Norwegian statutory rules on restructuring proceedings are in most cases considered inadequate as a restructuring tool, leaving companies in distress to rather seek out-of-court restructurings in the vast majority of cases. This is confirmed by statistics, which show that only three statutory restructuring proceedings had been opened in Norway in 2019 by 10 October. In 2018, a total of six statutory restructuring proceedings were opened, of which three were successful, two ended in winding-up proceedings and one is still ongoing. Only three judicial restructuring proceedings were opened in 2017, of which one was successful and the other two ended in winding-up proceedings. By contrast, the number of actual winding-up proceedings each year for the last three years has been approximately 6,000 (see more detailed statistics below).
There have been a number of large out-of-court restructurings over the past few years, especially in the shipping and offshore sector. Many large shipping corporations have had several rounds of out-of-court restructurings, mainly involving their financial creditors, where high-yield unsecured bond debt has been restructured; partly with remittals and partly with debt-to-equity swaps. Secured debt, however – and primarily syndicated bank debt – has been renegotiated with respect to covenant waivers and extensions, in most cases without the secured creditors suffering any loss. Thus, several of these businesses are still overindebted, and new rounds of restructurings are ongoing, with even more expected in future.
The Norwegian economy was deeply affected by the recent offshore crisis, but has had a steady regrowth over the past three years. There are more jobs, the unemployment rate has decreased, and there has been higher activity again especially in the offshore sectors. It is expected that growth will decline going forward, partly due to lower investments on the Norwegian shelf. Norway's central bank, Norges Bank, has as a consequence gradually increased the key policy rate over the past year, which is now at 1.5%. In comparison, the rate was kept at 0.5% from March 2016 until September 2018.
In 2018, a total of 6,233 winding-up proceedings and forced dissolution proceedings combined were opened in Norway, compared to 6,131 in 2017. By September 2019, the sum was 4,784. Two sectors highly represented in the winding-up statistics are the construction and building sector, which is normal, and the retail sector, which is having a particularly rough time at the moment.
The recent oil crisis hit a market vital to the Norwegian economy, and financial institutions and bondholders have been involved in a number of refinancing/restructuring cases in the offshore sector over the past few years. Unsecured bondholders and equity stakeholders have taken the largest hits so far, while the financial institutions have mainly provided amendments and extensions of loan facilities and taken few haircuts. Fewer new loans have been issued in the years following the crisis, however, lending activities have picked up again.
The oil crisis resulted in increased activity in distressed debt investing, debt trading and distressed M&A transactions within the shipping and offshore sector. We now also see increased debt investing activity in retail, with many large businesses struggling.
Export Credit Norway, a state-owned company which helps Norwegian exporters succeed abroad by offering Norwegian and foreign companies competitive financing when they buy goods and services from Norwegian exporters, recently reported an increase in new loans and payouts in Q2, 2019, especially to maritime industries. As per 30 June 2019, Export Credit Norway had NOK60.8 billion's worth of active issued loans, of which 25.5% are placed in the energy and industry sector, 70.8% are placed in shipping, and the remaining 3.7% are placed in projects in the fishing and aquaculture sectors.
The Bankruptcy Act of 1984 regulates voluntary and compulsory statutory restructuring proceedings (the latter providing "cram-down" rules), as well as winding-up proceedings.
The Satisfaction of Claims Act of 1984 regulates an estate's automatic seizure of a debtor's assets, how an estate handles the debtor's contractual obligations, which claims are entitled to dividend payment and the priority between these claims, etc.
Other relevant legislation includes the Mortgage Act of 1980, regulating security interests such as pledges, mortgages, liens, retention of title rights, etc; the Enforcement Act of 1992, regulating enforcement of secured and unsecured claims; the 2004 Act on Financial Security, which, inter alia, provides exceptions to the Enforcement Act. Furthermore, the Limited Liability Companies Act of 1997 regulates compulsory liquidations and directors' liability; the Wages Guarantee Scheme Act of 1973 regulates employees' right to payment from the government Wages Guarantee Fund when their employer goes bankrupt; and the 1996 Act on Guarantee Schemes for Banks and Public Administration etc of Financial Institutions provides regulation on insolvency proceedings in financial institutions.
The different statutory bankruptcy and insolvency proceedings in Norway are restructuring proceedings, either voluntary or compulsory, insolvent winding-up proceedings, as well as forced liquidation or dissolution proceedings, which are opened on different grounds but are handled in more or less the same way as winding-up proceedings.
Norwegian law does not set specific timelines in this respect; however, see 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies.
A company can commence non-statutory voluntary restructuring proceedings or other voluntary arrangements, as well as statutory debt-restructuring proceedings, either voluntary or compulsory, or winding-up proceedings.
No one other than the debtor may file for statutory restructuring proceedings. Either the debtor or its creditors may petition for winding-up proceedings; however, such proceedings will only be opened if the debtor is insolvent. Forced liquidation or dissolution proceedings are opened by the court upon receipt of certain notifications from the national business registry; see 7.1 Types of Voluntary/Involuntary Proceedings.
The debtor must be insolvent, ie, both illiquid and have negative net assets, in order to commence winding-up proceedings. However, in order to commence statutory restructuring proceedings, the debtor only has to be illiquid. There are no such requirements for non-statutory proceedings. Insolvency is not a prerequisite for forced liquidation or dissolution proceedings.
