A large number of international corporate groups conducting their activities all over the world have holding or finance companies in Luxembourg. Naturally, further to the 2007-11 global financial crisis, business law firms witnessed a surge of international debt restructuring and insolvency proceedings involving large groups of companies. By reason of the recent Covid-19 pandemic, history has repeated itself and a number of international creditors need to handle situations involving financially distressed debtors. The present note addresses selected aspects of Luxembourg bankruptcy law that international creditors may encounter – and should watch for – when seeking to have their debtors declared bankrupt in Luxembourg or, on the contrary, when trying to assess the bankruptcy risk as they negotiate a distressed investment or a debt restructuring with a group comprised of key entities located in Luxembourg.
Satisfying the "loss of creditworthiness" criteria
In such situations, an international creditor's first struggle relates to determining when the conditions of bankruptcy under Luxembourg law are met.
A commercial entity is bankrupt under the Luxembourg Commercial Code ("LCC") when (i) it has ceased its payments (cessation des paiements) and (ii) its credit is exhausted (ébranlement du crédit).1
Whether the first condition is met can be objectively determined as case law has ruled that the failure to pay a single undisputed, certain, liquid and due debt is sufficient for the District Court to declare a company bankrupt.
A creditor may satisfy this requirement by obtaining a judgment against its debtor.2 Seeking to have a debtor declared bankrupt is a measure of last resort and courts do not look favorably on creditors applying for bankruptcy to put pressure on debtors. Thus, when creditors obtain a judgment recognising their claim being due and payable, courts may find it relevant to assess whether the creditor has engaged sufficient efforts to have the judgment enforced before initiating bankruptcy proceedings.
The second condition is less clear-cut and more subjective, as a commercial entity is deemed to have lost its creditworthiness if its trade or business partners refuse to continue trading with it. As this concerns the debtor's internal affairs, information on other creditors' unwillingness to trade with the debtor may not easily be available. Yet, when a creditor applies to the District Court to have a debtor declared bankrupt, it must ensure that both conditions of bankruptcy are met on the day that the bankruptcy judgment is rendered.
Case law provides little guidance as to when or how the second condition is met, and courts often tie the loss of creditworthiness to the debtor's cessation of payments since failure to pay debts as they become due would logically not inspire trust in equity, debt or commercial partners.3 Loss of creditworthiness may thus be both the cause and the consequence of the cessation of payments. In theory, the existence of one single debt may lead to loss of creditworthiness if it is sufficient to jeopardise the debtor's affairs entirely.
In order to demonstrate that the "loss of creditworthiness" criteria is met, creditors may seek to provide any evidence that the activities of the debtor are frozen by reason of other creditors' unwillingness to wait to collect what is owed to them, suppliers' refusal to deliver (unless paid in cash), financial institutions' refusal to lend funds, or that the debtor proceeds with payments to ordinary creditors to the prejudice of preferred creditors.4 One supplier's refusal to deliver may constitute evidence of loss of creditworthiness, but on its own will generally not be sufficient as the criteria concerns the general commercial loss of one's credit in the eyes of trade partners.
How many trade partners need to have lost their confidence in the debtor for the criteria to be met? As can be expected, Luxembourg case law does not provide any figures or indications, but rather takes all circumstances and evidence submitted into consideration. Doctrinal guidance provides that a commercial entity is deemed to have lost its creditworthiness when there is no longer a sufficiently broad consensus of creditors maintaining their confidence in the debtor, which results in the debtor not being able to pursue its activities.5
A contrario, the same reasoning could be used to evidence that, where the creditor group shows willingness to discuss alternatives to bankruptcy, the Luxembourg board could be comforted in not having to file for bankruptcy as creditor support would mean that said company may not have lost its creditworthiness.
n practice and in particular in a restructuring context, this is clearly the approach taken by the market and by most Luxembourg company boards, in particular in cases where a judicial restructuring is brought forward abroad (typically, via a UK Scheme or foreign equivalent or a US Chapter 11 proceeding). Creditors would often use this approach and contact the board of directors of a Luxembourg debtor company to ensure willingness to constructively discuss alternatives to bankruptcy to avoid the board precipitating a bankruptcy filing and thereby cutting off the possibility of changes to restructure the wider group.
Facing oppositions after having had a debtor declared bankrupt
Even when the conditions of bankruptcy are met and a judgment declaring a commercial entity bankrupt is rendered, the bankrupt company (or other creditors) may seek to oppose it.6
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1. Article 437 LCC.
2. A commercial entity seeking to declare voluntary bankruptcy (aveu de faillite) must submit its balance sheet with evidence of the extent of its liabilities and subsequent warranty calls from its creditors. It should however be noted that there have been certain instances where the Luxembourg court did not request a court order to evidence that the claim was indeed due.
3. The reverse is not necessarily true as a company would not be found bankrupt if it maintains strong credit with partners despite having ceased its payments.
4. Trib. Lux., 10 février 1995, n°44568 ; CA, 4 décembre 2013, n°40250 ; CA, 12 novembre 2014, Pas. Lux., 2015/5, p. 340-345.
5. See generally M. Mailliet, Manuel de droit Luxembourgeois de la faillite, Larcier 2022, page 57 et ss.
6. In practice, one does not have any opportunity to object before the bankruptcy judgment is rendered.
Originally published by CMI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.