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Last update: 15-02-2005
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Bankruptcy - Luxembourg

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TABLE OF CONTENTS

1. What are the different types and aims of insolvency proceedings? 1.
1.a) Definition of insolvency 1.a)
1.b) Types of procedure 1.b)
2. What are the conditions for opening each type of insolvency proceedings? 2.
2.a) Substantive conditions 2.a)
2.b) Publicity 2.b)
3. What is the role of the various participants? 3.
3.a) Bankruptcy 3.a)
3.b) Composition 3.b)
3.c) Suspension of payments 3.c)
3.d) Administration 3.d)
3.e) Collective debt settlement 3.e)
4. What are the effects of the opening of proceedings? 4.
5. What are the specific rules related to certain categories of claim? 5.
6. What are the rules relating to detrimental acts? 6.
7. What are the conditions for the lodgement and admission of claims? 7.
8. What are the rules relating to reorganisation proceedings? 8.
8.a) Collective debt settlement 8.a)
8.b) Administration 8.b)
9. What are the rules relating to the winding-up proceeding? 9.
10. What are the conditions for the closure of the proceeding? 10.

 

1. What are the different types and aims of insolvency proceedings?

1.a) Definition of insolvency

In Luxembourg legal tradition, which draws on Belgian legal tradition, insolvency is defined as a situation where a debtor's liabilities are greater than his assets.

1.b) Types of procedure

There are five types of insolvency proceeding in Luxembourg. Three apply only to traders (natural and legal persons) and one only to natural persons who are not traders. The fifth applies only to notaries (and as it is specific to a single professional group, it will not be described in this factsheet).

In addition, Articles 593 et seq. of Luxembourg's Commercial Code lay down a procedure whereby traders can obtain suspension of payments on certain conditions.

Administration is a procedure for reorganising the business of traders who request it. However, traders can also file for administration in cases where they wish to ensure the best possible realisation of their assets.

Bankruptcy is a procedure for liquidating the assets of a trader who has become insolvent.

Composition to avoid bankruptcy is open under certain conditions to debtors who meet the criteria for bankruptcy. Where it involves the surrender of assets, its purpose, like bankruptcy, is to allow liquidation of the assets of the trader concerned. However, it differs from bankruptcy in that the trader avoids the effects of bankruptcy proceedings.

A rehabilitation procedure also exists for notaries who are no longer creditworthy, whereby they can benefit from special arrangements in order to reorganise their affairs or ensure sound realisation of their assets.

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The collective debt settlement procedure is open only to insolvent natural persons who are not traders. Its aim is to enable those who request it to put their financial situation straight by way of a debt repayment plan.

2. What are the conditions for opening each type of insolvency proceedings?

2.a) Substantive conditions

Anyone filing for administration must be a trader and must be acting in good faith. He must have lost his creditworthiness, but it must none the less be possible to reorganise the business in such a way as to reduce liabilities.

For bankruptcy proceedings, the debtor must be a trader, have ceased payments and lost creditworthiness.

For composition, the conditions are the same as for bankruptcy, the one difference being that a debtor filing for composition must have been unfortunate and have acted in good faith (Article 2 of the Law of 14 April 1886 on composition to avoid bankruptcy).

Traders who are unable to honour their debts as a result of extraordinary circumstances may apply to the commercial court for a suspension of payments. Suspension of payments will be granted only if the trader's circumstances allow assets and liabilities to be brought back into balance.

The collective debt settlement procedure is open only to natural persons who are not traders, who have not become insolvent deliberately and who are legally resident in Luxembourg.

Administration (Article 1 of the Grand Ducal Decree of 25 May 1935 supplementing the legislation on suspension of payments, composition to avoid bankruptcy and bankruptcy by establishing the administration procedure), composition (Article 3 of the Law of 14 April 1886 on composition to avoid bankruptcy), collective debt settlement in the event of overindebtedness (Article 3 of the Law of 8 December 2000 on preventing overindebtedness and introducing a procedure for collective debt settlement in the event of overindebtedness) and suspension of payments proceedings are initiated on application by the debtor.

