Luxembourg company in financial difficulty: restructuring, insolvency and the managers' duties

A company in trouble has more options than bankruptcy, but fewer days than its managers think

Since 1 November 2023 Luxembourg has a modern toolkit for companies in financial difficulty. The Law of 7 August 2023 on business preservation and the modernisation of bankruptcy law replaced the old controlled management and composition procedures, which were rarely used, with three levels: confidential help out of court, a court-supervised reorganisation with a stay of enforcement, and bankruptcy as the last step.

The law also leaves the managers with two hard deadlines. When losses eat half of the share capital, the managers have two months to put the future of the company to the shareholders. When the company has stopped paying its debts and lost its credit, they have one month to file for bankruptcy, unless they file for judicial reorganisation first. Missing either deadline is the most common route to personal liability.

For a solvent company that simply wants to stop, see our note on how to close a Luxembourg company.

When losses reach half, then a quarter, of the share capital

The first legal trigger is on the balance sheet. When net assets fall below half of the subscribed capital because of losses, the managers or the board must convene a general meeting within two months of the date on which the loss was discovered or should have been discovered. It applies to the SA under Article 480-2 and to the SARL under Article 710-27 of the Law of 10 August 1915 on commercial companies.

The managers prepare a special report that explains the causes of the situation and justifies the measures they propose. The meeting decides whether to dissolve or continue, usually with measures: a capital increase, a debt waiver or a conversion of shareholder loans into equity.

A vote to continue is lawful. What matters is that the meeting is held, on time and with a proper report. If the managers fail to convene it, they can be held liable to the company and to third parties for the damage caused, and the law presumes that the damage results from the failure to convene.

The test is on net assets, not cash. A company with negative equity can still pay every invoice on time, and a sound balance sheet can still run out of cash. Managers must watch both.

A subordination letter from the parent protects third parties but does not cure the capital loss. Our note on shareholder loans in the Netherlands and Luxembourg covers the terms and the tax side.

Law and practice: Law of 10 August 1915 on commercial companies, Article 480-2 (SA and, by reference, SCA) and Article 710-27 (SARL): meeting within two months, special report, reduced majority below one quarter, presumption of damage for managers who fail to act. Court of Appeal, 16 June 2020, on the date at which the thresholds are assessed. Loss reporting runs alongside the annual accounts cycle.

Early warning, conciliation and the out-of-court agreement

Early warning. The 2023 law lets the Ministry of the Economy and the Ministry for SMEs detect companies at risk. A dedicated unit gathers data from public sources: unpaid social security contributions and VAT outstanding for more than three months, judgments by default against the company, dismissals for economic reasons, and the filed accounts held by the central balance sheet office. A flagged company may be contacted and invited to use the procedures below.

Conciliation. At the company's request, the minister appoints a business conciliator, usually a sworn expert. The company may propose a name. The conciliator does not run the company; the task is to help the managers reach an amicable agreement with creditors, prepare a reorganisation plan, or organise a sale of all or part of the business. Conciliation is confidential.

Out-of-court amicable agreement. The company can agree with two or more creditors on how and when its debts will be paid: rescheduling, partial waivers, conversion into equity. The agreement binds only those who sign it. If the parties wish, the president of the district court sitting in commercial matters can approve it, which makes it enforceable. The approval is not published. An approved agreement survives a later bankruptcy: payments made under it cannot be clawed back merely because they fall in the suspect period, and creditors who took part are not liable just because the rescue failed.

• Prepare a 13-week cash-flow forecast. Creditors and the court want to see when cash arrives and leaves, not only a balance sheet.
• Rank creditors. Banks with security, tax and social security, suppliers, intra-group lenders and shareholders behave differently and vote in different classes.
• Pay what creates personal risk first. Net salaries, wage withholding tax and VAT on sales already invoiced.

Law and practice: Law of 7 August 2023 on business preservation and modernisation of bankruptcy law, in force since 1 November 2023 (bill no. 6539): Title on the detection of companies in difficulty, the business conciliator and the out-of-court amicable agreement. Law of 7 July 1971 on sworn experts.

