Bankruptcy vs. liquidation: what do these terms mean and how are they similar or different? Although they may be related in certain specific cases, bankruptcy and liquidation are not the same, both are distinct concepts in Luxembourg law and apply to different situations. Below we will examine in detail the meaning of both terms and their implications.
Bankruptcy
Bankruptcy proceedings may be initiated by admission of the debtor as he is legally obliged to do so, by appointment of one or more creditors or on the court's own initiative. However, in order to declare bankruptcy, the court must verify beforehand that the following conditions are met.
- To have the status of merchant: the person or company in question must be a natural person who as a regular occupation performs acts qualified as mercantile by law or a legal person constituted under one of the corporate forms provided for by the amended law of August 10, 1915 on mercantile companies.
- Being in cessation of payments: at least the main payments such as salaries or social security payments must have ceased.
- Restrictionof credit: the merchant can no longer obtain credit from banks, suppliers or creditors.
It is important to bear in mind that all three conditions must be met. Although the impossibility of paying a single overdue debt, regardless of its amount, is sufficient to establish a state of cessation of payments, a simple temporary cash flow problem does not imply bankruptcy, as long as the merchant is able to obtain the necessary credit to continue its operations and meet its commitments.
If the conditions for the declaration of bankruptcy are met, the court issues a declaration of bankruptcy and the process is initiated by appointing a trustee in bankruptcy who is in charge of administering the debtor's assets and distributing them among the creditors.
Liquidation
- Voluntary liquidation usually occurs when the company has sufficient assets to comply with its obligations and can occur for multiple reasons, the most common being the achievement or extinction of the corporate purpose, the expiration of the term of duration of the company, the will of the partners following a disagreement or an unprofitable situation of the company or legal reasons inherent to the legal form of the company.
The dissolution process must follow specific rules that vary depending on the type of company although broadly speaking the process is similar. The decision to dissolve the company marks the beginning of the liquidation and the appointment of one or more liquidators who are responsible for all liquidation operations until the final meeting to close the liquidation. Once the procedure is completed, the company is deregistered in the Commercial Registry (RCS).
- Judicial liquidation is a procedure whereby the court dissolves a company and orders the liquidation of its assets but does not necessarily imply that the company is in a state of insolvency. The court may be forced to order the compulsory liquidation of a company in different circumstances and they are not always directly linked to bankruptcy, these circumstances are: the petition of one or several partners or shareholders, the petition of any interested person when the shares are in the hands of only one person or the petition of the public prosecutor for serious violations of the law.
Once the court orders the liquidation, the procedure is initiated and a liquidator is appointed who is responsible for all liquidation operations until the liquidation is closed. Once the liquidation procedure is concluded, the company is deregistered in the Commercial Registry (RCS).
Similarities and differences
As we have seen, bankruptcy and liquidations are different, although there may be similarities, as between bankruptcy and judicial liquidation, they are not the same. Bankruptcy is a specific type of insolvency situation that can result in a judicial liquidation, so that every bankruptcy involves a form of judicial liquidation, but not every judicial liquidation is a bankruptcy. The following table makes the differences clearer.
