1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
A number of statutory insolvency and restructuring proceedings are available in Luxembourg. These can broadly be split into two categories: rescue proceedings (which include suspension of payments, controlled management and composition with creditors), and insolvency proceedings (which include bankruptcy and compulsory liquidation). However, there has been no consolidation of these proceedings and they exist under different laws and governmental decrees.
There are also specialised procedures which apply to certain types of companies, such as regulated companies in the insurance and financial sectors and regulated investment funds.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
As Luxembourg is a member of the European Union, Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the EU Insolvency Regulation) has direct applicability in Luxembourg and judgments concerning insolvency proceedings made in EU and non-EU courts are, in principle, recognised in Luxembourg (Luxembourg recognises the universality of bankruptcies), without any need for a further court order (subject to certain conditions).
In addition to the EU Insolvency Regulation, Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation) is also applicable in Luxembourg and may be of relevance in connection with restructuring proceedings.
Luxembourg has not adopted the UNCITRAL Model Law.
1.3 Do any special regimes apply in specific sectors?
The Luxembourg insolvency and restructuring tools apply only where a company is not subject to a more specific regime. Special insolvency regimes apply to regulated entities such as credit institutions and insurance undertakings, investment funds, securitisation vehicles and collective investment vehicles, including:
- the Law of 12 July 2013 on Alternative Investment Fund Managers, as amended;
- the Law of 23 July 2016 on Reserved Alternative Investment Funds, as amended;
- the Law of 15 June 2014 on Investment Companies in Risk Capital, as amended;
- the Law of 13 February 2017 on Specialised Investment Funds, as amended;
- the Law of 17 December 2010 on Undertakings for Collective Investment, as amended; and
- the Law of 22 March 2004 on Securitisation, as amended.
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
Luxembourg is generally considered to be a creditor-friendly jurisdiction – albeit not due to its restructuring and insolvency laws, but rather in light of its very wide implementation of the Financial Collateral Arrangements Directive in the Luxembourg Collateral Law of 2005, as amended (the Collateral Law). The Collateral Law covers pledges and assignments of any financial instruments and receivables, and any security under the Collateral Law is considered to be ‘bankruptcy proof' and is therefore a very popular option for creditors.
The Luxembourg insolvency and restructuring tools are somewhat outdated and cumbersome, and are often perceived as being value destructive, which makes them neither debtor nor creditor friendly. As in many other European jurisdictions, insolvency proceedings are court led, with neither creditors nor debtors being able to influence proceedings; while restructuring procedures tend to lack the desired flexibility, involve some form of publicity and are generally perceived as lengthy and costly.
1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?
In Luxembourg, statutory reorganisation proceedings are rarely used (and, where they are used, often come too late to stave off bankruptcy), and the most common proceeding is thus a filing for bankruptcy. In 2018 approximately 1,033 bankruptcy proceedings were opened, with most being filed in the trade and construction sectors; the country's dominant financial services sector has remained relatively stable. Most proceedings filed in Luxembourg have little to no cross-border element and tend to be relatively simple.
Some of the highest-profile, most complicated proceedings filed in Luxembourg were opened in the aftermath of the financial crisis (2007–2008) against credit institutions and their branches or subsidiaries thereof (eg, Kaupthing, Glitnir, Landesbanki, Dexia, Fortis, Lehman Brothers and Banco Espirito Santo).
Recognising the need to modernise the Luxembourg insolvency and reorganisation landscape, on 1 February 2013 the government filed draft Bill 6539 on the preservation of business and the modernisation of the bankruptcy law. The 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. New measures include, in particular:
- the decriminalisation of fraudulent bankruptcy;
- an accelerated administrative dissolution procedure without liquidation, initiated by the state prosecutor; and
- an easing of the conditions required for a debt contribution action (action en comblement de passif).
However, the draft bill was heavily criticised by the Luxembourg Council of State, which questioned its feasibility and practicality. In response, the draft bill was comprehensively redrafted in March 2018 and it remains under discussion.
