Contributed By DLA Piper Denmark (Copenhagen V - HQ)
A high proportion of the Danish corporate environment is made up of small and medium businesses.
Even though the Danish economy is once again booming or on the verge of booming, there has also been a 15% increase in the number of bankruptcies since late 2017, with levels rising to those seen in 2012-2013.
To a large extent, this statistically significant increase can be attributed to a recent change in the Danish corporation legislation, whereby the capital requirements to certain company entities were lowered significantly. Many startups were incorporated under this lenient regulation but were never transitioned into actual operations, effectively remaining dormant. A significant number of these companies fail to file annual reports as required, and are therefore forcefully liquidated by way of bankruptcy proceedings.
This is also reflected in the fact that the number of jobs lost to bankruptcy is generally on a downward trend, meaning that an increasing portion of the bankrupt companies actually had no employees.
The overall booming nature of the economy is reflected in a slight increase in corporate turnover, despite seeing a dip in early 2018, which has since nearly fully recovered. It is also reflected in the sector-specific economic indicators, with the manufacturing and construction sectors in particular gaining significant ground, whereas the service sector is losing ground.
The real estate market is reinforcing its upwards tendency with increasing prices and declining foreclosure numbers. In fact, nationwide condo prices have exceeded the peak of 2006-2007 by a double-digit percentage margin, whereas other residential property prices have just about reached parity with the peaks of 2006-2007. This rate of growth is largely being driven by extremely favourable interest rates, and is centred around the Greater Copenhagen area and a handful of the larger cities.
Finally, the drought Denmark has seen in 2018 is resulting in lower crop yields and is forecasted to result in elevated bankruptcy levels in the agricultural sector, essentially putting 3-5% of all agricultural businesses at risk.
In Denmark, there has never been a widespread tradition of dealing in distressed debt, and this general tendency does not seem to have changed over the years. There has, however, been a significant increase in the sale of non-performing loans from the Governmental Limited Liability Company Finansiel Stabilitet A/S to foreign investors.
In line with the general declining number of bankruptcies, there has also been a decline in distressed M&A transactions. Because potential buyers – who are usually competitors in the trade – have better capital bases and/or financing options, there has been a slight increase in the values achieved through such transactions, although the values are still significantly lower than non-distressed sales.
Furthermore, due to legislative changes, in recent years the financing of commercial real estate projects has moved from traditional bank financing to financing from Danish pension funds, seeing as the bank sector is no longer allowed the same exposure towards such projects.
The principal piece of legislation underpinning Danish insolvency law is the Danish Insolvency Act (Consolidated Act no. 11 of 6 January 2014 as amended), which contains procedural as well as substantive provisions pertaining to formal insolvency proceedings, including provisions on the opening of insolvency proceedings, the appointment of a trustee/reconstructor, clawback/avoidance, creditor voting rights, priority of claims, etc.
Underpinning the Insolvency Act is the Danish Administration of Justice Act (Consolidated Act no. 1308 of 9 December 2014 as amended), which supports the coherence between the bodies of law on formal insolvency proceedings (eg, the Insolvency Act) initiated in the interest of the entire body of creditors, and individual enforcement proceedings before the Bailiff’s Court, initiated in the interest of a single creditor. Furthermore, the Danish Companies Act (Consolidated Act no. 1089 of 14 September 2015) contains provisions regarding the responsibilities of management, and the Danish Criminal Code (Consolidated Act no 873 of 9 July 2015) and the Danish Act on Bookkeeping (Consolidated Act no. 648 of 15 June 2006 as amended) both support the overall regulation of insolvency matters.
On 1 January 2014, parts 19-22 of the Danish Insolvency Act on ‘insolvency quarantine’ entered into force, pursuant to which the trustee of a defunct company must inform the insolvency court and the general body of creditors on whether or not management has grossly mismanaged a business and is therefore deemed unfit to participate in the management of other companies. If relevant, the trustee must petition the insolvency court to initiate separate insolvency quarantine proceedings against the management.
Two insolvency proceedings are available to distressed debtors under Danish insolvency law: traditional bankruptcy proceedings and the recently enacted reconstruction proceedings.
In bankruptcy proceedings, the management and Board of Directors are relieved of their duties and a trustee assumes control of the business and all its assets. The trustee is entrusted with preserving the value of the assets, liquidating the assets and distributing the proceeds equally throughout the order of priority of creditors. There is no statutory timeframe dictating how long or short the bankruptcy proceedings may be from start to finish, with the caveat that the trustee must at all times seek to preserve and maximise the value of the assets to the benefit of creditors, and that the trustee should not conduct any speculative business.