| Aspect | Bankruptcy | Judicial Liquidation | Voluntary Liquidation |
| Main Cause | Severe insolvency: inability to pay due debts and loss of credit. | Linked to legal or administrative irregularities, or failure to comply with legal obligations. Insolvency may exist but is not always the case. | Free decision by shareholders or partners in a solvent company wishing to cease activities and dissolve. |
| Nature | A mandatory judicial process. | Can be court-ordered or, in specific cases, requested by interested parties. | A voluntary process decided by the company’s shareholders or partners. |
| Process Initiation | Can be initiated by the debtor's admission, at the request of one or more creditors, or by the court on its own initiative. | Ordered by the commercial court following a request (court, creditors, or partners) or for serious legal violations. | Shareholders decide in an extraordinary general meeting, under corporate statutes and company law. |
| Appointment of Manager | A trustee, appointed by the court, manages the liquidation of assets and their sale to repay creditors. | A judicial liquidator, appointed by the court, supervises and executes the liquidation process. | A liquidator is appointed by the shareholders or partners to carry out the liquidation. |
| Financial Status of the Company | Insolvent: unable to meet financial obligations. | Not always insolvent. May involve it (but not always) or situations like fraud or mismanagement. | Solvent: the company has sufficient assets to cover all its financial obligations. |
| Role of the Court | Central: declares bankruptcy, appoints the trustee, oversees the process, and closes it. | Central: supervises the process, appoints the liquidator, and enforces the necessary measures. | Secondary, though the court may intervene if disputes or irregularities arise during the process. |
| Impact on Creditors | Creditors are prioritized for repayment according to an established order (preferential debts first). They may lose part of their claims if assets are insufficient. | Similar to bankruptcy: creditors receive payments from liquidated assets, with preferential debts first. | Creditors are fully reimbursed before any remaining assets are distributed to shareholders. |
| Expected Outcome | The company ceases operations permanently and is removed from the Commercial and Companies Register (RCS). | The company stops operating, and its assets are liquidated to pay creditors (if any). | Once liquidation is complete, the company is dissolved and removed from the Commercial and Companies Register (RCS). |
| Protection for Shareholders | Shareholders generally lose their investment, as creditors take priority in the liquidation of assets. | Similar to bankruptcy: shareholders only receive the remaining assets after all debts are settled. | Shareholders are entitled to receive the remaining assets after all company debts are paid. |
| Applicable Legal Framework | Commercial Code: Articles 437 to 614. Law of August 7, 2023, on business preservation. | Commercial Code and Law of August 10, 1915, on commercial companies. | Law of August 10, 1915, on commercial companies. |
| Main Objective | Maximize debt recovery for creditors through the sale of assets. | Resolve serious legal situations and attempt to satisfy creditors if debts are present. | Dissolve the company in an orderly manner without financial or legal crises. |
The legal framework in Luxembourg
In Luxembourg, bankruptcy proceedings and liquidations are regulated by different laws and regulations that form the legal framework for insolvency and dissolution of companies, as described below.
Bankruptcy
The principles of bankruptcy law in Luxembourg are mainly regulated by the Commercial Code and since August 2023, by the new law modernizing the insolvency legal framework.
- Articles 437 to 614 of the Commercial Code: regulate bankruptcy proceedings. These articles establish the criteria for declaring bankruptcy, the rules for the administration of the proceedings, the role of the trustee, and the management of assets. They also establish the rights of creditors and priorities in the payment of debts.
- Law of August 7, 2023: this law is related to the preservation of companies and the modernization of bankruptcy law. This new law introduces important reforms in insolvency law, marks a focus on the preservation of companies through early restructuring mechanisms, grants greater flexibility in insolvency proceedings for viable companies and simplifies and modernizes the declaration of bankruptcy and the role of the courts.
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Learn moreVoluntary liquidation
This procedure is less conflictive and does not involve insolvency, it is mainly regulated by Articles 1100-1 to 1100-15 of the Law of August 10, 1915 on commercial companies:
- Articles 1100-1 to 1100-4: set forth general rules on how voluntary liquidation should be initiated.
- Articles 1100-5 to 1100-13: establish specific obligations during liquidation, such as an initial inventory and balance sheet of the company's financial situation, payment of debts before distributing remaining assets to shareholders, and the submission of periodic reports on the status of the liquidation.
- Articles 1100-14 and 1100-15: detail the process of finalizing the liquidation and formally removing the company from the Commercial and Companies Registry (RCS).
Judicial liquidation
This is mainly regulated by Article 1200-1 of the Law of August 10, 1915. This article covers the situations in which the court may order the judicial liquidation of a company, regulates the appointment and responsibilities of the judicial liquidator, defines the instructions for the sale of company assets and establishes the rules for distribution to creditors.