In light of the limited in-court restructuring tools available in Luxembourg, court-led proceedings (outside bankruptcy, where the courts appoint receivers and have significant experience of complex international cases) involving Luxembourg companies within international corporate groups are relatively rare. The professionals who specialise in debt restructurings in Luxembourg must thus be familiar with foreign in and out-of-court restructuring tools and processes as much as with the local landscape.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
For immovable property, mortgages are generally the most common form of security taken in Luxembourg and may be granted in a legal, judicial or contractual manner. For a contractual mortgage to be validly constituted, it must:
- be created by notarial deed, indicating the nature and location of the immovable property over which the mortgage is being granted; and
- be granted for an evidenced amount.
A mortgage will be legally binding and effective against third parties once it has been registered in the Luxembourg mortgage register (which should be done in the district in which the property is located). The registration is valid for 10 years and may be renewed indefinitely for further 10-year periods thereafter, provided that neither the underlying debt for which the mortgage was created nor the 10-year term itself is extinguished.
For movable property, financial collateral arrangements, governed by the Collateral Law, are the security of choice in Luxembourg, especially in respect of the Luxembourg special purpose vehicles that commonly sit within international groups and operate as financial companies or bond issuers. Financial collateral arrangements under the Collateral Law cover any pledge or assignment by way of security regarding financial instruments and receivables (including most types of shares and bonds). The Collateral Law allows any party (even non-commercial, non-regulated parties) to grant or benefit from the security thereunder and provides extensive contractual freedom. The benefits of a security interest under the Collateral Law are as follows:
- It is highly cost effective;
- It is easily put in place and enforced;
- It is subject to few formalities (usually just notification or registration in a shareholder or bondholder register); and
- It is considered ‘bankruptcy remote'.
The enforcement of the share pledges over the top Luxembourg SPV in a corporate group to gain control of the group is also relatively well tested and there is extensive case law on the matter, which adds to the legal certainty surrounding such security packages and their enforcement.
In practice, Luxembourg SPVs are also established to create a single point of enforcement in order for this creditor-friendly security system to be used to its maximum potential.
Aside 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.
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
Enforcement of security subject to the Collateral Law is quick and cost efficient (not taking into account the valuation), and may be done out of court even in a bankruptcy scenario.
The Collateral Law allows the enforcement of a pledge over shares in a Luxembourg company, accounts held in Luxembourg and claims governed by Luxembourg law upon the occurrence of a trigger event (which is freely determined by the parties) without prior notice, and which can be freely determined. Such trigger events need not entail an acceleration or even a payment default.
The security agent/pledgee may, among other things:
- appropriate the collateral or have the collateral appropriated by a third party at a price determined, before or after the appropriation of the collateral, pursuant to the valuation method agreed between the parties in the pledge/security agreement;
- sell or cause the sale of the collateral by way of:
- a private sale on arm's-length conditions;
- a sale via the stock exchange; or
- a public auction;
- request a court that title to the collateral be transferred to it; or
- offset the value of the collateral against the secured liabilities or request a direct payment from the relevant debtor (in case of a pledge over receivables).
In practice, the two most commonly used enforcement procedures are those set out in the first and fourth bullet points above. No court involvement is required for the enforcement of the pledge/security, except for the enforcement procedure under the third bullet point above.
The Collateral Law does not specify any specific period within which enforcement must occur and the timing will depend in particular on:
- the enforcement method chosen;
- any possible recourse of the security provider (although unlikely to succeed); or
- the potential involvement of third parties (eg, courts, stock exchanges or valuation experts).
Financial collateral arrangements which fall within the Collateral Law are valid and effective against all third parties, including the bankruptcy trustee or liquidator, notwithstanding any insolvency proceedings, liquidation proceedings or any other situation leading to a competition among creditors, even if the security agreement has been entered into or amended during the claw-back period.
