Our Luxembourg Restructuring & Insolvency team has written a series of snippets on LinkedIn covering the practical impact of the introduction of new tools for bankruptcy prevention.
Snippet series
What is the impact on the double Luxco and the Luxembourg share pledges?
Luxembourg bolsters its position for the structurings of international investments with the introduction of new tools for bankruptcy prevention. The existing and new financial collateral arrangements maintain their bankruptcy insolvency proceedings remote status, preserving the benefit and popularity of the double Luxco structure and the related enforcement of Luxembourg share security.
Luxembourg financial collateral arrangements will thus continue to provide creditors with leverage in restructuring negotiations but also offer enhanced flexibility and resilience in navigating challenging financial landscapes.
The new judicial reorganisation by collective consent: what is it?
The judicial reorganisation by collective consent (réorganisation judiciaire par accord collectif) is a promising and flexible new judicial reorganisation proceeding aiming at preserving the continuity of all or part of the assets or the business of a debtor under the supervision of the court.
In particular, it:
- can be proposed when the continuity of the business is threatened shortly or in the long term;
- is, in principle, a 'debtor in possession' process,
subject to the designation of
(i) an insolvency practitioner (manditaire de justice) to assist the debtor (at the request of the debtor or an interested third-party) or
(ii) a provisional administrator (administrateur provisoire) (at the request of any interested party or public prosecutor) in case of serious faults (fautes graves et caractérisées); - is subject to creditors' approval – in each class, by a majority of creditors, representing at least half of the sums owed in principal (two classes of creditors being contemplated – 'ordinary' and 'extraordinary' creditors);
- provides for a cross-class cram-down mechanism permitting such a plan to be imposed on a dissenting class of creditors; and
- is subject to court oversight and sanction.
Read The new judicial reorganisation by collective consent: key features to learn more.
Court approval of the restructuring agreement
The new Luxembourg Restructuring Toolbox permits distressed companies to have their restructuring agreements with creditors approved by the court – what for if the creditors agree?
Having the restructuring agreement approved by the court protects the actions of implementation from the clawback period of up to 6 months and 10 days. In order to qualify, the restructuring agreement needs to be concluded with all or at least two creditors with the view of reorganising all or part of the assets or activities of the debtor. It's particularly relevant when the agreement is concluded with some – but not all – creditors.
The approval by the court offers limited protection as it only covers clawback of payments, and the protection does not extend to clawback of property transfers for free or at significantly reduced values nor to granting of security interest for pre-existing debts (with the important exclusion of financial collateral). In most international transactions, the protection will likely be sufficient.
The new judicial reorganisation by collective consent: what does it entail?
What are the main effects?
- Subject to certain exceptions, no bankruptcy, judicial liquidation or enforcement measures can be declared or taken
- Suspension of the obligation to file for bankruptcy
- Stay on payments (for an initial maximum period of up to 4 months, with possible extensions up to a total maximum of 12 months)
- Subject to certain exceptions and to applicable contractual provisions, continuation of contracts
- Possible suspension of execution of certain agreements when reorganisation imperatively so requires
What can be agreed?
Measures under a reorganisation plan may take many forms aiming at remedying the company's financial difficulties, notably:
- Amendments of existing financial agreements, for instance:
- extension of payment term;
- debt reduction in principal and/or interest;
- differentiated settlement of certain categories of debts, in particular according to their size or nature;
- waiver of interests or rescheduling of such interest payment; or
- set-off of amounts realised against the principal amount of the debt as a priority
- Debt for equity swaps
The reorganisation plan must meet the criterion of the best interests of the creditors.
Read The new judicial reorganisation by collective consent: key features to find out more!
New litigation option for creditors of Luxembourg debtors
The new Luxembourg Restructuring Toolbox adds a significant litigation option for creditors of Luxembourg debtors. Creditors will be able to request the appointment of a judicial agent by showing that the serious misconduct of their debtor or its corporate bodies threatens the business continuity of the debtor. The creditor must also demonstrate that the proposed mission of the judicial agent is likely to safeguard business continuity.
Until now, Luxembourg law offered limited options to creditors faced with mismanagement of their debtor. The default option of bankruptcy often meant lengthy procedures with an uncertain outcome.
The ordinary summary judge already has the power to appoint a provisional administrator but normally only does so at the request of one or more shareholders and if the corporate bodies of the relevant company are completely blocked.
The reform creates a new balance between the interests of creditors and the traditional reluctance of Luxembourg courts to intervene in the management of commercial companies, a feature which was highlighted during the parliamentary debates.
Given that the judicial reorganisation under the law is in principle a "debtor in possession" process, the appointment of a judicial agent may potentially be used to request the opening of a judicial reorganisation in a case where the debtor is unwilling to do so, as such a reorganisation is – by definition – meant to ensure business continuity. This interpretation is confirmed by the fact that the judicial agent remains in place after the opening of a judicial reorganisation.
Cross-Class Cramdown with Luxembourg Characteristics
The newly implemented cross-class cramdown in Luxembourg differs
from that in the English restructuring plan in several important
aspects. These differences should be carefully weighed when
selecting the preferred jurisdiction for filing.
In Luxembourg, there are for now only two possible classes of
creditors, and creditors are assigned to their class based on the
nature of their claim and the related security. Consequently,
creditors holding debt with varying commercial terms might be
grouped together, unlike the English system that categorizes them
in as many classes as needed and based on shared interests.
In Luxembourg, approval within each class will require the consent
of a majority of voting creditors based on headcount, comprising at
least half of their total debt as opposed to the UK's
requirement of a 75% threshold based on value.
Either class of creditors in Luxembourg has the ability to cramdown
the other, with the caveat that if "extraordinary
creditors" are subjected to cramdown, they must be treated
more favourably than the ordinary creditors. Moreover, the proposed
plan must be in the best interests of the creditors, and neither
class may recover more than the combined sum of their claims and
interests. Notably, there is no "not worse off"
test.
Another distinctive aspect is that Luxembourg law enumerates the
reasons for which the court can reject a cross-class cramdown,
leaving the court with very limited discretion in
decision-making.
The role of directors in the case of insolvency
The new Luxembourg Restructuring Toolbox contains significant changes for directors of Luxembourg companies which are in financial distress and introduces more automatic criminal sanctions.
Directors of Luxembourg companies are familiar with the 30 days deadline they have to file for bankruptcy once the two cumulative conditions of cessation of payments and loss of creditworthiness are met.
The criteria and deadline remain unchanged by the reform, but the judicial reorganisation will become an attractive alternative to bankruptcy and the provisions of the law offer legal certainty to directors, who will not need to worry about the deadline to make a bankruptcy filing as long as the judicial reorganisation is ongoing.
However, since the judicial reorganisation is a "debtor in possession" process, the directors will have the responsibility to direct such process, notably by establishing a restructuring plan or by conducting negotiations with creditors under the shield of a stay on all individual creditor actions. They may be assisted in such role by a judicial agent, appointed by the court or may even be replaced, in the case of grave misconduct, by a court-appointed judicial administrator.
Finally, it should be noted that the reform aims to increase punishment for the directors who fail to meet the 30 days deadline to make a bankruptcy filing by removing any discretion of the courts in finding that they are criminally liable if the deadline was missed.
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.