In reconstruction proceedings, the management and Board of Directors retain control of the business and a reconstructor assists the business in the reconstruction process, acting as supervisor during the process. As a general rule, the reconstructor does not have any influence on how management conducts business during the reconstruction, although their consent is required in order to perfect any act of significant importance for the business. However, the practical reality surrounding reconstructions is quite different. Matters on which the reconstructor must report to the insolvency court and general body of creditors include whether or not the management and Board of Directors have acted in good faith and co-operated throughout the reconstruction. Any major decision made without the reconstructor’s consent is therefore liable to trigger a negative report, which in practice would end the reconstruction. If the reconstructor still has faith in the business case but not in the management and Board of Directors, the reconstructor may request that the insolvency court replace them with the reconstructor himself, effectively sidelining management and handing full control of the business over to the reconstructor. Unlike bankruptcy proceedings, reconstruction proceedings must adhere to strict timelines and therefore cannot extend beyond a total of 11 months from start to finish. Once a formal reconstruction has been initiated, the debtor cannot exit the proceedings and return to normal operations.
There is a statutory requirement that a reconstruction must contain either a compulsory composition or a sale of business. Any failure to adhere to the procedural rules or timeframes results in an immediate and irrevocable bankruptcy over the business. Likewise, if a reconstruction proposal does not carry through the creditors' vote, the insolvency court will immediately open bankruptcy proceedings in place of reconstruction proceedings.
Management is responsible for ensuring that a company has sufficient working capital in order to continue trading. A poorly capitalised company can continue trading (without management risking liability) if the management has a reasonable expectation that the financial situation can be rectified within a foreseeable timeframe.
Once a company reaches the point-of-no-return, its management has an obligation to cease the operations of the company, ensure the equal treatment of creditors and initiate the necessary insolvency proceedings.
A company can apply for direct bankruptcy proceedings to be opened, or it may seek to have reconstruction proceedings opened as an attempt to avoid outright bankruptcy.
If it is considered gross negligence on the part of management to allow a company to continue trading beyond the point-of-no-return, then management can be held liable for any losses suffered by creditors as a result thereof. Such a claim against management can be brought by either the trustee or an affected creditor.
Also, if management is deemed to have grossly mismanaged its duties, it risks being put into bankruptcy quarantine – ie, prohibited from participating in the management of any limited liability company for a given timeframe (usually three years).
If a company is deemed insolvent, its management or the creditors may apply to the insolvency court to open either bankruptcy or reconstruction proceedings. If the court also finds the company to be insolvent, the company cannot block either of the mentioned proceedings, although an involuntary reconstruction will most likely entail the sidelining of current management, as explained above.
Danish insolvency law is limited in its application to insolvent debtors (ie, debtors who are unable to service their debts as they fall due), provided that the illiquidity is of a non-transient nature.
Irrespective of its indicative value in determining insolvency etc, a balance sheet deficit is not a defining characteristic of insolvency under Danish law.
Even though banks and other entities regulated by the Danish Financial Business Act (Consolidated Act no. 182 of 18 February 2015 as amended), the Danish Act on the Governmental Limited Liability Company Finansiel Stabilitet (Consolidated Act no. 875 of 15 September 2009 as amended) and the Danish Act on Restructuring of Certain Financial Enterprises (Act no. 333 of 31 March 2015) are subject to the ordinary Insolvency Act, they must adhere to the stricter solvency requirements laid out in the former legislation.
Non-compliance with these stricter solvency requirements may force a bank to ask the Governmental Limited Liability Company (called Finansiel Stabilitet A/S) to transfer the assets and select portions of the liabilities of the bank to a designated buyer, leaving only the remaining portions of the bank eligible for bankruptcy proceedings under the Insolvency Act.
In general, Danish parties exhibit a preference for statutory restructuring processes rather than consensual or out-of-court restructurings. Therefore, even when a consensual restructuring is attempted or suggested, there will usually be an expectation that it will be structured so as to reflect the basic principles laid out in the Danish Insolvency Act. There is no requirement to attempt or even consider informal reconstruction before formal judicial insolvency proceedings are initiated.