Other security interests not governed by the Collateral Law are more burdensome, time consuming and costly to enforce, and in case of bankruptcy will normally require court/receiver involvement, as they are not bankruptcy remote.
3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?
Unfortunately, Luxembourg law has no express framework for informal out-of-court restructuring. That being said, there is nothing to prevent a company from seeking contractual arrangements with its creditors to the same effect. Most informal workouts involving Luxembourg entities or instruments are governed by foreign law.
3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
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.
3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
The three formal restructuring proceedings available in Luxembourg can be initiated by the debtor only. Each requires a certain threshold of consent from creditors, which must be achieved in order for the application to be granted (alongside the other procedure-specific conditions which must be met).
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
The formal restructuring proceedings in Luxembourg are heavily court led, and both the debtor and creditors will lose control of the restructuring process to a significant degree. However, the creditors nonetheless retain some influence in each case, given that the consent of a certain percentage is required to approve an application.
In the case of a suspension of 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).
In the case of controlled management, once approved, 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 payments, entering into obligations, borrowing money or receiving funds). In addition, the commissioners can compel the debtor to perform a given action.
In a composition with creditors, during the proceedings and until ratification of the composition, the debtor cannot dispose of assets, grant mortgages or enter into any commitments without the authorisation of the delegate judge. Once the plan has been adopted, the debtor must act within the framework of the plan until completion.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
All three restructuring proceedings provide for some form of stay.
In case of a suspension of payments, creditors can no longer enforce their rights against the debtor once the suspension has been granted by the court; however, proceedings initiated before the court granted the suspension are not affected (likewise, the supposition does not apply to taxes or other public charges).
In case of a composition with creditors, once approved, all enforcement measures (other than mortgages and security interest under the Collateral Law) are temporarily suspended.
In controlled management proceedings, once the court has confirmed the proceedings and appointed an investigating judge, a stay is imposed and enforcement proceedings are stayed, and creditors will generally be paid in accordance with the plan or from the proceeds available from realisation of the debtor's assets.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
The length of the different rescue proceedings under Luxembourg law differs from case to case and depends heavily on the debtor's situation (including complexity and size) and the timeframes which the court sets. However, they are usually lengthy and can last several years, which is one of the reasons why they are seldom used.
3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.
In the case of a suspension of payments or controlled management, the directors of a Luxembourg company will remain in their position and will run the business, with the substantial caveat that most actions require the prior consent of the appointed commissioners. This is also true for the shareholders, which lose any (already very limited) influence over the proceedings, unless they also qualify as creditors.
Both unsecured and secured creditors (other than mortgagees and beneficiaries of collateral arrangements), on the other hand, can exert a limited degree of influence on the proceedings, as they will be entitled to vote at a creditors' meeting in favour or against certain proposals.
Within the scope of the restructuring proceedings, employment contracts will generally remain in place and the restructuring should have no effect on employees of the debtor. The same will apply for any pension creditors – although it should be specified that the pension system in Luxembourg is split between public pensions and any additional independent private pension plans, which is why a restructuring should have no effect on pension creditors.
Once a suspension of payments is approved, the court will appoint one or more commissioners to supervise the directors/managers of the company. In controlled management, the court will also appoint one or more commissioners who will prepare and submit a reorganisation plan for the company.
Finally, as all three restructuring proceedings are very heavily court driven, the court will play an important role in each and will in each case be charged with deciding, on the merits, whether approval of the proceedings is warranted:
- In case of a suspension of payments, the court will nominate one or more commissioners to supervise the suspension period;
- In a controlled management scenario, the court-appointed commissioners will report to the court and will submit a reorganisation plan which the court will then have to approve, after it has been voted on by the creditors; and
- In a composition with creditors, the court will need to approve the plan which has been voted on by the creditors.
3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?
Generally, Luxembourg restructuring proceedings, other than the composition with creditors, will bind dissenting creditors, as long as the requisite majority in each case has consented. However, this is of limited efficiency in practice, given that in many cases the relevant security assets will be outside the scope of such proceedings. Also, Luxembourg's creditor class system is mostly limited to secured and unsecured creditors, and lacks the sophistication and formalism found in other jurisdictions.
