Restructuring and insolvency matters

Restructuring and insolvency matters

The deadline applicable to filing for bankruptcy under Article 440 of the Commercial Code is no longer suspended. In the context of the Covid-19 crisis, this deadline had been exceptionally suspended until 30 June 2022.

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 one 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).

Please also note that creditors may 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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Since 1st July 2021, access to short-time working is defined in accordance with the legal provisions set out in the Labour Code, Book V, Title 1: "Preventing redundancies and maintaining employment".

More information can be found under the following link:

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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.

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 (