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10 June 2020 / news

Restructuring & Insolvency Q&A: liability risk

The restructuring & insolvency Q&A series provides a comprehensive overview of some of the key points of law and practice of the regulatory environment in Luxembourg. Today's chapter focuses on liability risk.

What duties do the directors of the debtor have when the company is in the “zone of insolvency” (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

Managers/directors of a Luxembourg company are obliged to file for bankruptcy within one month of the insolvency test being met. Upon entering into the ‘zone of insolvency’, the directors of a Luxembourg company may no longer act only in the interests of the company itself, but must take into account the interests of all stakeholders, including creditors.

Are there any circumstances in which the directors could incur personal liability in the context of a debtor’s insolvency?

Directors can be held liable under Luxembourg law for:

  • failure to perform their mandate;
  • misconduct in the performance of their mandate; and/or
  • damages caused by any fault to negligence.

Not filing for bankruptcy within the requisite timeframe constitutes serious misconduct, which could lead the court to impose civil or criminal liability on the directors and order the directors/managers to bear all or part of the debts of the company.

In addition to the general grounds of civil liability for breach of fiduciary duties, a director can be held liable for the company’s debts. Legal and de facto directors of a debtor can be held personally liable for its outstanding debts if bankruptcy results from serious and blatant faults for which they are accountable. Examples include entering into transactions that are completely disproportionate to the debtor’s financial position and lead to its bankruptcy. Such claims can be brought only by the receiver.

Is there any scope for any other party to incur liability in the context of a debtor’s insolvency (e.g. lender or shareholder liability)?

A debtor’s parent entity (domestic or foreign) can be held accountable to fully pay up those shares to which it has subscribed. It can also be exposed to liability if it has acted as a de facto/shadow manager, or if the creditors can successfully demonstrate that the parent entity and the debtor should be considered as one and the same party, in particular because of a commingling of assets.

The subsidiaries of a bankrupt group company might also bear exceptional or additional liabilities where the court considers that the group company would bear excessive risks disproportionate to its net assets and financial position, and takes the view that such company would never have taken such risks as a fully independent entity. For such additional liabilities to be incurred by the subsidiaries, it must be shown that those subsidiaries were compensated by present or future financial benefits.

Furthermore, a receiver can seek general tort damages from certain third parties that committed a fault that led to the bankruptcy or damaged the bankruptcy estate. Courts have recognised the validity of such actions against banks, accountants and auditors. A bank can, for instance, be held liable where it has misleadingly maintained the appearance of solvency of the debtor or where it has abruptly rescinded a credit facility.

Is it possible to effect a “pre-pack” sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

The assets of a debtor may be sold only with the prior consent of the relevant practitioner (eg, the receiver) and/or the court; and assets which are subject to a lien may be sold or disposed of only with the beneficiaries’ consent.

Is “credit bidding” permitted?

The assets of a debtor may be sold only with the prior consent of the relevant practitioner (eg, the receiver) and/or the court; and assets which are subject to a lien may be sold or disposed of only with the beneficiaries’ consent.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

First published in Mondaq



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