3.9 Can restructuring proceedings be used to compromise secured debt?
On the commencement of restructuring proceedings, secured creditors will retain the benefit of their security or mortgage and will retain the ability to enforce their rights in priority over any unsecured creditors. Creditors that hold the benefit of a security under the Collateral Law can operate outside of any restructuring or insolvency proceedings, and may enforce their security at
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
The restructuring proceedings under Luxembourg law do not specifically provide for contracts to be set aside or repudiated by the debtor without the counterparties' consent. There is no equivalent to the company voluntary arrangement in the United Kingdom, for instance.
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
The restructuring proceedings under Luxembourg law do not foresee any specific mechanism by which liabilities of third parties may be released. That being said, any debtor may reach an out-of-court settlement with one or more creditors in order to achieve such a release of a third party from its liabilities, either as part of restructuring proceedings or independently thereof.
3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?
No. That said, contractual subordination is recognised in Luxembourg and the parties (debtor, creditors and new money lenders) may choose to contractually grant preference to a new money lender as part of a debt restructuring.
3.13 How do restructuring proceedings conclude?
A suspension of payments will end either on the date determined by the supervisory judge or if an application to revoke the suspension by a creditor is granted.
If controlled management succeeds, the debtor will be able to retain control of its business; if it is unsuccessful, the debtor will simply be declared bankrupt.
A composition with creditors will end if:
- the financial situation of the debtor improves;
- the court annuls the composition; or
- the debtor is declared bankrupt.
4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
The most common proceedings initiated in Luxembourg are bankruptcy proceedings. The aim of bankruptcy proceedings filed against commercial companies in Luxembourg is the winding-up of the debtor's assets in the best interests of the bankruptcy estate and its creditors.
A company can also be subject to compulsory liquidation, which may be ordered by a court on the application of the state prosecutor where the company has pursued illegal activities or has seriously infringed any laws applicable to commercial companies generally.
4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?
A bankruptcy petition may be filed with the competent court (the district court sitting in commercial matters):
- by the directors/managers acting on behalf of the company;
- by an unpaid creditor; or
- at the court's own volition.
Under Luxembourg law, managers/directors are obliged to file for bankruptcy within one month of the debtor meeting the conditions of the insolvency test described below; otherwise, they may be held criminally and civilly liable.
The substantive test for insolvency, under Luxembourg jurisprudence, is where a commercial company both:
- has ceased payments and is unable to meet its commitments (ie, it cannot or does not fully pay its due, certain and liquid debts as they fall due); and
- has lost its creditworthiness (ie, it is unable to obtain credit from any source).
If a bankruptcy petition is filed, the court will consider the insolvency test; if the two criteria are met, it will declare the debtor bankrupt and open bankruptcy proceedings. Once the bankruptcy proceedings have been opened, the managers/directors are removed from office and a bankruptcy receiver is appointed by the court; the debtor, shareholders and creditors have no influence or control over the receiver.
4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
The debtor loses control over the proceedings, as its directors/managers are removed and a bankruptcy receiver is appointed by the court to manage the bankruptcy estate on the opening of bankruptcy proceedings. Likewise, the creditors have no control or influence over the proceedings following the appointment of the receiver, or over the receiver's actions. The receiver may or may not consult the creditors or shareholders as part of the liquidation; it has very extensive powers in deciding how to best conduct the liquidation. There is no credit bidding or similar procedure under Luxembourg law and there is no obligation to conduct public auctions or similar.