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Bankruptcy proceedings can be initiated in a number of ways.

The law requires bankrupt debtors to make a statement to that effect before the relevant commercial court (Article 440 of the Commercial Code).

However, Article 442 of the Commercial Code also allows a trader's creditors to file a bankruptcy petition.

Under the same Article, the commercial court can declare a trader bankrupt of its own motion (particularly in cases where composition proceedings have failed).

2.b) Publicity

Publicity measures are required for bankruptcy, composition, suspension of payments and administration.

Publication is by billposting and/or advertising in the press.

3. What is the role of the various participants?

3.a) Bankruptcy

As with all the proceedings applicable to traders covered in this factsheet, bankruptcy proceedings must be brought before the district court which deals with commercial matters and has territorial jurisdiction (hereinafter referred to as "the commercial court").

The commercial court will declare the trader bankrupt, set the date for the cessation of payments, appoint the various participants in the proceedings (official receiver, trustee), set the date for filing claims and the closing date for the verification of claims and formally close the bankruptcy proceedings.

A trustee will be appointed by the court to manage the assets; he will be responsible for realising the debtor's assets and distributing the proceeds among the various creditors, taking account of the rules on preferential claims and charges over property.

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He will carry out his duties under the supervision of the official receiver appointed by the commercial court.

Once bankruptcy is declared, the trader is prohibited from administering his assets and may no longer undertake any payments or transactions or take any other action in relation to those assets.

3.b) Composition

Once the petition is filed, the commercial court will appoint one of its judges to examine the petitioner's situation and to draw up a report.

On the basis of this report, the court will set a period of time within which the trader can make proposals to its creditors with a view to coming to an arrangement.

Lastly, the court will decide whether to approve the arrangement or not.

In composition proceedings, the court will appoint one of its members to report on the debtor's situation and to supervise the implementation of the arrangement between the debtor and his creditors.

As with bankruptcy proceedings, the debtor may not transfer, mortgage or commit assets without authorisation from the appointed judge (Article 6 of the Law of 14 April 1886).

3.c) Suspension of payments

The commercial court will appoint an official receiver to report to it on the debtor's situation and may decide to grant a suspension of payments. In this case it will appoint one or more administrators to supervise the debtor's transactions during the period of suspension.

During this period, the debtor may not transfer, mortgage or commit his assets.

3.d) Administration

The application is made to the commercial court in the district where the main place of business, in the case of a trader, or the registered office, in the case of a company, is located.

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If the conditions for administration are met, the court will appoint one of its judges to report on the trader's situation.

From this point on, the trader loses the right to transfer his assets (by selling them or giving them as security, for example) unless he receives written authorisation from the judge appointed by the court.

Once the report has been submitted, the court may accept or reject the application.

If it rejects it, it can declare the trader bankrupt in the same decision.

If it accepts it, administration of the applicant's assets is handed over to one or more administrators appointed by the court (not necessarily court judges), who will draw up an inventory of the trader's property and a balance sheet to assess the state of his assets and liabilities.

They will then draw up a reorganisation plan or an asset realisation plan.

This plan will be sent to the trader's creditors, as well as his co‑debtors and guarantors.

It will be submitted to the court, which can reject it (and declare the debtor bankrupt) or accept it (which will make it binding on the trader, his guarantors and co‑debtors vis‑à‑vis his creditors).

3.e) Collective debt settlement

Two types of body will be involved, one in the mutual agreement stage and one in the court stage.

In the mutual agreement stage, it will be the Service d’information et de Conseil en surendettement (or “SIC”: the Overindebtedness Information and Advice Service) which will examine the file and draw up a draft recovery plan in agreement with the debtor and his creditors.

This draft will be submitted to the Mediation Commission, which will in turn propose a recovery plan to the parties (debtor and creditors), containing a series of measures ranging from merely postponing or rescheduling debt payments to cancelling all or part of the debt.

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If the mutual agreement stage fails, the court stage will start.

