Any trader who ceases payments and whose credit is weakened is bankrupt.

The bankruptcy procedure is initiated either:

• because of the debtor's acknowledgement, to which he is legally obliged;
• by court summons by one or more creditors; or
• automatically by the court.

The publication of the bankruptcy in one or more newspapers circulated in Luxembourg serves to notify creditors of their debtor's bankruptcy.

A trader's creditors or contractual partners may therefore be surprised by the bankruptcy and must follow the appropriate procedure to collect their debt or recover their assets that are held by the bankrupt party.

As soon as a creditor is aware that their debtor is bankrupt, they must file a creditor claim with the clerk of the district court within the deadlines set by the declaration of bankruptcy.

Some creditors and claims have a preferential status, which means that they will be paid before ordinary creditors – known as 'unsecured creditors' –, who are paid equitably from the assets remaining to be distributed.

Salaried workers must declare their receivable salaries and allowances due by the employer following the bankruptcy.

The trustee handling the bankruptcy verifies the claims and distributes the business's assets based on the ranking of claims.

Before the bankruptcy is closed, the trustee must summon the creditors to a presentation of accounts meeting, and must draw up an asset distribution plan that is submitted to the bankruptcy judge.

A bankrupt party that has not been declared recklessly or fraudulently bankrupt may not be sued by its creditors unless it recovers financially within 7 years of the judgement of closure for inadequate assets.

Who is concerned

Creditors whose debtor has been declared bankrupt must file their creditor claims in a timely manner so that they can be accepted as part of the bankrupt party's liabilities.

As a representative of the State Treasury, the tax office is exempt from having to file creditor claims.

Preliminary steps

To ensure that their claims are file in a timely manner, creditors who are in doubt about the solvency of their debtor are advised to check as early as possible if their debtor has been declared bankrupt.

To validly assert a claim, creditors must be able to provide written proof of the claim (invoice, court decision concerning the recovery of a debt, etc.).

Deadlines

Creditor claims will only be accepted as liabilities if they are filed within the time frame set by the declaration of bankruptcy. This time frame may not exceed 20 days from day of the court ruling.

However, in reality, creditor claims are very often filed after the date set by the court.

How to proceed

Filing a creditor claim

Creditors must file a creditor claim with the clerk of the court having jurisdiction within the time frame set by the declaration of bankruptcy.

The claim must include:

• the creditor's identity, profession, registered address and bank details;
• the identity of the bankrupt party;
• the amount and origin of the claim;
• any related liens, pledges or mortgages and corresponding official documents validating them;
• the wording 'J’affirme que la présente créance est sincère et véritable' ('I confirm that this claim is true and accurate').

The claim must be signed by the creditor or by a proxy acting on the creditor's behalf.

It must be accompanied by supporting documents justifying the claim.

Late creditors who do not file their claim within the required time frame:

• will not be included in the distributions ordered by the bankruptcy judge;
• may, however, file and assert their claim up until the end of the distribution of the bankruptcy funds.

The body of creditors, i.e. the creditors with whom the bankruptcy trustee continues or starts contractual relations in the interests of all creditors after the declaration of bankruptcy order is issued, are not required to file their claims. The trustee pays them at the due date.

For example: bankruptcy trustee fees, rent due after the declaration of bankruptcy, etc.

Suspect period

In principle, the declaration of bankruptcy sets the date of cessation of payments to a date prior to the declaration. As a general rule, this date may be no more than 6 months prior to the bankruptcy.

The period between the 'actual' date of cessation of payments and the starting date of the bankruptcy is referred to as the 'suspect period' (période suspecte).

To safeguard creditors' interests, certain acts performed by the bankrupt party during this period that could be detrimental to the rights of the creditors are deemed null and void.

For example:

• any act performed for no consideration, or for a consideration that is clearly too low;
• any payment, by any means, of a debt that has not yet come due;
• any payment made by a method other than cash or commercial paper, even of a mature debt (for example: a transfer in lieu of payment);
• any mortgage and any guarantee or legal lien established for debts contracted before the cessation of payments.

All payments and acts (even for a consideration) performed by the bankrupt party during the suspect period may also be cancelled:

• if it transpires that the third party with which it transacted or which received payment was aware of the situation of cessation of payments; and
• it had sought to obtain privileged status relative to the other creditors.

Obligations

The bankruptcy trustee draw up an inventory of the assets and must differentiate between those that are part of the bankruptcy estate and those that must be excluded from it.

Outstanding contracts

It is traditionally agreed that outstanding contracts continue as long as they are not terminated by the trustee.

Employment contracts automatically terminate on the date of the declaration of bankruptcy.

Set-off

The declaration of bankruptcy does not affect statutory set-offs, provided that the conditions for such set-offs were met before the bankruptcy proceedings began.

Statutory set-offs:

• may not be ordered after collective insolvency proceedings have begun;
• may nonetheless be allowed during the suspect period, provided that the set-off order has become res judicata (expired means of appeal). In such cases, the set-off may will not become effective until after the date of the judgement.