The receiver, who effectively takes control of the debtor, does so under the supervision of a supervisory judge and in practice will often seek the judge's authorisation before divesting any assets, contracting loans or similar. It is difficult for creditors or any third parties to challenge such decisions.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Once insolvency or bankruptcy proceedings are opened, a stay is imposed. However, secured creditors, such as mortgagees or beneficiaries of a security under the Collateral Law, can continue to enforce their rights under the mortgage or security despite the opening of bankruptcy proceedings, as their rights are not affected by the opening of bankruptcy proceedings.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
Bankruptcy proceedings typically last between one and three years. Naturally, they can take much longer in complex cases or where litigation is involved.
The three key milestones in bankruptcy proceedings are:
- the appointment of a bankruptcy receiver;
- the realisation and distribution of any proceeds to the creditors; and
- the court judgment closing the bankruptcy proceedings.
4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.
Once bankruptcy proceedings have been initiated, the debtor and its directors/managers (who are removed from office) lose control of the company and the process. The same is also true for the shareholders, which in principle have no influence on the process.
Both unsecured and secured creditors (other than mortgagees and beneficiaries of financial collateral arrangements under the Collateral Law) will also lose any control over the process; their rights are limited to their share of the proceeds from the realisation of the debtor's assets based on the distribution priority (unless the receiver decides to involve them in the process at its own discretion).
Upon a declaration of bankruptcy, any employment contracts of the company are terminated with immediate effect (unless the receiver decides to let some or all of them continue to run to benefit the estate), and the employees are legally entitled to:
- their salary for the month in which the declaration is made and the following month; and
- compensation of 50% of their monthly salary for the statutory notice period.
Court costs and certain social security claims are super-privileged claims by statute.
The receiver is appointed when the proceedings are opened and becomes responsible for realising the assets and distributing any proceeds. The court which appoints the receiver will supervise the process and the actions of the receiver.
4.7 What is the process for filing claims in the insolvency proceedings?
Once bankruptcy proceedings have commenced, any individual legal actions against the debtor – whether initiated by secured or unsecured creditors – are suspended and the creditors must file proof of claim with the court. That said, ‘bankruptcy proof' secured creditors (eg, pledgees under the Collateral Law and/or mortgagees) are not affected by the bankruptcy filing, and may act freely in relation to their security/mortgage and take any enforcement action irrespective of the bankruptcy proceedings.
4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?
As discussed, any security under the Collateral Law and mortgages are considered bankruptcy remote and will not fall within the bankruptcy estate.
In general, the priority of preferential rights in bankruptcy proceedings in Luxembourg can be split (and ranked) into three categories:
- creditors of the bankruptcy (including legal expenses incurred after the opening of bankruptcy proceedings in the interests of all creditors);
- preferred creditors of the bankruptcy estate, in the following order:
- preferred creditors by law (eg, certain employee claims and claims in favour of Luxembourg tax and social security authorities); and
- creditors with non-bankruptcy proof security (both contractual and judicial in nature); and
- ordinary unsecured creditors.
As Luxembourg law does not recognise the concept of equitable subordination, shareholders are treated as subordinated creditors by virtue of holding equity and not debt; but if they have other contractual arrangements in place as creditors, they will generally qualify as ordinary creditors.
4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
On becoming subject to bankruptcy proceedings, the debtor's contracts will remain in force (except for intuitu personae contracts and contracts that specifically stipulate bankruptcy as a termination event). The receiver cannot, in principle, reject or disclaim any contracts and must comply with their terms. However, upon establishing that this is in the interests of the creditors at large, the bankruptcy receiver may request that the insolvency judge terminate an agreement to which the debtor is a party.
4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?
A debtor's pre-insolvency transactions can be affected by bankruptcy proceedings if they were concluded during the claw-back period. The court will determine the date on which it deems the cessation of payments to have occurred and then determine the length of the claw-back period, which cannot be longer than six months from the bankruptcy declaration.
Certain payments made, as well as other transactions concluded or performed, during the claw-back period can then be subject to cancellation by the court (if requested by the receiver). The following transactions may be set aside or declared null and void upon request by the receiver:
- contracts entered into by the debtor, if its own obligations are significantly more onerous than the obligations of the other party;
- the payment of debts that have not fallen due;
- any payment made in kind (eg, asset transfer) by the debtor in respect of debts that are due (excluding cash and negotiable instruments);
- the granting of a security interest for antecedent debts (ie, for past consideration); and
- the payment of certain debts that have fallen due, but that arose during the claw-back period (or the 10 days preceding it).
