ROSALIA Ane

MSc 2 International Audit and Compliance

Based on your previous works, to what degree would you say that the IMA is truly innovative
act?

In my opinion, I would prefer to say that IMA is only updated regulation from outdated version of
insolvency act 1870, but normally the new inserted article is innovative compared to the old law because
they adopt the reorganization plan like US Chapter 11. The innovatio’s degree is difficult to determine
but for sure there are some massive innovations which is inspired by US chapter 11. The US chapter
11 is the common insolvency law that using globally as inpirative law, including EU Directive 2019/1023
(RX Directive) which adopting some point from the rules.

Here, I would like to presence main inovative ideas from new act (IMA) compared to old law then the
comparation with US Chapter 11.

The main innovation within IMA and Comparation to Old Insolvency Law 1870

Modernizing the insolvency law to increase Luxembourg’s attractiveness and the competitiveness of its
restructuring framework to detect an early stage of companies’ financial distress and prevent
bankruptcy, here the innovations from the IMA:

New preventive reorganisation procedures

The old legal framework of Insolvency law 1870 are as follows:

1. Bankcruptcy is under 437 to 592 article LCC (Luxembourg Code of Conduct) applied when the
debtor in this condition:
a. Unable to pay its debt have due
b. Lost credit worthiness

Must submit the bankcruptcy within 1 month by the director/manager or they will have problems
with the laws.

2. Controlled Management → Tribunal Arrondisemment de Luxembourg is choosen if there is

“controlled management” after the debtor applied facing financial difficulties for further action
such as reorganising and restructuring its debts, realising the assets in the best interest of
creditors.
3. Suspension of payments article 593, this applies when debtor could not face its financial
obligations but after the examination of its balance sheet, they have enough assets to pay all
its debts, this procedure is rare.
4. Composition with creditors (concordat préventif de faillite) : regulated under law 14 April 1986,
the aim is to obtain a restructuring of the debtor’s liability, the application of this procedures
required 75% of the claims.

The new reorganisation procedures are replacing the old legal framework in Insolvency law 1870
including:

1. Conciliation (conservatory measures) when the debtor requests that the Minister for the
Economy or the Minister for Small and Medium-Sized Enterprises appoint a conciliator
(conciliateur d'entreprise) to facilitate the reorganisation of all or part of its assets or its
business.
2. Judicial reorganisation proceedings aim to preserve the continuity of all or part of the assets or
the business of the debtor under the supervision of the court.
Under judicial reorganisation there are three types of judicial reorganisation proceedings
a. Mutual agreement – The debtor intends to obtain a stay (sursis) to conclude a mutual
agreement. The proceeding is judicial compared to the above-mentioned reorganisation by
 mutual agreement (out-of-court procedure), so that the common rules listed below are
applicable.
b. Collective agreement – The debtor intends to reach a collective agreement (accord collectif)
with some of its creditors on a reorganisation plan. The Law embeds the UK cross-class
cram-down mechanism (also provided for in the EU Directive of 20 June) within the
framework of this procedure. This enables a restructuring plan to bind dissenting creditor
classes under certain circumstances.
c. Transfer by court order – All or part of the assets or the business of the debtor is transferred,
by court order, to one or several third parties. This proceeding may be voluntary and
involves employees and employee representatives.

On each type there are some common rules governing the judicial reorganisation proceedings:

In the pre-opening phase, when the debtor requests proceedings, a delegate judge is
appointed, the obligation to file a bankruptcy petition is suspended. Meanwhile the Public
Prosecutor is notified, and no bankruptcy, judicial liquidation, or enforcement actions (except
for certain exceptions) can be initiated until the District Court issues a judgment on the debtor's
request. Then, after the procedure officially begins, a maximum four-month stay period is
enforced. The existing agreements and financial arrangements, except for employment
agreements, remain enforceable. This includes financial collateral arrangements like pledges,
set-off or netting arrangements, and professional payment guarantees, benefiting creditors.
Payments made are binding on third parties, and any new liabilities are considered debts of the
insolvency estate.

3. Reorganisation by mutual agreement (out-of-court procedure) is a voluntary out-of-court

proceeding pursuant to which the debtor and at least two of its creditors mutually agree to
reorganise all or part of the assets or the business of the debtor. Once approved by the District
Court (tribunal d'arrondissement), the mutual agreement is enforceable and payments pursuant
to it are enforceable against the insolvency estate even if they fall within the suspect period.

To sum up, preventing bankruptcy by facilitating the recovery and continuity of viable business
through a reform of the legal framework consisting of reorganisation procedure. The new legal
framework enables companies and some entities (special limited partnerships, commercial or civil
companies, individual traders and craftsmen, with certain exceptions such as credit institutions,
investments firms, financial institutions, electronic money institutions and payment institutions,
insurance and reinsurance undertakings, etc.) in situation of imminent or foreseeable peril (the
"Debtor") to preserve all or part of their assets or activities under judicial supervision. While the old
legal framework is more likely applicable especially for the composition with creditors and the
control management because it time consuming and costly and lack of flexibility.

Identification of businesses in difficulties and businesses likely to be declared bankrupt.

There is new measurement to detect business difficulties and business likely to be declared bankrupt.

The responsibility of identifying financially distressed debtors with the potential to disrupt their business
continuity falls upon the Minister for the Economy and the Minister for Small and Medium-Sized
Enterprises. The detection of financial difficulties by the Minister are as follows (article 6):

1. Inviting the debtor’s business to obtain any information relating to the state of its affairs and
inform it of the reorganization measures available to this process.
2. Have an access for certain information from National Institute of Statistic and Economic
Studies, consisting of information about the Central Balance Sheet Office, pursuant to article
76 act 19 December 2002 on the trade and companies register and the accounting and annual
accounts of companies.
3. The list of protest concerning bills of exchange and promissory notes
4. Dismissal notification for economic reason pursuant to article L.511.- 17 French Labor Code
 5. The list of debtors who have not paid, within three months, all the social security and VAT debts
and deductions from salaries and wages that have been the subject of an administrative
constraint imposed on them.

Those collected debtor’s information can be modified by requesting to the minister for rectification of
the data collected about the debtor (Article 6 - 6).

The point is in the old law 1870 there are not those detection measures to prevent the companies which
facing financial distress or more likely going bankruptcy.

The new act gives the second chance to unfortunate but honest companies and entreprises.

It also creates a new way to stop stigmatizing failure and give an honest manager who has gone
bankrupt a new chance to do business again and does not impact their reputation with the “principe de
la nouvelle chance”, while not directly preventing bankruptcy it helps to mitigate its impact.Meanwhile
in the old law 1870 there is not arrangement for this point.

Protecting more the employment of the companies which facing financial distress

The new act offers enhanced protection for employment. Employment contracts are automatically
transferred to the purchaser of a distressed company, ensuring job continuity. The New Insolvency Law
also allows employees and employee representatives to contest this notification and claim damages
from the transferor. Based on old law 1870, the point of employment contract are based on the
proceedings such as concordate preventive and control management, the employment remains
continue, if any activities unless the insolvency officer terminate it. Under bankruptcy proceedings,
according to Article L.125-1 of the Labour Code (Code du Travail), employment contracts are terminated
with immediate effect when a company is declared bankrupt.

The similarities and distinguishment between IMA and US Chapter 11 for its innovative points

The similarities between IMA and US Chapter 11 are as follows:

1. Chapter 11 of the United States Bankruptcy Code provides a procedure by which an individual
or a business can reorganize its debts while continuing to operate. The debtor, often with
participation from creditors, creates a plan of reorganization under which to repay part or all its
debts this arrangement is like the conciliation and reorganisation procedures under IMA.
2. As of the 7th august 2023 act of Luxembourg borrows from the same principles for its
reorganisation by judicial procedure with the same goal to protect the debtor and the interests
of the creditors by finding common grounds between them.

The distinguishments between IMA and US Chapter 11 are as follows:

1. The American Law has one more specificity that Luxembourg did not have, the debtor can
obtain new financing or loans by giving priority and/or security to the new creditors, this
particular part of the law was not kept in Luxembourg as it could lead to a downward spiral into
more problems of debt if applicable.
2. Chapter 11 is available only to businesses that are incorporated in the US or have significant
operations in the US, whereas the Luxembourg law applies to businesses incorporated in
Luxembourg.

The framework of IMA is adopting several points from US chapter 11 but US chapter 11 is well-
established legal framework that has been used for decades, while for IMA is a new tool insolvency law
that will need a time to be implemented.
In conclusion, the IMA framework is very innovative to increase the attractiveness and competitiveness
of its restructuring and insolvency framework – the law on business preservation and modernisation of
bankruptcy law (Law), which aims to modernise insolvency law and also grant a second chance to
entrepreneurs. The innovation is inspired by US chapter 11. From new act there are transformation in
judicial reorganisation plan, detection for business difficulties, protection for employee and give second
chance to start new business. Those features’ objective is to keep the company alive and avoiding the
bankcruptcy proceedings.

Additional Information for Judicial Procedures Process Article 12 – 37

1. Judicial Reorganisation Proceeding

 2. Reorganisation by Mutual Agreement

Sources:

https://www.dentons.com/en/insights/articles/2023/july/20/new-luxembourg-law-to-preserve-
businesses-and-modernize-insolvency-law

https://www.dentons.com/en/insights/articles/2023/july/20/new-luxembourg-law-to-preserve-
businesses-and-modernize-insolvency-law

https://www.dentons.com/en/insights/articles/2023/july/20/new-luxembourg-law-to-preserve-
businesses-and-modernize-insolvency-law

https://www.arendt.com/jcms/p_2100968/en/luxembourg-new-rules-on-business-preservation-and-
modernisation-of-insolvency-lawc

https://www.mondaq.com/insolvencybankruptcy/1344902/luxembourg-new-rules-on-business-
preservation-and-modernisation-of-insolvency-law

https://uk.practicallaw.thomsonreuters.com/6-501-
9478?transitionType=Default&contextData=(sc.Default)&firstPage=true

New Insolvency Law of Luxembourg 2023