Contractual set-offs are not allowed:

• after collective insolvency proceedings have begun; or
• during the suspect period.

Bankrupt party's spouse

The bankrupt party's spouse may recover their own property and any assets that they brought to the community of property during the marriage.

Movable tangible assets entrusted to the bankrupt party

Owners of movable tangible assets who have deposited such assets with the bankrupt party (for the purpose of storage or sale) may file a claim to have the assets returned, provided they are assets in kind at the time the bankruptcy proceedings open.

The trustee must be able to identify these assets.

If the bankrupt party has resold these assets before the bankruptcy proceedings begin, the owner may claim the price or the portion of the price that the buyer has not paid at the time of the declaration of bankruptcy.

However, such claimed assets may not:

• have been pledged; or
• be subject to a financial collateral arrangement.

Immovable tangible assets entrusted to the bankrupt party (including through cloud computing)

Owners of intangible assets (for example: data stored on 'cloud' computing systems) or the persons who have entrusted them to the bankrupt party may claim these assets (at their own expense) if these assets can be separated from all other intangible movable assets at the time the bankruptcy proceedings open.

In other words, the bankruptcy trustee must be able to separate the data and files claimed from all other data and files.

If the bankrupt party has resold these assets before the bankruptcy proceedings begin, the owner may claim the price or the portion of the price that the buyer has not paid at the time of the declaration of bankruptcy.

However, such claimed assets may not:

• have been pledged;
• be subject to a financial collateral arrangement.

Movable assets sold with a retention of title clause

Sellers of movable assets who, according to a written record, remain the owner of the assets until they have been paid for in full, may claim such assets within 3 months if:

• the assets are assets in kind when the proceedings begin, or
• they can be recovered without damage from the assets into which they have been incorporated.

If the bankrupt party has resold these assets before the bankruptcy proceedings begin, the owner may claim the price or the portion of the price that the buyer has not paid at the time of the declaration of bankruptcy.

Commercial papers and outstanding securities

The owner of securities which have not yet been paid for or of commercial papers they entrusted to the bankrupt party (with a mandate to collect them or for specific payments) may claim them if they are assets in kind at the time of the declaration of bankruptcy.

Preferential nature of certain claims

The various debts or creditors may have a rank that allows for priority or preferential repayment before the repayment of the ordinary creditors, known as 'unsecured creditors'.

Preferential claims

Preferential claims are listed according to their preferential ranking.

The trustee settles such claims according to their priority as listed below (this list is not exhaustive), before paying any other creditors:

• legal costs;
• employees' claims, namely:
  • salaries and allowances still owed by the employer after the bankruptcy. The total sum of the following 3 amounts is limited to the amount that would normally be due in the case of dismissal with notice from the date of the declaration of bankruptcy:
    • the salary for the month in which the bankruptcy took place;  
    • the salary for the following month;
    • 50% of the severance pay that would have been due in the event of a dismissal with notice;
  • where applicable, any outstanding salaries during the 6 months of work prior to the bankruptcy.

Outstanding salaries after the last 6 months of work do not receive preference. These sums are considered unsecured claims;

• claims from public administrations;
• debts backed by mortgages;
• all other debts backed by collateral.

'Super-preferential' claims owed to employees

If the business's available assets cannot cover the employees' preferential claims within 10 days of the declaration of bankruptcy, the Employment Fund (Fonds pour l'emploi) guarantees the payment of part of such preferential claims, which is why these claims are known as super-preferential claims.

The share of the claims not covered by the Employment Fund retain their status as preferential claims.

Applications must be submitted by the trustee or employee to the National Employment Agency (Agence pour le développement de l'emploi - ADEM).

Unsecured claims

Unsecured claims (i.e. non-preferential claims) all have the same ranking.

The trustee does not pay them until all preferential claims have been settled. They then distributes the assets on a 'pro rata' basis, i.e. in proportion to the amount of each claim with regard to the total amount of the claims accepted as liabilities.

Verification of claims and closure of the bankruptcy proceedings

The trustee verifies claims as and when they are submitted by matching all the documents provided by the creditors with the records in the accounts of the bankrupt party. The bankruptcy judge may also order the creditor, or any other person able to provide information, to appear in court.

If the claim is disputed, the bankruptcy trustee informs the creditor after the closure of the claim verification report. Disputed claims are settled before the competent courts, which will decide whether they are justified or not.

Justified claims are included as outstanding liabilities in the bankruptcy proceedings.

Based on the verification reports and judgements handed down on the disputed claims, the trustee:

• makes a final determination of the bankrupt party's statement of liabilities;
• then prepares a report on:
  • the bankruptcy;
  • the likely result of the liquidation: apportionment plan.

Before the bankruptcy proceedings are closed, a meeting of creditors is convened and the planned distribution is submitted for the approval of the bankruptcy judge.

Once the assets have been distributed, the trustee reissues the accounts and files a request with the court to declare the bankruptcy proceedings closed.

After the insolvency proceedings are closed, if there are any assets, the creditors receive the full amount or a fraction of the amount of their claim in accordance with the apportionment terms provided for in the judgement closing the proceedings.

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