Legal guide for company directors and CEOs in Luxembourg

Directors’ duties related to the Environment

Luxembourg has environmental legislation which is mainly grouped together in a collection known as the “Environmental Code”. This legislation includes in particular the:

• Amended law of 10 July 1999 on classified facilities
• Law of 15 December 2020 on climate, amending the amended Act of 31 May 1999, establishing a fund for the protection of the environment
• Law of 18 December 2015, amending the amended law of 21 March 2012, relating to waste products.

The Environmental Code contains certain obligations for both individuals and legal entities in particular in terms of pollution, treatment of waste, or prior authorisations to exercise certain industrial activities or activities resulting in the emission of greenhouse gas emissions. Directors shall ensure that the company complies with these rules.

Directors’ duties related to Employee welfare

The Luxembourg law on commercial companies dated 10 August 1915, as amended (the “Company Law”), and the law of 24 May 2011 concerning the exercise of certain rights of shareholders at general meetings of listed companies and the law of 19 May 2006 on takeover bids, as amended, include several provisions in relation to employees, some of which may include employee welfare provisions:

• In the context of a cross-border merger, the management bodies of the merging companies shall prepare a report to the shareholders explaining, from a legal and economic point of view, the operation of the merger. If the merging companies have employees, the report shall also explain the consequences of the merger for them
• A listed company shall prepare a report on the annual evolution of employee remuneration and average remuneration
• In the context of a takeover bid, the management body shall inform and seek the opinion of employee representatives or, in the absence of such representatives, of employees themselves, in particular as regards the effects of the bid on all the company’s interests and especially on employment
• The offering document must contain the bidder’s intentions regarding job retention, including any significant changes to working conditions.

In addition, the Luxembourg Labour Code contains certain obligations for employers notably in terms of labour conditions and safety. For more details on directors’ duties and responsibilities, please refer to the specific paragraph below.

Corporate governance principles

The Luxembourg Stock Exchange published on December 2017 a fourth version of its X Principles of Corporate Governance (the “X Principles”) which aims to complete Luxembourg laws in terms of best practice in this particular field. The X Principles contain not only mandatory principles for companies whose shares are listed in Luxembourg, but also “comply or explain” recommendations and guidelines. The X Principles may be seen as a non-binding framework in terms of corporate governance for companies whose shares are not listed in Luxembourg. The X Principles contain a specific chapter (one principle and several recommendations and guidelines) relating to ESG.

On a voluntary basis, Luxembourg companies may also ratify the diversity charter and follow other non-binding recommendations published by the Luxembourg government.

Health and safety/Gender pay equality

As mentioned above, the Luxembourg Labour Code contains several provisions relating to the health and safety of employees. In simple terms, an employer must ensure that employees are safe during working time. The employer shall analyse the occupational risks, taking into account inter alia the sector of activity and the working environment. Appropriate measures shall be adopted to keep employees safe.

The Luxembourg Labour Code also contains certain provisions relating to gender pay equality and, in particular, penalties in the event of failure to comply. Indeed, every employer is obliged to ensure equal pay for men and women if they do the same work or if they do work of equal value. In addition, any discrimination based on gender, either directly or indirectly by reference in particular to marital or family status, is prohibited.

Recent evolutions in Luxembourg

In July 2021, the Luxembourg government launched its national Pact, “Enterprises and Human Rights”. Directors may choose to follow this non-binding guide to apply the general guidelines of the United Nations relating to companies and human rights. Signatories will be expected to ensure the best possible respect for human right throughout their supply chain. To this effect the guide recommends that, among other things, companies:

• Raise awareness among staff
• Appoint a human rights officer
• Train relevant employees
• Develop tools to identify risks and prevent human rights violations
• Set up one or more remedies to deal with reported cases
• Publish an annual report on the measures implemented.

Recent evolutions in the European Union

In April 2021, the European Commission published a proposal for a directive of the European Parliament and of the Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No. 537/2014, as regards corporate sustainability reporting. This proposal aims to amend the existing reporting requirements of the non-financial reporting directive, Directive 2014/95/EU, and in particular (without limitation) to extend its scope to all large companies and companies listed on regulated markets.

