New Luxembourg law modernizing Luxembourg’s insolvency law and introducing new rules on business preservation

1. Purpose and aim of the Bill of Law

On 19thJuly 2023 the Luxembourg’s Parliament (Chambre des Députés) adopted the Bill of Law No. 6539A (the “Law”) the purpose of which is to implement several measures and introduce new procedures to promote the preservation of businesses and modernize the insolvency law. The Law is set to enter into force on the first day of the third month following its publication in the Luxembourg Official Journal, i.e., during Q4 2023.

It took more than ten years to finally adopt the Law, as it was originally part of the Bill of Law n°6539 to preserve businesses and modernize bankruptcy regulation, which was introduced on 1st February 2013 and then split in two parts:

    • Bill of Law No. 6539A the subject of the following article; and
    • Bill of Law No. 6539B creating the procedure for administrative dissolution without liquidation which was adopted by Parliament on 18th October 2022.

The Law aims at transposing Directive (EU) 2019/1023 of the European Parliament and of the Council of 20th June 2019 on preventive restructuring frameworks as well as at modernizing Luxembourg’s legal framework on insolvency law by granting, inter alia, a second chance to companies in financial difficulties.

2. Applicability

Pursuant to art. 2 of the Law, it only applies to:

    1. Traders (commerçants) who are natural persons within the meaning of art. 1 of the Luxembourg Commercial Code;
    2. SNC; SCS; SCA; SA; Sàrl; SCSp; SC and SE;
    3. Craftsmen (artisans); and
    4. Civil companies,

(Together, the “In-Scope Entities”)

According to the provisions of art. 3 (i) Investment firms; (ii) Insurance and reinsurances companies; (iii) undertaking for collective investments; (iv) Specialized investment funds; (v) venture capital investment companies;(vi) Pension funds; and(vii) RAIF fall expressly out of the scope of application of the Law.

3The key provisions of the Law

The institutions involved in the legislative procedure, such as the Chamber of Commerce (Chambre de Commerce), noted, in the opinions they rendered that the Law constitutes a significant improvement in the planned liability regime for managers and is a good step towards the grating of a second chance.

The Law introduces important procedures such as, inter alia:

  1. The detection of companies in difficulties.
  2. The reorganization by mutual agreement.
  3. The Judicial reorganization procedures.

In addition to the main procedures listed above, the Law also introduces (i) new procedures regarding conservatory measures, such as the conciliation, and (ii) amendments to the bankruptcy -related provisions.

📍The detection of companies in difficulties

Under chapter 2 of the Law, the legislator introduces provisions regarding the detection of companies in difficulties and companies likely to be assigned for bankruptcy.

The purpose of these provisions is to enable the Ministry of Economy and the Ministry having the Middle Class in its competences to detect In-Scope Entities facing difficulties and to invite them to discuss about possible reorganization measures.

The preventive aspect of the Law will therefore consist of enabling these two ministries, based on the information at their disposal, to identify and contact In-Scope Entities likely to be in difficulty.

Once an In-Scope Entity in difficulty has been identified, the Minister may invite it to discuss the state of its business and inform it of the available reorganisation measures.

Similarly, it is within the competences of these two ministries to appoint, at the request of the In-Scope Entity facing difficulties, a company conciliator (conciliateur d’entreprise) to (i) assist the debtor in the preparation and conclusion of an out-of-court agreement with creditors, or (ii) obtain the creditors’ consent on a reorganisation plan, or (iii) achieve a business/asset transfer.

The mission of the conciliator can be both inside and outside a judicial reorganization procedure.

Furthermore, the Law also introduces a new assessment unit for companies in difficulty (Cellule d’évaluation des entreprises en difficulté).

This unit will be responsible for assessing the appropriateness, for an In-Scope Entity, to file for bankruptcy and it will be composed by five members nominated by the Ministry of Economy.

The Law defers further provisions regarding the functioning and the organisation of the unit to a Grand-Ducal regulation (règlement grand-ducal).

