Luxembourg adopts insolvency reform: new restructuring options to complete the existing Luxembourg toolkit
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Before the adoption of the IMA (which should be enacted shortly) the Luxembourg restructuring framework already offered a range of (mainly consensual and solvent) restructuring options.
When it comes to legally organised restructuring options, Luxembourg has not traditionally offered effective restructuring procedures. The old procedures, which aimed at avoiding bankruptcy, were considered to be outdated and unpractical for various reasons. By adopting the IMA, the Luxembourg legislator fills that gap, providing for a variety of judicial and extra-judicial restructuring procedures on top of the already existing Luxembourg restructuring toolkit. The IMA also implements the restructuring frameworks directive EU 2019/1023 (the RX Directive).
The main amendments include the implementation of various mechanisms that will help undertakings in financial difficulties to avoid bankruptcy and preserve their business as well as the abolishment (except for currently pending procedures) of certain obsolete insolvency procedures (controlled management, composition with creditors and reprieve from payment) which were rarely used in practice.
The adoption of the IMA follows a legislative process of more than a decade. The IMA prioritises (where practicable) the preservation and/or reorganisation of a debtor’s business as opposed to its liquidation.
It remains to be seen (i) how and to what extent the new restructuring procedures will be used in practice by local and international players, and (ii) how the Luxembourg insolvency practitioners and judiciary will receive and implement the IMA on the ground.
The IMA has also revamped certain provisions of bankruptcy, which is a liquidation procedure. Bankruptcy has been the overwhelmingly used insolvency procedure prior to the adoption of the IMA. We anticipate that the bankruptcy procedure will remain the predominant Luxembourg insolvency procedure after the entry into force of the IMA.
It is finally important to note that the IMA does NOT affect the special protection of collateral arrangements under the Luxembourg act of 5 August 2005 on financial collateral arrangements, as amended (the Financial Collateral Act). In particular, the judicial reorganisation suspension period will not affect the enforceability of security under that act or netting or set-off arrangements.
1. Scope of the IMA: special limited partnerships (sociétés en commandite spéciale) in scope
The IMA applies to:
- traders (commerçants) who are natural persons as referred to in article 1 of the Luxembourg Commercial Code;
- commercial companies referred to in article 100-2, paragraph 1 of the act of 10 August 1915 on commercial companies, as amended (the Companies Act);
- special limited partnerships (sociétés en commandite spéciale) referred to in article 100-2, paragraph 4 of the Companies Act;
- craftsmen; and
- civil companies
2. Introduction of prevention measures to detect financial difficulties early
The IMA introduces prevention measures with a view to detecting the financial difficulties of a business at an earlier stage and facilitating business preservation and reorganisation.
According to the IMA, the Minister of the Economy and the Minister for Small and Medium-sized Businesses are responsible, within their respective areas of responsibility, for detecting debtors in financial difficulty when such difficulties are likely to jeopardise the continuity of the debtor’s business.
To improve the detection of undertakings likely to be declared bankrupt, a special Evaluation Committee for Businesses in Difficulties (Cellule d’évaluation des entreprises en difficultés) is created, the members of which are designated by the Minister of the Economy amongst the personnel of some of the main administrations (including direct tax, social security, VAT, etc.).
3. Reorganisation by amicable agreement: an extrajudicial procedure to allow a debtor to negotiate an amicable agreement with its creditors - subject to court certification (homologation) to be enforceable
The IMA provides that the debtor may propose an amicable agreement to all its creditors, or at least two of them, aiming to reorganise (all or part of) its assets or activities. To that effect, the debtor is further entitled to request the appointment of a business conciliator (conciliateur d’entreprise) whose mission is typically to prepare and facilitate the conclusion of the amicable agreement. Depending on the scope of its mission, the business conciliator can also assist with the performance of the amicable agreement.
Once the debtor and its creditors have reached an amicable agreement, the debtor applies to the court to obtain a certification of the agreement. The court will assess whether or not the purpose of the amicable agreement is to reorganise (all or part of) the debtor’s assets or activities to grant the certification which will render the amicable agreement enforceable.
Clawback provisions do not apply to the certified amicable agreement nor to any acts accomplished as a consequence of the latter. This means, amongst other things, that these acts cannot be set aside or declared void even if the creditors were aware of the debtor’s state of cessation of payments.
The amicable agreement may only be disclosed to third parties if the debtor has given its express consent.
4. Judicial Reorganisation: a judicial business continuity procedure set for a variety of situations and objectives
Purpose of judicial reorganisation
The purpose of a judicial reorganisation procedure is to preserve, under the supervision of a judge, the continuity of all or part of the assets or activities of the undertaking.
