Luxembourg controlled management proceedings

 MARKET VIEW – LITIGATION 

Bonn Steichen & Partners’ head of disputes Fabio Trevisan explores the ‘soft alternative’ to bankruptcy and what it means for both debtors and creditors

Luxembourg law provides for a range of insolvency procedures, of which the most common have as their purpose the winding-up and realisation of the assets of the debtor, namely bankruptcy and judicial liquidation; whereas other insolvency procedures, such as suspension of payments (sursis de paiement), composition with creditors (concordat préventif de faillite) and controlled management (gestion controlée), aim at preserving and/or recovering the business of the debtor. Controlled management (gestion contrôlée) was devised as a less blunt measure than bankruptcy and as a softer alternative to composition with creditors; it permits companies in a temporarily weakened financial state to find a solution while avoiding the harshness and finality of bankruptcy. The controlled management regime is governed by the Grand-Ducal Decree of 24 May 1935, supplementing the legislation on suspension of payments, composition with creditors and bankruptcy.

On what grounds can a company be placed into controlled management?

Controlled management will be granted by the Commercial Court only if it deems that:

1. the credit of the debtor is undermined; or
2. the settlement in full of the debtor’s liabilities is in jeopardy; and
3. controlled management would allow the recovery of the debtor’s business, or would improve the position of the debtor in respect of the sale of its assets.

The aim of an application for controlled management is to facilitate either a reorganisation or an orderly winding up of a company.

What is the process for opening a controlled management procedure?

‘An application for controlled management may only be initiated by the debtor itself. Case law considers that the debtor must act in good faith.’

An application for controlled management may only be initiated by the debtor itself. Case law considers that the debtor must act in good faith when making the request for an order of controlled management.

It is down to the directors of the company to file an application for controlled management with the Luxembourg commercial district court. Such application must be supported by evidence, including a list of the company’s known creditors.

Such a request is no longer admissible if the company has been declared bankrupt by a final judgment.

What are the main steps of the controlled management procedure?

If the district court accepts the application, after having heard the debtor in a private hearing, the court will open the first phase by appointing one of its judges as a delegated judge, with the mission to draw up a report on the business of the debtor. The delegated judge can be assisted by experts. The court will set the date on which the delegated judge shall deliver their report.

Upon receipt of the delegated judge’s report, the district court, after having heard from the debtor in a private hearing, has two options:

1. it rejects the request to be put under controlled management; or
2. it places the assets of the debtor under the control of one or several commissioners, opening the second phase.

The commissioners will prepare an inventory of the assets of the debtor and a statement of the financial situation of the debtor. The commissioners will draw up their report, which will encompass either a business reorganisation or a liquidation plan.

The report must take into account the interests of all the interested parties (ie the debtor and its creditors) on an equal basis, and must respect the ranking of the existing privileges and mortgages.

The plan is then provided to the known creditors and submitted to the approval of the court.

An excerpt of the plan is also published in the Mémorial (Luxembourg’s official gazette).

Within 15 days following the communication or the publication, the creditors must inform the court whether they accept or reject the plan. They can also send written observations to the court.

After having heard from the debtor in a private hearing, as well as any other person the court considers appropriate, the court will render its decision.

The court may only accept the plan if more than 50% of the creditors, whose undisputed claims represent more than 50% of the liabilities of the company, approve the plan. Creditors that do not vote are deemed to have accepted the plan.

If the plan is accepted, the judgment is published in the Mémorial and in any newspaper determined by the court. The judgment can be appealed by the debtor or its creditors within eight days of publication.

If the plan is rejected, the court will either reject the application for controlled management or set a short timeframe within which the commissioners should draw up a revised plan.

The timescale for the whole process (from the filing of the application to the rendering of the final judgment) depends on the complexity of the matter at stake and is determined on a case-by-case basis by the court (it can take from a few months to one or more years).

What about creditors’ rights during the controlled management process?

Once the decision appointing the delegated judge has been taken, creditors are precluded from enforcing their rights against the company. This stay of execution concerns both unsecured and secured creditors (mortgagees, privileged creditors or pledgees). However, as a result of the provisions of the Luxembourg financial collateral law, security falling within the scope of that law remains enforceable, notwithstanding the controlled management process.