📍 Reorganization by mutual (out-of court) agreement

Chapter 4 section 2 of the Law also introduces a procedure enabling a distressed In-Scope Entity to seek to reach an out-of-court agreement with all its creditors or at least two of them, with or without the assistance of a conciliator, for the reorganisation of all or part of its assets or activities.

The debtor may request that such agreement be judicially homologated. Such homologation by the court gives to the agreement direct enforceability and sets aside the application of certain statutory claw-back provisions. 

📍 The judicial reorganization procedure 

According to the provisions of the Law, the debtor may also apply for a judicial reorganization procedure. The purpose of such judicial reorganization procedure is to preserve, under the control of the judge, the continuity of all or part of the assets or activities of such debtor.

The Law provides for three different judicial reorganisation proceedings depending on the intended objective:

    • Mutual agreement – The debtor intends to obtain a stay (sursis) to conclude a mutual agreement. The proceeding is judicial compared to the above-mentioned reorganisation by mutual agreement (out-of-court procedure).
    • Collective agreement – The debtor intends to reach a collective agreement (accord collectif) with some of its creditors on a reorganisation plan.
    • Transfer by court order – All or part of the assets or the business of the debtor is transferred, by court order, to one or several third parties. This proceeding may be voluntary and involves employees and employee representatives.

⤵⤵ Procedural aspects

The procedure for the opening of a judicial reorganisation procedure established by the Law is particularly detailed and complex.

Some key elements are:

      • Until the Court has ruled on the request for judicial reorganization proceeding, no bankruptcy, judicial liquidation or enforcement measures (with exceptions) can be declared or taken. The court may pronounce the suspension thereof, at the express request of the debtor in his petition for judicial reorganization. The application for suspension of the sale shall have, in principle, no suspensive effect.
      • The court shall examine the filing for the judicial reorganization proceeding, within fifteen days from its deposit at registry of the court (depot au greffe) and fix a date for the hearing of the debtor.
      • At least three days before the hearing the debtor is summoned to appear before the court.
      • After (i) having review the report of the delegated Judge, and (ii) within eight days from when it finished to examine the filing, the court shall render its judgment on the opening of the judicial reorganization proceedings.
      • The judgment ruling on the application to open the judicial reorganization may not be subject to opposition, but it may only be appealed within eight days from its notification to the debtor.
      • If all the prerequisites are fulfilled, the court shall declare the judicial reorganization procedure open and determine the duration of the stay (sursis) which may not exceed four months.
      • In the event of serious and characterized misconduct or manifest bad faith on the part of the debtor or one of his organs, the court may, at the request of any interested party or of the public prosecutor chose a provisional administrator for the duration of the stay (sursis).
      • The enforcement of financial collateral arrangements falling within the scope of the Law of 5 august 2005, as amended (the “Financial Collateral Act”) is not affected and remains possible during this suspension period.
      • The application for or commencement of the judicial reorganization procedure shall not terminate the contracts in progress or the terms of their performance.
      • Penalty clauses, including interest rate increase clauses, intended to cover potential damages suffered because of non-compliance with the main undertaking, remain ineffective during the stay period and until the full implementation of the reorganization plan as far as the creditors included in the plan are concerned.
      • A claim arising from current contracts with successive performances is not subject to the stay, insofar as it relates to performances made after the judgment opening the judicial reorganization proceedings.
      • New liabilities are considered as being debts of the insolvency estate.

4. Final remarks

The impact of the new Law on the day-to-day life of companies and managers are hard to assess. Indeed, in particular it will take some time to evaluate if the Law achieved its aim of granting a second chance to the debtor.

The Law introduces new procedures which will require intense educational effort to make sure In-Scope Entities, stakeholders and creditors are aware of the various options and their effects.

For more information or assistance on this topic, please do not hesitate to contact our Corporate team at the following address:

Samia RABIA, Partner Brouxel and Rabia Luxembourg Law Firm
Miroslava DUDAS
Eric Jungblut, Brouxel & Rabia Luxembourg Law Firm
Marco David, Associate, Brouxel & Rabia Luxembourg Law Firm - Corporate, Commercial, Criminal, Dispute, Litigation, Italian Bar