 Luxembourg disclosure obligations

The law of 19 December 2002 on the trade and companies register and the annual accounts of companies was amended by the law of 23 July 2016 relating to the publication of non-financial information. These provisions apply to certain large companies. These companies shall, in particular, publish an annual management report which includes information relating to ESG (e.g. diversity, environment, social questions, respect of human rights and the fight against corruption).

EU disclosures obligations

The European Union has its own legal framework in terms of ESG disclosure and reporting which is included in Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector and in Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088.

On a voluntary basis

Companies which do not fall into the scope of application of the above law and regulations (i.e. companies that do not exceed the limits of at least two of the following three criteria: (i) total balance sheet of EUR 20 million, (ii) net turnover of EUR 40 million, and (iii) average number of full time employees of 250) may follow certain non-binding guidelines in terms of ESG disclosure and reporting; this information may be included in a management report attached to the annual accounts of the company or a separate communication made on the company’s website.

For public limited liability companies, the Luxembourg law on commercial companies dated 10 August 1915, as amended (the “Company Law”) stipulates that the management is conducted either by: (i) a one-tier management board; or (ii) a two-tier structure:

• a one-tier structure consists of a board of directors composed of at least three members, or a minimum of one director if the company only has one shareholder
• a two-tier structure consists of a management board (“directoire”) exercising the same duties/liabilities as a board of directors, under the supervision of a supervisory board (“conseil de surveillance”)
• in a simplified joint stock company, the articles of association provide the rules on company management
• for private limited liability companies, the Company Law stipulates a one-tier management structure; the company is managed by one or several managers, and if there are several managers, they can form a board
• in Luxembourg, directors of a public limited liability company are commonly referred to as directors (“administrateurs”), whereas directors of a private limited liability company are commonly referred to as managers (“gérants”).

This guide relates to both Luxembourg public and private limited liability companies unless stated otherwise. As such, all reference to director/directors will include a reference to manager/managers and vice versa.

A two-tier structure in a public limited liability company recognises the functions of executive directors who manage the company (management board), and the members of the supervisory board who are in charge of controlling the management body.

The general principle is that the shareholders of a company can freely designate the director(s), who can either be individuals or corporate entities. There are practically no legal limitations on the suitability criteria for electing directors. However, minors, incapacitated persons and persons declared bankrupt may not be appointed as directors.

Furthermore, neither qualification nor Luxembourg nationality is required to be appointed as a director, even though from a tax perspective and for substance reasons, it may be advisable to appoint a Luxembourg resident as a director.

With the exception of Luxembourg general partnerships (“sociétés en nom collectif”), it is not necessary for directors to also be shareholders of the company. Where a legal entity is designated as a director it must appoint a permanent representative to carry out the director’s functions and to act in the name and on behalf of the legal entity (according to the Company Law, there is no such requirement for private limited liability companies). Such representative will be held responsible and liable to the same extent as if he/she had carried out those functions in his/her own name.

Directors are appointed by the general meeting of shareholders of the company for the period of time stated in the articles of association of the company. The Company Law provides for a time limitation of 6 years applicable to the mandates of director(s) of public limited liability companies. At the end of their mandate, both directors and managers may be re-elected.

Directors may be removed by the general meeting of shareholders at any time ad nutum (without cause). If a company removes a director without a fair reason, it will have to indemnify him/her. The director can be removed by any shareholder in the event of gross misconduct.

Managers may only be removed by the shareholders for legitimate reasons. The articles of association can allow the removal ad nutum.

A director/manager may resign at any time. However, his/her resignation must not cause damage to the company and should, therefore, be done carefully. The removal or resignation of a director must be published in the Luxembourg Recueil des Sociétés et Associations. The director’s resignation will be effective with regard to third parties from its publication in the Luxembourg Recueil des Sociétés et Associations.

The board of directors has the power to take any action necessary or useful to realise the corporate object of the company, subject to any contrary provision in the articles of association and a limited number of acts which are reserved to the general meeting of shareholders (for example, the approval of the annual accounts, the appointment or removal of directors and any changes to the articles of association). Restrictions to the powers of directors contained in the articles of association do not affect the rights of third parties. The board of directors is vested with the widest management powers, including the day-to-day management of the company.

