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26 May 2020 / news

Restructuring & Insolvency Q&A: restructuring

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 restructuring.

Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

Unfortunately, Luxembourg law has no express framework for informal out-of-court restructuring. That being said, there is nothing to prevent a company from seeking contractual arrangements with its creditors to the same effect. Most informal workouts involving Luxembourg entities or instruments are governed by foreign law.

What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

A formal financial reorganisation can be effected in Luxembourg through suspension of payments (sursis de paiements), controlled management (gestion contrôlée) or composition with creditors (concordat préventif de faillite). These proceedings tend to be lengthy and costly, and lack the desired flexibility; as a result, they are seldom used by Luxembourg companies.

Note further that none of the following rescue proceedings will affect the rights of a secured creditor benefiting from a security under the Collateral Law.

Suspension of payments: This procedure, which can be initiated only by the debtor, allows a commercial company which faces temporary liquidity difficulties to avail itself of a stay until its financial liabilities can be met. An application for suspension of payments is made by filing a request with the district court and the Superior Court of Justice in Luxembourg.

A suspension of payments will be granted only if:

  • the debtor’s temporary financial difficulties are due to extraordinary and unexpected circumstances and the debtor has sufficient means to pay off all its creditors; and
  • the debtor is in a situation where it appears likely that it can re-establish a proper balance between its assets and liabilities.

The court has the power to grant a temporary stay either immediately or at a later stage of the proceedings. However, a suspension of payments requires:

  • the consent of a majority of creditors representing at least 75% of the debtor’s liabilities; and
  • the approval of the Superior Court of Justice.

This is not, per se, a debtor in possession proceeding and the relevant court order will appoint one or more commissioners to supervise the management of the company during the suspension of payments period.

Controlled management: A commercial company may also apply for controlled management, the purpose of which can be either:

  • to reorganise and restructure its debt and business; or
  • to realise its assets in the best interests of its creditors.

This procedure cannot be initiated by creditors and may be initiated only where the debtor files an application before the district court sitting in commercial matters. To be eligible for controlled management, the debtor must be acting in good faith and must demonstrate that:

  • its creditworthiness is impaired;
  • it is facing difficulties in meeting all of its commitments; and
  • its creditors are contemplating enforcement proceedings.

For an order for controlled management to be granted, more than 50% of the creditors (in number) representing more than 50% of the debtor’s outstanding debts must approve the plan, which in turn must be approved by the court, and any reorganisation plan must take into account all interests at stake and comply with the ranking of privileges and mortgages. The approved reorganisation plan will consequently be binding on all creditors, including dissenting creditors, and creditors that abstain from voting are deemed to have consented.

Composition with creditors: This final formal restructuring procedure available under Luxembourg law aims to avoid bankruptcy by allowing a debtor facing financial difficulties (but not yet meeting the criteria for insolvency) to negotiate a settlement (in whole or in part) or a rescheduling of its debts with its creditors. Having successfully renegotiated the terms of its debts with its creditors, the debtor must then apply to the district court sitting in commercial matters for approval of the arrangement.

To be eligible for a composition with creditors order, the debtor must:

  • be deemed by the court (at its absolute discretion) to be unfortunate and acting in good faith; and
  • be unable to meet its obligations; or
  • have lost all creditworthiness.

Moreover, to succeed, the application:

  • requires the consent of 75% of the creditors;
  • must meet the legal provisions; and
  • must not be deemed by the court to be contrary to the public interest or the interests of the creditors generally.

The approval of a composition by the court makes it compulsory for all participating creditors. However, in practice, the benefits may be negligible, as only unsecured creditors and secured creditors that have waived their rights (or voted in favour) are bound by the composition; the composition has no effect on creditors that did not participate in the composition proceedings.

How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

The three formal restructuring proceedings available in Luxembourg can be initiated by the debtor only. Each requires a certain threshold of consent from creditors, which must be achieved in order for the application to be granted (alongside the other procedure-specific conditions which must be met).

What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?

The formal restructuring proceedings in Luxembourg are heavily court led, and both the debtor and creditors will lose control of the restructuring process to a significant degree. However, the creditors nonetheless retain some influence in each case, given that the consent of a certain percentage is required to approve an application.

In the case of a suspension of payments, the debtor cannot, without the commissioners’ prior approval, dispose of its assets or take any actions (including granting mortgages, making payments, borrowing money or receiving funds).

In the case of controlled management, once approved, the debtor cannot, without the commissioners’ prior approval and under penalty of nullity, dispose of its assets or take any actions (including granting mortgages, making payments, entering into obligations, borrowing money or receiving funds). In addition, the commissioners can compel the debtor to perform a given action.

