Luxembourg introduces a simplified dissolution procedure for companies without liquidation
09 November 2022
On 18 October 2022 the Luxembourg Parliament adopted a law implementing a new procedure for the administrative dissolution of companies without entailing any specific liquidation process (the "Administrative Dissolution Law"). The second voting of the bill of law number 6539B was dispensed with and approved of by the State Council on 25 October 2022.
The bill of law resulted from the split of bill number 6539 which related to a vaster array of aspects with respect to the largest-ever modernisation of bankruptcy law.
What is the objective of the Administrative Dissolution Law?
The Administrative Dissolution Law implements a new and simplified dissolution procedure. This new mechanism will be applicable in specific circumstances in addition to the existing and rather formal court-ordered procedure of judicial liquidation which is set out in article 1200-1 of the Luxembourg law of 10 August 1915, on commercial companies (the "Luxembourg Company Law").
The currently applicable procedure of dissolution can prove rather cumbersome and time consuming in specific cases as it consists of the public prosecutor requesting the district court to order the dissolution and liquidation of Luxembourg companies and involves the participation of especially appointed liquidators in an asset liquidation process. This mechanism is however only possible in situations in which the company in question:
- pursues activities that contravene criminal law or
- seriously contravenes the provisions of the Luxembourg Commercial Code, the laws on commercial companies or the provisions governing business licences.
Should the district court consider the alleged infringements to be sufficiently serious, one or more liquidators will be appointed who will decide on the method of liquidation. In this respect, the liquidator(s) will identify all the assets and liabilities of the company and subsequently ensure the payment of the liabilities by realizing the assets.
Given that this formal procedure has frequently proven to be a considerable administrative burden on the district court likely to cause important costs as well, the need arose for the introduction of a simplified less time-consuming and financially onerous out-of-court system which could be applied to inactive companies that do not have any assets or staff, providing for the effective and time-efficient dissolution of empty shell companies (also sometimes called "zombie companies") without any specific commercial activities. In other words, the main purpose of the administrative dissolution procedure is to avoid court-ordered liquidation.
Who can the new administrative dissolution procedure be applied to?
Three conditions must be met in cumulative manner. The company to be dissolved:
- must be a commercial company the activities of which breach criminal law or that seriously contravenes the provisions of the Luxembourg Commercial Code or the laws governing commercial companies and business licences (as is the case in the currently applicable procedure referred to above);
- must not have any employees; and
- cannot have any assets either.
With respect to item 1) above this might for instance be the failure to file the annual accounts or the absence of a registered office or the resignation of the entire management board without having put in place a replacement board.
The new simplified dissolution procedure will however not apply to certain entities that are subject to prudential supervision. These are, among others, entities such as banks, regulated entities of the financial sector, insurance and reinsurance companies and specialised investment funds.
How does the new procedure work?
The new procedure will not involve the participation of the district court any more as the administrative dissolution procedure will be opened by the administrator of the Luxembourg Trade and Companies Register (RCS) at the request of the public prosecutor. The opening of the administrative dissolution procedure cannot be requested by any third party, creditor or shareholder of the company concerned. The opening by the RCS administrator of the dissolution procedure must occur within three days of the request made by the public prosecutor.
The RCS administrator must notify the company concerned and the decision to open such procedure must be published within three days in two newspapers in Luxembourg and in the Recueil Electronique des Sociétés et Associations (RESA). As from the publication, the Company is divested by operation of law of the administration of all its property.
Subsequently, the RCS administrator will conduct an audit on whether the conditions for the administrative dissolution without liquidation as per the above are met by analysing information on the company's financial and administrative situation to be provided by entities such as the relevant banks, insurance companies and government authorities.
As a result of these investigations the company will either be dissolved by publishing the dissolution decision on the RESA or, provided the above referred-to conditions have not been met cumulatively, the RCS administrator will inform the public prosecutor thereof who will then request the procedure be stopped. The decision to do so will be published on the RESA.
If assets are found after the dissolution of the company, the district court sitting in commercial matters may order the liquidation of the company at the request of the public prosecutor. The company will then be deemed to exist for the purpose of its liquidation.
Are there any remedies the company can resort to?
The company subject to the dissolution procedure and in fact any interested third party taking the view that the conditions for the opening of the procedure were not met have the right to contest the decision to open the administrative dissolution procedure made by the RCS administrator.
A formal appeal in this respect must be lodged with the competent district court within one month of the publication of the decision to open the administrative dissolution procedure on RESA. The claimant can but is not obliged to provide specific evidence that one or several conditions for the procedure to be opened were not met. Should the district court come to the conclusion that indeed the conditions for the opening of the procedure were not met it will decide to halt the procedure and the decision to do so will be published on the RESA. However, should an infringement of criminal law or a serious breach of the applicable commercial laws pursuant to article 1200-1 of the Luxembourg Company Law have been confirmed the company concerned will be subjected to the opening of an in-court judicial liquidation procedure.
When does the Administrative Dissolution Law enter into force?
The Administrative Dissolution Law was published on 4 November 2022 (N° 541 Mémorial A) and will enter into force on 1 February 2023.
Finally, it is worth noting that the more important part of the original bill (i.e., number 6539A after the split) is still being discussed and pending in the legislative process before the Luxembourg parliament. We will be monitoring any further developments on this part of the legislative project and be providing more information as the process continues. Please feel free to check our regular legal updates on www.ashurst.com in this respect.
For additional information in this respect, please also do not hesitate to contact our corporate and insolvency law specialists.