What is the role of the debtor during the control management process?

During the first phase of the controlled management process, the debtor may not, under pain of nullity, without the written approval of the delegated judge, dispose of its assets, grant pledges or mortgages, make commitments or receive movable property.

Scholars consider that this prohibition should be interpreted narrowly, such that the debtor should still be entitled to commit acts not expressly prohibited. In other words, the debtor should remain free to deal with the day-to-day management of their business.

Contrary to the bankruptcy regime, where the debtor is deprived of the right to administer its assets, the debtor placed into the controlled management regime (second phase), does not, in theory, lose the right to manage its assets, but remains under the strict supervision and control of the commissioners.

Indeed during the appointment of the commissioners, the debtor may not dispose of its assets, grant pledges or mortgages, plead, transact, borrow, receive funds, make any payment or perform any act of administration, without the prior consent of the commissioners. Any such transactions made without the commissioner’s consent will be void.

What is the claw-back regime?

Besides the establishment of the plan, the commissioners also have extraordinary powers to be exercised under the consent of the court, which include the annulment of certain acts of the debtor.

Indeed, the commissioner can challenge a payment or an act committed by the debtor either because such payment or act was made or committed during the so-called suspect period (the suspect period is set by the court, usually six months before the judgment deciding to continue the controlled management process (second phase)), or if the payment is proved to be fraudulent, from the date of such payment.

According to the Luxembourg commercial code, the following agreements and payments are void when they occur during the suspect period (or the preceding ten days):

• asset transfers and other transactions for no consideration or for a value that is lower than their true market value;
• mortgages or pledges granted to secure the debtor’s previously existing liabilities;
• payments of debts not yet due;
• payments of matured debts other than by cash or bill of exchange (effet de commerce), eg transfer of a property in payment (dation en paiement); and
• payments of matured liabilities or other transactions for valuable consideration made during the suspect period if the fund’s
• recipient was aware of the company’s cessation of payments/financial difficulties.

In the above listed circumstances, fraud need not be proved (the fraudulent aspect is more or less deduced automatically by operation of law).

When the commissioner refers such matters to the court, the latter, if the test is met, declares the above agreements entered into during the suspect period as void.

A commissioner is also allowed to challenge fraudulent payments or acts made or committed by a debtor, regardless of the date of such payments or acts (ie before or during the suspect period), by initiating a revocatory action.

The following three cumulative conditions must be met in order for such action to be successful:

• fraud by the debtor (it is sufficient to prove that the act was abnormal and that the debtor acted by knowing the harm to be made to the creditors, case law considers that there is no need to prove the particular intent to defraud);
• complicity of the party receiving the fraudulent payment or benefiting from the fraudulent act; and
• loss suffered by creditors due to the fraudulent payment/act (ie reduction in the value of the debtor’s assets).

As long as the controlled management proceedings have not been closed, the commissioner can invoke the nullity of the transactions at any time.

What steps need to be taken by the creditors?

The legal provisions governing controlled management do not provide for any specific procedure for creditors to file a proof of debt to perfect a claim against a company under controlled management.

However, the court and the commissioners are in a position to provide information only to known creditors. It would therefore be recommended to creditors to make themselves known to the court at the earliest opportunity.

If the controlled management application is ultimately rejected and the company is subsequently declared bankrupt, it will become necessary to file a statement of claim, within a set date, as provided for in the judgment declaring the company bankrupt. The statement of claim can nevertheless be filed at any time during the bankruptcy proceedings. However, dividends will only be paid out to those creditors that have filed their statement of claim.

Do all current contracts continue to apply after filing for controlled management?

The controlled management process, like the bankruptcy regime, does not trigger the termination of the current contracts. The debtor remains bound by its contractual obligations. However, it is necessary for the debtor to request the authorisation of the commissioners to perform its obligations under these contracts.

Controlled management is considered an insolvency procedure under Luxembourg law and would therefore generally constitute an event of default under financing documentation. However, such an event will always depend on the specific terms of the relevant documentation.