On 19 July 2023, the Luxembourg parliament passed bill no. 6539A on business preservation and modernisation of bankruptcy law.

This bill aims to modernise Luxembourg’s insolvency laws, implementing EU Directive 2019/1023 of the European Parliament and the Council of 20 June 2019 on preventive restructuring frameworks (the 'Business Preservation and Insolvency Modernisation Act' or 'BPIM Act').

The BPIM Act reforms the insolvency laws by implementing new mechanisms designed to ensure that distressed companies do not automatically resort to bankruptcy and are provided with support measures and tools to allow them to continue carrying out their activities. The BPIM Act also abolishes some outdated proceedings like controlled management (gestion contrôlée) and composition with creditors (concordat préventif de faillite) which were hardly used in practice. Finally, the BPIM Act amends some bankruptcy-related provisions of both the Luxembourg Commercial Code and the Luxembourg Criminal Code.

Two important points to note:

  1. The BPIM Act applies to special limited partnerships (sociétés en commandite spéciales) on top of other types of commercial or civil companies, traders (commerçants) and craftsmen (artisans)
  2. The lender-friendly protection awarded to Luxembourg collateral arrangements under the Act of 5 August 2005 on financial collateral arrangements will not be affected by any stay or suspension period under the BPIM Act and lenders will continue to be able to enforce their security interests

Preventive measures
The BPIM Act implements new preventive measures designed to detect financial difficulties at an early stage. The Minister of Economy and the Minister of Small and Medium Businesses are responsible for collecting information allowing for the identification of distressed companies. A new Business Evaluation Committee (Cellule d’Evaluation des Entreprises en Difficultés or CEvED), composed of three public authorities such as the Direct Tax Administration (Administration des Contributions Directes), the VAT Authority (Administration de l’Enregistrement et des Domaines) and the Social Security Authority (Centre Commun de la Sécurité Sociale) is created. The Business Evaluation Committee will be able to grant payment extensions to struggling businesses and provide recommendations aimed at preventive restructuring measures.

The largely voluntary reorganisation possibilities made available to distressed companies include both out-of-court and in-court (judicial) proceedings, adapted to the needs and size of distressed companies.

Out-of-court reorganisation
A distressed company can seek to reach an agreement on a payment plan with two or more creditors, aiming at reorganising all or part of its assets or activities. To that end, the distressed company is entitled to request the appointment of a business conciliator (conciliateur enterprises) to facilitate an amicable agreement. This agreement will then be certified by the District court sitting in commercial matters (Tribunal d’arrondissement siégeant en matière commerciale) upon petition of the distressed company. Should it be certified by the court, said agreement will become enforceable and claw-back provisions will not be applicable even if the creditors were aware of the company’s state of suspension of payments (cessation des paiements). The agreement will remain enforceable in the event of a subsequent bankruptcy even if it was concluded during the hardening period (période suspecte).

In-court reorganisation
The BPIM Act provides for three different in-court proceedings, depending on the situation at hand and intended goal:

1. Collective agreement
A distressed company that intends to reach an agreement with some of its creditors on a reorganisation plan (accord collectif) can petition the court to that effect.  The plan needs to present the current financial situation and the solutions proposed to resolve the difficulties. This new tool provides for a cross-class cram down mechanism allowing to secure a reorganisation plan that will bind dissenting creditor classes under specific circumstances. The collective agreement becomes enforceable when the court rules on the plan and, if the company does not comply with its terms, a creditor or the public prosecutor may request the court to repeal the agreement.

2. Court-ordered stay of payments
Under this option, a distressed company may apply to the court to obtain a stay of all payments on debts contracted prior to the application. This procedure gives the distressed company time to either negotiate a mutual agreement with some creditors or start collective agreement or court-supervised reorganisation proceedings. The maximum duration of a stay of payments is six months, and in order to avoid recurring proceedings, a company that has already applied for and obtained a stay may no longer do so for three years, unless it requests the total or partial transfer of its business or activities.

3. Court-supervised transfer 
This procedure is initiated either by the distressed company or the State public prosecutor. The court appoints a legal representative to organise the transfer of all or some of the distressed company’s assets to ensure the continuity of its business (or a part thereof) and job preservation by one or several third-party purchasers. The legal representative should identify the offer that will ensure preservation of the most jobs and present various offers to both the company and the court. The court must give its approval to the legal representative before the latter can proceed with the transfer.

Modernisation of bankruptcy
The BPIM Act further amends a few bankruptcy-related provisions of both the Luxembourg Commercial Code and the Luxembourg Criminal Code:

  • Bankruptcy proceedings can now be commenced by the State public prosecutor (on top of the debtor, its creditors or the court upon its own initiative)
  • Fraudulent bankruptcies are reclassified as an offence (délit) (and no longer a crime), allowing for an ease in prosecution and a more time-effective procedure 
  • The offences of both simple bankruptcy (banqueroute simple) and fraudulent bankruptcy (banqueroute frauduleuse) now apply to the debtor’s de facto directors
  • The statutory obligation for the directors of a distressed company to voluntarily file for bankruptcy is suspended as from the filing of an application for judicial reorganisation and until the end of the suspension period as determined by the court
  • The list of persons that can be appointed as bankruptcy receiver (curateur de faillite) is extended

The BPIM Act enters into force on the first day of the third month following its publication in the Luxembourg Official Gazette (Journal official du Grand-Duché de Luxembourg), which is expected over the course of the summer. We will inform you of the date of entry, once known.

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