Restructuring & Insolvency Q&A: legal framework
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 the legal framework.
What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
A number of statutory insolvency and restructuring proceedings are available in Luxembourg. These can broadly be split into two categories: rescue proceedings (which include suspension of payments, controlled management and composition with creditors), and insolvency proceedings (which include bankruptcy and compulsory liquidation). However, there has been no consolidation of these proceedings and they exist under different laws and governmental decrees.
There are also specialised procedures which apply to certain types of companies, such as regulated companies in the insurance and financial sectors and regulated investment funds.
What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
As Luxembourg is a member of the European Union, Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the EU Insolvency Regulation) has direct applicability in Luxembourg and judgments concerning insolvency proceedings made in EU and non-EU courts are, in principle, recognised in Luxembourg (Luxembourg recognises the universality of bankruptcies), without any need for a further court order (subject to certain conditions).
In addition to the EU Insolvency Regulation, Regulation (EU) 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels I Regulation) is also applicable in Luxembourg and may be of relevance in connection with restructuring proceedings.
Luxembourg has not adopted the UNCITRAL Model Law.
Do any special regimes apply in specific sectors?
The Luxembourg insolvency and restructuring tools apply only where a company is not subject to a more specific regime. Special insolvency regimes apply to regulated entities such as credit institutions and insurance undertakings, investment funds, securitisation vehicles and collective investment vehicles, including:
- the Law of 12 July 2013 on Alternative Investment Fund Managers, as amended;
- the Law of 23 July 2016 on Reserved Alternative Investment Funds, as amended;
- the Law of 15 June 2014 on Investment Companies in Risk Capital, as amended;
- the Law of 13 February 2017 on Specialised Investment Funds, as amended;
- the Law of 17 December 2010 on Undertakings for Collective Investment, as amended; and
- the Law of 22 March 2004 on Securitisation, as amended.
Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
Luxembourg is generally considered to be a creditor-friendly jurisdiction – albeit not due to its restructuring and insolvency laws, but rather in light of its very wide implementation of the Financial Collateral Arrangements Directive in the Luxembourg Collateral Law of 2005, as amended (the Collateral Law). The Collateral Law covers pledges and assignments of any financial instruments and receivables, and any security under the Collateral Law is considered to be ‘bankruptcy proof’ and is therefore a very popular option for creditors.
The Luxembourg insolvency and restructuring tools are somewhat outdated and cumbersome, and are often perceived as being value destructive, which makes them neither debtor nor creditor friendly. As in many other European jurisdictions, insolvency proceedings are court led, with neither creditors nor debtors being able to influence proceedings; while restructuring procedures tend to lack the desired flexibility, involve some form of publicity and are generally perceived as lengthy and costly.
How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?
In Luxembourg, statutory reorganisation proceedings are rarely used (and, where they are used, often come too late to stave off bankruptcy), and the most common proceeding is thus a filing for bankruptcy. In 2018 approximately 1,033 bankruptcy proceedings were opened, with most being filed in the trade and construction sectors; the country’s dominant financial services sector has remained relatively stable. Most proceedings filed in Luxembourg have little to no cross-border element and tend to be relatively simple.
Some of the highest-profile, most complicated proceedings filed in Luxembourg were opened in the aftermath of the financial crisis (2007–2008) against credit institutions and their branches or subsidiaries thereof (eg, Kaupthing, Glitnir, Landesbanki, Dexia, Fortis, Lehman Brothers and Banco Espirito Santo).
Recognising the need to modernise the Luxembourg insolvency and reorganisation landscape, on 1 February 2013 the government filed draft Bill 6539 on the preservation of business and the modernisation of the bankruptcy law. The draft bill includes various preventive, repressive, restorative and social provisions which aim to reduce, or at least stabilise, the recent increase of bankruptcies in Luxembourg. New measures include, in particular:
- the decriminalisation of fraudulent bankruptcy;
- an accelerated administrative dissolution procedure without liquidation, initiated by the state prosecutor; and
- an easing of the conditions required for a debt contribution action (action en comblement de passif).
However, the draft bill was heavily criticised by the Luxembourg Council of State, which questioned its feasibility and practicality. In response, the draft bill was comprehensively redrafted in March 2018 and it remains under discussion.
In light of the limited in-court restructuring tools available in Luxembourg, court-led proceedings (outside bankruptcy, where the courts appoint receivers and have significant experience of complex international cases) involving Luxembourg companies within international corporate groups are relatively rare. The professionals who specialise in debt restructurings in Luxembourg must thus be familiar with foreign in and out-of-court restructuring tools and processes as much as with the local landscape.
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]