INSOLVENCY; RECONSTRUCTION AND BANKRUPTCY
We act for Norwegian and foreign creditors in reconstructions and bankruptcies in Norway. In addition to advise on negotiations and file claims on behalf of creditors, we assess situations in respect of fraudulent preference, irregular payments and other circumstances that may give grounds for claw back or claims for compensation, overdue insolvency filings and other illegal actions by the debtor and(/or its board of directors.
1. The Temporary Reconstruction Act 2020
The Norwegian insolvency legislation had up to May 2020 made it difficult for Norwegian companies to obtain successful financial reconstruction arrangements, and more often than not a composition proceeding in Norway ended up in a bankruptcy proceeding. However, as a result of the Covid-19 pandemic outbreak in March 2020, the Norwegian Parliament in May 2020 adopted the Temporary Reconstruction Act to Aid Businesses Facing Bankruptcy due to Covid-19.
Because of the historically inefficient rules relating to composition proceedings, Norwegian businesses have traditionally sought to negotiate financial reconstructions out of court. Such negotiations quite often take place between the financial creditors and the debtor, leaving minor trade creditors somewhat unaffected.
Because of the change in the way companies now is financed, i.e. to a large extent with bond debt instead of bank loans, such negotiations tend to be more complicated as compared to the old regime with loans from a few banks and financial institutions.
2. Reconstruction proceedings
In Norway a company may have two alternatives with the courts; either to apply for reconstruction proceedings or to file for bankruptcy. The main Norwegian insolvency legislation is found in two acts: the Debt Composition and Bankruptcy Act (1984) (the Bankruptcy Act) and the Debt Recovery Act (1984) (the Recovery Act).
The Liens Act (1980), as well as the special provisions regarding mortgages and liens in other acts, such as the Maritime Act and the Aviation Act, are also of importance when evaluating the creditor positions in insolvency. Together, the two main acts represent a structure for approaching the issues concerned in the breakdown of a debtor's finances intended to be tuned to the requirements of a modern business environment. It should be noted, however, that the Bankruptcy Act's former system for dealing with the situations where a moratorium and/or a partial forgiveness of debt may prevent liquidation and form the basis for the continued healthy operation of the debtor, has not become the popular success envisaged in 1984. This part of the legislation was built on the same principles as the U.S. "Chapter 11"-procedure, but did not go as far in providing the court with flexibility to steer the process to a result which could be seen as acceptable by all parties involved.
Following the outbreak of the Covid-19 pandemic, the Norwegian Parliament therefore passed a temporary act on reconstruction (the Reconstruction Act). The Reconstruction Act replaces relevant provisions of the Bankruptcy Act, as well as other acts, until its date of expiration on 1 July 2023.
The main purpose of the Recontruction Act is to prevent businesses from going bankrupt, when the businesses are profitable under normal circumstances, but are facing sudden and presumably temporary financial difficulties resulting in an inability to pay its creditors. However, businesses that are generally non-profitable may also apply for reconstruction under the act. The proposal introduces a more flexible legal framework for continued business operations in close cooperation with the creditors.
3. Voluntary or compulsory reconstruction
When a company is unable to fulfil its obligations as they fall due (illiquidity), the company may petition the court to commence reconstruction proceedings in order to negotiate with its creditors regarding reconstruction. Reconstruction can be voluntary or compulsory for the creditors.
In voluntary reconstruction, all creditors must as a main rule approve the reconstruction plan. Compulsory reconstruction means that a majority of the creditors may adopt the plan on behalf of all creditors involved. Naturally, voluntary reconstruction allows for more flexible solutions. For efficiency, the procedural regulations in the Reconstruction Act do not differentiate between voluntary and compulsory reconstruction. This means that the petition to open reconstruction proceedings does not need to specify whether voluntary or compulsory proceedings are being requested.
4. Who may petition for reconstruction?
Pursuant to the Bankruptcy Act, the company had to be in a situation in which it is unable to pay its debts as they mature in order to apply for and be granted a court ordered reconstruction process.
Under the Reconstruction Act, negotiations may be applied for at an earlier stage when the company has, or in the near future is expected to encounter, serious economic difficulties. Initiating a court-sanctioned debt reconstruction process at an earlier stage is expected to increase the likelihood of a successful outcome, as the debtor still has liquidity and thus a better chance at negotiating with its creditors.
Under the Reconstruction Act, creditors may also petition the court for reconstruction. The reason for this is that creditors might in some cases assess the debtor's economy and need for help at an earlier stage and more correctly. The threshold to open proceedings is however higher, as the creditor must be able to substantiate that the debtor is illiquid in order for reconstruction to be opened.
The Reconstruction Act contains provisions which protect the debtor from bankruptcy and debt enforcement during the period of negotiations.
