Restructuring & Insolvency Q&A: insolvency
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 insolvency.
What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
The most common proceedings initiated in Luxembourg are bankruptcy proceedings. The aim of bankruptcy proceedings filed against commercial companies in Luxembourg is the winding-up of the debtor’s assets in the best interests of the bankruptcy estate and its creditors.
A company can also be subject to compulsory liquidation, which may be ordered by a court on the application of the state prosecutor where the company has pursued illegal activities or has seriously infringed any laws applicable to commercial companies generally.
How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?
A bankruptcy petition may be filed with the competent court (the district court sitting in commercial matters):
- by the directors/managers acting on behalf of the company;
- by an unpaid creditor; or
- at the court’s own volition.
Under Luxembourg law, managers/directors are obliged to file for bankruptcy within one month of the debtor meeting the conditions of the insolvency test described below; otherwise, they may be held criminally and civilly liable.
The substantive test for insolvency, under Luxembourg jurisprudence, is where a commercial company both:
- has ceased payments and is unable to meet its commitments (ie, it cannot or does not fully pay its due, certain and liquid debts as they fall due); and
- has lost its creditworthiness (ie, it is unable to obtain credit from any source).
If a bankruptcy petition is filed, the court will consider the insolvency test; if the two criteria are met, it will declare the debtor bankrupt and open bankruptcy proceedings. Once the bankruptcy proceedings have been opened,the managers/directors are removed from office and a bankruptcy receiver is appointed by the court; the debtor, shareholders and creditors have no influence or control over the receiver.
What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
The debtor loses control over the proceedings, as its directors/managers are removed and a bankruptcy receiver is appointed by the court to manage the bankruptcy estate on the opening of bankruptcy proceedings. Likewise, the creditors have no control or influence over the proceedings following the appointment of the receiver, or over the receiver’s actions. The receiver may or may not consult the creditors or shareholders as part of the liquidation; it has very extensive powers in deciding how to best conduct the liquidation. There is no credit bidding or similar procedure under Luxembourg law and there is no obligation to conduct public auctions or similar.
The receiver, who effectively takes control of the debtor, does so under the supervision of a supervisory judge and in practice will often seek the judge’s authorisation before divesting any assets, contracting loans or similar. It is difficult for creditors or any third parties to challenge such decisions.
Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Once insolvency or bankruptcy proceedings are opened, a stay is imposed. However, secured creditors, such as mortgagees or beneficiaries of a security under the Collateral Law, can continue to enforce their rights under the mortgage or security despite the opening of bankruptcy proceedings, as their rights are not affected by the opening of bankruptcy proceedings.
What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
Bankruptcy proceedings typically last between one and three years. Naturally, they can take much longer in complex cases or where litigation is involved.
The three key milestones in bankruptcy proceedings are:
- the appointment of a bankruptcy receiver;
- the realisation and distribution of any proceeds to the creditors; and
- the court judgment closing the bankruptcy proceedings.
What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.
Once bankruptcy proceedings have been initiated, the debtor and its directors/managers (who are removed from office) lose control of the company and the process. The same is also true for the shareholders, which in principle have no influence on the process.
Both unsecured and secured creditors (other than mortgagees and beneficiaries of financial collateral arrangements under the Collateral Law) will also lose any control over the process; their rights are limited to their share of the proceeds from the realisation of the debtor’s assets based on the distribution priority (unless the receiver decides to involve them in the process at its own discretion).
Upon a declaration of bankruptcy, any employment contracts of the company are terminated with immediate effect (unless the receiver decides to let some or all of them continue to run to benefit the estate), and the employees are legally entitled to:
- their salary for the month in which the declaration is made and the following month; and
- compensation of 50% of their monthly salary for the statutory notice period.
Court costs and certain social security claims are super-privileged claims by statute.
The receiver is appointed when the proceedings are opened and becomes responsible for realising the assets and distributing any proceeds. The court which appoints the receiver will supervise the process and the actions of the receiver.
What is the process for filing claims in the insolvency proceedings?
