Judicial reorganisation by collective agreement
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Summary:
Enable businesses facing financial hardship to reach an agreement with their creditors so that they can reorganise their debts, avoid bankruptcy and continue operating.
Reorganisation by collective agreement provides businesses facing financial hardship with an alternative to bankruptcy, in that it allows them to continue operating and to safeguard their employees' jobs.
The aim of the procedure is to create the conditions for businesses to reach an agreement with their creditors, so that they can:
- reorganise their debts; and
- surmount the financial hardship they are experiencing.
It is a consensus-based approach to avoid compulsory liquidation.
The reorganisation plan is central to the procedure of reorganisation by collective agreement. The purpose of the plan is to restructure the business facing financial hardship so that it can continue to operate, while at the same time undertaking measures to remedy its financial situation.
Who is concerned
This procedure is available to:
- traders;
- commercial companies;
- craftspeople; and
- civil companies (sociétés civiles).
A trader is any natural or legal person who:
- engages in commercial operations; and
- does so in a professional capacity.
Prerequisites
The business must be considered viable, i.e., it must show potential for recovery.
The business must be facing financial hardship that prevents it from honouring its debts as and when they fall due. However, the financial hardship must be considered to be:
- temporary; and
- surmountable through an agreement with the business's creditors.
How to proceed
Filing an application
You must file a petition with the court – i.e., the district court (tribunal d’arrondissement) with jurisdiction for hearing commercial matters. The petition must include any documents that substantiate the fact that your business is experiencing financial hardship and that you are making every effort to remedy the situation.
In your petition, you must:
- explain your financial situation;
- provide a list of your creditors; and
- include a plan for remedying your financial issues.
If certain documents are not available when you file your petition, you can forward them to the court up to 2 days before the hearing.
Your petition must be:
- signed by you, as the business's representative, or by your lawyer; and
- filed with the clerk of the court.
You will receive a receipt confirming that your petition has been filed with the court.
Supporting documents
Your petition must include the following documents:
- a description of the situation: in this document, you should explain why you believe that your business's short-term or long-term survival is at risk;
- the objectives of the procedure: you should explain what you hope to achieve by filing for judicial reorganisation (e.g., have enough time to pay off your debts, or to negotiate with your creditors, etc.);
- the last 2 annual financial statements:
- if you are a company, you will need to provide your annual financial statements for the last 2 years;
- if you are a natural person (a sole trader), you will need to provide your last 2 income tax returns;
- a recent accounting statement, i.e., a document that:
- shows what the business enterprise owns (its assets) and what it owes (its liabilities);
- must be accompanied by a recent income statement (less than 3 months old);
- must have been drawn up with the help of an accountant;
- a provisional budget: a plan setting out the business's projected income and expenditures for the requested deferment period. This budget must have been prepared with an accountant;
- the list of your creditors: you should provide a list of all of your creditors – i.e., the persons or companies to whom you owe money – showing the amount you owe each of them;
- a recovery plan: a document explaining what measures you plan to implement to bring about a return to profitability and satisfy your creditors and, if applicable, what measures are planned as regards your employees (e.g., a redundancy plan);
- the obligations you have to your employees: a report showing how you have informed your employees, or their representatives, about the situation;
- legal documents (if applicable): if you are requesting that the seizure of certain assets be suspended, you should attach a copy of the legal documents pertaining to the seizures in question;
- a list of your partners (if applicable): if you are a company with partners whose liability is unlimited, you should provide a list of the partners and demonstrate that they have been duly informed.
Appointment of a 'delegated' judge (juge délégué)
Once your petition has been filed, a 'delegated' judge will be appointed to examine the admissibility and suitability of your petition.
The judge may wish to question you and any other persons they may deem relevant for their inquiry.
They may also ask you to provide further information so as to gain a better understanding of the business's financial situation.
Protection available pending the judge's decision
Pending the court's decision on the petition for judicial reorganisation:
- the debtor may not be declared bankrupt or dissolved by court order;
- the debtor's assets (movable or immovable) may not be sold as part of part of the implementation of enforcement proceedings.
Enforced sale of movables
If an enforced sale of movables is planned within 2 months of filing the petition for judicial reorganisation, the sale may go ahead unless the court decides to suspend it.
In that case, you must request the suspension of the sale in your petition. However, merely requesting a suspension will not automatically prevent the sale.
If the court grants the suspension, you will be required to bear any costs in connection with the suspension.
Petition review time
The court will examine your petition for judicial reorganisation within 15 days of your filing.
You will be summoned to a hearing unless you have waived your right to attend.
The summons will be sent by registered letter at least 3 days before the hearing.
Conduct of the hearing, and ruling
After having heard both you and the 'delegated' judge (who will have produced a report on the situation), the court will hand down a ruling within 8 days of the hearing.
If all the legal conditions are fulfilled, the court will:
- initiate judicial reorganisation proceedings; and
- set the length of the deferment period, which may not exceed 4 months.
If not all the legal conditions are fulfilled, the petition will be denied.
The court will notify you of its decision to initiate the proceedings, and the decision will be recorded in the Electronic Compendium of Companies and Associations (Recueil électronique des sociétés et associations) to make the information publicly available.
If the petition is denied, you will also be informed by the clerk of the court.
Information to creditors
You must inform each of your creditors individually of the court's decision to initiate reorganisation proceedings within 14 days of the decision. The information may be communicated by registered letter or by email.