It is possible to assign certain powers reserved explicitly to the board of directors by the articles of association to certain individual directors. This assignment cannot, however, be claimed against third parties, even if the restriction has been published in the Luxembourg Recueil des Sociétés et Associations.

Unless otherwise provided in the articles of association, any director represents the company vis à vis third parties in general and in any legal proceedings. The articles of association may authorise one or more managers to represent the company in any transaction, instrument or in any legal proceedings, either individually or jointly. A clause to that effect is effective vis à vis third parties subject to its due publication in the Luxembourg Recueil des Sociétés et Associations.

Board meetings are held and organised either on the basis of internal procedures or in accordance with the articles of association of the company. The articles of association may, for instance, provide for a detailed meeting schedule and procedures. Thus, the articles may stipulate that directors can participate in board meetings either by telephone or by videoconference or by any other similar means of communication. Attendance at a meeting by such means is deemed to constitute attendance in person. Circular resolutions are also widely used in Luxembourg.

A director is an agent of the company. A director may, but need not, be remunerated. The general meeting of shareholders determines the remuneration of directors, unless the articles of association grant this power to the board of directors. Directors shall fulfill all obligations mandated by their position and are liable if they violate their social mandate by improperly managing the company or by performing acts in breach of laws or the articles of association. They are under the duty to report on the execution of their mandates to the company and the shareholders at least once a year (by submitting the annual accounts to the shareholders’ approval), subject to specific situations in which a more frequent reporting is required under the Company Law, the articles of association or contractual arrangements between the company and its shareholders.

A director can also be an employee of the company, provided his/her tasks as an employee are separated from his/her duties as a director. The director’s services may also be provided by a management company that contracts with the company.

The Company Law requires that a director who has, directly or indirectly, an interest of a patrimonial nature which is conflicting with that of the company in relation to an operation falling within the scope of the board of directors’ competence, should inform the board of the same and must not participate in the deliberation or the vote on such matter. The minutes of the board meeting must record this circumstance and a report in this respect will need to be made to the shareholders of the company at the next general meeting of shareholders.

In the case of a company which has only one director, the conflicted sole director may still take the decision; however, the conflict of interest must be mentioned in the document recording it. Also, a report to shareholders will have to be made as per the above.

It is not entirely clear whether the fact that a director is sitting on the board of two companies which have opposing interests implies that such director is conflicted himself/herself. While it could be argued that this is not necessarily the case, and that in such a situation, the director may not have his/her own personal interest in the transactions pursued by these companies (and that, therefore, he/she is not conflicted), according to certain Luxembourg legal doctrine, such approach would be too limited and it is prudent to consider that the conflict of interest exists also in a situation where a person is director of two companies whose interests are opposed.

The day-to-day transactions entered into at arm’s length are excluded from the conflict of interest restrictions.

The directors or the members of the management board must act with loyalty, honesty and in good faith for the exclusive benefit and in the corporate interest of the company. The board of directors is responsible for defining the company’s business plan and improving the company’s financial results. The articles of association may specify the duties of the directors.

Directors’ duties are owed to the company, and as such they may be held liable towards the company on both civil and criminal grounds. They are jointly and severally liable in accordance with the general provisions on civil liability and the provisions of the Company Law towards the company and towards all third parties, for any damage resulting from a violation of the Company Law or of the articles of association of the company.

According to Luxembourg laws, directors have specific duties in the case that a company is in financial difficulties:

• they must convene and hold in a timely manner a general meeting of shareholders when the company’s net equity becomes negative by more than half, then three quarters, of the share capital (at least for public limited liability companies) to decide upon the company’s dissolution or to continue to conduct business, and
• they must file a petition for bankruptcy before the clerk’s office of the commercial court within 1 month of the “cessation des paiements” (if the company’s credit is compromised and if the company has stopped paying its debts). If the filing is not done during this period of 1 month, directors could trigger their own liability for the amount representing the increase of debts from this date to the late date of filing.

A distinction must be made between the civil and criminal liability of a director.

Civil Liability

In terms of civil liability, a distinction is to be drawn between: (a) contractual liability; (b) liability for breaches of the articles of association and of the Company Law; and (c) liability in tort.

