The reform of Luxembourg’s bankruptcy law to grant a second chance to entrepreneurs should also be a moment to rethink how to support founders before things reach the point of no return. Elise Patelet, senior associate for law firm Harvey and specialist in corporate and tax law, explains.
In her legal career, Elise Patelet has worked with a handful of founders of startups that did not take off. According to CB Insights, the most common causes are lack of cash, no market need, being outcompeted, having a flawed business model or legal challenges.
In such cases, the company can be declared bankrupt in two ways: when the director files for bankruptcy or when an unpaid creditor applies for bankruptcy.
In both instances, the experience is stressful and frustrating for founders because, under Luxembourg’s current law, they will be penalised if they wish to start a new business. What is more, founders lose a project to which they have committed a substantial amount of money, time and know-how. “For some, the failure is sometimes stronger than the ambition or movement behind the initial project,” Platelet explains.
But these hardships could be considerably reduced if founders received the right support early on through the creation of a dedicated advisory service.
“Maybe you can show the status of your tax payment or your Social Security contributions to an advisor at the Chamber of Commerce. Because sometimes you need to review what has happened and what are the opportunities,” the lawyer says.
Once a startup files for bankruptcy, they will be assigned a curator or manager who helps to close the business and clear what debts they can. Platelet believes a challenge in the legal industry is finding lawyers specialised in specific innovative startup fields who are capable of correctly evaluating their assets. “Maybe we do not have the knowledge and the experience to deal with the very specific and very innovative assets of one startup company,” she says, adding: “Sometimes, with a good valuation you can limit damages and debt with the Luxembourg tax authority with the VAT and salaries.”
“Sometimes, with a good valuation you can limit damages and debt with the Luxembourg tax authority with the VAT and salaries.”Elise Patelet, lawyer with Harvey
In France, there are lawyers specialised in this area when it comes to innovative models and labour law. The lawyer adds that France also offers several options to founders whose businesses are floundering, compared to two in Luxembourg: bankruptcy and voluntary liquidation.
The voluntary liquidation path allows founders to hold a business licence once the company has been wound up. But, what founders may not be aware of is the fact that their assets and IP can be sold off to cover outstanding debts.
It is challenging for founders with cash flow difficulties to think about the end stages of the startup while developing their product or service. But, Platelet believes it is all about timing. She says: “Be sure that you do the brainstorming at the right time. Because it’s a question of timing.”
Find out more and read more about the willingness to give a second chance to entrepreneurs.