Restructuring & Insolvency In Luxembourg - Staying Ahead Of The Curve

Trends and Developments

Exploring the Potential of Luxembourg's Restructuring Regime

As a key hub for international investments, Luxembourg established itself as a prominent European jurisdiction for restructuring and insolvency. The country's legal framework, particularly the law of 5 August 2005 on financial collateral agreements (the "Financial Collateral Law"), provides robust mechanisms for securing and enforcing pledges.

During the past few years, Luxembourg's restructuring and insolvency landscape has increasingly favoured out-of-court proceedings. It has been shaped around the so-called double LuxCo structures, which provide swift and court-tested security enforcement mechanisms, offering near bulletproof protection for secured lenders.

In 2023, Luxembourg transposed EU Directive 2019/1023 into national law via the law of 7 August 2023 on the continuation of businesses and modernisation of insolvency law, which became effective on 1 November 2023 (the "2023 Law"). With the reform of the insolvency framework in Luxembourg, there has been a growing interest in the in-court restructuring measures introduced by the 2023 Law – in particular, the judicial reorganisation procedure (réorganisation judiciaire) (JRP). International practitioners and clients have turned to Luxembourg to assess whether the 2023 Law has the potential to become a useful tool in implementing contentious restructurings within the EU.

During the past year, various decisions based on the 2023 Law have become available, shedding some light to the country's potential as a restructuring jurisdiction. Although some important questions remain unanswered, this article provides a critical overview of the most substantial lessons from available case law and expectations for the future.

Lessons from existing case law

Opening of JRP

The sole intended purpose of the JRP is to preserve the continuity of the assets or activities of the debtor under the supervision of the judge. Under the 2023 Law, three objectives can be pursued through the JRP. Debtors may launch a JRP for the purposes of:

• enabling an amicable agreement to be reached with their creditor(s);
• obtaining creditors' consent on a reorganisation plan (réorganisation judiciaire par accord collectif) (the JRP by collective consent (CC)); or
• transferring their assets or activities by a court order (the "judicial transfer").

Debtors may pursue a specific objective for each of their activities or portion thereof and may request the Luxembourg courts to change the objective pursued at any time during the stay.

The JRP is initiated with the filing of a petition (requête) by the debtor in line with the formalities set forth in the 2023 Law. As of the filing, and at least until the court rules on the petition for the JRP, no bankruptcy, judicial liquidation or administrative dissolution can be declared and the obligation to file for bankruptcy is therefore suspended. In addition, during this period and subject to limited exceptions, no enforcement action may be taken against the debtor's movable or real property as a result of the exercise of enforcement proceedings.

Consistent with a strict reading of the 2023 Law, case law has reinforced that the decision to commence a JRP is solely conditional upon:

• the petition of the debtor being submitted in line with the formalities set out in the 2023 Law (and, in particular, the required information and supporting documents); and
• the continuity of the business being threatened in the short or long term.

With regard to the first condition, if documents attached to the debtor's petition are incomplete, Luxembourg courts may reject the debtor's petition to open a JRP. The debtor can provide certain missing documents after the filing but at least two days before the petition hearing to ensure that the court has sufficient time to review the debtor's petition. If documents cannot be provided, a detailed explanation must be submitted by the debtor outlining the reasons for their unavailability.

Failure to provide the necessary documents or a valid justification within the required timeframe will result in the court rejecting the request to open a JRP, declaring the petition unfounded. However, in such a case, the debtor has the opportunity to rectify the situation by appealing the refusal decision and submitting the missing documents and justifications as part of the appeal process.

As regards the second condition, Luxembourg courts have repeatedly confirmed that the state of bankruptcy does not prevent the opening or continuation of a JRP. Recent case law has highlighted that the financial difficulty of the debtor must be temporary and that the debtor's long-term sustainability must be demonstrated. Debtors have cited reasons such as the war in Ukraine, real estate sector challenges and persistent high interest rates as justifications for financial difficulty.