A stay of enforcement and three ways out

Judicial reorganisation is the court procedure for a business whose continuity is threatened, in the short or longer term. It is open to a company that has already stopped paying some debts, provided the business is worth saving. The company petitions the district court sitting in commercial matters with its accounts, a cash forecast, a creditor list and its objective. The court rules within fifteen days.

The stay. From the opening, creditors cannot enforce claims that arose before it against the company's assets. The stay lasts up to four months and can be extended, in total, to twelve months from the judgment. During the stay, the company cannot be declared bankrupt on a creditor's petition and cannot be dissolved by the court or by administrative decision. The filing also suspends the managers' duty to file for bankruptcy while the stay runs. Wage claims and financial collateral remain enforceable. A company that has used a stay cannot ask for another for three years, except to sell its business.

Collective agreement. The company proposes a plan: rescheduling, partial waivers, debt-for-equity swaps, sale of non-core assets. Creditors vote in classes, broadly creditors with security or a privilege and ordinary creditors. The plan is adopted when, in each class, a majority of the voting creditors, representing more than half of the principal of the claims, vote in favour. Once the court approves it, it binds every creditor in the classes, including those who voted against.

Transfer by court order. When the company cannot be saved as it stands, a court-appointed agent sells the business, or the viable part of it, to the best bidder. Employees transfer with the business; the debts stay with the old company.

Law and practice: Law of 7 August 2023, Title on judicial reorganisation: opening conditions, stay and its exceptions, voting by classes, court approval, transfer by court order. Law of 5 August 2005 on financial collateral arrangements. The Luxembourg insolvency register lists reorganisation judgments.

Bankruptcy, judicial liquidation, administrative dissolution and voluntary liquidation

Conditions. A commercial company is bankrupt when two conditions meet: it has stopped paying its debts (cessation des paiements), and it has lost its creditworthiness, meaning that no lender or supplier will finance it any further. A company that its parent or bank still funds is not bankrupt, however weak its balance sheet.

The one-month duty. Under Article 440 of the Commercial Code the managers must declare the cessation of payments at the clerk's office of the district court within one month. They file a balance sheet, a list of creditors and debtors, and the books. A late filing is one of the grounds for simple bankruptcy, a criminal offence of the managers.

What the judgment does. The court appoints a curator, a lawyer who takes over the company's assets and runs the procedure under a supervising judge. The managers lose their powers. Creditors file their claims by the date set in the judgment; the curator sells the assets and pays secured and privileged creditors first, then ordinary and subordinated ones.

The suspect period. The court fixes the date on which payments stopped. It can go back up to six months before the judgment. Transactions in that period, and in the ten days before it, are exposed. Gifts, undervalue deals, early payments and new security for old debts are void against creditors (Article 445). Other payments can be set aside if the other party knew of the cessation of payments (Article 446). Fraudulent acts can be attacked whatever their date (Article 448). Repayments of shareholder loans and transfers to group companies in the last months are the first thing a curator looks at.

Judicial liquidation. Under Article 1200-1 of the 1915 law, the district court can, at the request of the prosecutor, dissolve and liquidate a company that pursues activities contrary to criminal law or seriously breaches commercial law, including the duty to file accounts.

Administrative dissolution without liquidation. Since 1 February 2023, the Law of 28 October 2022 lets the business register manager, at the prosecutor's request, dissolve an empty shell company: one that breached commercial or criminal law, has no employees and no assets. It is a tool against abandoned companies, not an exit route; see our note on running a Luxembourg SARL or SA for the filing duties that keep a company off that list.

Voluntary liquidation. A company that can pay all its creditors can be dissolved by its shareholders and liquidated. A liquidator who discovers that the debts exceed the assets must stop and file for bankruptcy.