Danish banks, etc, are usually reluctant to engage in talks about the restructuring of a distressed business and, if approached with considerations of this sort, the banks, etc, will ask the debtor himself to procure or produce the necessary documentation on his financial position. The bank will procure the necessary documentation only in cases where the debt to the bank, etc, is sufficiently large. It should be noted, however, that significant debtors are very often kept out of formal insolvency proceedings through the use of inter-creditor or inter-bank agreements, so that the major creditors more or less have direct control of how the value of the debtor’s assets should be preserved and/or liquidated. This is usually due to the fact that formal reconstruction proceedings have difficulty in preserving the value of the debtor’s assets. From a legislative and judicial perspective, there has been building momentum over the last decade towards gearing formal insolvency proceedings (principally reconstruction proceedings but also bankruptcy proceedings) to be better able to preserve the assets’ values, jobs and the business as a whole, whereas previously there was a strong focus on the protection of creditors’ rights.
In Denmark, there is no tie between formal and informal restructuring efforts/proceedings. Therefore, since informal restructuring efforts have no stay on singular enforcement proceedings, an informal restructuring requires the business and/or major lenders to either pay out small and aggressive creditors or otherwise persuade such small creditors to participate in the restructuring.
In instances where a consensual restructuring is feasible, a debtor will confer with major creditors on the content and timing of the contemplated restructuring. The major creditors will often form an ad hoc steering committee, as the success of the restructuring is dependent upon all these creditors acceding to the restructuring plan.
Standstill agreements are not uncommon in, or leading up to, a restructuring but they also occur as a form of defence of a lender's mortgage rights – eg, as an attempt to postpone or avoid a debtor’s full-blown financial breakdown.
Usually, a debtor will nominate a lawyer and/or accountant to assist in the restructuring, and, provided the suggested advisers are reputable, major creditors will not object. Depending on the amounts involved, major creditors will often insist that their adviser (typically a lawyer) is hired by a debtor to work in conjunction with the debtor’s advisers, and, seeing as these types of restructuring processes are trust-driven, the debtor will never object.
The formal proceedings almost always serve as the benchmark against which consensual restructurings are measured, so they are only successful if there is an appreciable upside for major creditors. If such an upside cannot be reasonably quantified, the creditors will most likely terminate the out-of-court proceedings.
Danish insolvency law does not afford new money super-priority as such, although an intercreditor agreement may afford super-priority for new monies (which, of course, only applies to the participating creditors). Capital injection as part of an informal restructuring is usually made pro rata between major creditors in order to keep a debtor afloat or by parties closely related to the debtor in order to support the restructuring.
Danish clawback rules, however, do allow for such new capital to be duly secured against the debtor’s assets without risk of subsequent clawback/avoidance of that security.
There are no laws that dictate creditors' duties to one another; creditors are free to vote as they see fit.
The only restriction is that a creditor’s voting in reconstruction proceedings may not be influenced by a debtor or any third party giving that creditor preferential treatment of any kind. Non-compliance with this restriction will lead to the insolvency court refusing to confirm a reconstruction, or rescinding the reconstruction if it has already been confirmed.
Danish law does not provide for a cramdown of an out-of-court restructuring towards dissenting creditors, who must either be paid in full or otherwise be persuaded to co-operate. Also, the formal Danish reconstruction regime is not geared to provide a separate cramdown process – ie, the relevant rules do not allow for only the cramdown parts of the regime to be invoked. This lack of cramdown enforcement of a consensual restructuring is due to a desire from the Danish legislature and insolvency courts to encourage distressed businesses to seek assistance through formal insolvency regimes.
A mortgage over real estate must be registered with the Land Register.
A pledge over non-negotiable and unlisted shares must be registered with the company in the register of shareholders. A mortgage over negotiable unlisted shares or over listed shares must be registered with the financial institution that keeps the company’s register of shareholders.
A mortgage over movable property (aside from aircraft and ships) must be registered with the Land Register.
Historically, Danish law has not allowed for the creation of floating charges, and mortgage rights therefore had to attach to specific identifiable assets. One of the few exceptions to this rule is the recently enacted floating charges over a company’s outstanding debtors, inventory, operating equipment, livestock, intellectual property and certain vehicles. Such a floating charge must also be registered with the Land Register. Due to the all-encompassing nature of this floating charge, it has become a matter of semantics if the general rule is one of acceptance or disallowance of floating charges.
Danish law distinguishes between two types of securities: pledges and mortgages. A security right consisting of a floating charge covering receivables is considered a pledge even though a floating charge covering, for instance, inventory and operating equipment is considered a mortgage.
