Restructuring and insolvency matters
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A Luxembourg company is considered bankrupt if it fails the following tests: (1) it can no longer pay its debts which are due and payable (“liquidity” test) and (2) it has no possibility to raise financing (“creditworthiness” test). These two conditions must be met cumulatively.

Therefore, if you are able to negotiate payment terms with your company’s creditors or if your company remains in a position to seek further equity or debt financing to cover its liabilities which are immediately due and payable, a bankruptcy filing will not be necessary at this stage.

If, however, your company is deemed bankrupt because if fails both the “liquidity” test and the “creditworthiness” test, its managers/directors will need to declare such insolvency within a month of the company ceasing its payments to its creditors.

Certain criminal sanctions and prohibitions to take on further board mandates may result from a late filing for bankruptcy. We accordingly recommend to reach out to your legal advisor early in order to (1) determine the exact starting point of the above time period, which will require a sometimes detailed analysis of the applicable facts and circumstances and (2) prepare the bankruptcy filing itself, which will need specific background information to be gathered, accounting documentation to be produced and a board meeting to be held (among others).

Update : On 1 April 2020, the Luxembourg government adopted a Grand Ducal decree suspending the obligation on companies to file for bankruptcy within one month of ceasing payments to creditors.

A similar measure had recently been announced in Germany, and we are satisfied that the Luxembourg government has decided to take the same approach with respect to Luxembourg companies. The duration of the suspension of the bankruptcy obligation is not yet known, but the relevant legislation is expected to be adopted shortly. We also hope that the well-advanced draft legislation on reorganisation of companies facing financial difficulties, and the implementation into Luxembourg law of Directive 2019/1023 on restructuring and insolvency, will progress at an accelerated pace given the severe economic harm to businesses resulting from the Covid-19 crisis.

Please note, however, that creditors can still file petitions for the bankruptcy of Luxembourg debtors, whereby courts will give precedence to urgent claims (e.g. in respect of companies with a large number of employees).

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Commercial companies other than banks, insurance companies or regulated investment funds can in theory have access to three separate forms of reorganisation procedures, one of which only remains used in practice, i.e. controlled management. Controlled management is a procedure under which the management of the company is placed under the control of one or more commissioners designated by a court and its aim is to allow either a reorganisation or an orderly winding up of a company.

To be qualified for controlled management, a company must establish that (1) its credit has been undermined in such a manner that the company is not likely to obtain further credit from its creditors, (2) the complete execution of its obligations is comprised such that the company believes that it will soon be unable to pay its debts, and (3) controlled management will facilitate reorganisation of the company or will enhance the liquidation of the company’s assets. However, most importantly, it is not available for companies that are already in a state of bankruptcy, which the court administering the controlled management proceedings is entitled to verify at all stages of the procedure.

In the course of the controlled management proceedings, a report will be prepared by the court-appointed commissioner(s), containing either a reorganisation plan or a liquidation plan. Creditors will afterwards be convened to vote on the proposal. The approved plan will finally need to be sanctioned by the district court.

It is worth noting that the legal framework around judicial reorganisation procedures is being materially reshuffled, creating what is expected to be much more effective reorganisation tools, with final legislation expected to be adopted around the end of the year. Please see the following briefing notes for your reference: Restructuring & Insolvency – Briefing note 1/2 and Restructuring & Insolvency – Briefing note 2/2.

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Unlike judicial procedures, a non-judicial restructuring will often require the consent of all creditors (except in certain specific cases, e.g. where bondholders are tied between themselves by a majority vote).

A number of consensual restructuring measures may be envisaged where creditors consent to them. Those that we most often see and put in place are a contractual standstill (i.e. temporary suspension of payments), debt rescheduling (i.e. an extension of the term of the debt), a reduction of interest rates, a partial write-off of the principal and/or interest, a debt-for-equity swap, the advance of “super senior” new debt, the contribution of fresh equity, other forms of rescue financing and sales of assets or even debt-for-assets swaps.

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If on a going concern basis directors must look at the long-term benefit of the company in every decision they make on its behalf, the dynamic is rather different in a situation of financial difficulties, where the scope of their fiduciary duties may drastically change:

  • First, directors will be expected to take a shorter-term perspective than outside financial difficulties, focusing e.g. on refinancing the due and payable obligations of the company, negotiating payment terms with the company’s creditors, disposing of certain assets to settle liabilities (including salaries), i.e. in a nutshell keeping the business afloat in the immediate future.
  • Second, the frequency of board meetings should be increased as the crisis intensifies, with the board taking preventive action as much as possible to avoid the bankruptcy.
  • Third, in a situation of financial difficulties, board members are subject to certain additional duties, such as convening a general meeting of shareholders when the company’s net equity becomes negative by more than half, then three quarters of the share capital (at least for certain corporate forms) or filing for bankruptcy within a month of the company having ceased its payments to creditors (as discussed above).

