Bankruptcy reform : not user friendly for entrepreneurship
Opinion of the Chamber of Commerce
The Chamber of Commerce has issued its opinion on the draft legislation for the protection of businesses aimed at updating bankruptcy laws and the additional parliamentary amendments to the initial draft legislation. The Chamber of Commerce welcomes the reform and the majority of the amendments proposed, however is critical of the lack of provisions for preventative measures and the severity of the penal measures that do not differentiate between honest entrepreneurs and dishonest entrepreneurs.
The Chamber of Commerce has long been calling for major reforms to bankruptcy laws. It therefore welcomes the majority of the amendments that aim to update the legislation. However, in this case, the draft legislation and its amendments do not sufficiently take into consideration the needs of Luxembourg’s businesses and economy.
The principal fault in the draft legislation is that it does not take into account the reality faced by SMEs and microbusinesses, which make up 99% of Luxembourg’s economy and contribute considerable more value than in other countries. These business partners simply cannot be overlooked. The Chamber of Commerce would therefore like to focus on measures that prevent bankruptcy, which, until now, have not been adequately developed. A simple alert system for businesses facing difficulties is not enough.
The Chamber of Commerce recommends carrying out an in-depth analysis into the causes of the difficulties encountered by businesses in order to provide preventative solutions. One solution in particular could be to make available qualified professionals to help businesses identify the source of any issues as well as the means to overcome difficulties that can appear at any time in the life of a business.
The Chamber of Commerce has indeed already introduced services dedicated to this end: the ‘One-stop shop to prevent’ initiative, which it established in parallel to what already exists in France and Belgium, in order to help the self-employed and leaders of professional businesses to assess their situation and choose the best options to make their business sustainable, thanks to training, coaching, and personalised advice.
Regarding the penal measures of the law, the Chamber of Commerce regrets to see that the burdens of business leaders in cases of bankruptcy are actually increased in the draft legislation.
The draft provisions currently systematically sentence all de jure or de facto managers to a penal sentence of negligent bankruptcy if they have not announced within the one month period indicated by law that they have ceased all payments. In these cases, the judge cannot fully know the real situation of the entrepreneur and has no other choice but to issue a penal sentence due to simple non-compliance with a deadline.
Similarly, the Chamber of Commerce cannot accept the new conditions on the banning of doing business (Article 444-1) and on the action to make good a deficiency in company assets (action en comblement de passif) (Article 495-1). The legislation currently penalises managers having committed blatant gross misconduct contributing to bankruptcy, but the amendments drastically change this by removing the concept of blatant gross misconduct and by penalising any misconduct by management “committed within the scope of bankruptcy”.
Furthermore, and despite firm opposition from the Chamber of Commerce, the new Article 97 in the draft legislation maintains certain provisions from the Abgabenordnung tax code that uphold that under certain conditions the manager of a business can be held accountable by the fiscal authorities for the debts of the bankrupt business. At the same time, the new text eliminates the concept of fault (Schuld), effectively reinforcing the responsibilities of managers to the fiscal authorities, which the Chamber of Commerce cannot accept. This modification makes it impossible for the fiscal authorities and administrative bodies to assess the circumstances of bankruptcy on a case-by-case basis.
The Chamber of Commerce would like to highlight the importance of differentiating between the honest but unfortunate business owner and the dishonest entrepreneur who has used and abused their business and lenders for their own profit.
The Chamber of Commerce therefore fully opposes these provisions, which also come with a heavy price for Luxembourg and risk jeopordising the country’s position as a place that welcomes and encourages entrepreneurs and startups. The penal measures are in total contradiction to the principle of giving entrepreneurs a second chance, which is a key concept in the 5th SME Action Plan that was recently announced by the Minister for Small and Medium-sized Enterprises, Lex Delles. Knowing as we do that 18% of successful entrepreneurs within the European Union initially fail and that these entrepreneurs in particular then go on to launch businesses that grow more quickly than others, we can only commend what these entrepreneurs learn from on-the-ground, first-hand experiences, even when they initially result in failure. The Chamber of Commerce firmly believes that this ongoing shaming and stigma of failed entrepreneurship and businesses must come to an end.
For more information on the “One-stop shop to prevent” initiative, please see:
To read the Chamber of Commerce’s opinion in its entirety, please click here.