A creditor secured by way of a pledge is free to enforce his pledge irrespective of whether a bankruptcy or reconstruction is being pursued.
In the reconstruction of a debtor, a creditor secured by way of a mortgage is not allowed to enforce his security rights if the debtor services the secured debt. If the debt is only partially secured – ie, the asset does not provide full security for the secured claim – a debtor is only required to service the secured proportion of the debt. The creditor may enforce the mortgage only in the event of a debtor failing to service the secured (part of the) debt. In the event of a debtor’s bankruptcy, the trustee is afforded a period of six months to liquidate the assets of the estate, including mortgaged assets. Once the six-month period elapses, any mortgagee may request the trustee to put the mortgaged asset up for public auction, and the trustee is required to immediately oblige such a request.
A fully secured creditor is not eligible to participate in any voting at creditor meetings and is therefore not able to disrupt the process. A partially secured creditor may exercise voting rights proportionate to the unsecured portion of his claim.
Cash collateral is considered a pledge under Danish law but can usually be set off against a secured claim without court assistance.
A share security is considered a mortgage and is usually enforced by way of a public auction over the shares, with the aid of the Bailiff’s Court. A public auction may take several weeks.
There are no special procedures or impediments that apply to foreign secured creditors.
A trustee must adjudicate the creditor’s security and verify the merits of a claim, but no other special procedural rules apply to secured creditors.
Danish insolvency law does not divide creditors into classes, apart from (fully) secured and unsecured creditors.
Only unsecured debt carries voting rights.
In a formal restructuring, process trade creditors are susceptible to a scheme of arrangementalongside other unsecured creditors.
Unsecured creditors may petition the insolvency court to hold an election for the trustee of an estate or the reconstructor of a reconstruction, but this right is limited to the first few weeks after the opening of the proceedings in question.
After that point, creditors in a bankruptcy have no formal possibilities other than filing a complaint over the trustee with the insolvency court.
It should be noted, however, that a majority of the unsecured creditors in a reconstruction can compel the reconstructor and/or the insolvency court to terminate the reconstruction in favour of bankruptcy proceedings, seeing as the reconstruction proposal would otherwise be rejected by the unsecured creditor(s) in question.
Pre-judgment attachments are available. The Administration of Justice Act provides for interim measures, including the arrest of assets, but such interim measures are precluded once formal insolvency proceedings are opened.
Depending on the nature of a claim, it can take anywhere from a few hours or days to several years. The pivotal issue is whether or not the claim is immediately enforceable (eg, a court ruling that cannot be appealed to a higher instance), or if such a basis for enforcement must first be obtained through a civil suit.
Landlords do not have any bespoke rights or remedies in Denmark.
No special procedures, impediments or protections are applicable to foreign creditors.
The order of priority of claims in reconstruction is as follows:
In bankruptcy proceedings, the bankruptcy administration costs and debts incurred during the bankruptcy rank prior to/over reconstruction expenses.
New money added during a reconstruction is considered debt incurred with the consent of the reconstruction and therefore ranks very high in the order of priority of claims. Likewise, new money added during a bankruptcy is considered debt incurred during the bankruptcy and therefore ranks very high in the order of priority of claims.
The statutory waterfall priority of claims stated above determines which unsecured claims gain (elevated) priority status against the estate/reconstruction. In general, debts incurred under a formal insolvency proceeding enjoy an elevated priority against the estate compared to other priority claims.
The waterfall of claims only relates to the distribution of liquidated free assets to unsecured creditors. Secured claims are fulfilled separately.
Under Danish law, there are only two forms of formal insolvency proceedings: bankruptcy and reconstruction. Both types of proceedings require a debtor to be insolvent in the sense that they are unable to service their debts as they fall due.
Bankruptcy proceedings may be commenced by either a creditor or the debtor petitioning the insolvency court to do so. Once the court receives such a petition, the debtor and the creditor filing the petition are summoned to a court hearing, where only they are present. The court will issue a bankruptcy order if it finds that there is a basis for doing so, or it may choose to stay the hearing for a finite period of time. If bankruptcy proceedings are commenced, the court appoints a trustee, who assumes control of the assets and liabilities of the debtor in place of management. The trustee must seek to preserve the values of the assets as best possible, and dispose of these assets to the benefit of creditors. The trustee must issue creditors letters at regular intervals, accounting for the state of affairs of the estate.
