Compliance in Progress Summary
A 2003 European Commission's Final Report of the Expert Group for the "Best Project on Restructuring, Bankruptcy and a Fresh Start" noted that Luxembourg has fully adopted 28 of the World Bank's Principles for Effective Insolvency and Creditor Rights Systems, almost fully adopted 9 of them, and partially adopted the remaining 4. The foundational legislation underpinning Luxembourg's insolvency practices is the Commercial Code of 1807, which is buttressed by provisions of later, specific-purpose laws and amendments. PricewaterhouseCoopers reported in 2006 that Luxembourg has traditionally been perceived as debtor-friendly in matters of insolvency, but the legislation passed during last several years has attempted to shift the balance to accommodate a greater focus on creditor rights, as well.
General Overview
In 2002, the European Commission set up an Expert Group on Restructuring, Bankruptcy and a Fresh Start to collect data on the legal and social consequences of business failure. In 2003 the Expert Group published a final report entitled "Best Project on Restructuring, Bankruptcy and a Fresh Start," which considered, among other issues, European Union countries' compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank in 2001. According to the 2003 final report by the Expert Group, Luxembourg has fully adopted 28 of the World Bank's Principles and Guidelines for Effective Insolvency and Creditor Rights Systems; almost fully adopted 9, and partially adopted 4. According to a 2006 report by PricewaterhouseCoopers (PWC), it has been the historical perception that Luxembourg's laws favored debtors over creditors, due to the prevalence of liquidations as opposed to alternative proceedings. However, the PWC report also noted that there appears to have been a shift toward a more creditor-friendly orientation.
Philippe & Partners and Deloitte & Touche (PP&DT), when reporting for the European Commission in 2002, revealed that Luxembourg's insolvency regime is founded upon the Luxembourg Commercial Code, initially enacted in 1807. This original legislation is buttressed by further laws, including a 1886 Law on Compositions to Avoid Bankruptcy and a 1935 Law on Controlled Management. In addition, the Luxembourg’s Civil Code contains relevant provisions, such as distinguishing between individuals and legal entities and providing for separate definitions for civil and business entities. According to PP&DT, only business entities are subject to the provisions of the Commercial Code with regard to insolvency and bankruptcy. According to the 2006 PWC report, new laws have been passed that have made minor modifications to the foundational legislation. These include a law passed in 2000 that "provides for the enforceability of retention of title clauses in favor of the seller, in the event of the purchaser's bankruptcy," and a law passed in 2001, concerning property transfers carried out to establish security. The 2001 law permits the holder of the security to enforce such guarantees even after bankruptcy proceedings have begun. Additionally, in 2003, a Property Transfer Bill was submitted to parliament that was expected to further refine the 2001 law. Another bill pending before parliament aims to "increase the minimum share capital of Luxembourg limited companies and provides for various measures to guarantee the entirety of the share capital and prevent insolvency," the PWC report stated.
The 2006 PWC report further noted that Luxembourg recognizes three distinct approaches to insolvency: bankruptcy (liquidation), controlled management, and composition. When a debtor business "has ceased to make payments and where its commercial creditworthiness has been impaired," liquidation proceedings may commence. The action may be initiated by the debtor, who petitions the Commercial Court in the locale of its primary offices; or creditors may make such a filing. Alternatively, the Court may originate the action. As a member state of the European Union (EU), Luxembourg is also governed by the EU Insolvency Regulation, which provides for the possibility that insolvency actions against a foreign company may be brought forward in Luxembourg if the debtor company has an operational unit in Luxembourg. Liquidations ordered by the Court are administered by a court-appointed receiver, under the supervision of a court-appointed judge. Pay-out of liquidated assets is subject to a prioritization schedule, which places at the top of the list payments due to the receiver, and funds to cover liquidation expenses. After that come employees, contributions to the social security fund, and taxes. Senior and secured creditors come next, followed finally by unsecured creditors. In the event that inadequate funds are realized through liquidation to satisfy all creditors, creditors of the same ranking are allocated equivalent payments. Compositions require that creditors comply with the terms of the composition proposal when seeking to enforce their rights. A creditor may challenge the Court's judgment through recourse to a controlled management situation. The PWC report added that appeals, if they are to be filed, must be initiated within 15 days of the contested judgment. There is a five-year window in which the actions of a receiver may be contested, commencing at the close of the formal insolvency proceeding.
