On 1 November 2023, the Luxembourg law dated 7 August 2023, issued from Draft Bill No. 6539A on business preservation and modernization of the insolvency law ("Law" or "Reform"), entered into force.
While initial discussions leading to this Reform started about ten years ago1, the need for suitable instruments to address financial difficulties in businesses was further emphasized by the pandemic, resulting in a notable increase in bankruptcies in Luxembourg since 2021.
The long-awaited Reform, therefore, aims to prioritize company reorganizations over liquidation and to increase the efficiency of procedures concerning restructuring, insolvency, and discharge of debt.
By adopting the Law, the Luxembourg legislator's goal is to substantially modernize the Luxembourg insolvency framework and namely the restructuring mechanisms (i.e., the composition with creditors (concordat préventif de la faillite), controlled management (gestion contrôlée), moratorium or reprieve from payment (sursis de paiement) proceedings,) which, over time, have become inadequate for current business' requirements.
To achieve that purpose, the Law:
- Provides for two types of reorganization procedures: (i) one extra-judicial (by mutual agreement) and (ii) one judicial (either by mutual agreement, by collective agreement, or by transfer by court order), which replace the outdated procedures of composition with creditors, controlled management and reprieve from payment.
- Modernizes the provisions of the Commercial Code and of the Criminal Code on bankruptcy proceedings to mainly codify practical use developed over the years.
- Grants a second chance to entrepreneurs, notably in implementing the restructuring frameworks directive EU 2019/1023 ("Restructuring Directive").
The Law has the following two purposes:
- To identify distressed debtors at an early stage.
- To introduce new and efficient reorganization procedures in Luxembourg's framework to debtors facing a distressed situation.
To preserve Luxembourg's creditor-friendly orientation and the related effectiveness of the Luxembourg law dated 5 August 2005 on financial collateral arrangements, as amended ("2005 Law"), it is worth noting that the enforcement of financial collateral arrangements falling within the scope of the 2005 Law is not affected by the Reform and remains possible during the judicial reorganization procedure despite the stay pronounced by the court.
As the Reform represents a significant shift in Luxembourg's insolvency law, this alert seeks to outline the main features of Luxembourg's new insolvency legal framework.
For further information on what these developments mean for your organization, please get in touch with your usual Baker McKenzie contact.
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