Reconstruction proceedings may be commenced by either a creditor or the debtor petitioning the insolvency court to do so. As with bankruptcy proceedings, the parties are summoned to a hearing where no one else is present. If the debtor is a natural person, however, they cannot be unwillingly forced into reconstruction proceedings, and may therefore elect to have the reconstruction petition converted into a bankruptcy petition against themselves. If the court finds that the statutory requirements have been met, the principal requirement being the debtor’s insolvency, it will immediately commence reconstruction proceedings, appoint a reconstructor and reconstruction accountant, and schedule the first creditors’ meeting (which is to be held no later than within the following four weeks). The reconstructor is then tasked with notifying all known creditors of the proceedings and the time and place for the first creditors’ meeting.
Danish reconstruction proceedings are similar to other debtor-in-possession proceedings in the sense that management retains control of the debtor's affairs, although the reconstructor must consent to all material actions taken by the debtor. Furthermore, a successful reconstruction requires the reconstructor to confirm to the court and the creditors that management has been fully co-operative throughout the process, which in practice means that the reconstructor is often heavily involved in the day-to-day affairs of the debtor.
At least one week prior to the creditors’ meeting, the reconstructor must supply the insolvency court and the general body of creditors with a motivated reconstruction plan and an updated balance sheet.
At the first creditors’ meeting, the reconstructor and debtor must present a reconstruction plan, outlining the general terms of the contemplated reconstruction. The creditors vote on this plan, which carries unless it is opposed by a qualified majority of the creditors.
No later than three months into the reconstruction proceedings, the reconstructor must issue a report to the insolvency court and the general body of creditors accounting for the progress of the reconstruction, the result of any ongoing trading by the debtor and any other factors of significance for the reconstruction.
The second creditors’ meeting is to be scheduled for no later than six months into the reconstruction. Under certain circumstances, the insolvency court can postpone this meeting for up to four months. Two weeks prior to the meeting, the reconstructor must supply the court and the general body of creditors with the final reconstruction proposal outlining the proposed action to be taken as part of the reconstruction, which could be a compulsory composition. Again, the reconstruction proposal carries unless it is opposed by a qualified majority of the unsecured creditors. If the proposal does not carry, the court will immediately open bankruptcy proceedings over the debtor.
If the reconstruction proposal carries, it has a global effect – ie, it is a binding court decision for all existing creditors (known or unknown). Seeing as the votes on the creditors’ meetings are pivotal to the process, any successful reconstructor should have liaised in advance with all significant creditors so as to ensure that they do not oppose the final proposal.
The trustee/reconstructor may choose to maintain contracts that have not yet been fulfilled unless doing so would be contrary to the very nature of that contract. If a contract is maintained by the trustee, all claims arising from that contract are elevated in the estate’s priority of claims. If a contract is not maintained, the contract party may terminate the contract and file any and all claims arising therefrom with the estate/reconstruction. In reconstruction proceedings, the reconstructor may also maintain a contract that has been terminated within the last four weeks preceding the initiation of the reconstruction, provided the contract party has not acted upon the termination – eg, if leased inventory has not yet been retrieved.
In reconstruction proceedings, the debtor formally retains the ability to dispose of the assets, although the consent of the reconstructor will be required for most sales. In practice, the reconstructor will be heavily involved if the sale of assets is not customary for the business in question. A sale of the business or a separate branch of the business may only happen as a result of an approved and confirmed reconstruction proposal. A sale of separate pledged/mortgaged assets requires the consent of the pledgee/mortgagee. If a sale of the business happens as the result of a confirmed reconstruction plan, the sale can include a statutory debtor change so as to include both a pledged/mortgaged asset and the underlying financing.
The reconstruction proceedings effectively block enforcement proceedings against a company, thereby offering a de facto moratorium. However, this only extends to pre-existing claims, as new claims stemming from continued operations have priority and must be honoured continuously.
In bankruptcy proceedings the trustee is responsible for the sale of assets, either through a sale of individual assets or through a sale of the business as such. If a mortgagee refuses to consent to a sale of a mortgaged asset, the trustee may request that the mortgaged asset is sold by way of a public, forced auction.
In both bankruptcy and reconstruction proceedings, anyone may bid on the asset in question, including the pledgee/mortgagee. A bid “within” the pledgee/mortgagee’s own security right is effectively set-off against the secured debt. The only party who may not acquire the assets is the reconstructor/trustee/reconstruction accountant.
Pre-packed sales are not uncommon as such, but the reconstructor/trustee must somehow ensure that the sale is made on arm’s-length terms.
