On 7 August 2023, a new restructuring framework in Luxembourg has been adopted with the law on business preservation and modernisation of bankruptcy law (the Law), which will enter into force on 1 November 2023. The Law offers debtors new restructuring options to address their financial difficulties ahead of insolvency.
A long-awaited reform
Over the past few decades, the existing restructuring tools in Luxembourg, such as the composition with creditors (concordat préventif de la faillite) and the controlled management (gestion contrôlée) proceedings, have been of limited use since they were subject to restrictive conditions and/or inadequate to reorganise the debtor’s business.
Discussions around a reform of the restructuring framework have started since 2013 and have been accelerated with the requirement to implement the Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks. The Law replaces the existing restructuring tools by an out-of-court consensual restructuring proceeding (réorganisation par accord amiable) and a court-monitored restructuring proceeding (réorganisation judiciaire) that may result in the restructuring plan or a transfer of all or part of the assets or business of the debtor. In addition, some public actors benefiting from certain information rights are charged with early warning of distressed debtors whom they may help with the appointment of a conciliator.
The Law shall apply to traders, special limited partnerships, craftsmen and civil companies.
1 Early warning and assistance of a conciliator
Based on information rendered available to it, the minister of the economy is in charge of detecting distressed debtors. It shall convene them to a meeting in person where it informs them about the need to act without delay and informs them of the available restructuring tools.
A special committee composed of representatives of public administrations (tax, social security, ministry of the economy) appreciates the level of distress of a debtor and the opportunity to file a bankruptcy petition in relation to a debtor.
A debtor may request the minister of the economy the appointment of a conciliator chosen among the experts of the law of 7 July 1971, as amended, who shall help the debtor reaching consensual reorganisation or reorganisation plan or sale in the course of judicial reorganisation.
2 Consensual restructuring (réorganisation par accord amiable)
Consensual restructuring offers a debtor a flexible out-of-court negotiation framework. Such framework is not public as is not subject to any conditions.
A debtor may propose a settlement agreement (accord amiable) to all or part of its creditors to reorganise its assets or business. For the negotiation and preparation of the settlement agreement, the debtor may request the minister of the economy the assistance of a conciliator.
The debtor may seek court approval (homologation) of the settlement agreement. The settlement agreement will be enforceable (exécutoire) and have the following advantages:
the settlement agreement (as well as any related agreements) approved during the hardening period is excluded from the scope of avoidance actions where subsequent judicial restructuring, bankruptcy or liquidation proceedings are subsequently opened; and
participating creditors are protected against any liability claims initiated by the debtor, other creditors or third parties.
3 Judicial restructuring (réorganisation judiciaire)
The proceeding may be opened at the request of the debtor when the future of its business is at peril, either in the short or in the long term.
The judicial restructuring is a public and court-monitored proceeding aiming at adopting a restructuring plan (plan de réorganisation) and/or allowing the transfer by court order (transfert par decision de justice) of all or part of the assets or the business. The proceeding is supported by measures facilitating and accelerating the course of the restructuring.
3.1. Preparation, adoption and confirmation of a restructuring plan
The opening judgement or a subsequent judgement sets a date for the adoption of the restructuring plan.
The debtor prepares the restructuring plan which shall include a list of claims arising prior to the opening of the proceeding, a list of creditors and the class of creditors to which they belong (either secured or unsecured), the restructuring measures contemplated (which may be of financial or operational nature), a list of creditors whose rights will not be affected.
The restructuring plan is binding on all the creditors, even those who have not vote in favour:
if it is voted, within each class of creditors, by a majority in amount of the voting affected creditors (cram down);
where it is not approved by each class of creditors, if the court may confirm a restructuring plan that comply with the principles set out by the Directive 2019/1023, including namely the satisfaction of the best-interest-of-creditors test and the compliance with the relative priority rule (cross class cram down).
3.2. Transfer by court order of all or part of the assets or business
The debtor may consent that all or part of its business is transferred to a third party. Such transfer aims at preserving the viability of the business and is ordered by the court.
The court shall appoint an insolvency practitioner chosen among the experts of the law of 7 July 1971, as amended to monitor the solicitation process and the transfers in the name and on behalf of the debtor.
The insolvency practitioner shall seek approval of the transfer by the court, noting that secured creditors rights on movable or immovable assets are transferred to the purchase price of the such assets.
3.3. Measures supporting negotiations during the judicial restructuring
Debtor in possession
In principle, the debtor remains in control of its assets and the day-to-day operation of its business. However, it may request the assistance an insolvency practitioner. Such an insolvency practitioner may also be appointed upon request by any interest third-party, provided that it bears the costs and fees associated to it. In the event of serious misconduct of the debtor, the court may appoint an interim administrator (administrateur provisoire) who will replace the debtor in the control of its assets and business.
Suspension of burdensome contacts
As from the opening of the judicial restructuring, the debtor may suspend unilaterally the execution of burdensome contracts but may not terminate them. Any liability claims resulting of this suspension shall be included the restructuring plan.
Stay of individual actions (sursis)
To support negotiations with its creditors during the judicial restructuring, the debtor may request the court a stay of individual actions for an initial duration of up to 4 months, that may be extended without exceeding 12 months.
The stay prohibits the payment of all types of claims arising prior the opening of the proceeding (créances sursitaires), including secured and preferential claims with certain exceptions, such as wages claims.
The stay also applies to any individual enforcement actions with certain exceptions. In particular, collateral arrangements governed by the law of 5 August 2005 remain enforceable.
Conclusion and perspectives
The new proceedings are certainly improving the Luxembourg restructuring framework, as they offer a concrete alternative to bankruptcy and liquidation proceedings. However, the Law lacks of clarity on certain common and practical aspects of restructuring proceedings. The success of the new proceedings will depend on how insolvency practitioners and the courts will implement them.
From an international perspective, the judicial restructuring will likely be added to Annex A or the Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast) so that Luxembourg courts will assume jurisdiction if the debtor has its centre of main interests in Luxembourg. This will allow the restructuring plan to be automatically recognised and enforceable in the rest of the European Union.
In the coming years, the new proceedings might be affected by the principles set out in the recent proposal for a directive of the European Parliament and of the Council dated 7 December 2022 harmonising certain aspects of insolvency law.