Proceedings will be initiated before the magistrate's court in the debtor's principal place of residence.

The parties will then be summoned before the magistrate's court, which may require them to submit all the documents and information enabling the court to establish the debtor's assets and liabilities.

On the basis of this information, the court will decide on a recovery plan containing measures which will enable the debtor to meet his commitments.

The recovery plan adopted by the court will be valid for a maximum of seven years and may be rendered null and void in a limited number of cases (such as where the debtor does not meet the obligations imposed on him by the recovery plan).

4. What are the effects of the opening of proceedings?

In composition, bankruptcy, suspension of payments and administration proceedings, compulsory enforcement action against the trader and his property is suspended. However, there is no legislation in Luxembourg which would prevent creditors taking action to keep the debtor's property intact.

In all these proceedings, the debtor is no longer at liberty to dispose of his property.

In some cases however (in suspension of payments or administration proceedings), he may transfer property if authorised to do so by the person appointed by the commercial court.

In collective debt settlement, when a debtor makes an application to the SIC, all enforcement measures on his property are suspended, except for those relating to maintenance obligations (Article 3 of the Law of 8 December 2000). If the mutual agreement stage fails, the magistrate's court responsible for hearing the court proceedings may suspend enforcement on the same conditions as above.

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5. What are the specific rules related to certain categories of claim?

In principle, the various proceedings described in this factsheet do not terminate the debtor's contracts.

However, bankruptcy proceedings are an exception. The court decision declaring the trader bankrupt terminates employment contracts (Article 30 of the Law of 24 May 1989 on employment contracts).

The various proceedings do not affect creditors' rights to preferential payment, except in the case of composition proceedings.

Taking part in the vote on the composition means that creditors with charges over the property will lose their right to preferential payment (Article 10 of the Law of 14 April 1886).

In bankruptcy and administration proceedings, it is possible to offset two debts provided that they are of a fixed amount and due before the court bankruptcy or administration order is handed down or that the debts are linked and are from the same source (Luxembourg district court, 14 May 1986, No 32046 of the roll).

In bankruptcy cases, any offsetting by agreement is null and void if carried out during the suspect period (i.e. the period leading up to the bankruptcy order).

In administration, composition and suspension of payments proceedings, offsetting is impossible after the point at which the debtor loses the freedom to transfer his claims and assets.

6. What are the rules relating to detrimental acts?

In bankruptcy, administration, suspension of payments and composition proceedings, the debtor loses the right to perform certain types of transaction, including payment transactions.

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Except in bankruptcy proceedings, the prohibition applies unless the debtor has received authorisation from the person appointed by the court.

Any transaction carried out in violation of this prohibition will be null and void.

In bankruptcy proceedings, the court can declare void any transactions carried out by the debtor during the suspect period.

The suspect period is defined as the period which runs from the date on which the debtor ceases payments. Any transactions undertaken by the debtor in this period may be declared void. If they were undertaken against payment, proof would be needed that the persons entering into a contract with the debtor were aware that the latter had ceased payments.

7. What are the conditions for the lodgement and admission of claims?

In bankruptcy proceedings, the bankruptcy order will be published by various means (in the press, registration with the commercial court) so as to bring the situation to the attention of the bankrupt's creditors and allow them to make themselves known (Article 472 of the Commercial Code).

Creditors must then file a claim with the registry of the commercial court, together with proof of the claim (Article 496 of the Commercial Code).

The claims are examined by the trustee responsible for liquidating the bankruptcy estate and may be rejected by him (Article 500 of the Commercial Code).

In composition proceedings, the debtor applying for composition must specify in his application the name and principal place of residence of his creditors and the amount of their claims (Article 3 of the Law of 14 April 1886).

The creditors will be notified by registered letter (Article 8 of the Law of 14 April 1886) inviting them to take part in the composition meeting.

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The invitation will also be published in the press.

During the composition meeting, the creditors will state the amount of their claims.

As indicated above, creditors with claims secured by charges over the property who take part in the vote will lose their right to preferential payment (Article 10 of the Law of 14 April 1886).

