Detection of businesses in financial difficulty 

The Law entrusts the Minister for the Economy and Minister for Small and Medium-sized Businesses with the task to detect debtors in financial difficulties when these difficulties are likely to jeopardise the going concern of the debtor's business.

The Law establishes the Cellule d’Evaluation des Entreprises en Difficulté (composed of five members; one of each of the CCSS, the ACD, the AED¹, one member proposed by the Minister for the Economy and one member proposed by the Minister for Small and Medium-sized Businesses) to detect companies which are likely to face bankruptcy.

The competent minister may invite the debtor to gather information on the state of its affairs and inform it of the reorganisation measures available to it.

To detect a debtor in financial difficulties, the competent minister has access to: 

• information held at the National Institute of Statistics and Economic Studies (STATEC);
• certain judgments against the debtor;
• the tableau des protêts drawn up by the registrars (receveurs de l’enregistrement);
• notifications of redundancies for economic reasons;
• a list of debtors who have not paid, under certain circumstances, all their social security and VAT debts.

1: CCSS: Centre commun de la sécurité sociale; ACD: Administration des contributions directes; AED: Administration de l’enregistrement, des domaines et de la TVA.

Objectives of the Judicial Reorganisation Procedure

The purpose of the judicial reorganisation procedure is to preserve the continuity of a business’ assets or activities under the supervision of the judge.

The procedure is initiated when (i) the undertaking is put at risk, in the short or long term and (ii) the debtor has filed an application for judicial reorganisation.

The opening of this procedure can pursue either of the following objectives: 

• to secure a stay of proceedings (sursis) to enable an amicable settlement (accord amiable);
• to agree a reorganisation plan (plan de réorganisation) with the creditors (réorganisation judiciaire par accord collectif);
• to enable the transfer by court order (transfert par décision de justice), to one or more third parties, of all or part of the assets or activities of the debtor.
• At any time during the stay of proceedings, the debtor may ask the court to change the objective of the judicial reorganisation procedure.
• The request for the opening of the judicial reorganisation procedure may pursue a distinct objective for each business of an enterprise or part of a business.

Impact of the stay of proceedings (Sursis)

Before the court’s judgment

As soon as the debtor has filed its application and for so long as the court has not ruled on the application of the debtor:

• no enforcement action may be taken against the debtor's movable or immovable assets during the stay of enforcement (please see below regarding the impact on the law of 5 August 2005 on financial collateral arrangements, as amended); 
• the debtor may not be declared bankrupt (except at its own initiative), nor be judicially dissolved, nor be subject to administrative dissolution without liquidation;
• the debtor is under no obligation to file into bankruptcy.

After the court’s judgment

•  This stay of proceedings further applies as from the court judgment declaring the opening of the judicial reorganisation, for the duration set by the court (up to four months, which can be extended to a maximum of 12 months in total).

Impact on financial collateral arrangements

The judicial reorganisation and related stay of proceedings does not impact:

• financial collateral arrangements, set off and netting arrangements falling under the law of 5 August 2005 on financial collateral arrangements, as amended, nor
• the pledgee’s capacity to enforce such financial collateral against a defaulting debtor (with the exception of in court proceedings, which are never used in practice)

Any other security interests such as pledges (other than financial collateral arrangements) or mortgages (hypothèques) granted by the debtor will however not be enforceable in principle during the stay of proceedings.

Amendments to the insolvency proceedings in Luxembourg

The Law introduces several other noteworthy amendments to the existing insolvency framework:

• the public prosecutor can also initiate the bankruptcy procedure (faillite) in addition to the debtor’s acknowledgement (aveu), a request from a creditor or the court’s own initiative;
• the decriminalisation of fraudulent bankruptcy (banqueroute frauduleuse), which will constitute a mere criminal offence (délit) and no longer a serious crime (crime) with a view to facilitating prosecution;
• the de facto or de jure managers or directors of a company can also be held liable for simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse); 
• a new system for debt discharge that is open to individuals who qualify as traders (commerçants) and who have been declared bankrupt; 
• the repeal of the composition with creditors (concordat préventif de la faillite), controlled management (gestion controlée) and moratorium or reprieve from payment (sursis de paiement) proceedings, which were almost never used in practice. It should be noted that the law does not properly repealed the reprieve from payment (sursis de paiement) and hence despite the intention of the legislators to repeal it, it remains applicable.

Scope

The Law applies, amongst others, to the following debtors:

• commercial companies (e.g. S.A., S.à r.l., S.C.A, S.C.S.); 
• special limited partnership (sociétés en commandite spéciale); and
• civil companies.

The Law notably does not apply to amongst others::

• credit institutions and investment firms;
• insurance and reinsurance undertakings;
• investment funds (e.g. UCITs, SICAR, RAIFs, FIS); and
• securitisation undertakings issuing financial instruments to the public (on a continuous basis), 

since these entities are subject to special insolvency regimes.