The court may order that the petitioner pays an adequate advance payment to cover costs related to the proceedings or provides security for such payment. As reconstruction may now be petitioned by a creditor, it is important to note that the creditor might be ordered to provide such payment or security, however so that the creditor will only remain liable for the excess part of the advance payment not covered by the debtors assets.
The reconstruction proceedings may be initiated by a creditor. However, it is more likely that such proceedings will commence either by the initiative of the debtor or when the debtor counter a claim for payment by applying for reconstruction proceedings.
5. What may be the result of a reconstruction?
A voluntary reconstruction can, among other things, involve
- payment deferral (voluntary moratorium)
- percentage reduction of debt (voluntary composition)
- that the debt is fully or partially converted into equity (voluntary composition by conversion)
- transfer of all or part of the debtor's business and assets to a new owner, without liquidation of the debtor's business (reconstruction transfer)
- transfer and liquidation of all or part of the debtor's business and assets in return for the debtor being released from the part of the debt not covered by the liquidation (voluntary liquidation composition)
- a combination of these schemes, and possibly in combination with other measures.
A forced reconstruction with forced composition can involve
- payment deferral (forced moratorium)
- percentage reduction of debt (forced composition)
- that the debt is wholly or partly converted into equity (forced conversion)
- transfer of all or part of the debtor's business and assets to a new owner, without liquidation of the debtor's business (reconstruction transfer)
- transfer and liquidation of all or part of the debtor's business and assets in return for the debtor being released for the part of the debt not covered by the liquidation
- a combination of these schemes.
6. Bankruptcy proceedings
According to section 60 of the Bankruptcy Act, an insolvent debtor shall be subject to bankruptcy proceedings when the debtor or a creditor so requests.
A creditor may choose to file a bankruptcy petition if a claim is not paid and there is reason to believe that the debtor is insolvent. The debtor is insolvent when he or she cannot meet his or her obligations as they fall due unless the insolvency may be assumed to be of a transient nature. However, insolvency does not exist if it can be assumed that the debtor's assets and income will be able to provide full coverage of the debtor's obligations, even if compliance with the obligations will be delayed because the coverage must be sought through the sale of assets.
In addition to put leverage on the debtor to pay a claim, a bankruptcy petition may be filed for other reasons, inter alia because the creditor suspects that other creditors have been paid in a situation of fraudulent preference, the debtor has committed other fraudulent acts, the debtor's business has been conducted in a negligent way that has brought losses upon the creditor and the debtor's management and/or board of directors should be held liable for losses.
It may be difficult for a creditor to prove that a debtor is insolvent. Sections 62 and 63 of the Bankruptcy Act contain provisions relating to presumption of insolvency.
If the debtor acknowledges being insolvent, or if the debtor has ceased making payments or the creditor has been unable to achieve coverage through attachment or some other form of legal enforcement of debt during the last three months before the bankruptcy petition was submitted, insolvency is assumed to exist.
If the debtor has a statutory obligation to keep accounting records, or has had such obligation during the last year before the bankruptcy petition was submitted, insolvency in general shall be assumed to exist when bankruptcy is petitioned by a creditor who can prove to have filed a claim against the debtor for a clear debt that has fallen due, and who at least four weeks thereafter has served a notice on the debtor to pay within two weeks. In such case the bankruptcy petition must have been received by the court during the first two weeks after the expiration of the payment deadline. The service of a payment notice is frequently used as a collection measure.
7. Foreign insolvency proceedings
Norway may by an agreement with a foreign state accept to recognize foreign insolvency proceedings as binding in Norway. By a convention 19 November 1934 entered into between Norway and the other Nordic states Denmark, Finland, Iceland and Sweden, the states agreed that a bankruptcy in one of the states should also comprise the debtor's assets in the other states.
Apart from the Nordic bankruptcy convention, Norway has as of 2022 not entered into any bankruptcy convention. This means, as a point of departure, that inter alia U.S. Chapter 11 proceedings, UK schemes of arrangements or other similar foreign proceedings, as a main rule are not recognized in Norway, and do not as a matter of Norwegian law prevent other creditors from seeking satisfaction of their money claims in Norway. This understanding was confirmed by the Supreme Court in a ruling from 2013.
However, in 2021 the Bankruptcy Act was amended to include provisions stating that a foreign insolvency proceeding that comprises all of the assets of the debtor, shall have effect in Norway if the proceedings are commenced at the center of main interest of the company, they are collective, the debtor wholly or partly is deprived of disposal of his assets, a receiver or trustee has been appointed, the debtor is a legal person, and the foreign proceedings take place in a jurisdiction which acknowledges similar Norwegian proceedings (reciprocity).
The content of this overview is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
