The Restructuring Review - 11th edition - Luxembourg Chapter 2018

I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

Situated at the crossroads between Belgium, France and Germany, Luxembourg is a highly stable country and has registered relatively consistent growth rates in the last two years with a GDP growth of 2.3 per cent in 2017 (compared to 3.1 per cent in 2016). Economists also forecast a GDP growth rate of 4.6 per cent in 2018.2

In Luxembourg, bankruptcy proceedings are currently the most common insolvency proceedings, while reorganisation proceedings remain rarely used in practice or are often used too late to avoid bankruptcy. In 2017, the number of bankruptcy proceedings remained stable with a total of 988 judgments (compared to 1,039 in 2016).3 In contrast, approximately 420 bankruptcy proceedings were opened by the Luxembourg District Court during the first half of 2018, thus reflecting a slight downward trend in 2018.

In this context, the business sector most affected by the high bankruptcy ratio is the services sector.4 These figures reflect the structure of Luxembourg's economy, which is still led by the banking and financial sector. Around 150 credit institutions are established in Luxembourg. Some multinational companies, such as ArcelorMittal, Goodyear, DuPont, SES or Ferrero have chosen to successfully establish their European headquarters in Luxembourg. In recent years, multinational companies active in the high-tech and e-commerce industries have also decided to set up their European or international headquarters in Luxembourg.

Regarding Luxembourg reorganisation proceedings, few were opened in 2017. Only one controlled management proceeding was opened in 2017, and was followed by a bankruptcy proceeding.

After the 2007-2008 crisis, proceedings were opened against several credit institutions with established subsidiaries or branches in Luxembourg, including among others some Icelandic banks (Kaupthing, Glitnir Bank, Landsbanki) as well as Lehman Brothers and Espirito Santo.

II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK

The Luxembourg legislative framework makes a distinction between proceedings involving the winding up of the debtor (bankruptcy proceedings),5 and proceedings aiming at the reorganisation of the debtor: controlled management,6 composition with creditors to avoid bankruptcy7 and suspension of payments.8

Of the above, controlled management is the most-used reorganisation proceeding. Suspension of payments and composition with creditors have rarely been used successfully in the past decades.

It must be added that specific insolvency regimes govern credit institutions, insurance undertakings and investment funds, for example:

the amended law of 18 December 2015 on the resolution, reorganisation and winding-up measures of credit institutions and certain investment firms; the amended law of 7 December 2015 on the insurance sector; the amended law of 17 December 2010 relating to undertakings for collective investment (UCIs); the amended law of 13 February 2007 on specialised investment funds; the amended law of 12 July 2013 on alternative investment fund managers; the law of 23 July 2016 on reserved alternative investment funds; and the amended law of 15 June 2004 relating to the investment company in risk capital (SICAR). i Winding-up proceedings

Bankruptcy

Conditions for opening

Debtors who carry out commercial activities and who make a profession out of these activities may be declared bankrupt.

Two conditions have to be met cumulatively for a trader to be considered bankrupt: (1) he or she can no longer pay debts as they fall due (i.e., he or she is in a situation known as cessation of payments); and (2) he or she is no longer being granted credit.9

The cessation of payments means the debtor is unable to meet his or her commitments.10 It implies that unpaid debts are certain, liquid and have fallen due on the day on which the bankruptcy judgment is delivered.11 It is not necessary that the debtor has ceased all his or her payments. The only relevant issue is to establish whether the default in payment to certain creditors is temporary or permanent. In the latter case, the existence of a single debt may lead to the cessation of payments.12 Inversely, temporary financial difficulties would not be sufficient.13

The loss of creditworthiness may result from the inability to raise credit or from the creditors' refusal to accept any further delay in paying back the debt.14

Procedure

The district court with jurisdiction may declare the debtor bankrupt upon the request of: (1) one or more creditors; (2) the public prosecutor; (3) upon the declaration of the cessation of payment by the debtor himself or herself; or (4) ex officio by the court.

The proceeding is carried out by a receiver under the supervision of a bankruptcy judge, who are both appointed in the bankruptcy judgment. The receiver will have the judgment published in summary in the newspapers designated by the court.

The receiver represents both the debtor and the body of creditors.

The receiver prepares an inventory of all of the debtor's assets. If it appears that the assets are insufficient to cover the costs of the bankruptcy proceeding, the court may upon request of the receiver decide to end the proceeding immediately.

All creditors have to lodge a proof of their claim with the district court. The receiver decides together with the bankruptcy judge whether the declared claims have to be accepted or not. Creditors whose claims have been rejected may refer to the district court for judgment.

All assets of the debtor are realised either by private contract or by public auction as ordered by the court. The receiver seeks to obtain payment of all outstanding claims of the debtor.

The receiver administers and realises the debtor's assets and distributes the proceeds among the creditors on the basis of their rank and after the administrative costs and fees of the receiver are paid.

After all proceeds have been distributed among the creditors, the receiver submits a detailed report about the bankruptcy proceeding.

Effects

Upon the bankruptcy judgment, the debtor is no longer entitled to administer his or her assets or dispose of them. Any legal actions taken by unsecured creditors against the debtor are suspended. Certain preferential creditors are allowed to continue the proceedings they have initiated. Creditors benefiting from financial collateral arrangements or set-off and netting arrangements may exercise their rights (see Section II.iv).

The district court determines a hardening period (or suspect period), which covers the situation where the debtor, before having been declared bankrupt, was unable to meet its financial obligations and during which 'abnormal' transactions performed by the debtor may be declared void. Such clawback actions will be discussed below. In practice, the district court usually sets the hardening period to the legal maximum of six months prior to the bankruptcy judgment.

Agreements entered into by the debtor are not automatically terminated, with the exception of intuitu personae agreements, employment agreements and those including an insolvency termination clause. Generally any business activity of the debtor is stopped, but in certain cases the receiver may decide to continue the business temporarily.

After bankruptcy proceedings have started, the debtor can propose a...