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Regarding the liability of board members, here again, the situation is different in a normal fashion or when financial difficulties have made the business bankrupt. In the former instance, directors may generally be held liable if they committed an error in discharging their management duties that a normally prudent and diligent director, placed under the same circumstances, would not have committed. In a situation of bankruptcy however, the Luxembourg court which opened the bankruptcy proceedings may board members liable under various circumstances:

  • First, a board member may be held liable for all or part of the liabilities of the bankrupt company in case there are insufficient assets to settle all such liabilities and the board member has contributed to the occurrence of the bankruptcy through his/her gross negligence.
  • Second, a director may be declared personally bankrupt, with the liabilities of the bankrupt company added to his/hers, in case he/she acted under the cover of the bankrupt company for his/her personal benefit, used the bankrupt company’s assets as if they were his/her own or misused his/her authority in order to pursue a loss-making activity for his/her personal benefit and without a reasonable chance of avoiding the bankruptcy.
  • Third, a director who has contributed through a serious and characterized offence to the bankruptcy may also be prohibited by courts to exercise any commercial activity or hold directorships or other similar mandates.

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Various measures have been implemented in Luxembourg to support businesses during this difficult period. Among such measures is the possibility for companies, under certain conditions, to resort to short-time working schemes (chômage partiel) depending on the nature of the difficulties encountered and under certain conditions to protect employment and prevent dismissals for economic reasons.

There is a specific short-time working scheme in case of force majeure, that can be applied to employees who are not covered by a medical certificate of incapacity for work and who can no longer be employed at all or can no longer be employed on a full-time basis, when the company cannot ensure the continuation of its normal economic activity, for reasons related to the Coronavirus, or if there is a significant drop in demand from customers or users due to the Coronavirus. It applies in principle to all economic sectors where the causes of economic difficulties are directly related to the Coronavirus.

If the Employment Fund (Fonds pour l’emploi) accepts an employer’s request to benefit from a short-time working scheme, 80 % of the salaries normally received by the employees (capped at 250 % of the minimum wage for an unskilled worker) during the non-work periods with a maximum of 1.022 hours per employee and per year will be covered. In order to apply for the scheme, an online application must be introduced.

The government confirmed that partial unemployment will be maintained until 31st December 2020 and that no employee will receive less than the social minimum wage during partial unemployment.

In addition, after the end of the emergency state on 24 June 2020, companies can continue to apply for short-time work but with new terms and conditions. Four options (described under point 13 below) to apply for short-time work are accessible to companies.

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For the time being, there are currently no legal or regulatory provisions which would prevent a creditor from recovering or trying to recover its claim(s) during the crisis (e.g. by sending formal notices, initiating legal proceedings, attaching its debtor’s bank accounts, etc.). There may however be contractual impediments.

Bear in mind that the Luxembourg Courts are currently working at lower volumes and dealing with a reduced schedule of items, which may impact cases where their intervention is required (e.g. for interim relief measures). By and large, hearings on the pleadings will be postponed. Only those cases which are of particular urgency in light of the circumstances of each case will be maintained for hearings. Which cases are considered urgent will be determined by the court for interim relief, with respect to both pending and incoming cases.

Furthermore, further to Article 1 of the Grand-Ducal Regulation of 25 March 2020 suspending time limits in judicial matters and temporarily adapting certain other procedural modalities which was published the same day in the Official Gazette, the time limits prescribed in proceedings before the judicial, administrative, military and constitutional courts shall be suspended for the duration of the state of crisis. The Grand-Ducal Regulation also contains some provisions in certain specific matters such as in criminal matters, lease matters or as regards seizures on immovable property.

It is also important to remember that companies in critical financial condition that do not receive deferrals of payments to their creditors may eventually have to be declared bankrupt. Bankruptcy would put an end to a company’s activity, and thus preclude it from recovering after the crisis and paying its debts at a later stage.

Before taking action, therefore, creditors should verify on a case-by-case basis whether it is imperative to obtain payment of the claim immediately, or whether payment of the claim can be accepted in instalments, or even deferred. Ideally, the creditor should work with the debtor to find the best way to handle the situation.

We can assist you in choosing the right way forward, and with the follow-up measures your decision will entail (negotiating new payment terms with your debtor(s), enforcing the due and payable debts, etc.).

Your contacts for more details: Clara Mara-Marhuenda ( and Evelyne Lordong (