Luxembourg introduces new restructuring procedures

A new law was voted on 19 July 2023 with the Luxembourg Parliament with the aim to improve and modernise the Luxembourg toolbox relating to insolvency proceeding law and to introduce restructuring procedures. At the same time, the law implements Directive 2019/1023 on restructuring and insolvency proceedings.

In a nutshell, the composition with creditors (concordat préventif de la faillite), the suspension of payment (sursis de paiement) and the controlled management (gestion contrôlée) which fell into disuse will be replaced by new procedures.

Who is concerned?

All commercial companies (including sociétés en commandite spéciale), business persons and civil companies, except credit institutions, investment firms, insurance and reinsurance companies, most of the companies of the financial sector (including investment funds) and law firms.

What are the key provisions?

Any debtor may propose to its creditors (at least two of them) an out-of-court arrangement (accord amiable) with the purpose to reorganise all or part of its assets or activities. This arrangement executed outside of legal proceedings would then have to be homologated by a court. The advantage of this procedure lies in the fact that if the debtor goes bankrupt despite the out-of-court arrangement, the transactions carried out under the arrangement will not be cancelled.

The law’s most innovative aspect is the possibility for a distressed debtor to initiate a judicial restructuring procedure. Three objectives may be pursued (which may vary for different segments of the business and change during the course of the proceedings): either (i) to obtain a standstill (sursis) to enable an out-of-court arrangement to be reached, or (ii) to obtain the agreement of creditors on a restructuring plan, or (iii) to enable any part of the assets or business of the distressed debtor to be transferred by court order.

The law provides for specific deadlines aimed at speeding up the procedure. Let’s take a closer look at the three objectives:

1. A standstill may be granted for four months (and may be extended). During this period, no enforcement of the debtor's claims may be pursued or exercised against its assets, no seizure may be carried out and the debtor may suspend the performance of his contractual obligations if the restructuring so requires (except for employment contracts and contracts for successive performance). If a bankruptcy is declared against the debtor, claims arising during the standstill period will be considered as debts of the bankruptcy estate but pledges may still be enforced.
2. In order to conclude a restructuring plan, the debtor will prepare a detailed plan for a maximum period of five years. The plan may include a maximum 24-month suspension of payment. Concerned creditors will vote on the plan which will then have to be homologated by a court.
3. A court-appointed agent (mandataire de justice) will organise and complete the transfer of assets or business. A suspension of payment may also be granted.

In conjunction with these new procedures, the law provides for alarm mechanisms in order to detect distressed debtors.

What will the impact be?

The law will enter into force on the first day of the third month following its publication, probably on 1^st November.

We will probably have to wait several years to measure the impact of this long awaited reform on the Luxembourg economy but practitioners are eager to discover these new tools to assist their clients in restructuring of their corporate structures.