This country-specific Q&A provides an overview of Restructuring & Insolvency laws and regulations applicable in Luxembourg.
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
For immovable property, mortgages are generally the most common form of security in Luxembourg. 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.
In order for a mortgage to be legally binding and effective against third parties, it has to be registered in the Luxembourg mortgage register (which should be done in the district in which the property is located and will be valid for a period of 10 years).
For movable property, the most frequently used security are financial collateral arrangements governed by the Luxembourg Collateral Law of 2005, as amended (the Collateral Law). Financial collateral arrangementsincludeany pledge or assignment by way of security forfinancial instruments and receivables (including most types of shares and bonds) and are “bankruptcy remote”. Under the Collateral Law any party (includingnon-commercial, non-regulated parties) maygrant, or benefit from, security; in additionit offers extensive contractual freedom, specificallyin respect of the enforcement trigger (which does not need to be a payment default) and allows for very efficient out of court enforcement options (appropriation and private sale).
There is no public registry for moveable assets typically covered by the Collateral Law and perfection formalities are done via notification or registrations in private registers typically held by the companyor its custodian.
The formalities to perfect a pledge, and make it enforceable against third parties, differ depending on the type of security asset:
Shares/PECs : the pledge should be recorded in the shares/notes/certificates register held by the issuing entity.
Account(s): as most banks in Luxembourg have a first lien on their accounts under their general terms and conditions, such banks will need to waive their lien in order for a first lien security to be able to be put in place in favour of a third party pledgee.
Receivables: in principle, a receivables pledge is valid between the parties on the date it is entered into but its enforceability against third party debtors is subject to their notification. In practice, depending on the receivables and debtors involved, notification will be made on the date of the pledge or at a later date, usually upon the occurrence of an event of default.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Enforcement of security under the Collateral Law is both quick and cost efficient (notwithstanding the valuation by an expert, if needed), and may be done out of court – even in a bankruptcy scenario.
The Collateral Law permits the enforcement of a pledge over shares, accounts, and claims upon the occurrence of a trigger event (contractually determinable by the parties) without prior notice.
The Collateral Law provides for a variety of in and out of court enforcement processes, but in practice the two most commonly used enforcement procedures are (i) the appropriation of the collateral (either by the pledgee or a third party) using a contractually determined valuation method and with a valuation that may usually occur after the appropriation has taken place and (ii) private sale at “normal commercial conditions”.
The Collateral Law does not specify aspecific 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); and
the potential involvement of third parties (e.g. courts, stock exchanges or valuation experts).
Other security interests not governed by the Collateral Law are more burdensome to put in place andenforce, time consuming and costly, and in case of bankruptcy will normally require court/receiver involvement.
In addition to the security above, a business pledge is also available under Luxembourg law, albeit rarely used because of the costs involved in putting it in place. Assets which can be pledged thereunder include licences, trademarks, patents, leases, furniture and materials. The business pledge, with a validity of 10 years,can only be granted to credit institutions which have been so authorised by the Luxembourg government.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
For a commercial company the substantive, and cumulative, test for insolvency under Luxembourg jurisprudence is met where the company:
has ceased payments and is unable to meet its commitments (i.e. it cannot or does not fully pay its debts as they fall due); and
has lost its creditworthiness (i.e. it is unable to obtain new credit, extensions etc. from any source).
The directors of a Luxembourg company have a statutory obligation to file for bankruptcy within one month of the cessation of payment and directors may incur both criminal and civil liability if they fail to file within the set timeframe.
In light of the current Covid-19 crisis, the Luxembourg Government has taken new measures to support businesses, which amongst others, also affect the test for insolvency. According to the Grand-ducal regulation of 25 March 2020,the statutory deadline to file for bankruptcy(once the conditions above are met) is temporarily suspended.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Under Luxembourg insolvency laws, the following types of proceedings may be opened against a Luxembourg company (the Company):
bankruptcy proceedings (faillite);
controlled management proceedings (gestion contrôlée); and
composition proceedings (concordat préventif de la faillite).
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.
