On 21 July 2023, the long-awaited Draft law 6539A (since 2013), aiming at modernising the insolvency tools available for restructuring a company, has been officially adopted (but not yet published in the Journal Officiel for the law to come into force).
The expectation was also due to the need for Luxembourg to implement the EU Directive 2019/1023 of 20 June 2019 on restructuring and insolvency, whose purpose is harmonising the differences between Member States regarding the range of procedures available to debtors in financial difficulties in order to restructure their business.
Luxembourg was, among the Member States, a State with insolvency procedures not adapted to the goal of maximising the chances of preserving the ongoing concern, for the benefit of all stakeholders. Indeed, the old procedures of the composition with creditors (concordat préventif de la faillite), the suspension of payment (sursis de paiement) and the controlled management (gestion contrôlée) were outdated and inefficient. With the new Draft law, the following new tools will supersede these procedures.
Who is concerned?
- All commercial companies (including sociétés en commandite spéciale), traders and civil companies, except credit institutions, investment firms, insurance and reinsurance companies, most companies of the financial sector (including investment funds) and law firms.
The introduction of a new system to detect the warning signs of distressed business and of a screening-for-bankruptcy administrative body:
- An additional mission is entrusted to the Minister for the Economy and the Minister for Small and Medium-Sized Enterprises, identifying debtors in financial difficulty as early as possible (with a range of indicators, such as annual accounts, debts to public authorities and redundancies for economic reasons) likely to jeopardise the continuity of their business. In this case, the Minister can convene a meeting with the debtor to obtain information on the state of its affairs and to inform it of possible reorganisation and/or restructuring measures.
- A new, dedicated, public agency, the Cellule d’évaluation des entreprises en difficulté, is created to assess the appropriateness of bankruptcy petitions (its organisation and operation will be set out later in a grand-ducal regulation).
New preventive restructuring proceedings available:
- The conciliation: appointment of a business conciliator, at the request of the debtor, in order to facilitate the reorganisation of part or all of the debtor’s assets or activities.
- Reorganisation of a business by a voluntary out-of-court arrangement: in a dialogue between the debtor and its creditors (at least two of them), under the supervision – or not – of a conciliator. Upon application of the debtor, the court may approve such an arrangement, which will become enforceable, after verifying that it allows the reorganisation of part or all of the debtor’s assets or activities. If approved by the court, the key benefit lies in the fact that such an arrangement will not be affected by the subsequent opening of bankruptcy, and thus the risk of clawback action during the hardening period is excluded.
Introduction of a new judicial reorganisation proceedings (subject to specific deadlines): aimed at preserving the continuity of part, or all, of the debtor’s assets or activities, under court supervision, with three different objectives:
- obtaining a stay (sursis), limited in time (up to four months, which may be extended to a maximum of 12 months), of the creditors’ enforcement action, in order to reach an out-of-court arrangement (as indicated above);
- reaching a collective agreement, with some, or all, of its creditors (who can vote in favour or against the proposed detailed plan), on a reorganisation plan (such provision allowing the cram-down of dissenting creditors);
- organising the transfer, by court order, to one or several third parties, part, or all, of the debtor’s assets or activities.
Creditors benefiting from financial collateral arrangements (e.g. pledges), set-off or netting arrangements and professional payment guarantees, should be unaffected by the judicial reorganisation proceedings and should be able to enforce their guarantees.
What is the next step?
- This law will enter into force on the first day of the third month following its publication in the Journal Officiel (not intervened yet), likely during Q4 2023.