The PP&DT report of 2003 included a number of recommendations aimed at improving Luxembourg's insolvency regime, some of which have been acted upon since the publication of the report. For instance, the report recommended an increase in the minimal capital requirement, as provided for in a bill pending before parliament at the time of the report. The report also suggested that the creation of a new National Company of Credit and Investment (Societe Nationale de Credit et d'Investissement) might reduce the number of bankruptcies that occur due to undercapitalization. This is expected to offer assistance to entrepreneurs who find it difficult to obtain capital from the banks. The report also pointed out that Luxembourg's system, which makes the filing of a 3-year financial plan mandatory whenever a company is established in Luxembourg that must be vetted by an administrative authority, is problematic as currently constituted. In such cases, the resulting plan document would have to be controlled by the Ministry of Small and Medium Sized Businesses (Ministere des Classes Moyennes, or MCM), which does not have any formal mandate to assume this control. In the opinion of PP&DT, this places increased responsibility on the new company's founders in the case of bankruptcy early in the life of their firm. Trade licenses are issued and controlled by the MCM under the current regime, insofar as its elements are required under a 1988 law that is directed to controlling access to specific professions, including artisans, traders, industry, and a number of liberal professions. The MCM requires a range of documentation from potential business entrants, including a statement regarding prior bankruptcies as to any responsibilities that will fall to the individual who served as manager of the prior (bankrupt) firm. In such cases, the MCM may request supplementary information of the trustee of the bankrupt firm, to be provided in the form of a variety of questionnaires.
However, the 2003 PP&DT report found that such questionnaires are "often not completed in the best possible manner" (p. 40). They frequently are lacking in adequate or precise information, or they are completed by inexperienced individuals. The trustees are not appropriately compensated for the task. Negative opinions of the manager in question are rarely offered. Finally, the entire process is time-consuming, inhibiting the MCM's ability to issue a trading license to the proposed firm within the mandated 3-month timeframe. As an alternative, the report suggested that control of declared bankruptcies be subject to greater systematization, and should formally include an analysis of the reasons for bankruptcy. This removes the obstacle that leads to MCM’s delays in issuing trade licenses, as the necessary information is already in hand. To accomplish this, Luxemburg should enhance the prosecution department and judiciary police, to make the reporting and analytical process more formal; merge the questionnaires used in the process into a single, unique document; amend the Trade Code to require that the questionnaire be filed by bankruptcy trustees; and improve the compensation paid to trustees. The PP&DT report also suggested that the MCM more frequently exercise its right to seize the trade license of anyone who significantly fails to pay his social and fiscal obligations. To do this, there needs to be greater cooperation between the MCM and the various public administrations. Finally, the PP&DT report recommended that Luxembourg follow the French example of creating confidential "prevention cells," permitting entrepreneurs to address incipient problems "without losing his credibility vis-à-vis his creditors and his clients" (p. 42). The PP&DT report also added that greater systematic action by the courts to sanction bankruptcies would help to avoid repeat offenders.
On its "Doing Business 2010" web page, the World Bank compared the efficacy of Luxembourg’s insolvency proceedings with the averages attained by member states of the Organisation for Economic Co-operation and Development (OECD) along three performance dimensions: time required for completion (in years), cost of proceedings (as a percentage of the debtor estate), and creditor recovery rate (expressed in terms of cents on the dollar). In Luxembourg, it takes an average of 2.0 years to close a business, as compared to the OECD average of 1.7 years. The cost in Luxembourg averages 15 percent of the estate, compared to 8.4 percent in OECD countries. The recovery rate in Luxembourg is 41.7 cents on the dollar, whereas the rate in OECD member states averages 68.6 cents on the dollar.
