Up Again Luxembourg: Governance


1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?

The key topics to focus on during the deconfinement period are set out below.

With respect to the business's activities:

  • assess the impact on the business of the lockdown and the return to work, and continue to monitor that impact;
  • identify and monitor the (potential) risks facing the business, with a short and long-term focus on key clients and suppliers, eventual cashflow and solvency issues, and margin calls;
  • renegotiate the relevant contractual arrangements entered into with customers or suppliers, depending on the business's needs post-COVID-19;
  • assess the business's potential litigation risk, including the impact of decisions made or not made during the lockdown, and if necessary prepare for potential litigation;
  • (further) develop an adequate strategic management process capable of identifying potential threats, advance planning and the safeguarding of critical business functions in the event of disruption;
  • prepare the business for the new normal, with a focus on the business's competitiveness, resiliency, productivity and value;
  • review and further develop business continuity planning;
  • depending on the business's corporate objective, looking out for possible investment opportunities; and
  • consider the need for external advice on any of the above issues.

With respect to the business's staff:

  • adopt of a return-to-work plan and a strategic communication plan for interacting with employees, shareholders, potential investors and other stakeholders;
  • comply with the government's, legislator's or health authority's regulations, requirements, guidelines or recommendations; and
  • proactively communicate internally with staff, addressing their reasonable needs and concerns.

With respect to the business's financial position:

  • consider the available state aids;
  • monitor whether the business could be in default under any credit agreement and give regular updates on this to the company's creditors, shareholders, potential investors and other stakeholders; and
  • monitor whether the business meets or is likely to meet the criteria for insolvency under Luxembourg law.

2. Should boards adopt particular governance practices in this context?

The main governance principles remain applicable, but boards should pay particular focus to:

  • ensuring effective communication within the board so that business decisions are taken effectively and efficiently;
  • regular and transparent communication of business decisions with employees and other securityholders;
  • elevation of stakeholders' considerations during the board's discussions;
  • properly recording board discussions and decisions;
  • increasing the frequency of board meetings where needed, considering whether it would be appropriate to meet urgently for an immediate discussion and briefing from relevant advisors, or diarising regular meetings as the situation unfolds; and
  • considering the setting-up of an ad-hoc or temporary post-lockdown and/or post-COVID-19 committee of the board, which can meet more frequently and report back to the full board with updates and recommendations.

3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?

Boards must always act in the best interests of the company. This is why corporate purpose and values will play an important role in determining the company's response during and after the pandemic, and the role of long-term owners will be crucial in balancing the interests of all shareholders.

The board should also remain committed to good corporate governance to enhance trust, integrity and ethics, with a view to building stronger relationships and trust with stakeholders and employees, thus preserving the long-term value of the company.


4. Your company is facing liquidity issues as a result of COVID-19:

a. What are the repercussions for continuing to operate your company?

Where a company faces liquidity issues, several decisions may need to be taken by the board to keep the company afloat, such as:

  • refinancing of the company;
  • cashflow management;
  • negotiation of payment terms;
  • control of overhead expenses;
  • earlier invoice submission; or
  • disposal of assets to settle liabilities; or
  • application for available state aid – the Luxembourg government has introduced various aid schemes under which companies can apply for different forms of direct liquidity support when they meet the relevant conditions for such support. The amount often depends on the size of the company.

Board members can be held personally liable if they commit a management error or contravene with the mandatory provisions of the Luxembourg law of 10 August 1915 on commercial companies, as amended and restated, or any provisions of the articles of association of the company they manage.

The board must monitor whether the company has negative net assets, because, under certain conditions, specific Luxembourg law provisions may apply (e.g. in the case of a public limited liability company, the requirement to hold an extraordinary general meeting of the company's shareholders to approve the continuation of the company).

The board should pay even greater attention to the following liability regime:

  • Board members who committed gross and serious misconduct (faute grave et caractérisée) that contributed to a bankruptcy may be held personally liable to bear the company's debts, in whole or in part, jointly and/or severally, where the company's bankruptcy reveals a shortage of assets. The absolute lack of taking measures to resolve the company's difficulties can qualify as a gross and serious misconduct by the board members.
  • The bankruptcy could also be extended (extension de la faillite) to any legal or de facto board member who has abusively pursued, in their personal interest, a loss-making business that could only lead to the company's cessation of payments. In that case, the board member may personally be declared bankrupt.

b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?

Under Luxembourg law, any commercial company and any trader which is in a situation of both:

  • cessation of payments (cessation de paiement), meaning that the company has ceased to pay its debts when due; and
  • loss of creditworthiness (ébranlement du crédit), meaning that no more credit can be obtained from banks, suppliers or creditors is required to file for bankruptcy (faillite sur aveu).

This declaration shall be submitted by the board to the competent district court within one month of the date on which both conditions are fulfilled. 

This one-month period was suspended during the state of crisis, and the legislator has decided to extend the suspension until 24 December 2020 (six months following the end of the state of crisis) by the Law of 20 June 2020.

From a practical point of view, though, a company can still apply for bankruptcy. A representative of the company must call the clerk's office of the district court, sitting in commercial affairs (tel: 475981-718) to apply.

c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?

Board members must take all decisions with a view to the company's long-term benefit and in the corporate interest of the company.

Where the business has liquidity issues, the board should to take preventive actions sufficiently in advance to avoid a possible bankruptcy (see question 1(a) above) and the frequency of board meetings might need to be increased.

The board's discussions and decisions must be properly recorded for eventual evidence purposes.

d. Will your company be wound up if you fail to make payments when due?

A company will not be automatically wound up where it cannot make payments when due.

As above, a company will be required to file for bankruptcy only if:

  • it fails to pay debts as they fall due; and
  • it ceases to be “creditworthy.”

If these two criteria are met and an insolvency filing is made, a bankruptcy judgement will be handed down by the court, which will appoint a bankruptcy trustee (curateur) to conduct the insolvency proceedings under the supervision of a bankruptcy judge (juge commissaire).

A company in a state of bankruptcy can also be declared bankrupt:

  • at the request of a creditor having a certain, liquid and due claim against the company; or
  • at the initiative of the Public Prosecutor.

In this context and to preserve the economy, the Bill of Law n° 7552 suggests in its current version the inadmissibility of bankruptcy petitions introduced by creditors (faillites sur assignation) during the two-month period following the state of crisis. It is specified that this inadmissibility would only benefit companies experiencing financial difficulties as a result of the COVID-19 pandemic. This Bill of Law was tabled on 6 April 2020 but has not yet been adopted, meaning bankruptcy petitions may currently still be initiated by creditors.

Procedures of automatic bankruptcy (faillite d'office) at the initiative of the Public Prosecutor, as well as a judicial liquidation (liquidation judiciaire) of commercial companies pursuing activities contrary to criminal law or seriously infringing the provisions of the Commercial Code or the laws governing commercial companies, may also still be initiated.