If a debtor is clearly unable to ensure the continuity of all or part of its assets or activities, including when such debtor is subject to a JRP, filing for bankruptcy becomes the appropriate measure. Notably, the bankruptcy of a debtor during the execution of a reorganisation plan (as defined later in the article) is one of the events that results in a revocation of the reorganisation plan (which deprives it of any effect, except for payments and transactions already carried out).

As a result, the opening of a JRP can only be refused on the basis that one or both of the above-mentioned conditions are not met, subject to appeal. Although not explicitly provided in the 2023 Law, the available case law has highlighted that the debtor's good faith is not a condition for the opening of a JRP. However, there has been a positive correlation between cases where Luxembourg courts have decided to appoint a provisional administrator (administrateur provisoire) to substitute management and cases where the debtor's good faith appears questionable (as part of the condition of the condition of serious and aggravated faults).

An important protective feature of the JRP is the stay of the debtor's payments, which begins on the opening of the proceedings. The stay can last up to four months, with possible extensions up to a total maximum of 12 months. The debtor can make a recommendation as to the duration of the stay, but this is ultimately decided by the court. The duration of the stay must be determined so as to maintain a balance between the protection of the debtor and the rights of the creditors. To that end, Luxembourg courts have taken into account several factors, including the complexity of the case, characteristics of the business segment, the number of creditors, the complexity of the debt, and potential disputes with respect to the debt.

In addition, Luxembourg courts have agreed to extend the duration of stays (only) where the debtor was able to provide due justification for such stay, with courts making it clear that the purpose of the stay is not to save the debtor's time pending a possible cash inflow. For the purpose of justifying an extension of the stay, courts have considered factors such as ongoing negotiations and numerous meetings with the various stakeholders having taken place during the initial period of the stay. In a very recent decision, the court has clarified that if a JRP with different objectives has been successively opened, for the purpose of calculating the maximum extension period, the starting point of the stay will be the latest judgment opening a JRP.

Special caution is required where other companies of the debtor's group are co-debtors and/or personal security grantors, as the latter are not covered by the stay on payments. More generally, they are not covered by the reorganisation plan under a JRP opened with regard to the main debtor.

Against this context, it becomes clear that the opening of JRP is a powerful protection tool for debtors. This is particularly true where creditors threaten to initiate bankruptcy proceedings against a debtor, where the debtor has already been issued with a bankruptcy summons, or when various attachments (saisies) or similar measures have been imposed. Indeed, many JRPs are opened as a protection tool once the debtor has been summonsed by the court following the filing of a bankruptcy petition against the debtor by a creditor, including ‒ in some cases ‒ by the social security or tax administrations in Luxembourg.

Debtor-in-possession process and limitations

Under the 2023 Law, the JRP is a debtor-in-possession process, in the sense that:

• only the debtor can apply for a JRP and make the relevant filings to support such proceeding (except with regard to the judicial transfer, which can – in certain circumstances – also be introduced at the request of the public prosecutor, a creditor, or any party with an interest in acquiring all or part of the business); and
• in principle, the debtor's board is not removed from the management thereof.

However, there can be certain limitations to the debtor's "control" over the process, given that – in the context of a JRP – Luxembourg courts may:

• continue the mandate of a company conciliator (conciliateur d'entreprise), if one has been priorly appointed as a conservatory measure prior to the JRP at the request of the debtor in order to prepare and facilitate the objective of the JRP pursued by the debtor;
• at the request of the debtor or an interested third party, designate an insolvency practitioner (mandataire de justice) to assist the debtor in achieving the purposes of the JRP; and
• most importantly, at the request of the state prosecutor or any interested party, designate a provisional administrator (administrateur provisoire) in the event of serious and aggravated faults (fautes graves et caractérisées).

In the context of international restructurings, the involvement of a company conciliator and insolvency practitioner is rather exceptional. Additionally, their role is typically rather advisory in nature and is limited to acting as a liaison between different parties and helping them navigate the process. Concerning the role of the insolvency practitioner, the court has very recently accepted a modification of such insolvency practitioner during the JRP where the circumstances justify it.

