Luxembourg’s Chamber of Deputies on 19 July 2023 voted in favour of bill 6539A, which focuses on business preservation and modernising bankruptcy law. After the vote, Delano sat down with Sébastien Binard, Clara Mara-Marhuenda and Matthieu Taillandier from Arendt & Medernach to hear more about the law and what it means for companies in the grand duchy.
Three preventive reorganisation measures
The new law includes three new procedures, explained Mara-Marhuenda, who focuses on corporate and finance disputes, asset tracing, arbitrating and mediation, and insolvency and restructuring. These are conciliation, judicial reorganisation proceedings and reorganisation by mutual agreement. This last option is an “out-of-court proceeding, and the tribunal intervenes only at the end of the proceedings to approve the agreement.”
“The highlight is to have--in one law--a set of various preventive measures to avoid bankruptcy
Then within the judicial reorganisation, there are three types of proceedings, depending on the objective, Mara-Marhuenda continued. The first is a mutual agreement. “You have simply a ‘stay,’ or a ‘sursis,’ so that the debtor is able to negotiate an agreement with its creditors,” she explained. “You have a collective agreement, ‘accord collectif,’ with a reorganisation plan to be approved by the creditors.”
“And you have the possibility of the transfer by court order.” This third option involves selling all or part of a debtor’s assets to one or several third parties, explained Mara-Marhuenda. “The highlight is to have--in one law--a set of various preventive measures to avoid bankruptcy.”
“Now, with this new law, it is specifically, expressly stated in the law that the debtor’s state of bankruptcy is not, in itself, an obstacle to the opening or continuation of reorganisation proceedings. So it’s a big change,” she said.
Importance of business preservation
“We had until now a bankruptcy law. Now, we have a law on business preservation and bankruptcy,” said Taillandier, emphasising the importance of the business preservation part. Taillandier advises on financing transactions, such as bank lending, acquisition finance, asset and fund financing, and also specialises in securitisation transactions. “That is what is very, very different. It is opening a lot of perspectives for business which are having difficulties.”
Up until now, if a company had financial trouble, there were measures available, “but at the end of the day, anything which would be court-driven would be bankruptcy,” said Taillandier. “Now you also have court-driven and organised processes for preservation, which is a key point.”
“Long way in the making”
Figures from Luxembourg’s statistics bureau Statec show that 556 companies were declared bankrupt and 407 were liquidated in the first half of 2023, with the number of bankruptcies up by 13% compared to the same period during 2022. Is this new law a response to a recent spike in bankruptcies, perhaps brought about by the covid-19 pandemic or the energy crisis?
This bill of law “was a very long way in the making,” said Binard, who specialises mainly in corporate law, mergers & acquisitions, private equity transactions, and restructuring & insolvency. A bill to reform bankruptcy law in the grand duchy was first filed in 2013, in fact, but progress stalled through the years.
It was really a question of the competitivity of the country
Binard described the process as the Luxembourg train departing the station, then getting overtaken by the Brussels train--a 2019 EU directive on restructuring frameworks aimed to increase the efficiency of procedures, and “served the same purpose as the proposed measures under Luxembourg law.” The EU directive needed to be implemented as well, and “so that was a good occasion to kill two birds with one stone.”
Modernisation was “absolutely necessary”
Luxembourg’s legislation was “obsolete” and modernisation was “absolutely necessary,” said Binard. “More than that, it was really a question of the competitivity of the country. Luxembourg is basically losing marks, or points, in each competitive study because its insolvency law, in a broader sense, was deemed uncompetitive, or, at least, inadequate.”
This law is also part of a “general trend at the European level” to opt for reorganisation procedures, said Binard. “If you can save the business with the right tools, rather than just liquidating it, then it’s better for the economy overall.”
The United States has chapter 11 proceedings, the UK has restructuring schemes and France has its ‘plan de sauvegarde’--these tools have proved “very successful,” said Binard, but Luxembourg didn’t really have anything like that before. “Now we have more options available and more tools available.”
An interesting feature in the law, which exists in some other jurisdictions, is the ability to “cram down dissenting creditors,” added Binard. “It means that while certain classes of creditors may not be okay with the proposed restructuring--because they would be, for instance, losing their claims, or losing a lot of money--the court has the power to still force the restructuring plan on those [creditors], but providing again, that certain safeguards are met.”
Aim to keep restructuring procedures in Luxembourg
“What is very important to have in mind,” said Taillandier, echoing Binard’s earlier statements, “is that this is a question of competitiveness of the country.” The law is for everyone in Luxembourg--from retail players to bigger, more international entities.
The idea--and the hope--is also to take and to keep some of this restructuring being done out of Luxembourg
In the past, when these larger players faced difficulties, they carried out “market cherry picking” to find a jurisdiction in which to perform their restructuring “because we did not have the right tools in Luxembourg,” said Taillandier. “The only tools which were in fact available were bankruptcy.” A lot of these restructurings were therefore done abroad, under other laws which offered more flexibility. “The idea--and the hope--is also to take and to keep some of this restructuring being done out of Luxembourg.”
Though it will be a challenge to see how the law will be implemented in practice, “it needs to be noted as well that this market of restructuring is much more professional now than it was, even a few years ago, in Luxembourg,” said Taillandier. “Luxembourg is quite well-equipped with professionals in this respect.”