Once bankruptcy proceedings have been initiated, the Court will appoint a bankruptcy receiver (curateur) (the Receiver) and a supervisory judge (juge-commissaire).The debtor loses control over the proceedings and the directors are removed following the appointment of the Receiver. The Receiver takes control of the company to realise the company’s assets and ultimately distribute the proceeds to the creditors and, if any surplus is available, to the shareholders. Creditors have no control 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 and has very extensive powers in deciding how to conduct the liquidation.
In practice, bankruptcy proceedings tend to take a significant amount of time (from a couple to many more years) from commencement to completion of the liquidation and as Luxembourg law does not provide for a set timeframe for completion; it notablydepends on the complexities of the bankruptcy and the efficiency of the Receiver.
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.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
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 (e.g. 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.
Luxembourg law does not recognise the concept of equitable subordination, shareholders are treated as subordinated creditors by virtue of holding equity only, and being a shareholder will not affecttheir position or rank if they are also creditors.
Secured assets qualifying as financial collateral under the Collateral Law and/or subject to a mortgage are considered bankruptcy remote and will not fall within the bankruptcy estate. The holders of such security will therefore not be included in the bankruptcy waterfall.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
A debtor’s pre-insolvency transactions and corporate acts can be affected by bankruptcy proceedings if they were concluded during the claw-back period (période suspecte) (which dates back to a maximum of six months from the bankruptcy judgement).
Certain payments made, as well as other transactions concluded or performed, during the claw back period may be subject to cancellation by the court (at therequest ofthe Receiver). The following transactions may be set aside or declared null and void in this fashion:
payment of debts that have not fallen due;
sale of assets without or forinadequate consideration;
granting of a security interest for pre-existing debts (i.e. for past consideration);
payment of certain debts that have fallen due, but that arose during the claw-back period (or 10 days preceding it); and
payments made for mature debts as well as other transactions concluded for consideration during the claw–back period if the counterparty knew or could reasonably be expected to have been aware of the bankrupt’s cessation of payments.
Finally, the receiver may, without any limitation in time, challenge any fraudulent transaction or payment.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Once insolvency or bankruptcy proceedings are opened, a stay is imposed on creditors who can no longer enforce their rights against the bankrupt company individually. Thisstay only has territorial effect unless a specific regulation extends itseffects, such as Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the EU Insolvency Regulation). Bankruptcy remote secured creditors, such as mortgagees or beneficiaries of a security under the Collateral Law can continue to enforce their rights irrespective ofthe opening of proceedings.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
A formal debt reorganisation can be effected, in Luxembourg, either through a suspension of payments (sursis de paiements), controlled management (gestion contrôlée) or composition with creditors (concordat préventif de faillite). These proceedings tend to be lengthy, costly, and lack the desired flexibility and predictability and are therefore very rarely used in practice for commercial (non-regulated) companies. As further discussed in Q21 below, the use of popular foreign restructuring proceedings, such as U.S. Chapter 11 and other DIP proceedings, in connection with international debt restructurings that involve a Luxembourg component (such as Luxembourg holding or issuing companies), has increased over the years as a result.
Suspension of payments:Initiated by the debtor, it allows a commercial company which faces temporary liquidity problems to avail itself of a stay until its payment obligations can be met.
A suspension of payments will be granted by the relevant court only if (i) the debtor’s temporary financial difficulties are due to extraordinary and unexpected circumstances and(ii) the debtor has sufficient means to pay off all its creditors or 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 (i) the consent of a majority of creditors representing at least 75% of the debtor’s liabilities, and (ii) the approval of the relevant court.
This is not, per se, a debtor in possession proceeding and while management of the company will remain in place the relevant court order will appoint one or more commissioners to supervise their actions.
Controlled management: A commercial company may apply for controlled management to either reorganise and restructure its debt and business, or to realise its assets in the best interests of its creditors.
To be eligible, the debtor must be acting in good faith and must demonstrate that its creditworthiness is impaired or that it is facing difficulties in meeting all of its commitments, and that 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. A reorganisation plan must take into account all interests at stake and comply with the ranking of privileges and mortgages. The approved reorganisation plan will be binding on all creditors including dissenting creditors and creditors that abstain from voting will be deemed to have consented to it.