However, the appointment of a provisional administrator can be of particular consequence, given that this entails the replacement of the debtor's management. That being said, Luxembourg courts constantly emphasise that such appointment is an exceptional measure imposed only where serious and aggravated faults/misconduct have been committed by the debtor or one of its bodies. As such, a request by the state prosecutor or any interested party must be sufficiently reasoned to justify the appointment of a provisional administrator. Notably, the vast majority of such requests are initiated by the state prosecutor.

In several cases, Luxembourg courts have decided to replace the management of the debtor with a provisional administrator after making a cumulative assessment of facts that could qualify as serious and aggravated faults. The following circumstances have led the Luxembourg courts to appoint a provisional administrator – although it is important to note that none of these faults have, so far, independently (in and by themselves) met the threshold of "serious and aggravated faults":

• non-publication of the annual accounts of the company within the applicable deadlines;
• the distribution of a dividend to a shareholder who is indebted towards the company (compte courant d'associé débiteur);
• the carrying out of activities without the required business licences;
• incomplete accounting records; and
• the existence of state creditors (such as the Luxembourg tax administration), which interestingly appears to be considered as an aggravating factor by courts.

The possible appointment of a provisional administrator as part of a JRP and the associated loss of control of the management constitutes a potential risk for debtors. This risk needs to be carefully assessed – considering the position of the debtor and its level of compliance with the various legal rules – before applying for a JRP.

That being said, and for completeness, a provisional administrator (administrateur provisoire) and a judicial agent (mandataire de justice) can be appointed outside of a JRP, subject to respective conditions being met. Notably, the appointment of a judicial agent (mandataire de justice) is subject to the demonstration of serious and aggravated misconduct (manquements graves et caracterisés) by the debtor or its corporate bodies that threatens the continuity of the business.

Reorganisation plan

In the context of the Luxembourg insolvency reform, the most-awaited tool for international investors, creditors and debtors has been the option to launch a reorganisation plan as part of a JRP by CC. This option enables debtors (including those with a large base of lenders) to reorganise their debt and corporate structure, subject to court oversight and sanction.

Under a reorganisation plan, which is filed with the Luxembourg courts by the debtor, various measures can be proposed, including (but not limited to):

• extensions of existing financial arrangements;
• debt waivers;
• debt-for-equity swaps; and
• a new financing.

In line with other jurisdictions who have a longer tradition with court-sanctioned restructurings, the Luxembourg reorganisation plan must meet the criterion of the best interests of the creditors. This means that no creditor should be in a less favourable situation as a result of the reorganisation plan than the creditor would have been if the normal order of priorities was applied ‒ either in bankruptcy, judicial liquidation, or in the event of a better alternative solution.

As is typical with other European and non-European restructuring plans, the reorganisation plan is subject to creditors' approval and a cross-class cram-down mechanism can be applied allowing a reorganisation plan to be imposed on a dissenting class of creditors (subject to important limitations, which will not be elaborated on in this article). In that respect, the 2023 Law only provides for two classes of creditors:

• extraordinary creditors (créanciers sursitaires extraordinaires) – ie, holders of claims secured by a special lien or a mortgage, the claims of creditor-owners as well as the outstanding claims of the tax and social security authorities; and
• ordinary creditors (créanciers sursitaires ordinaires) – ie, holders of claims other than "extraordinary" claims).

It is worth noting that debts and creditors can be categorised into subcategories (particularly with regard to their scope or nature) without impacting their dual classification for the purpose of approving the reorganisation plan.

After the reorganisation plan has been approved in accordance with the (double) majority requirements provided for in the 2023 Law (ie, approval by the majority of creditors in each class, representing at least half of the principal sums owed within that class), it must be sanctioned by the Luxembourg court. It is important to note that the grounds for rejecting the sanctioning of a reorganisation plan are exhaustively set out in the 2023 Law and Luxembourg courts only perform a marginal assessment when deciding whether to sanction a reorganisation plan. Specifically, the court checks:

• whether the formalities required under the 2023 Law have been complied with;
• whether any new financing is necessary for the implementation of the reorganisation plan and, if so, that this does not materially prejudice the interests of the creditors;
• that the reorganisation plan offers a reasonable prospect of avoiding the insolvency of the debtor or ensuring the viability of the business; and
• that there is not breach of the public order.