A) Contractual liability

Directors are agents of a company. They are liable to the company for the fulfilment of their tasks and for any shortcomings in the performance of their duties. It is generally accepted that a claim based on this liability can only be brought by the company.

A finding of liability requires the establishment of three factors: (1) fault; (2) damage; and (3) a causal link between the fault and the damage.

Legal proceedings based on contractual liability, the actio mandati, can only be brought before the court by the company after a simple majority decision of the general shareholders’ meeting. The company may appoint one or several proxy holders to implement this decision. No actio mandati can be brought by the company if discharge was validly granted to the directors by the annual general shareholders’ meeting. Shareholders as individuals do not have the right to bring a claim against the directors on these grounds even if the general meeting refuses or neglects to proceed with a claim.

In principle, the contractual liability imposed by the Company Law is an individual liability as a personal fault must be involved. Insofar as the fault can be attributed to a specific director, his/her civil liability cannot be extended to other directors who did not commit the fault. However, in many cases, the damage results from concurring faults committed by different directors such that without the fault of one of the directors, the faults of the other directors would not have been sufficient to cause the damage. In such cases, each director will be jointly and severally liable. Directors will be held jointly and severally liable if the damage is triggered by a joint fault, i.e. where different people knowingly contributed to the act causing the damage. In such a situation, each director must account for the entire amount of the damages. Any director may be sued and the payment by one director releases all other liable directors from any obligation towards the company.

B) Liability for breaches of the articles of association and of the Company Law

The Company Law states that directors may be held jointly and severally liable to the company and to third parties for all damages resulting from a breach of the Company Law or of the articles of association. Again, fault, damage and a causal link must be established for legal proceedings to be successful.

Legal proceedings can be brought by the company, according to the same rules as those applying to contractual liability. Third parties, such as public authorities, creditors, employees or an individual shareholder of the company, may also bring a claim. A discharge granted to the directors by the annual shareholders’ general meeting does not bar third party claim.

If fault is proven, a presumption of joint and several liability rests on all directors. Any individual director can be held liable for the payment of the entire damage caused by a breach of the Company Law or the articles of association, without the plaintiff having to prove who specifically committed the breach.

C) Liability in tort

The common rules of tort liability, provided for in the Luxembourg Civil Code, are also applicable to directors. If a tort is committed, the injured person is entitled to claim indemnification for the damage caused by the tort.

A tort is committed if the general duty of due care and diligence or a provision imposing a specific obligation of a non-contractual nature is breached.

For a director to be held liable for a tort, the essential elements (fault, damage and a causal link between fault and damage) must be proven on an individual basis. The claim must therefore relate to a breach of a director’s personal obligation.

Legal proceedings can be brought by the company itself or as third parties.

Where the fault is both a breach of an agreement between the director and the company, and a breach of the general duty of due care and diligence that applies to everyone, the company can bring a claim if the actual damage is different from the damage that would have resulted from a fault in carrying out the director’s management tasks (i.e. contractual liability).

Third parties, including creditors and shareholders, can in certain conditions hold directors personally liable for all damages suffered due to a breach of a specific legal provision or the general duty of due care and diligence.

Criminal Liability

In addition to triggering civil liability, a fault committed by a director may also constitute a criminal offence potentially leading to criminal liability. Examples include the default of publication of the annual accounts, the misue of corporate assets, the non-convening of the general meeting despite a request from shareholders who are entitled to require the holding of such meeting, the purchase of the company’s shares in the absence of sufficient distributable reserves, the granting of security or loans for the purpose of acquisition of the company’s own shares without satisfying the legal conditions to do so, the abuse of powers and votes.

If a director is found guilty he/she can be sentenced to imprisonment and/or a fine depending on the criminal offence.

Tax non-payment related liability

In certain circumstances, directors can be held personally liable towards the tax authorities for payment of the company’s taxes. The tax authorities can issue a guarantee call tax assessment (“bulletin d’appel en garantie”) to the director. The said guarantee call tax assessment determines the principle and the quantum of the debt of the company for which the director is personally responsible. In case of plurality of directors, the tax authorities may address the guarantee to any of the directors.

