Since 1 November 2023, the new bankruptcy reforms aimed at supporting Luxembourg entrepreneurship are finally in force. Olivier Wies, corporate lawyer and former legal consultant at the House of Entrepreneurship provides insights into the actual advantages and disadvantages of these reforms and advises entrepreneurs on how they can capitalize on the changes for their benefit.
What are the main amendments made to the bankruptcy law?
Firstly, the new bankruptcy law includes an extension of scope to sole traders, meaning that the bankruptcy regime is now open not only to commercial companies but also to natural persons who are self-employed. Previously, self-employed professionals were also liable with their own belongings, however, as the new law now also includes sole trades, they get an increased level of protection.
Personally, I think the change with the furthest-reaching consequences for the Luxembourg ecosystem is the second chance principle which gives entrepreneurs and businessmen another chance to open a business in case their first one fails. Failure is a natural part of being an entrepreneur, so in this sense, the second chance principle is also an acknowledgment of the realities of working in the startup world.
What changes do you suggest startups and entrepreneurs make in light of this new reform?
The most important thing I would say is that they react when they face financial difficulties. Around 80% of the clients I consult come to see me when it’s nearly too late. It’s not a shame to have financial difficulties, but if you wait around too long it will be too late to fix them. The new reforms give a lot more leeway to react to financial difficulties, so I really suggest entrepreneurs to be more proactive and reactive.
“This new law will likely lead to a more risk-tolerant startup ecosystem.”
Olivier Wies, corporate lawyer and former legal consultant at the House of Entrepreneurship
According to the latest STATEC count, 162 companies were declared bankrupt in the third quarter of 2023, up by 3% compared to 2022. How do you expect the draft bill 6538 to impact these numbers?
That’s hard to say as sole traders are also included in the bankruptcy reform. But I think it’s safe to assume that this change will motivate people with good ideas to start earlier and not wait until they have 12k to start a company.
A lot of young entrepreneurs fear falling into bankruptcy, that is their biggest fear. There’s this stigma around bankruptcy which is part of the reason why many startups go bankrupt because they don’t go to the banks or lawyers early enough to mitigate the damage.
However, I think that young entrepreneurs now entering the market will be more informed and feel more supported by this law. The previous law was very direct in deciding when a company was bankrupt, this one opens up a lot more possibilities for young entrepreneurs to defer payments for example, and thereby avoid bankruptcy.
What are some of the downsides of this new reform?
There are more effective criminal prosecutions due to this new law. Simple bankruptcy has become a criminal offence which is now punishable by a prison sentence ranging from 1 month to 2 years and you can also get fined between 251-25 000€. Fraudulent bankruptcy was rarely prosecuted before and now simple bankruptcy has become a criminal offense, so young entrepreneurs should keep that in mind. This could also lead investors to perceive the market as riskier in case fraudulent market practices are not strongly discouraged.
Are there any other aspects of this reform you’d like to draw attention to?
Before the reform, if one of your companies had gone bankrupt, the manager of the company had to follow a course at the house of training, and after a few years, you’d be allowed to start a new business. Now, the new reform has a principle of vulnerability of professional good repute which relates both to the holder of the business authorization but also to the majority shareholder and any person in a position of significant company influence. This implies that if you’re a majority shareholder of a company and it goes bankrupt you have a higher liability than before.
This article was first published in the Silicon Luxembourg magazine. Read the full digital version of the magazine on our website, here. You can also choose to receive a hard copy at the office or at home. Subscribe now.