Composition with creditors: Lastly, a commercial company may apply for a composition with creditors with the aim of avoiding bankruptcy by allowing a debtor facing financial difficulties (but not yet meeting the criteria for insolvency) to negotiate a settlement or a rescheduling of its debts with its creditors.
To be eligible, the debtor must be deemed by the court to be unfortunate and acting in good faith and the application requires the consent of the majority of the creditors representing 75% of the debtor’s liabilities.
Only unsecured creditors and secured creditors who have waived their rights (or voted in favour of the composition) are bound by the composition and the composition has no effect on creditors who did not participate in the composition proceedings; which renders the composition procedure very unattractive for debtors.
The Luxembourg Government has for several years now been expected to significantly alter the Luxembourg restructuring tools and it seems like the current Covid-19 crisis may reignite the debate around draft Bill 6539, filed by the government on 1 February 2013 on the preservation of business and the modernisation of the bankruptcy law (the Draft Bill). The Draft Bill aims to modernise the Luxembourg restructuring regime and replace certain of the current reorganisation tools with new procedures to incentivise restructuring over bankruptcy proceedings.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Luxembourg law does not have any statutory provisions dealing specifically with new money financing, but a receiver would normally be bound by the contractual agreements in place, including regardingthe ranking of such financing.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
The restructuring proceedings under Luxembourg law do not foresee a specific mechanism by which liabilities of third parties may be released.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities do they have? Are they permitted to retain advisers and, if so, how are they funded?
In practice, the aforementioned restructuring proceedings are rarely used, particularly in larger, cross-border, restructurings. Under a composition with creditors the competent court will convene a creditors meeting to approve the composition and, similarly, in a controlled management scenario the creditors will be asked to assent to the proposal. In both situations the creditors can decide to form a creditor or steering committee of their own volition, but any powers and responsibilities would be bespoke and contractually agreed between the creditors (and would need to give them the necessary majorities for them to wield any influence). Luxembourg law does not specifically provide for creditor committees, other than those convened by the supervising judge, and they would need to be self funded unless otherwise agreed with the debtor as part of the restructuring plan. There is no creditor committee practice similar to the UK or the US in Luxembourg insolvency proceedings.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
In principle, contracts of a bankrupt company are not automatically terminated upon commencement of bankruptcy proceedings, save for intuitu personae agreements (such as proxies) and contracts that specifically include bankruptcy as a termination event. The bankruptcy receiver cannot, in principle, cherry-pick and must comply with applicable contractual terms. However, upon establishing that this is in the interests of the creditors at large, the bankruptcy receiver may request that the bankruptcy judge terminates an agreement to which the debtor is a party.
Similarly, restructuring proceedings under Luxembourg law do not specifically provide for contracts to be set aside or repudiated by the debtor without the counterparties’ consent.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
In a Luxembourg bankruptcy scenario, once a Receiver is appointed, the Receiver will realise the assets of the debtor through sales and dispositions (and, especially for immovable assets, after obtaining the prior consent of the supervisory judge) and third parties will purchase these assets free and clear of any encumbrances.
The concept of credit bidding does not exist under Luxembourg law, but creditors can propose to purchase certain assets from the bankruptcy estate and the Receiver may indeed decide to launch such a process. However, there is no obligation on the part of the Receiver to act upon creditors’ demands or proposals.
In practice, in the context ofan international restructuring, creditors often make use of a consensual enforcement of a Luxembourg financial collateral security to allow for a “clean” transfer of the business to the creditor group and therebyarrange for a “pre-packaged” sale.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
When managing a distressed debtor, directors must ensure that they keep informed of the financial status and evolving situationof the company as well as on its restructuring or liquidation options, the enforcement risks etc. and they should ensure that these are discussed in very regular and frequent board meetings. Thedecision making and discussion process shouldbe carefully recorded in board minutes or other formal means to be able to demonstrate, should the company plunge into bankruptcy at a later stage, that the directors acted prudently, diligently and loyallytowards the company as a whole. Evidence in board minutes of the discussions and strategic approaches taken, even if risky, are the best protection directors can have against claims from the Receiver of a third party.