Moreover, the directors remain responsible for the tax filing obligations even if the tax compliance work has been partly or fully assigned to a third party.

Liability in case of bankruptcy of the company

Bankruptcy is not in itself a punishable offence. However, if it is the result of an error committed by the director, the bankruptcy engages the responsibility of the director. In certain situations where the conduct of the directors had fraudulent character, it is possible to look through the separate legal personality of the company and hold directors personally liable for company’s debts (extension of company bankruptcy to the directors). Further, if directors have committed a gross and manifest fault (“caractérisée”) leading to the bankruptcy, the Luxembourg Commercial Court can decide on a motion from the bankruptcy receiver that any shortfall in the company’s assets is made up from the personal assets of the directors (action to bridge insufficient assets).

Liability of directors of Luxembourg public and private limited liability companies is a matter of public policy (“ordre public”), irrespective of whether this relates to liability towards the company or towards third parties. Therefore it is not possible to derogate, by contract or otherwise, from the principles described above.

Directors receive a discharge from the annual ordinary general meeting approving the annual accounts for their management of the company. The discharge will have the effect of precluding any liability claims of the company (but not to third parties, liquidators or bankruptcy receivers), having granted it against the discharged directors for any fault in the execution of their mandate covered by the discharge. In respect of a fault committed by a director, a discharge will only have effect if it has been granted in full knowledge of the facts (“en pleine connaissance de cause”).

Directors can have their potential liability insured with an insurance company. Such insurance contract is, in practice, often concluded by the company itself and covers the company’s regularly appointed directors. The insurance will cover the liability of directors towards the company and third parties as well as the liability resulting from a management fault, a violation of the Company Law or of the articles of association and from torts.

However, as a general matter, insurance law disallows claims if the damage was caused by a serious mistake, such as gross negligence or a wilful act of the insured.

Health and safety

Directors must first ensure the safety and well-being of the company’s employees, business partners and other stakeholders as well as the public at large in complying with all applicable safety measures.

Financial situation monitoring

Directors must proactively and periodically assess the impact of the COVID-19 (Coronavirus) crisis on the financial position of the company based on updated management accounts to continue as a going concern in the foreseeable mid-term including, without limitation by, considering the impact on:

• current liquidity status, the forecast needs for the upcoming mid-term, the opportunity to proceed with any envisaged distributions, contributions, voluntary prepayments of debt ahead of maturity date
• terms and conditions of the key agreements to which the company is a party (such as financing covenants)
• main fixed costs, expenses and payments (including employees and office rental if applicable)
• status of the (recent/on-going) projects in which the company and/or its affiliated company(ies) is/are involved
• disruption in supply chains/interconnected businesses
• tax payments/advances, and
• any other relevant matters.

Directors must further consider any and all protective, safeguarding and financial measures available to help the company cope with the current crisis and must take the necessary measures to mitigate the business, financial and human risks caused by COVID-19 and ensure business continuity as much as possible.

Financing and commercial agreements

Directors should carefully review the company’s contractual financing and commercial documentation to assess whether the COVID-19 pandemic could lead to an event of default, a relief of payment or otherwise impact its agreements.

M&A transactions

Certain deals are likely to be disrupted due to market uncertainty and volatility caused by COVID-19. Purchasers might seek to terminate pre-contractual arrangements and renegotiate the terms of the transactions in arguing that the conditions for completion are not fulfilled, by seeking to rely on material adverse effect clauses or by reopening discussions on purchase price where the value of the target has (or is about to) decrease(d).

Directors have to seek appropriate advice on the company’s legal rights and obligations in such circumstances.

A series of measures have already been taken by the Luxembourg Government to alleviate the financing and liquidity needs of companies, to mitigate the impact of the COVID-19 pandemic on their businesses and to ease the continuity of businesses.

Holding of meetings

The Luxembourg Government has taken a series of measures to maintain good governance of companies. Such measures allow companies to hold their meetings, in particular meetings of shareholders and boards of directors, without requiring the physical presence of their members.

The effective participation of members in such meetings and the exercise of their rights are guaranteed through the use of:

• distance voting
• written circular resolutions
• videoconferencing, or
• any other means of telecommunication.