Once bankruptcy proceedings have commenced, any individual legal actions against the debtor – whether initiated by secured or unsecured creditors – are suspended and the creditors must file proof of claim with the court. That said, ‘bankruptcy proof’ secured creditors (eg, pledgees under the Collateral Law and/or mortgagees) are not affected by the bankruptcy filing, and may act freely in relation to their security/mortgage and take any enforcement action irrespective of the bankruptcy proceedings.
How are claims ranked in the insolvency proceedings? Do any claims have “super priority” and is there scope for subordination by operation of law (e.g. equitable subordination)?
As discussed, any security under the Collateral Law and mortgages are considered bankruptcy remote and will not fall within the bankruptcy estate.
In general, the priority of preferential rights in bankruptcy proceedings in Luxembourg can be split (and ranked) into three categories:
- creditors of the bankruptcy (including legal expenses incurred after the opening of bankruptcy proceedings in the interests of all creditors);
- preferred creditors of the bankruptcy estate, in the following order:
- preferred creditors by law (eg, certain employee claims and claims in favour of Luxembourg tax and social security authorities); and
- creditors with non-bankruptcy proof security (both contractual and judicial in nature); and
- ordinary unsecured creditors.
As Luxembourg law does not recognise the concept of equitable subordination, shareholders are treated as subordinated creditors by virtue of holding equity and not debt; but if they have other contractual arrangements in place as creditors, they will generally qualify as ordinary creditors.
What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
On becoming subject to bankruptcy proceedings, the debtor’s contracts will remain in force (except for intuitu personae contracts and contracts that specifically stipulate bankruptcy as a termination event). The receiver cannot, in principle, reject or disclaim any contracts and must comply with their terms. However, upon establishing that this is in the interests of the creditors at large, the bankruptcy receiver may request that the insolvency judge terminate an agreement to which the debtor is a party.
Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?
A debtor’s pre-insolvency transactions can be affected by bankruptcy proceedings if they were concluded during the claw-back period. The court will determine the date on which it deems the cessation of payments to have occurred and then determine the length of the claw-back period, which cannot be longer than six months from the bankruptcy declaration.
Certain payments made, as well as other transactions concluded or performed, during the claw-back period can then be subject to cancellation by the court (if requested by the receiver). The following transactions may be set aside or declared null and void upon request by the receiver:
- contracts entered into by the debtor, if its own obligations are significantly more onerous than the obligations of the other party;
- the payment of debts that have not fallen due;
- any payment made in kind (eg, asset transfer) by the debtor in respect of debts that are due (excluding cash and negotiable instruments);
- the granting of a security interest for antecedent debts (ie, for past consideration); and
- the payment of certain debts that have fallen due, but that arose during the claw-back period (or the 10 days preceding it).
Additionally, certain payments made for matured debts, as well as other transactions concluded for consideration, during the claw-back period are subject to cancellation by the court if they were concluded with the counterparty’s knowledge that the debtor was insolvent at the time.
Finally, the receiver may, without any limitation in time, challenge any transaction or payment made in fraud of the creditors’ rights.
There are a few statutory exceptions to the above (eg, the Collateral Law); and special provisions under the Law on Securitisation also govern the insolvency of an assignor when future claims are assigned to a securitisation undertaking.
How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
Once the receiver and the delegate judge have disposed of all assets of the debtor and distributed the proceeds, the bankruptcy proceedings are concluded by judgment of the court. Unpaid liabilities will not, in principle, survive the closure of bankruptcy proceedings.
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
Anne-Marie NicolasPartner Attorney at Law / Avocat à la Cour
Anne-Marie Nicolas, partner, is a member of the Banking & Finance Practice Group in our Luxembourg office. She co-heads the Luxembourg Restructuring Team. Anne-Marie focuses on secured lending, including acquisition finance and real estate finance, as well as debt restructuring.T: +352 466 230 314 E: [email protected]
Richard SteichenAssociate Attorney at law / Avocat à la Cour
Richard Steichen, associate, is a member of the Banking & Finance Practice Group in our Luxembourg office and a member of the Restructuring Team. He focuses on secured lending and financial restructurings.T: +352 466 230 492 E: [email protected]