In bankruptcy proceedings, a qualified minority of creditors may require the formation of a creditors’ committee, consisting of up to three members. The insolvency court decides how the members of such a committee are to be elected, in order to ensure a diverse representation of the general body of creditors.
The trustee must inform the creditors’ committee of any significant actions taken and of any particularly significant actions that are planned to be taken, unless doing so would be detrimental for the estate.
The creditors’ committee is strictly of an advisory nature to the trustee and the insolvency court, and has no special powers. The trustee must suggest to the insolvency court how members of the creditors’ committee are to remunerated. The costs are borne by the estate, alongside the trustee’s remuneration in the order of priority of claims.
Danish insolvency law does not distinguish between different classes of creditors as such (apart from secured and unsecured creditors). A passed reconstruction does, however, imply a cramdown imposed on dissenting creditors as it is binding for all unsecured creditors by virtue of law.
There are no restrictions on debt trading, which can therefore take place at any time. Once a transfer has been made, the purchaser is recognised as the rightful creditor.
There are no group reconstruction proceedings available, but it is possible to co-ordinate the separate reconstruction proceedings for each company and thereby achieve a somewhat similar result as actual group proceedings.
The court-appointed reconstructor must consent to all actions of significance for the reconstruction, including sales of assets. Such consent is usually given explicitly in writing, but can also be given implicitly by way of the reconstructor's actions.
During a formal reconstruction proceeding, sales are made by the debtor with the consent of the reconstructor. The reconstruction does not in itself clear pledges and mortgages, and the sale of encumbered assets (which do not represent any excess value) must therefore be co-ordinated with such stakeholders. Such secured creditors can either demand cash payment or accept that the purchaser assumes the rights and responsibilities of the seller.
If the insolvency court has made a binding determination of the value of a pledged asset, then the pledge and accompanying financing passes to the purchaser on a statutory basis. In essence, the 'surplus pledge' is removed and the determined pledge and financing is passed on.
It is possible to prepare a reconstruction in such a manner that a pre-packed sale is executed within a very short period of time. With the permission of the court, the two mandatory creditors’ meetings can be scheduled back-to-back, limiting the reconstruction to a mere few weeks. When making such a request to the court, the debtor and reconstructor will need to clearly quantify that the compressed timeframe will not unduly affect any creditor’s position – eg, they must demonstrate a clear picture of the body of creditors and a clear show of support from a majority of the creditors for the reconstruction proposal and the compressed timeframe.
Other claims, including secured creditor liens and security arrangements, can be released only if the secured creditor accepts the release.
New money can be secured against the company’s assets to the same extent that the company could otherwise do so.
It is not possible to use the statutory process to determine the value of a claim. Both the formal bankruptcy and reconstruction processes are ill suited for such 'fact finding' missions, as a company cannot withdraw from the processes again.
A reconstruction proposal adopted by the majority of the creditors is not valid and binding until it has also been confirmed by the insolvency court. The insolvency court may reject such proposal if it is disproportionate to the debtor's financial situation, and is required to reject it if there has been any procedural misconduct, incompleteness of significant factual statements made by the debtor or non-compliance with the Danish Insolvency Act, or if one or more creditors have been given preferential treatment outside the reconstruction so as to influence the vote.
With the consent of the reconstructor, the company may terminate its contracts with customary or reasonable notice, regardless of whether or not the agreement called for a prolonged notice.
Furthermore, the company may – with the consent of the reconstructor – uphold a contract during the reconstruction and subsequently terminate it with one month’s notice, irrespective of the notice stated in the contract.
A statutory procedure cannot release non-debtor parties from liabilities.
Creditors may perform set-off if both the main claim and the counterclaim where created either prior to or after the reference date and/or the opening of insolvency proceedings.
If a company is in significant violation of the terms of a passed reconstruction, the reconstruction may be lifted, which, in turn, would resurrect any claims that have been subject to a haircut, thereby exposing the company to possible bankruptcy proceedings.
Existing equity owners can receive or retain ownership of property, although this seldom happens.
If a sale of assets amounts to a sale of the business (or a separate branch of the business), the sale must – in theory – await the approval of the reconstruction proposal at the second creditors’ meeting. Failure to do so means the sale is not protected from clawback claims from a subsequent trustee if the business is declared bankrupt (which will often be the case when the business/operations have been sold).