Additionally, certain payments made for matured debts, as well as other transactions concluded for consideration, during the claw-back period are subject to cancellation by the court if they were concluded with the counterparty's knowledge that the debtor was insolvent at the time.
Finally, the 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 above (eg, the Collateral Law); and special provisions under the Law on Securitisation also govern the insolvency of an assignor when future claims are assigned to a securitisation undertaking.
4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
Once the receiver and the delegate judge have disposed of all assets of the debtor and distributed the proceeds, the bankruptcy proceedings are concluded by judgment of the court. Unpaid liabilities will not, in principle, survive the closure of bankruptcy proceedings.
5 Cross-border / Groups
5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?
Luxembourg courts generally hold that courts in the jurisdiction of the principal establishment of a company (outside the scope of the EU Insolvency Regulation, for which the centre of main interest is the criterion on which the insolvency court's jurisdiction is based) have jurisdiction to decide on matters of insolvency regarding that company. In Luxembourg, there is no recognition of jurisdiction based on the location of a company's assets or any other connection with another jurisdiction. As per the EU Insolvency Regulation, a foreign debtor whose centre of main interest is located in Luxembourg may enter into restructuring or bankruptcy proceedings in Luxembourg.
5.2 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?
Insolvency proceedings that fall within the scope of the EU Insolvency Regulation 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. However, save for cooperation duties in the context of European insolvency proceedings, there is no duty for the commercial court or the appointed receiver to cooperate or consult with foreign courts and officers in case of cross-border insolvency proceedings. In practice, however, Luxembourg insolvency practitioners and courts are usually constructive and communicate well with foreign courts and professionals in a cross-border context.
Luxembourg private international law recognises the principle of universality and unicity of insolvency proceedings. Luxembourg courts therefore often do recognise foreign insolvency proceedings. Recognition will be granted without the need for any further orders of enforcement of the award if the foreign proceedings do not conflict with any domestic proceedings and the following conditions are met:
- a judgment by a competent court;
- observation of due process;
- application of the appropriate Luxembourg conflict of law rules by the foreign court;
- a judgment that does not contravene Luxembourg public policy; and
- the extraterritorial scope of the foreign insolvency law.
Furthermore, Luxembourg courts generally hold that the courts at the location of the principal establishment of the company have jurisdiction to decide on matters of insolvency regarding that company.
Luxembourg case law generally states that there can only be one single insolvency proceeding; however, under the EU Insolvency Regulation, secondary proceedings can be opened in any member state.
5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
The commercial court or the receiver has no obligations to coordinate or work together with foreign courts or officers, other than those under the EU Insolvency Regulation. In practice, however, Luxembourg insolvency practitioners and courts are usually constructive and communicate well with foreign courts and professionals in a cross-border context.
5.4 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?
Luxembourg generally does not recognise the concept of a corporate group for purposes of insolvency proceedings and treats each company as a separate legal entity distinct from its parent and subsidiaries. Therefore, a debtor can be put into bankruptcy or become insolvent without necessarily affecting any of its affiliates. In practice, however, there will often be some form of cooperation between the receiver appointed in Luxembourg and any foreign insolvency officers appointed for other group companies.
In exceptional circumstances, the corporate veil may be pierced by a Luxembourg court where the managers/directors or shareholders disregarded the separate legal personality of the company; in such case the court may disregard the individual legal personality of such company in order to sanction the shareholders or managers/directors at fault.
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
Luxembourg courts apply the EU Insolvency Regulation's presumption that the centre of main interest of a debtor corresponds to its registered office (as well as any rebuttals under the regulation), and will apply the factual criteria specified therein.
