Bankruptcy procedure

The bankruptcy procedure may be initiated:

  • by acknowledgement of the debtor because they are legally bound to do so;
  • by court summons by one or more creditors;
  • automatically by the court.

If the criteria to declare bankruptcy are met, the court issues a declaration of bankruptcy.

This declaration of bankruptcy takes effect on the day the judgement is delivered, with retroactive effect starting at midnight, even if the judgement has been appealed or opposed.

A trustee in bankruptcy, who is typically selected from the lawyers on the list of lawyers registered with the Bar Association, and bankruptcy judge who supervises the bankruptcy procedure, are appointed.

The judgement sets the date of cessation of payments.

Following the judgement:

  • the trader loses all administrative powers over their assets and the right to take legal action in matters regarding the latter, with these powers being transferred to the trustee in bankruptcy;
  • the period between the cessation of payments and the declaration of bankruptcy:
    • is known as the suspect period;
    • may give rise to the cancellation of certain acts performed by the bankrupt party;
  • the bankrupt party can be held liable in the event of misconduct.

Who is concerned

In this case, the bankrupt party refers to any trader or commercial company that has been declared bankrupt.

The bankrupt party's contracting parties and its creditors are affected in different ways by the bankruptcy procedure.

How to proceed

Transfer of the bankrupt party's powers to the trustee in bankruptcy

On the day the bankruptcy is declared, the trader or commercial company loses:

  • the right to administer their estate, i.e., their movable and immovable assets, including any assets that may be attributable to them as long as they are in a state of bankruptcy;
  • the right to take legal action as a defendant or plaintiff in matters relating to their estate.

A trustee is appointed to stand in the stead of the bankrupt party in matters regarding the liquidation of the bankruptcy estate, such as the cancellation of contracts and the stewardship of the proceedings.

All payments, operations or acts performed by the bankrupt party after the declaration of bankruptcy are automatically null and void.

In principle, after this judgement, creditors may not:

  • individually sue the bankrupt party;
  • enforce sentences, even if they precede the bankruptcy.

Exceptions are made for certain creditors who have special preferential claims (for example: mortgagees, pledgees, lessors of commercial premises, etc.).

Publication

The judgement specifies the newspapers in which information about the bankruptcy must be published.

Information about the bankruptcy is also published on the websites of the Luxembourg Business Registers and the Bar of Luxembourg and Diekirch.

Trustee

The trustee in bankruptcy must manage the bankruptcy with all due diligence. They are responsible not only for representing and administering the assets of the bankrupt party, but also for representing the general body of creditors.

The bankruptcy trustee's actions are monitored by the bankruptcy judge appointed in the declaration of bankruptcy.

Procedures for creditors and other interested parties

Creditors must file a creditor claim with the clerk of the court.

Other interested parties, such as a contractual partner of the bankrupt party asserting interests other than the collection of a debt, must contact the bankruptcy trustee.

For each bankruptcy, all creditors' claims are recorded in a special register kept by the clerk of the commercial court and numbered in the order in which they are submitted.

Verification of claims

The bankruptcy judgement sets the date of the first hearing for the verification of claims. During these hearings, the trustee checks whether the claims that have been submitted are justified. This verification is based on:

  • the documents enclosed with to the claim;
  • the bankrupt party's accounting documents;
  • the explanations of the bankrupt party and the creditor making the claim.

This stage occurs is supervised by the bankruptcy judge.

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

If a claim is not justified, the trustee disputes it and notifies the creditor. Disputed claims are referred to the court having jurisdiction which, after hearing the parties, issues its decision on the validity of the creditor's claim.

Outstanding contracts

The declaration of bankruptcy does not automatically terminate outstanding contracts.

The bankruptcy trustee must assess whether it is best to terminate or continue to perform a contract.

Only employment contracts are terminated with immediate effect.

Nullity of certain acts performed during the suspect period

The judgement declaring bankruptcy can set the period of cessation of payments by the bankrupt party to a date prior to the declaration of bankruptcy. However, this date cannot precede the date of the judgement by more than 6 months.

In order to safeguard the interests of creditors, the period between the cessation of payments and the declaration of bankruptcy is deemed a "suspect period". The concept of "suspect period" was defined 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.

These include:

  • any act relating to movable or immovable assets that the bankrupt party may have disposed of for no consideration, or for a consideration where the sale price is clearly too low in relation to the value of the asset in question;
  • all payments made, either in cash or by assignment, sale, offsetting or otherwise, in respect of debts that have not yet become due;
  • all payments made in a form other than cash or commercial paper for debts due;
  • any mortgage or any other rights in rem granted by the debtor for debts contracted before the cessation of payments.

Other acts, however, are not automatically deemed null and void.

Therefore, certain payments made by the bankrupt party in respect of debts due and all other acts subject to payment during the suspect period may be declared null and void if it transpires that the third parties having received payments or having dealt with the bankrupt party were aware that the bankrupt party had ceased payments.

Validly-acquired rights of lien may be registered until the date of the declaration of bankruptcy. However, rights registered during the 10 days preceding the period of cessation of payments or subsequently may be declared null and void if more than 15 days have expired between the date of the deed constituting the lien and its registration.

Lastly, all acts or payments made fraudulently to creditors, i.e. carried out by the debtor in full knowledge of their prejudicial impact on other creditors (e.g. by decreasing the estate, by not respecting the preferential ranking of claims, etc.) are deemed null and void, regardless of the date on which they take place.

The concept of suspect period does not apply to:

  • financial guarantee contracts;
  • future claims assigned to a securitisation entity.

Closing the bankruptcy

To close the bankruptcy, the trustee summons the creditors to the presentation of accounts. The trustee draws up a proposed distribution of the assets and submits it to the bankruptcy judge. They then pay the sums due to the creditors.

The trustee may then file a motion to close the bankruptcy, which will be adjudicated by the court.

Individual over-indebtedness

In the event of individual over-indebtedness, a trader cannot, under any circumstances, benefit from the collective debt settlement procedure with regard to their business-related debts.

However, they may benefit from the procedure for all non-business related debts if:

  • they have stopped all commercial activities for at least 6 months; or
  • where applicable, if the court has ordered the closure of the bankruptcy proceedings.

Persons who find themselves in a situation of over-indebtedness because they have acted as a joint guarantor of a sole trader or a company may benefit from the collective debt settlement procedure provided they have never been a director in fact or in law of said undertaking.

Who to contact

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