In a composition with creditors, during the proceedings and until ratification of the composition, the debtor cannot dispose of assets, grant mortgages or enter into any commitments without the authorisation of the delegate judge. Once the plan has been adopted, the debtor must act within the framework of the plan until completion.

Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

All three restructuring proceedings provide for some form of stay.

In case of a suspension of payments, creditors can no longer enforce their rights against the debtor once the suspension has been granted by the court; however, proceedings initiated before the court granted the suspension are not affected (likewise, the supposition does not apply to taxes or other public charges).

In case of a composition with creditors, once approved, all enforcement measures (other than mortgages and security interest under the Collateral Law) are temporarily suspended.

In controlled management proceedings, once the court has confirmed the proceedings and appointed an investigating judge, a stay is imposed and enforcement proceedings are stayed, and creditors will generally be paid in accordance with the plan or from the proceeds available from realisation of the debtor’s assets.

What process do restructuring proceedings typically follow (including likely length of process and key milestones)?

The length of the different rescue proceedings under Luxembourg law differs from case to case and depends heavily on the debtor’s situation (including complexity and size) and the timeframes which the court sets. However, they are usually lengthy and can last several years, which is one of the reasons why they are seldom used.

What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.

In the case of a suspension of payments or controlled management, the directors of a Luxembourg company will remain in their position and will run the business, with the substantial caveat that most actions require the prior consent of the appointed commissioners. This is also true for the shareholders, which lose any (already very limited) influence over the proceedings, unless they also qualify as creditors.

Both unsecured and secured creditors (other than mortgagees and beneficiaries of collateral arrangements), on the other hand, can exert a limited degree of influence on the proceedings, as they will be entitled to vote at a creditors’ meeting in favour or against certain proposals.

Within the scope of the restructuring proceedings, employment contracts will generally remain in place and the restructuring should have no effect on employees of the debtor. The same will apply for any pension creditors – although it should be specified that the pension system in Luxembourg is split between public pensions and any additional independent private pension plans, which is why a restructuring should have no effect on pension creditors.

Once a suspension of payments is approved, the court will appoint one or more commissioners to supervise the directors/managers of the company. In controlled management, the court will also appoint one or more commissioners who will prepare and submit a reorganisation plan for the company.

Finally, as all three restructuring proceedings are very heavily court driven, the court will play an important role in each and will in each case be charged with deciding, on the merits, whether approval of the proceedings is warranted:

  • In case of a suspension of payments, the court will nominate one or more commissioners to supervise the suspension period;
  • In a controlled management scenario, the court-appointed commissioners will report to the court and will submit a reorganisation plan which the court will then have to approve, after it has been voted on by the creditors; and
  • In a composition with creditors, the court will need to approve the plan which has been voted on by the creditors.

Can restructuring proceedings be used to “cram down” and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is “cross-class cramdown” available?

Generally, Luxembourg restructuring proceedings, other than the composition with creditors, will bind dissenting creditors, as long as the requisite majority in each case has consented. However, this is of limited efficiency in practice, given that in many cases the relevant security assets will be outside the scope of such proceedings. Also, Luxembourg’s creditor class system is mostly limited to secured and unsecured creditors, and lacks the sophistication and formalism found in other jurisdictions.

Can restructuring proceedings be used to compromise secured debt?

Generally, Luxembourg restructuring proceedings, other than the composition with creditors, will bind dissenting creditors, as long as the requisite majority in each case has consented. However, this is of limited efficiency in practice, given that in many cases the relevant security assets will be outside the scope of such proceedings. Also, Luxembourg’s creditor class system is mostly limited to secured and unsecured creditors, and lacks the sophistication and formalism found in other jurisdictions.

Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

The restructuring proceedings under Luxembourg law do not specifically provide for contracts to be set aside or repudiated by the debtor without the counterparties’ consent. There is no equivalent to the company voluntary arrangement in the United Kingdom, for instance.

Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

The restructuring proceedings under Luxembourg law do not foresee any specific mechanism by which liabilities of third parties may be released. That being said, any debtor may reach an out-of-court settlement with one or more creditors in order to achieve such a release of a third party from its liabilities, either as part of restructuring proceedings or independently thereof.

Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is “DIP financing” available)?

No. That said, contractual subordination is recognised in Luxembourg and the parties (debtor, creditors and new money lenders) may choose to contractually grant preference to a new money lender as part of a debt restructuring.

How do restructuring proceedings conclude?

A suspension of payments will end either on the date determined by the supervisory judge or if an application to revoke the suspension by a creditor is granted.

If controlled management succeeds, the debtor will be able to retain control of its business; if it is unsuccessful, the debtor will simply be declared bankrupt.

A composition with creditors will end if:

  • the financial situation of the debtor improves;
  • the court annuls the composition; or
  • the debtor is declared bankrupt.

 

 

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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