The opening of a judicial reorganisation
(i) obtaining a suspension (sursis) in order to allow the conclusion of an amicable agreement;
(ii) securing the agreement of the creditors on a reorganisation plan (collective agreement); and/o
(iii) carrying out a judicial reorganisation by transfer of all or part of the undertaking or its activities.
The application for judicial reorganisation may pursue a separate objective for each line of business or any part of the business.
Court decision to open judicial reorganisation – suspension period
As long as the court has not ruled on the application for judicial reorganisation:
(i) the debtor may not be declared bankrupt or, in the case of a company, be subject to judicial dissolution (except that a company which pursues activities contrary to criminal law, or which seriously contravenes the laws governing commercial companies, may be wound-up and liquidated by the District Court) nor be subject to administrative dissolution without liquidation; and
(ii) no movable or immovable assets of the debtor may be realised further to the exercise of a general enforcement measure (voie d’exécution).
The judicial reorganisation is opened by a decision of the District Court ruling on the application of the debtor if it can show that its business is jeopardised (mise en péril de l’entreprise), either in the short or the longer term.
If this condition appears to be met, the court will declare the opening of judicial reorganisation and set the duration of the suspension period with respect to enforcement measures (voies d’exécution) (subject to certain exceptions) aimed at recovering debts. The maximum suspension period must, however, not exceed four months after the decision to open the judicial reorganisation procedure (which, depending on the set-up, can be extended to a maximum of up to twelve months). During this suspension period (i) no individual enforcement action of outstanding creditors (créanciers sursitaires) is permitted, and (ii) the debtor may not be declared bankrupt (except at its own initiative) or, in the case of a company, be subject to judicial dissolution or be subject to administrative dissolution without liquidation.
The enforcement of financial collateral arrangements falling within the scope of the Financial Collateral Act is not affected and remains possible during this suspension period.
At any time during the suspension period, the debtor has the right to request the court to amend the purpose of the judicial reorganisation procedure.
5. Modernisation of the bankruptcy procedure: limited changes and a new discharge of debt regime for natural persons
The IMA amends certain provisions of the Luxembourg Commercial Code and of the Luxembourg Criminal Code which are directly or indirectly related to the bankruptcy procedure (faillite).
Amongst the noteworthy changes in that respect, the IMA:
- provides that the bankruptcy procedure can also be initiated by the public prosecutor (previously, the initiation of bankruptcy was only possible upon acknowledgement (aveu) by the debtor, at the request of a creditor or upon the court’s own initiative);
- suspends the statutory obligation for the directors of a Luxembourg company to declare the cessation of payments (cessation des paiements) as from the filing of an application for judicial reorganisation and until the expiry of the suspension period as determined by the court;
- decriminalises fraudulent bankruptcy (banqueroute frauduleuse), which will constitute an offence (délit) and no longer a crime (crime) (which, on the other hand, eases prosecution);
- extends the offences of both simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse) to also apply to the debtor’s de jure and de facto managers;
- extends the list of persons that can be appointed as bankruptcy receiver (curateur); and
- introduces (in line with the requirements of the RX Directive) a discharge of debt regime in the context of bankruptcy procedures affecting natural persons.
6. Entry into force of the IMA
The IMA will enter into force on the first day of the third month following its publication in the Luxembourg Official Gazette (which is expected to occur either in July or in August).
7. Outlook regarding the IMA
It is yet to be determined how and to what extent local and international players with a Luxembourg nexus will have recourse to the new judicial and extra-judicial reorganisation options provided for by the IMA (be it in lieu or in combination with any already existing Luxembourg restructuring tools).
Luxembourg has traditionally been a jurisdiction of choice in the context of international debt restructurings (including thanks to the range and variety of Luxembourg vehicles as possible restructuring tools and to the legal robustness and insolvency remoteness of financial collateral arrangements under the Financial Collateral Act). We expect that (i) the entry into force of the IMA should not substantially change the position of Luxembourg in that respect, and (ii) Luxembourg vehicles and instruments should continue to play a key role in international debt restructurings. The IMA will arguably provide debtors and creditors with additional options to consider (and possibly leverage) in a distressed set-up.
More generally (in both local and international set-ups) the question of the practical feasibility and efficiency of the procedures under the IMA arises. This is because the IMA adds additional complexity and costs whilst at the same time adding new and additional duties and obligations on court officers and other relevant bodies and persons involved in the procedures.
The practical implementation of the IMA on the ground will therefore constitute a challenge for Luxembourg insolvency practitioners and the judiciary who will need to bring the provisions of this new insolvency regime to life.
Finally, we anticipate that the success of the IMA will also require a substantial educational effort to make sure all stakeholders are aware of the various options and their effects in order for them to make adequate choices when facing financial distress situations.