Otherwise, the sale of individual assets can be made freely during a reconstruction, with the caveat that the reconstructor’s consent is necessary if the sale carries a significant impact for the reconstruction.
Due to its reservation to judicial co-operation in the EU, Denmark is not part of or bound by the EU Regulation on Insolvency Proceedings (Council Regulation (EC) No 1346/2000 of 29 May 2000 as recast by Council Regulation (EU) No 848/2015 of 20 May 2015), and consequently there is no general statutory framework in place with regards to the recognition of foreign insolvency proceedings.
However, Denmark does recognise other Scandinavian insolvency proceedings, by virtue of the Nordic Bankruptcy Treaty.
Furthermore, Danish insolvency courts have been known to enter into singular agreements/protocols with foreign insolvency courts on a case-by-case basis if there is a need to do so.
Even though it has happened on a case-by-case basis, as a general rule the courts do not liaise with foreign courts.
Seeing as Danish law does not recognise foreign jurisdiction in insolvency-related matters, Danish private international law decides which laws govern a contract. Even then, Danish insolvency law will still apply with regards to certain insolvency-related matters, such as the perfection of security, clawback, etc.
Foreign creditors are not dealt with differently in Denmark.
In bankruptcies, one or more trustees are appointed. In reconstructions, one or more reconstructors and a reconstruction accountant are appointed.
A trustee is responsible for handling all aspects of an estate – liquidating the assets, adjudicating claims made against the estate, pursuing clawback claims, etc. The trustee reports to the general body of creditors by way of creditor information letters at set intervals, and to the insolvency court through the same letters, among other duties.
A reconstructor is responsible for overseeing the management of active operations of a company, and for detailing the reconstruction plan and proposal. The reconstruction accountant focuses on validating the value of assets and the overall financial aspects of the reconstruction process. Both report to the general body of creditors by way of creditor information letters at set intervals, and to the insolvency court.
A trustee is appointed by the insolvency court. If a trustee election has been requested, the court will consult the majority of creditors possessing voting rights, and will nearly always appoint the trustee nominated by the majority of creditors.
A reconstructor is appointed by the insolvency court. The court may choose to appoint additional reconstructor(s) or replace the incumbent reconstructor if it finds sufficient grounds to do so.
A trustee replaces management during proceedings. For reconstructors, see above.
Anyone who meets the impartiality requirements in the Danish Insolvency Act may be appointed as a statutory officer, but nearly all appointments are lawyers (or registered accountants with regards to reconstruction accountants).
Restructuring professionals, attorneys, accountants and other professionals can be statutory officers.
In informal procedures, any type of professional adviser may be employed by any party. Accountants and other types of advisers tend to be involved early on, while lawyers are brought in if a quick fix has not been achievable.
No authorisations or judicial approvals are required for such employments.
In Denmark, arbitrations and mediations are not used in restructuring, liquidation, insolvency or administration matters.
Parties almost never agree to arbitrate or mediate their disputes in restructuring or insolvency situations.
Courts never order mandatory arbitration or mediation in a judicially supervised insolvency or restructuring proceeding.
Pre-insolvency agreements to arbitrate disputes are not enforceable in statutory proceedings.
The Danish Administration of Justice Act provides the statutory framework for mediation processes and likewise the Danish Arbitration Act for arbitrations. Both areas, however, are to a large extent based on agreements between the involved parties.
The appointment of arbitrators and mediators is (almost) always governed by the agreement between the involved parties.
Danish insolvency law does not utilise chief restructuring officers (CRO). If a de facto CRO becomes part of the management of a debtor, he or she assumes the rights and responsibilities of a normal member of management.
Danish law does not recognise the concept of shadow directors in the usual common law sense. There are, however, rules regarding parties closely related to a debtor, which (if met) significantly broaden the scope of clawback rules and have severe consequences for such closely related parties’ floating charges over a debtor’s assets (if such floating charges exist). A financial institution must inform the Danish Financial Supervisory Authority if it chooses to temporarily assume control of a debtor’s business with the purpose of facilitating a restructuring or settling any outstanding debt.
Based solely on the account of ownership, owners/shareholders are not liable to creditors.
Chapter 8 of the Danish Insolvency Act contains provisions regarding clawback measures against actions that constitute a breach of the basic principle of creditor equality. Such actions may be gifts, the renunciation of inheritance, certain types of payments made by a debtor, the provision of security for pre-existing debt, or general creditor hostile actions.
