Luxembourg prioritises the preservation and reorganisation of business over liquidation

Luxembourg has shifted its focus towards preserving and restructuring businesses rather than resorting to liquidation. The enactment of the Insolvency Modernisation Act (IMA) in July 2023 by the Luxembourg parliament marks a significant move towards enhancing business continuity, facilitating restructuring, and modernising bankruptcy procedures. Prior to the IMA, Luxembourg had limited options for restructuring, primarily relying on consensus and solvency, which often led to the resolution of many matters in foreign courts.

Traditionally, Luxembourg lacked effective restructuring mechanisms due to outdated and impractical procedures. With the introduction of the IMA, Luxembourg aims to address this deficiency by offering a range of judicial and extrajudicial restructuring processes, thereby making local resolution more attractive. This aligns with the Directive (EU) 2019/1023 of the European Parliament, aiming to harmonise insolvency and reorganisation laws across EU Member States.

Key changes under the IMA include measures to prevent bankruptcy, elimination of outdated insolvency procedures, and a focus on preserving and reorganising businesses over liquidation. These changes are expected to have a profound impact on both local and international companies operating in Luxembourg, as well as on insolvency practitioners and the judiciary. The efficiency and cost-effectiveness of the process will play a crucial role in determining its reception and implementation.

It’s worth noting that the IMA does not affect the special protection of collateral arrangements under the Financial Collateral Act. The scope of the IMA extends to various entities, including commercial companies, and partnerships, while certain entities like UCITS, insurance companies, and credit institutions are subject to special insolvency regimes.

The IMA introduces prevention measures to detect financial difficulties early and allows debtors to negotiate amicable agreements with creditors, subject to court approval. Judicial reorganisation procedures aim to preserve assets or activities under judicial supervision, with the possibility of transferring the business or reaching collective agreements with creditors. Furthermore, the IMA modernises bankruptcy provisions and broadens the eligibility criteria for restructuring professionals. Cork Gully (Luxembourg) Sarl, through its directors has embraced the changes and now offers a range of restructuring services to both local and international companies operating in Luxembourg.

The IMA came into force on 1 November 2023. Embracing modern restructuring laws can offer companies facing financial distress a strategic alternative to liquidation by preserving value and maintaining stakeholder interests. The success of the IMA will depend on stakeholders becoming accustomed to its usage and benefits. Initial impressions among Luxembourg service providers have been positive, and it is anticipated that the new regime will be recognised and accepted in courts across jurisdictions.