Following the entry into force of the Luxembourg law of 7 August 2023 on business continuation and modernisation of bankruptcy law (the “Law”) on 1 November 2023, the Luxembourg courts have handed down several decisions clarifying the scope of application of judicial reorganisation proceedings, the new debtor-in-possession restructuring proceedings introduced by the Law.
Opening of judicial reorganisation proceedings
Judicial reorganisation proceedings are a new debtor-in-possession tool aiming to preserve continuity of businesses under control of a court. Judicial reorganisation proceedings can be initiated when the continuity of the business is threatened in the short term or in the long term. The courts have already assessed this condition on several occasions and have found the relevant applications to be admissible notwithstanding the fact that the relevant debtor might not be acting in good faith. In most cases, the debtors stress their future prospects to justify why bankruptcy proceedings should be avoided, even though the fact that a company meets the substantive criteria for bankruptcy per se does not prevent the opening of judicial reorganisation proceedings under the Law.
The courts have accepted an application for the opening of judicial reorganisation proceedings from a company that was non-compliant with the legal requirements for publishing its annual accounts with the Luxembourg Register of Commerce and Companies within the legally prescribed period.
Transfer by court order of all or part of debtor’s business
Under the Law, the opening of judicial reorganisation proceedings can have more than one objective: to reach a mutual agreement with creditors, to agree on a restructuring plan or to transfer all or part of the company or its activities. The parliamentary discussions which led to the adoption of the Law, emphasize that transferring a company or its activities (i.e. production lines, clientele, or personnel) often serves as the most effective method to ensure its continuation.
Since the Law does not explicitly define what “activities” can be transferred, this remains open to court interpretation. Indeed, in a recent judgment the court ruled that the ownership of shares by a non-operational, purely holding company does not constitute a transferable economic activity within the meaning of the Law and rejected the relevant application for putting a holding company into judicial reorganisation proceedings by ordering the transfer of its assets. In doing so, the court made reference to other activities that would fall under the scope of the Law by way of example (e.g. producing goods, providing services, or generally engaging in activities that fall under the VAT regime). Furthermore, the court stated that the Law only refers to the activity of the debtor and not the activity of its subsidiaries; consequently, it is not possible for a holding company to request the transfer of all or part of its subsidiaries’ assets (in case these are operational companies).
The judgement was subsequently appealed, one of the arguments presented to the court of second instance being a recent Belgian jurisprudence that would allow for the judicial reorganization of holding companies. However, the Luxembourg court maintained the decision from the lower court that the judicial reorganisation procedure by transfer of the debtor’s activity applies primarily to operational companies the preservation of which should be ensured, while the holding of shares does in general not constitute such an activity.
Share on