Despite the limited control of the court, a reorganisation plan has been refused by the court for not complying with the formalities set out in the 2023 Law on the basis that the reorganisation plan:

• failed to distinguish between a descriptive and a prescriptive part;
• did not specify the debtor's assets and liabilities at the time of presentation;
• provided a too-brief description of the debtor's economic situation, the causes and extent of the debtor's difficulties; and
• lacked the following:
• • information on the reorganisation plan's impact on employees;
  • potential new financing to support monthly payments;
  • an explanatory statement as to why the reorganisation plan offered a reasonable prospect of avoiding the debtor's insolvency and guaranteed the debtor's viability, detailing the preconditions necessary for the reorganisation plan's success; and
  • an explicit duration.

In this case, the court chose not to exercise the ability it has under the 2023 Law to allow a debtor to submit a new adapted reorganisation plan.

Existing case law has noted that the guaranteed success of a reorganisation plan is not a prerequisite for its approval. The existence of a risk of failure is not a sufficient ground for the court to refuse to approve the reorganisation plan.

The JRP by CC has unquestionable potential ‒ notably, owing to the relatively low applicable majority (particularly compared to certain majorities applicable in foreign restructuring proceedings) and the wide range of measures that can be proposed. However, there are some weaknesses and inherent limitations of the reorganisation plan under the 2023 Law in its current form ‒ in particular, the following.

• Creditors can be classified in only two classes (extraordinary creditors and ordinary creditors).
• Extraordinary creditors can only be subjected to a limited range of measures. Notably, they can only be subject to a suspension of their claims for a period not exceeding 24 months from the date of the approval of the reorganisation plan (subject to a limited and justified extension of a maximum additional period of 12 months). Courts have clarified that such stay on extraordinary debt is limited to the amount of the principal and such a stay will not affect the accrual of interest. Any other measure "affecting the rights of the extraordinary creditors" must be individually approved by such extraordinary creditor(s).

The 2023 Law does not specifically address the treatment of shareholders as part of the reorganisation plan nor does it clarify how shareholders can be compelled to co-operate with the implementation of equity-affecting measures (such as debt-to-equity swaps, which are ‒ in principle ‒ permissible under the 2023 Law).

Outlook

To conclude, 2024 saw global clients with a presence in Luxembourg opt for consensual transactions coupled with Luxembourg security packages, launch liability management exercises, and explore their options under the 2023 Law. Although large-scale applications of the JRP by CC and the 2023 Law have remained relatively limited, Luxembourg courts have considered key factors such as the complexity of a debtor's capital structure and debt arrangements, the large number of creditors involved, and the debtor's position within a larger group ‒ including where other entities of the group are subject to similar restructuring proceedings in Luxembourg or abroad ‒ when deciding on various aspects or consequences of the JRP (such as the duration of the stay). This demonstrates the willingness of Luxembourg courts to consider complex restructurings, including those involving cross-border elements.

Undoubtedly, an amendment of the 2023 Law would be welcome and could be expected sooner rather than later ‒ bearing in mind that, to date, no bill of law to this effect has been introduced. In this sense, potential amendments inspired by recent amendments to the Belgian insolvency regime (on which the 2023 Law is based, as parliamentary work demonstrates) could bring significant changes to Luxembourg's restructuring framework. The restructuring framework in Luxembourg would greatly benefit from, for instance, a more granular classification of creditors, the ability to impose additional measures on extraordinary creditors, and a clearer approach to shareholder treatment.

A key question for future case law will be how Luxembourg courts are to apply and enforce restructuring measures in practice, particularly in complex scenarios involving debt-to-equity swaps or other tailored solutions that go beyond the standard mechanisms explicitly provided for in 2023 Law. The practical implementation of these mechanisms will shape the effectiveness of Luxembourg's restructuring regime and determine whether it can provide a viable alternative to foreign insolvency frameworks. As these legal tools start being tested, 2025 will be a defining year in clarifying the role of Luxembourg courts in corporate restructurings and the extent of their intervention.

Originally published by Chambers and Partners

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.