For suspension of payments, the debtor is also required to submit a list of his creditors, indicating their names, the amounts of their claims and their principal residences.

Creditors are invited to a meeting by registered letter (Article 596 of the Commercial Code) and by advertisement in the press.

During the meeting, they will have to state the amount of their claims (Article 597 of the Commercial Code).

In administration proceedings, there is no procedure for filing and admission of claims. The debtor must inform the court of the identity of his creditors in his application.

They will subsequently be informed by the court of the reorganisation or asset realisation plan drawn up by the administrators appointed by the court.

8. What are the rules relating to reorganisation proceedings?

8.a) Collective debt settlement

The SIC will examine the file and will draw up a draft recovery plan in cooperation with the debtor and his creditors.

This draft will be sent to the Mediation Commission, which will in turn propose a recovery plan to the parties (debtor and creditors), containing a series of measures ranging from merely postponing or rescheduling debt payments to cancelling all or part of the debt.

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If the parties agree on the recovery measures, the plan will be signed by them and by the chairperson of the Commission and will be accepted. Unless stipulated otherwise, these measures will not change.

If six months have passed since the debtor's application was lodged and no recovery plan has been accepted, the SIC will inform the debtor of the failure of the mutual agreement procedure.

In the court proceedings, the court will decide on a recovery plan containing measures which will enable the debtor to meet his commitments.

The recovery plan adopted by the court will be valid for a maximum of seven years and may be rendered null and void in a limited number of cases (such as where the debtor does not meet the obligations imposed on him by the recovery plan).

8.b) Administration

The administrator(s) will work on drawing up an inventory of the trader's property and a balance sheet to determine his assets and liabilities.

They will then draw up a reorganisation plan or an asset realisation and distribution plan.

The asset realisation plan will have to respect the statutory order for preferential claims and mortgages.

The plan will be sent to the trader's creditors, as well as his co‑debtors and guarantors.

It will be submitted to the court, which can reject it (and declare the debtor bankrupt) or accept it (which will make it binding on the trader, his guarantors and co‑debtors vis‑à‑vis his creditors).

However, the court will be bound to reject the plan if a majority of the trader's creditors (representing 50% of total debts) oppose it.

If the reorganisation or asset realisation plan is accepted, the trader will regain the freedom to exercise his rights.

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9. What are the rules relating to the winding-up proceeding?

The rules on winding‑up relate essentially to the liquidation of assets in the event of bankruptcy. However, the composition legislation stipulates that where composition takes place by way of surrender of assets, the rules on the liquidation of the bankruptcy estate apply.

In the event of bankruptcy, the trustee will liquidate the debtor's assets and liabilities. He will sell the various assets owned by the bankrupt.

He will then establish the order of priority of creditors with preferential claims and the balance which will be distributed to creditors without preferential claims or charges over the property. He will invite all interested parties to the submission of accounts and will present the bankruptcy accounts to them.

He will then compensate the creditors in accordance with the order established by the record of the submission of accounts drawn up by him and signed by the official receiver and the registrar of the commercial court.

10. What are the conditions for the closure of the proceeding?

In bankruptcy proceedings, when the payments have been made, the trustee may apply for the proceedings to be closed, upon which the court will hand down the decision closing the bankruptcy proceedings.

In composition, suspension of payment and administration proceedings, the court's decision granting the relevant measure closes the proceedings.

The bankruptcy order can impose two types of penalty on the bankrupt: civil or criminal penalties.

If the court finds that the bankruptcy was caused by serious or blatant errors committed by the bankrupt, it can prohibit him from carrying on business directly or through the intermediary of a third party. This prohibition also applies to duties involving decision‑making powers within a company.

Other civil penalties include, for bankruptcies of commercial companies, the possibility of extending the bankruptcy to its managers, the possibility of actions based on Articles 1382 and 1383 of the civil code (ordinary liability) and Articles 59 and 192 of the Commercial Companies Law.

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Last update: 15-02-2005

 
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