An overly restrictive “second chance” reform

Note to reader: since December 12th and at the rate of one chapter per month, we will detail, in collaboration with the Luxembourg Startups Association, what the Luxembourg startup ecosystem expects from political parties, in the campaign for the municipal and legislative elections of 2023. The next theme will be developed in 13 February 2023.

Eight to nine out of ten start-ups don’t survive beyond three years. With the reform of the right of establishment law, often announced over the last 20 years and so far never adopted, these innovative entrepreneurs will not necessarily have the opportunity to try something else.

He became Minister of Economy, Franz Fayot (LSAP) had to abandon this dossier for which he was responsible as a deputy. But his appreciation continues, with the Competition Council being the last, in early December, to pronounce.

In its manifesto, the Luxembourg Startups Association (LSA) regrets that “the new conditions to be met in order to benefit from it remain very restrictive. The proposal refers to bad luck and mismanagement as possible reasons to exonerate the entrepreneur”.

No market, no customers

In article 7 of the bill, bad luck can “be due, in particular, to bad weather; a fire; the loss of an important client; a construction site whose duration and distance substantially impair the administrator’s economic activity; the health of the leader or a pandemic” while “mismanagement is a case of error in the company’s strategic choices”.

The FLA suggests adding “the fact that it has not found a market for innovative products, the famous ‘product-market-fit’ that all start-ups look for and that many start-ups will not find”.

If the causes of bad luck or mismanagement are defined, they are accompanied by an examination of the bankrupt company’s debt situation. The “tolerance” of the Minister of Economy ceases when these criteria are exceeded. However, regrets the FLA in substance, the 1% unpaid VAT, 1% unpaid tax and four months of social security contributions are too restrictive.

An advisory committee to rethink

According to the text of the bill, the 1% VAT is levied on the net amount paid in the last five years, the 1% unpaid tax on the net amount paid in the last five years and the four months of social contributions.

And once this double level has been reached (the reasons and the thresholds), the entrepreneur is not sure of having his second chance… which the Minister grants based on the recommendations of an advisory commission.

Element that is not criticized by the FLA, but by the Competition Council, according to which “articles 7.º and 7.º-bis already precisely define the conditions of a second chance agreement, it is questioned which will be the most -value of an advisory commission, which will still have to be established by grand-ducal regulation.” “In the opinion of the Council, article 7ter can be deleted, since that decision can be taken by appointment of an agent of the ministry based on the proposed text. At the very least, the establishment of this commission should be subject to a test of proportionality. ”

This commission should have another objective, scribbles the Chamber of Commerce in its opinion. “While it seems useful to check a businessman’s criminal record to protect his future co-contractors, the Chamber of Commerce considers that the discretion conferred on the Ministry of Economy to judge the integrity of applicants and therefore grant them – or not – the right to a second chance, could be equated with a judiciary”.

The possibility of sanctioning a businessman preventing him from “doing business again” should, however, be an exclusive prerogative of the courts, adds the Chamber of Commerce, which “thus defends the idea of ​​a second chance automatically attributable to the businessman whose good reputation was not tarnished, in the opinion of the courts. He considers the setting up of a second chance committee to be positive, which would further support the entrepreneur in his choice to resume activity after bankruptcy, on a preventive basis.

Will establishment and second chance reform be adopted by the end of the current mandate? It’s hard to say, but they will likely once again be the subject of the coalition program that will assume or retain power next fall.

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