As discussed, directors are obliged to file for bankruptcy within one month of the cessation of payment. 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.
Directors can be held liable under Luxembourg law, among other things, for:
the non-execution of their mandate;
any misconduct in the management of the Company’s affairs; and
any damages caused bytheir fault or negligence (liability based in tort (responsabilité délictuelle) under Article 1382 of the Luxembourg Civil Code).
If a shareholder had actively interfered in the management of the company a damaged third party mayhave an action against themon the basis that theyacted as a de facto director. The same would apply to any creditors having interfered with management or deemed to have taken management decisions in respect of the company.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Restructuring and insolvency proceedings under Luxembourg law do not have the effect of absolving directors and other stakeholders from their liability. In order for directors to avoid liability, they must be able to demonstrate that they always acted in the best interests of the company.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
Luxembourg has, to date, not adopted the UNCITRAL Model Laws and there are currently no plans by the acting Government to do so.
Luxembourg case law suggests that there can only be a single insolvency proceeding per company. However, under the EU Insolvency Regulation, secondary insolvency proceedings may also be initiated before the courts of another Member State of the European Union against the same debtor in any Member State where it has an establishment. The effects of these proceedings are limited to the assets situated in the latter Member State.
Furthermore, Luxembourg private international law recognises the principle of universality and unicity of insolvency proceedings.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Luxembourg courts have held that courts in the jurisdiction of the principal establishment/central administration of a Luxembourg 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) should 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. Pursuant to the EU Insolvency Regulation, a foreign debtor whose centre of main interest is located in Luxembourg may enter into insolvency proceedings in Luxembourg.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
Luxembourg, like many other European jurisdictions, does not recognise the concept of a “group” in a restructuring or insolvency context. Each member of the group is considered individually and so are their estates (except in certain situations where the corporate veil may be pierced and the insolvency extended, as a means of sanctioning to the shareholder or director at fault). 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.
Is it a debtor or creditor friendly jurisdiction?
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 implementationof the Collateral Law. The Collateral Law covers pledges and assignments of any financial instruments and receivables, and as any security under the Collateral Law is considered to be ‘bankruptcy proof’ it has become a very popular option for creditors, both in a regular financing and in a restructuring scenario. Luxembourg share pledge enforcements are used frequently to take control ofa group (the well-known “single point of enforcement” tool) but also to allow for a pre-pack like process to be implemented in a restructuring scenario.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
Similarly to many other European countries, Luxembourg, and its legal framework, attempt to protect employees in a distressed company scenario. That being said,the intervention of the state or regulators in insolvencies is very minor outside of the regulated sphere. Also, in most major international restructurings involving Luxembourg companies, the companies involved were holding or note-issuing companies with very few to no employees and thus the potential local impactrelatively low.
In light of the current Covid-19 crisis, the Luxembourg Government is providing additional, currently, short term, aid in the form of, amongst others, (i) State subsidies– throughrepayable capital grant(s), (ii) deferral of certain taxes and social contributions, (iii) certain guarantees, (iv) additional emergency allowances for small businesses and for self-employed workers– within certain parameters, and (v) paid family leave programs.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
The Luxembourg rescue proceedings are considered to be too formal, costly and burdensome and are therefore not extensively used and the most common local proceeding is consequently a filing for bankruptcy.
Since 2018 we have seen a substantial increase in major international debt restructurings involving Luxembourg entities and we anticipate this trend to continue. In many of these cases, the Luxembourg holding or bond issuing entities are key to the group, but after failing to reach a consensual compromise with their creditors they end up in foreign restructuring proceedings, such as a US Chapter 11 proceeding or other popular DIP proceedings.
The Draft Bill, briefly discussed at Q8, is currently being re-examinedand further updated with theaim to reform and modernise the Luxembourg restructuring and bankruptcy proceedings and to, inter alia, reduce the dependency on bankruptcy proceedings and to encourage companies in financial difficulties to avail themselves, at an early stage, of the toolsto ensure the viability of the business as a going concern.