may be negligible, as only unsecured creditors and secured creditors that have waived their rights (or voted in favour) are bound by the composition; the composition has no effect on creditors that did not participate in the composition proceedings.