Law and practice: Commercial Code, Book III: Article 437 (conditions), Article 440 (one-month declaration), Article 441 (documents), Article 442 (date of cessation of payments, up to six months), Articles 445, 446 and 448 (voidable transactions), Article 574 and Criminal Code, Article 489 (simple bankruptcy). Law of 10 August 1915, Article 1200-1. Law of 28 October 2022 on administrative dissolution without liquidation, in force 1 February 2023.

Where personal exposure comes from, and how to limit it

Managers do not answer for the company's debts merely because it fails. They answer for faults, which hindsight makes easy to find.

Civil liability. Continuing to trade and take credit with no reasonable prospect of recovery is the classic fault; the curator sues on behalf of all creditors.

Shortfall and personal bankruptcy. Where the assets do not cover the debts, the court can order managers, including de facto managers, to pay all or part of the shortfall if serious misconduct contributed to the bankruptcy (Article 495-1). Article 495 goes further. A manager who used the company as a front for personal dealings, used its assets as his own, or abusively continued a loss-making business that could only lead to cessation of payments, can be declared personally bankrupt. The court can also bar a manager whose serious fault contributed to the bankruptcy from running a business.

Tax liability. Managers must ensure that the company pays its taxes from its own funds. The General Tax Law (Abgabenordnung), still applied in Luxembourg for direct taxes, makes them liable by a liability notice for wage withholding tax and other taxes left unpaid through their fault. The VAT Law contains the same rule for VAT. The courts require proof of fault, but paying suppliers while withholding tax and VAT accumulate is hard to defend.

Nominee and foreign managers. Liability attaches to the person on the register and to anyone who manages in fact. See our notes on nominee directors and domiciliation and on a Luxembourg company with a foreign director.

Shareholder loans. Luxembourg has no statutory rule that subordinates shareholder loans in insolvency. They rank as ordinary claims unless the lender agreed to subordination. But repayments to shareholders in the suspect period are a prime target for claw-back.

Law and practice: Law of 10 August 1915, Article 441-9 and the parallel SARL provisions; Commercial Code, Articles 495, 495-1 and 574; General Tax Law (AO), §§ 103 and 109 as applied in Luxembourg, and Administrative Court of Appeal, 4 April 2017, on the need to prove fault; VAT Law of 12 February 1979, Articles 67-1 to 67-3.

Collecting from a Luxembourg company, and insolvency across the EU

For creditors. An undisputed money claim against a Luxembourg company can be pursued by a payment order (ordonnance de paiement), a written procedure before the Justice of the Peace or the district court depending on the amount. For cross-border claims within the EU, the European Payment Order under Regulation (EC) No 1896/2006 works the same way and is enforceable in other Member States without further steps. Once a stay or a bankruptcy opens, the creditor files its claim in the procedure instead.

Across borders. The EU Insolvency Regulation 2015/848 decides which country opens the main proceedings: the state where the company has its centre of main interests (COMI). The registered office is presumed to be the COMI, unless management is visibly run from elsewhere. A company managed day to day from Paris may have its COMI there. Secondary proceedings can open where the company has an establishment. The Luxembourg reorganisation procedures are listed under the Regulation, so they are recognised throughout the EU.

1. Week 0: the numbers turnCash forecast, list of creditors, check net assets against capital.
2. Within 2 months: shareholdersAlarm bell meeting with a special report if half of the capital is lost.
3. At once: protect cashPay net salaries, withholding tax and VAT; stop payments to shareholders and group companies.
4. Next: choose the routeConciliator and amicable agreement while creditors talk; judicial reorganisation when one starts enforcing.
5. Within 1 month of cessation of paymentsJudicial reorganisation if viable, otherwise bankruptcy filing.
6. Throughout: the recordMinutes and reports kept for the curator or the court.

Law and practice: Regulation (EU) 2015/848 on insolvency proceedings, Article 3 (COMI and presumption), Annex A; Regulation (EC) No 1896/2006 creating a European Payment Order; New Code of Civil Procedure, provisions on the payment order. Corporate services for board minutes and filings in Luxembourg.

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Luxembourg company in difficulty: frequent questions