Furthermore, regarding the holding of annual general meetings, companies may, despite any provision to the contrary in the articles of association, convene them on a date that falls within a period:

• 6 months after the end of their fiscal year, or
• in a period up to 30 June 2020.

Draft bill No. 7566 is currently being discussed to extend the effects of the above-mentioned measures to a date beyond the 3-month state of emergency period declared by the Luxembourg Government due to expire in mid-June 2020.

Extension of deadlines for filing annual accounts

On 27 March 2020, the Ministry of Justice submitted to the Parliament draft bill No. 7541 regarding the extension of deadlines in respect of the filing and publication of annual accounts, consolidated accounts and related reports with the Luxembourg Trade and Companies Register.

Concretely, the draft bill foresees that companies will have 9 months instead of 6 to approve the annual accounts and/or the consolidated accounts, with related documents (auditors’ reports) 10 months instead of 7, for filing and publishing said documents under the applicable procedures without any penalty.

Spreading of tax deadlines

The most relevant direct and indirect tax relief measures in Luxembourg include:

• relief from advance tax payments and deferral of tax payments
• extension of tax return filing deadline; and
• VAT measures.

These measures are covered in more detail in our CMS publication.

Suspension of insolvency filing obligation

In ordinary business circumstances, the directors of an insolvent company must file for bankruptcy within 1 month of the date on which it has ceased to pay its debts, provided that the company has also lost its creditworthiness (cumulative insolvency criteria). The loss of creditworthiness criteria is a very important addition to the more standard insolvency test of cessation of payments as it allows a company not to be considered insolvent as long as it is, for instance, in restructuring talks with its creditors.

Not filing for bankruptcy within the statutory timeframe constitutes serious misconduct, which can lead the court to recognise the directors’ civil or criminal liability and order the directors to bear all or part of the liabilities of the company

On 25 March 2020, the Luxembourg Government issued a Grand Ducal Regulation on the suspension of deadlines in judicial matters and the adaptation of certain other procedural provisions (the “Regulation”). Such Regulation aims, in particular, at suspending the 1-month period applicable to the insolvency filing obligation to enable directors to focus on keeping the company’s business afloat rather than worrying about their potential personal liability.

Were the company to be in cessation of payments following the implementation of the Regulation and remain in such position after the end of the COVID-19 pandemic, directors would have to file for insolvency 30 days after the state of emergency is lifted.

Directors are still allowed to file for insolvency (“aveu de faillite”), and may feel obliged to do so depending on the circumstances of the company.

Finally it is worth noting that the Regulation does not prevent creditors from petitioning for insolvency.

Other measures

Within the framework of its economic stabilisation programme, the Luxembourg Ministry for the Economy has set up a hotline and website with information for enterprises, which includes a FAQ on existing measures for companies including SMEs (financial support and partial employment): Coronavirus (COVID-19) Luxembourg economic stabilistaion programme as at 20 April 2020

In all circumstances, directors are under obligation to act bona fide in the best interest of the company. In the execution of their mandate, directors should act in a diligent and prudent manner. Any fault in management by the directors will be assessed by reference to an abstract criterion of a “good family father” (“bon père de famille”), i.e. a director who is competent, prudent, actively involved and bona fide, acting in all circumstances in the corporate interest of the company.

In view of the current exceptional situation related to COVID-19, directors are expected to focus their attention and efforts to guide the business through the crisis. In particular, this may result for the directors in: 

• remaining up to speed as to the COVID-19 related changes in regulations
• increasing the frequency of board meetings (held in digital-only form) to take any preventive action as much as possible to avoid bankruptcy, and carefully recording all decisions taken
• convening and holding in a timely manner a general meeting of the shareholders when the company’s net equity becomes negative by more than half, then three quarters, of the share capital (at least for certain corporate forms) to decide upon the company’s dissolution or to continue to conduct business (note that the deadline extension for the holding of annual general meetings mentioned above applies only to annual general meetings and does not apply to general meetings to be held in the framework of the capital impairment rules), and
• overseeing the financial statement preparation process as external auditors will likely demand a statement on the impact of COVID-19 be inserted in the notes to the 2020 (and likely beyond) annual accounts.

With respect to the directors’ obligation to file for bankruptcy, please refer to the above question.