The Luxembourg Government had acted swiftly in this context: early into the crisis, the Grand Ducal Regulation of 1 April 2020 amending the Grand Ducal Regulation of 25 March 2020 relating to the suspension of time limits in judicial proceedings and the temporary adjustment of certain other procedural modalities (the "Regulation") was adopted. The Regulation provided for the suspension of the time limit to file for bankruptcy (faillite) under art. 440 of the Luxembourg Commercial Code for the period of the state of emergency (état de crise).
As a reminder, such time limit is normally one month from the time a company is deemed bankrupt, i.e. if and when the two following criteria are cumulatively met:
- the company is unable to pay its debts as they become due and payable out of his own cash flow (i.e., the due and payable liabilities exceed the available assets) (cessation de paiements); and
- it is unable to obtain credit (whether from its own creditors or banks) (ébranlement du credit).
Before the end of the state of emergency on 24 June 2020, the Luxembourg Parliament passed the law of 20 June 2020 relating notably to the suspension of time limits in judicial proceedings (the "Law") in order to extend the said suspension of the obligation to file for bankruptcy for an additional six-month period after the end of the state of emergency (i.e. until 24 December 2020). Given the uncertain economic situation, the legislator considered this step necessary to avoid a potential avalanche of bankruptcy filings right at the outcome of the state of emergency, thereby granting companies in difficulties limited additional time to solve their liquidity or other issues.
A further bill of law had been introduced in April 2020, early into the state of emergency in order to render inadmissible petitions for bankruptcy filed by creditors against companies whose financial difficulties were due to the Covid -19 crisis during the state of emergency and two months after the end of the state of emergency (the "Bill"). The Bill has never been adopted, and seems outdated in its current form. With the Luxembourg government having recently expressed its opposition to the adoption of the Bill in in view of the various financial aids provided by the Luxembourg state during the crisis to help companies maintain their business, its implementation appears unlikely at this stage. The Luxembourg government added that, in its opinion, a two-month suspension would in any case not help companies resolve their liquidity issues within such a short time-frame and ultimately prevent their bankruptcy. We note as well that the Grand Duchy of Luxembourg is perceived as a creditor-friendly jurisdiction, and the Bill, if adopted, would indeed weaken the protection of the creditors' interest.
How do these measures impact bankruptcy in Luxembourg?
Neither did the Regulation nor does the Law expressis verbis require any grounds for the suspension of the time limit to apply. Therefore, in order to benefit from this suspension, a company in a given case will not have to justify that its situation (that would otherwise obligate it to file for bankruptcy within one month) results from the Covid -19 pandemic or that there are indeed reasonable prospects for improvement by the end of the suspension period. Given the administrative burden and the problems around burden of proof that would otherwise arise, this approach is to be welcomed.
The debtor itself may however choose to file for bankruptcy during the extended suspension period. It thereby needs to be remembered that the directors or managers of any Luxembourg company continue to be obligated to act in the company's best interest. For this reason, they need to assess, on a case-by-case and going-concern basis and taking into account all relevant circumstances of the relevant company, whether they may refrain from filing for bankruptcy e.g. in view of an expected improvement at the outcome of the Covid-19 crisis or shall nevertheless file for bankruptcy without undue delay.
This holds true in particular in view of their potential personal criminal (articles 573 to 585 of the Luxembourg Commercial Code) and civil liability (articles 495 and 495-1 of the Luxembourg Commercial Code).
What practical advice do you have for the management of companies?
In general, the uncertainty and volatility caused by the Covid-19 crisis necessitates that the managers or directors have timely and accurate information regarding business performance, key corporate risks and notably issues or challenges that are critical for the business. This is as well crucial to enable the managers or directors of a company to duly assess any bankruptcy situation and determine whether to file for bankruptcy or not, as the case may be.
The company’s risk management processes should be reviewed regularly in light of the effects of the Covid-19 pandemic of the company in the following months to determine whether any adjustments need to be made in order to allow the board of managers or directors to assess the situation and fulfill its fiduciary duties more thoroughly, quickly, and efficiently.
Whilst creditors of Luxembourg commercial companies remain entitled to petition for bankruptcy of their debtors in this unprecedented situation, the assessment whether and when to do so may in practice be complicated by the current uncertainties in the market. This scenario of creditors being barred from petitioning for bankruptcy of their debtors at least seems averted with the Bill facing strong headwinds. The number of Luxembourg bankruptcy procedures opened by the courts between March and August 2020 vary from month to month, without showing a clear pattern or an increase as one might have expected as a result of the lock-down. These numbers in fact do not vary much from the number of bankruptcy procedures opened during the same period last year.
It is certainly too early to draw any definite conclusion at this point where the pandemic is still omnipresent. There is yet hope that the suspension of the bankruptcy filing obligation, combined with the various financial aids granted by the State and other emergency measures, has allowed and continues to allow companies to alleviate the effects and financial distress resulting from this crisis.
Based on information publicly available on: