LUXEMBOURG Law and Practice Contributed by: Laure-Hélène Gaicio Fievez, Fabio Trevisan and Carolina Vasselli, BSP
Compulsory liquidation is generally restricted to corporate entities. However, insolvency regulation in Luxembourg can apply to individuals engaged in commercial activities, meaning sole proprietors or independent merchants could also be subject to compulsory liquidation under insolvency proceedings, depending on their financial structure and liabilities. The court may commence compulsory liquidation when a company demonstrates its inability to contin - ue operations due to insolvency, which is determined by two main factors: cessation of payments and loss of creditworthiness. Unlike voluntary liquidation, com - pulsory liquidation is guided by the principles of insol - vency law, which imposes specific solvency standards on entities. When a company is unable to meet its financial obligations, liquidation proceedings can be initiated to preserve creditors’ rights and achieve fair distribution of the company’s remaining assets. Compulsory liquidation can only be initiated by the public prosecutor pursuant to the law on commercial companies of 1915, as amended. Statutory insolvency procedure, on the other hand, may be initiated by sev - eral parties: • creditors, who may file for bankruptcy if they are owed debts the company is unable to pay; • the company’s management, which is obligated to initiate proceedings if it is clear that the company cannot fulfil its obligations; or • the public prosecutor (in some cases). Management has a duty to file for bankruptcy within a specific period once it becomes clear the company is insolvent, to avoid wrongful trading liability. Failure to do so may result in legal consequences for directors, who can be held personally liable for the company’s debts if they fail to act responsibly. 5.2 Course of the Liquidation Procedure The liquidation process formally begins when the company resolves to dissolve, typically requiring an extraordinary general meeting convened by the com - pany’s management, as detailed in 5.1 The Different Types of Liquidation Procedure ,“Voluntary Liquida - tion”.
Upon approval, a liquidator is appointed by the gen - eral meeting, responsible for overseeing the liquida - tion. The liquidator’s role is to represent the company throughout the liquidation, which includes ceasing trading activities and notifying relevant authorities about the proceedings. The liquidator then takes over the company’s assets and liabilities, conducting an inventory and preparing a balance sheet to establish the company’s financial standing. The liquidator’s primary responsibilities are to recover and realise the company’s assets to settle its debts. This can involve collecting receivables, selling assets, and potentially even continuing limited business oper - ations temporarily if it would better serve the liquida - tion process. For example, the liquidator may, under certain conditions, secure loans or issue commercial papers, provided such actions benefit the estate and do not unfairly disadvantage creditors. The liquidator’s powers may be modified according to the articles of association or by resolutions passed at the time of appointment. The distribution of assets follows a strict hierarchy: creditors must be treated equally, with priority given to specific claims, such as those related to wages, taxes and secured debts. Regardless of their matu - rity, all claims must be addressed, even if they were not yet due on the date of liquidation. If creditors fail to respond to requests from the liquidator, any unclaimed amounts are deposited with the Deposits and Consignments Fund ( Caisse des dépôts et con- signations ). Once all obligations are met, any residual assets are distributed to the shareholders, subject to tax obligations. To conclude liquidation, the liquidator prepares final liquidation accounts, which are then submitted to the general meeting of shareholders for approval. The meeting also appoints internal auditors to validate the liquidation accounts. Following approval, the liquida - tor is formally released from their duties, and the final steps include specifying where company records will be stored for five years, as required by law. The com - pany’s dissolution is then registered with the Trade and Companies Register (RCS), which updates the company’s status to “in liquidation” or “removed”, marking the official end of its legal existence.
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