Luxembourg, as of 1 November 2023, has a new law that focuses on business preservation and the modernisation of bankruptcy law. It gives other options to companies in distress, explained , a partner at Loyens & Loeff who heads the law firm’s banking & finance practice.
This new law, which implements EU directive 2019/1023 on preventive restructuring frameworks, emphasises the fact that companies now have options to restructure their debt. While options did exist before, these were not very efficient and thus were not often used.
There is also a “preventive process,” said Nicolas, and “there is a whole toolbox that was added to our legislation that allows companies to sort of ring the alarm bell to say, ‘I’m in trouble. Can someone look into my situation?’” The company can also discuss potential restructuring options with creditors.
With this new law, “there is a real rescue culture that could be implemented in Luxembourg. That was not the case before--it was pretty brutal,” said Nicolas.
“We had a very old-fashioned system,” added , partner and head of the law firm’s litigation & risk management practice group. “In a case of bankruptcy, the receiver would try to sell as much as possible--and as quickly as possible--and then to close the bankruptcy. So you would lose a lot of value from your assets. That was a downside--no second chance, and also loss of value.”
Positive points
The new law brings restructuring options, the “rescue culture” and the “cramdown” mechanism, which is when creditors can be forced to accept a restructuring.
“That makes a huge difference in practice, because you rarely have 100% of your creditors on board once you want to restructure. So you need that mechanism to bind those who don’t agree,” said Nicolas. “We’ve seen it in other countries. That works really well, and we have that now. That, for me, is the biggest advantage.”
“One interesting new procedure is also that--as a creditor, or even a third-party that has an interest--if you see that there are irregularities in the management of the company,” you can ask for a provisional administrator to be appointed, noted Hoffeld. This existed before, “but you needed to actually prove that there was a blockage of the company. And that’s sometimes difficult to prove. Here, you have an additional procedure that’s in place.”
“It’s obviously not yet tested, because it’s a new law. I’m not aware of any case law, which is normal because the law dates back to November 2023. But we have one procedure ongoing,” said Hoffeld. “So that’s another new tool.”
Disadvantages and “blind spots”
But for Nicolas, Luxembourg’s new law, , was done “in a bit of a rush.” There was a risk of sanction from the EU if the restructuring directive was not implemented and the country’s national elections were coming up. “So the drafting was not perfect. There are some blind spots--quite a few, actually.”
We also don’t have the judicial certainty that other countries have now
It is, for instance, based on Belgian law, “which is not the most competitive law in terms of restructuring, but also has a different market--Belgium is more centred on industrial and operational companies.” Luxembourg does have operational companies, but it also has a lot of special purpose vehicles (SPVs) and funds, she noted. So some elements are not “completely aligned” with other legislation, which is likely to create “interpretation issues” in the future.
Lack of “judicial certainty”
And “because we are late in the process of implementation, we also don’t have the judicial certainty that other countries have now. For example, if you look at the restructuring proceedings in the Netherlands, in England, in France, in the US, even in Germany--they are tested, so people know what to expect,” said Nicolas. “In Luxembourg, we don’t have that advantage because it’s new, it’s late and it has blind spots. Time will tell.”
It really depends a lot on the judges, on their way of applying the law
“And because there are so many blind spots and room for interpretation, I think that the judges will have a lot of leeway to interpret that law. And so it all will depend very much on case law,” said Hoffeld.
Risk of bad faith
A case brought to court in November 2023--after the law came into force--concerns an entrepreneur in the real estate industry who made a request for reorganisation but seems to not have acted in good faith, said Hoffeld. The entrepreneur did, however, get the requested organisation, “and the court decided that you do not have to prove your good faith--you just have to prove that there is risk for the continuation of the business.”
“That’s a bit astonishing,” said Hoffeld, adding that she thought it could “open the door to bad-faith entrepreneurs.”
Wide scope
The law’s scope remains quite open. “The entry requirements are unclear,” said Nicolas. “You don’t have to actually come up with a tonne of documents and justify yourself, which is also quite different from what you have to do in other countries.”
Luxembourg’s new restructuring law also allows for the filing of a “stay,” which Nicolas explained as an “interruption--if you want--of enforcement rights for your creditors.” Once again, the company doesn’t have to provide a lot of justification. “And because of that effect that the filing has, it’s a massive incentive for companies who are either fighting with the creditors or don’t know what to do with themselves, to just file to get the stay, and to interrupt any kind of enforcement actions.”
It’s not necessarily a bad thing, added Nicolas. “Creditors, in a sense, might have had too much leverage on this point, and also because our bankruptcy procedure was brutal,” she said. “But now it’s a bit the other way around. So we don’t know exactly if it’s going to balance out the sort of brutal bankruptcy procedure or if it’s going to just be abused all the time.”
Time will tell
“Again, it will very much depend on the courts and how they implement those requirements,” said Nicolas. “The law is not precise enough that you can say--with certainty--this kind of company can file, this kind of company cannot file, is this stay abusive or not? That’s really for the practice to figure out.”
The blanks will have to be filled in. If the law is applied in a “pragmatic way, then it can be a huge advantage,” said Nicolas. “It’s just there is complete uncertainty, because we can’t say in advance to our clients how it’s going to go. The law isn’t precise enough. So we completely rely on the courts, and we don’t exactly know which way they’re going to go. It could go both ways.”
“It really depends a lot on the judges, on their way of applying the law,” concluded Hoffeld.