Your creditors must also be informed that the list of creditors and other documents pertaining to the proceeding are available for their review at the office of the clerk of the court.
You will need to provide the clerk of the court with a copy of the letters sent to your creditors, along with the acknowledgements of receipt, so they can be added to your file.
Effects of the ruling on judicial reorganisation
Temporary freeze on the disposal of movable and immovable assets
While the deferment is in force, no individual proceedings to recover any debts contracted prior to the period of deferment may be brought or enforced in respect of the debtor's movable or immovable assets.
Deferment of creditors' proceedings
Once judicial reorganisation proceedings have been initiated, your creditors can no longer initiate proceedings for the payment of their receivables (debts). This measure also includes the suspension of proceedings to seize the business's movable or immovable assets. No new enforcement proceedings (such as a seizure) may be initiated.
Your creditors will be protected, but they will have to wait until the reorganisation plan is implemented to find out how and when their debts will be repaid.
Suspension of bankruptcy
During the period of deferment, your business cannot be declared bankrupt unless you file for bankruptcy yourself.
If you are a company, your company also cannot be dissolved by way of a court or administrative order.
Freeze on prior debts
All debts contracted prior to the initiation of judicial reorganisation proceedings will be frozen. This means that you will no longer be required to pay off your debts immediately. They will be reorganised or adjusted as part of the reorganisation plan.
New debts, contracted after the initiation of the proceedings, must be paid under normal conditions.
Negotiations with creditors
Once the court has decided to initiate judicial reorganisation proceedings, you will be able to negotiate a reorganisation plan with your creditors. This plan could include debt rescheduling arrangements, debt reductions, or other arrangements that enable your business's recovery.
Before it can be endorsed (approved), the plan must be accepted by your creditors at a hearing to vote on the matter, organised by the court.
Oversight by the court and the 'delegated' judge
During the proceedings, you will be placed under the supervision of the court and a 'delegated' judge. The judge will monitor the progress of the business's situation, ensure that all parties adhere to the rules of the proceedings, and produce reports for the court.
Depending on how the situation evolves, the court may extend or modify the deferment period, or may even terminate the reorganisation proceedings if not all the conditions are fulfilled.
Effects on existing contracts
As a general rule, all contracts entered into before the judicial reorganisation proceedings were initiated will remain in force. Nevertheless, you may request that certain contracts be terminated if they are deemed detrimental to the proper operation of the business.
Specific features of the reorganisation plan
Objective of the reorganisation plan
The reorganisation plan is designed to ensure the business's long-term viability. Its purpose is to:
- restructure the business's debts;
- adjust its economic activities; and
- implement measures to improve the management of the business and its profitability.
Content of the reorganisation plan
The plan must contain several essential components to demonstrate its feasibility and relevance. Here are some of those key components:
- a description of the current situation that the business is facing, including its financial difficulties;
- measures to be taken to remedy the situation, which may include:
- debt restructuring;
- the transfer of certain assets;
- measures to reduce costs;
- redundancies; or
- the renegotiation of contracts;
- a creditor repayment schedule, specifying how the debts will be rescheduled or reduced;
- a business plan and financial projections to demonstrate the business's ability to operate profitably after the reorganisation;
- impacts on employees (e.g., redundancies or staff cuts) and any measures to mitigate such impacts.
Presentation to creditors and creditors' approval
Once the plan has been prepared, it must be presented to your creditors. Your creditors fall into different categories (depending on the nature of their receivables: guaranteed, non-guaranteed, suppliers, etc.).
The plan must be approved by a majority of the creditors – the required majority is often established by law, depending on the amount of their receivables.
If the plan is approved by the creditors, it will be forwarded to the court for endorsement.
If a majority of the creditors refuse the plan, the business may be placed in compulsory liquidation.
Endorsement by the court
The court plays a key role since it is up to the court to endorse the reorganisation plan. It ensures that:
- the plan is realistic and viable for the business's recovery;
- all the creditors have been treated equally, without undue discrimination;
- the plan does not adversely affect the rights of minority creditors, or those who did not approve the plan.
If the court endorses the plan, it will become binding upon all the creditors involved, including those who voted against it.
Monitoring the implementation of the plan
Once the plan has been endorsed by the court, you must honour your commitments and implement the measures that are planned.
An auditor or an administrator may be appointed to:
- implement the plan; and
- report to the court on the progress of the reorganisation.
Revision or modification of the plan
In certain cases, the plan may be modified during the implementation phase, especially if:
- new difficulties arise; or
- economic conditions change.
Any changes to the plan must be approved by the court and, in certain cases, by the creditors as well.
Consequences of failing to adhere to the plan
If you fail to implement the reorganisation plan or to honour your commitments, your creditors may petition the court to:
- have the plan revoked; and
- resume individual proceedings.
This may result in the business being placed in compulsory liquidation.
Who to contact
District Court District Court Luxembourg
- Address:
- Cité judiciaire L-2080 Luxembourg Luxembourg
- Phone:
- (+352) 47 59 811
District Court District Court Diekirch
- Address:
-
4, place Guillaume
L-9237
Diekirch
Luxembourg
B.P. 164, L-9202 Diekirch
- Phone:
- (+352) 80 32 141
Related procedures and links
Related procedures
Links
Legal references
- Code de Commerce
-
Loi du 7 août 2023
relative à la préservation des entreprises et portant modernisation du droit de la faillite