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
No distinction is made in Luxembourg restructuring and insolvency proceedings between domestic and foreign creditors. However, it is unclear whether super-privileged creditor status will extend to a foreign equivalent.
6 Liability risk
6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?
Managers/directors of a Luxembourg company are obliged to file for bankruptcy within one month of the insolvency test being met. Upon entering into the ‘zone of insolvency', the directors of a Luxembourg company may no longer act only in the interests of the company itself, but must take into account the interests of all stakeholders, including creditors.
6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?
Directors can be held liable under Luxembourg law for:
- failure to perform their mandate;
- misconduct in the performance of their mandate; and/or
- damages caused by any fault to negligence.
Not filing for bankruptcy within the requisite timeframe constitutes serious misconduct, which could lead the court to impose civil or criminal liability on the directors and order the directors/managers to bear all or part of the debts of the company.
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 of a debtor can be held personally liable for its outstanding debts if bankruptcy results from serious and blatant faults for which they are accountable. Examples include entering into transactions that are completely disproportionate to the debtor's financial position and lead to its bankruptcy. Such claims can be brought only by the receiver.
6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?
A debtor's parent entity (domestic or foreign) can be held accountable to fully pay up those shares to which it has subscribed. It can also be exposed to liability if it has acted as a de facto/shadow manager, or if the creditors can successfully demonstrate that the parent entity and the debtor should be considered as one and the same party, in particular because of a commingling of assets.
The 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 risks as a fully independent entity. For such additional liabilities to be incurred by the subsidiaries, it must be shown that those subsidiaries were compensated by present or future financial benefits.
Furthermore, a receiver can seek general tort damages from certain third parties that committed a fault that led to the bankruptcy or damaged 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.
7.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?
The assets of a debtor may be sold only with the prior consent of the relevant practitioner (eg, the receiver) and/or the court; and assets which are subject to a lien may be sold or disposed of only with the beneficiaries' consent.
7.2 Is "credit bidding" permitted?
The concept of credit bidding does not exist in Luxembourg reorganisation or bankruptcy proceedings, but creditors can propose to purchase certain assets from the bankruptcy estate and the receiver may decide to launch such a process. However, there is no obligation on the part of the receiver to act upon creditors' wishes or proposals.
8 Trends and predictions
8.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
Rescue proceedings in Luxembourg are not extensively used, as they are considered to be too formal, costly and burdensome. However, since 2018 there has been a substantial increase in major international debt restructurings in Luxembourg and we anticipate this trend to continue. Many of these restructurings which do not survive the consensual route end up in foreign restructuring proceedings, even though the Luxembourg holding or bond issuing entities are often key to the group.
In recognition of this situation, on 1 February 2013 the government filed draft Bill 6539 on the preservation of business and the modernisation of the bankruptcy law. The draft bill includes various preventive, repressive, restorative and social provisions which aim to reduce, or at least stabilise, the number of bankruptcies in Luxembourg. However, the draft bill was heavily criticised by the Council of State as lacking efficient processes, providing for complex procedures and imposing new duties on court officers; questions were also raised regarding its feasibility and practicability.
The bill is currently being redrafted, but there seems to be little political will to update the current restructuring landscape in Luxembourg.
9 Tips and traps
9.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?
Where Luxembourg holding or bond issuing companies are key to a distressed group, the following points are often misunderstood or considered too late, thus jeopardising a smooth restructuring;
- the particularities of the conservative and cumulative insolvency test;
- the lack of availability of efficient in-court recovery proceedings and out-of-court tools;
- the fact that Luxembourg bankruptcy proceedings are aimed at liquidation and give shareholders and creditors no control or influence over the process;
- the statutory timeframe within which to file for bankruptcy once the criteria are met, which may lead to directors' civil and criminal liability; and
- the fact that bankruptcy will not stop the holder of security assets falling under the Collateral Law from quickly and efficiently enforcing its security, but that such enforcement will not be very useful if the underlying company is first declared bankrupt.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.