The ordinary clawback period is usually three to six months. If the creditor in question is closely related to a debtor, the clawback period is extended to two years, and the burden of proof generally shifts from the estate to the creditor.
Clawback claims are most often brought directly by a trustee. If a trustee elects not to pursue a potential claim, any creditor may continue to pursue the claim at his own expense, within a timeframe laid down by the insolvency court. If the creditor is successful, the proceeds go to the estate, but the creditor’s reasonable expenses will be covered by the estate through the proceeds of the case.
Often a trustee will ask one or more creditors to fund the further pursuit of a claim (often court cases) if the estate itself is unable to bear the associated costs.
Intercompany claims are dealt with just as any other claim, but are subject to stricter clawback rules seeing as the parties are/were closely related.
A parent company can only be held responsible for the liabilities and obligations of its direct and indirect subsidiaries if it has wilfully or otherwise assumed liability.
A parent company owner of an insolvent company may retain control and ownership of subsidiaries, but it cannot control the appointed insolvency officer.
Danish law does not generally impose nationality requirements with regards to loans or bonds issued to/by a Danish debtor. A Danish business is therefore free to obtain foreign funding if it wishes to do so.
There may, however, be practical matters of relevance in this regard. Depending on the foreign jurisdiction in question, there may be restrictions on cash transfers, and in practice it may be slightly more difficult to perfect certain Danish security rights – eg, registration of a foreign creditor's pledge of assets in the Danish Land Register (which covers rights over other assets than just immovable property).
The majority of Danish debt trading happens as a result of the insolvency of a bank (or similar entity). Once a financial institution becomes insolvent, the Danish governmental company tasked with dealing with insolvent banks (Finansiel Stabilitet A/S) initiates winding-up proceedings over the bank, and has previously sold the bank's claims (primarily to foreign capital funds) in portions, on one or more occasions. The insolvent bank whose claims are sold is subject to the licensing requirements of the financial legislation, in order to conduct banking business, but the purchaser of the same claims is not subject to the same statutory requirements. However, Finansiel Stabilitet A/S usually contractually requires the purchaser to abide by the same rules and regulations so that the debtor is not affected by the sale.
Denmark has little tradition of debt trading. When debt trading does occur, the transfer document is often limited to identifying the transferred debt and any accompanying securities, and stating that both the debt and the securities have been transferred. Depending on the type of security, such transfers of securities may require a re-registration of the security in order to perfect the transfer. Debt trading involving listed companies may, however, be subject to further disclosure requirements, depending on the size and nature of the contemplated transaction.
Even though various adapted LMA guidelines may be used by the market, there is no requirement to use them and they are not perceived to regulate debt trading as such.
Loan market guidelines do not have any legal effect.
Loan agreements in Denmark do not typically prohibit transfers without consent – see above.
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Under Danish law, insolvency is defined strictly as an inability to service one’s debts as they fall due. Therefore, valuations are not used to prove insolvency as such, although a negative balance is a strong indicator of insolvency. Valuations are used to ascertain whether or not a creditor is fully or partially secured, and in order to estimate which class of creditor is the 'fulcrum-class' which possesses the voting rights at creditor meetings.
Furthermore, in reconstruction proceedings the insolvency court may (at the request of the debtor and after having received the reconstruction accountant’s valuation) make a binding valuation of what value is to be assigned to a security right. Should the asset in question later be sold at a price exceeding the binding valuation, the excess value is allotted to the unsecured creditors. This rule of binding valuations does not apply to real estate, aircraft and ships.
Also, (informal) valuation is often used by partially secured creditors filing a bankruptcy petition against a debtor in order to establish that the creditor in question has a justified interest in initiating bankruptcy proceedings due to the unsecured portion of his claim.
Valuations are usually initiated by the debtor, trustee or reconstructor. Banks may sometimes initiate valuations of mortgaged assets prior to the initiation of insolvency proceedings in order to estimate their credit exposure.
Apart from adherence to accounting rules, Danish law does not require management or others to undertake valuations of a business or single assets. Therefore, there is no requirement to test market value by initiating valuations and/or M&A processes.
Valuations carried out in a formal insolvency context always reflect liquidation values as of a specific date (which may vary depending on in what context the valuation is to be used).
With regards to the valuation of real estate, Danish legal literature and jurisprudence suggests that valuations made by real estate agents cannot always be relied upon in insolvency scenarios and that the valuation should instead be a percentage of the public property evaluation (which regards the taxation of real estate and has no inherent connection to market value).