Subject to the 1996 Act on Guarantee Schemes for Banks and Public Administration etc of Financial Institutions, insolvency proceedings regulated by the Bankruptcy Act may not be applied to banks or insurance companies. If such financial institutions are unable to pay their debt as it falls due and are unable to secure an adequate economic basis for further operations, or unable to fulfil their capital requirements, they may instead be taken under public administration.
This Act further sets out that a bank that has its main office or a subsidiary in Norway has to be a member of The Norwegian Banks' Guarantee Fund. The Guarantee Fund provides a guarantee for customers against any loss they might suffer due to an insolvent bank not being able to honour its bank deposits, limited to NOK2 million per customer, and it also provides a guarantee scheme for insurance customers.
Out-of-court consensual restructurings are preferred by market participants in Norway. There are only a few cases each year where distressed companies file for statutory restructuring proceedings, and once filed, the outcome is rarely successful.
The perception among stakeholders, including financial institutions, seems to be that consensual restructuring processes best preserve both the value of the business and the value for the stakeholders. Stakeholders tend to be supportive of a company experiencing financial difficulties pending a more detailed assessment of its financial position, as long as the stakeholders' position is not materially worsened.
It is common in Norway for a financial institution to have pledges/mortgages in most or all of its debtor's assets, and it will always weigh its involvement in a consensual out-of-court restructuring against the probable outcome of a bankruptcy sale of the secured assets.
Participants in the Norwegian restructuring market generally do not support consensual restructuring frameworks such as the INSOL Principles.
There are no rules imposing a duty to negotiate with creditors before filing for bankruptcy or governing "pre-packed" bankruptcies.
A company may continue to trade whilst insolvent provided that the creditors’ positions do not worsen and there is a plan to rescue the company that is not unrealistic (see, however, 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies regarding the duties of a board of directors and the general manager in such situations).
A company may introduce a standstill of its debt, except for the running costs necessary to keep the business going while attempting to negotiate a restructuring plan. The standstill may be applied to all creditors or, for example, only to the largest/key stakeholders and intercompany debt.
There is no tradition of appointing steering committees or co-ordinators in consensual proceedings. The process is usually organised by the debtor’s legal adviser and/or other representatives of the debtor, and carried out through negotiations with the largest stakeholders in separate or joint meetings while attempting to raise capital to finance a restructuring or a composition.
Creditors normally expect to receive information about the company's economic situation and future prospects for the business, as well as the expected outcome for the creditors, whether or not the restructuring is successful. Financial institutions will often require that the shareholders contribute with new capital.
Unless otherwise agreed through negotiations, all the debtor's contracts and security interests must be respected, and all creditors must be treated equally (according to the priority of their claim) and fairly.
Norwegian restructuring law has no provisions facilitating super-priority financing. It is not common for super priority to be accorded to new money outside a statutory or formal process. New funds aimed at financing the restructuring period in consensual restructuring proceedings are usually provided by existing secured lenders and/or shareholders.
There is no specific legislation regulating out-of-court restructuring processes. Applicable principles imposing duties between creditors or between the debtor and creditors or third parties, include, inter alia:
Furthermore, all parties are bound by statutory law aimed at preventing money laundering, corruption, illegal insider trading, etc.
Under Norwegian law, minority creditors and/or owners cannot be crammed down in an out-of-court financial restructuring process. The process is therefore entirely dependent on what has been agreed between the parties involved. However, out-of-court restructurings are still applied in the vast majority of cases, as Norwegian restructuring legislation is not considered sufficiently flexible to be a suitable tool for the restructuring of large businesses with complex financial structures.
A real estate mortgage must be registered in the national land register in order to obtain legal protection against other creditors and a bankruptcy estate.
A share pledge obtains legal protection upon notification to the company, or, if the shares are registered in a securities register, by registration in the relevant register.
Movable property is generally divided into "inventory/stock", "machinery and plant" and "motor vehicles and construction machines". Assets included in these categories may be pledged as floating charges. Motor vehicles may also be pledged individually, and creditors could secure retention of title in assets included in these categories unless the assets are intended for onward sale. Trade receivables may also be encumbered by way of a floating charge or a factoring agreement, and a single monetary claim may be pledged or transported as security, obtaining legal protection through notification to the debtor.
All floating charges, as well as all encumbrances in registered motor vehicles, obtain legal protection by registration in the relevant register in the Brønnøysund Register Centre.
Mortgages and other rights in ships and other movable offshore installations obtain legal protection through registration in the Norwegian International Ship Register, if the vessel is registered there, or in the Shipbuilding Register, if the vessel is under construction or the construction contract is registered there.
Costs for establishing voluntary security interests in assets in Norway are generally low, and the process is fairly time-efficient.
Assets may also be encumbered with statutory liens. Examples are shared costs in a housing association, or water and sewerage fees to be paid to the municipality, which are secured in the property up to a specified amount. Particularly interesting in insolvency cases is the bankruptcy estate's statutory lien in all assets posed by the debtor or by a third party as security for the debtor's obligations. The lien is capped at 5% of the relevant asset's net value, and the estate may only apply the lien to cover necessary costs for handling the bankruptcy process.
In non-statutory restructuring processes, secured creditors retain all their rights and are free to accept or decline any proposal from the debtor. During the first six months of statutory compulsory restructuring processes and winding-up proceedings, secured creditors are prevented from enforcing their security interests due to an automatic stay set out in the Bankruptcy Act.
Any plan worked out by the debt-restructuring committee in statutory debt-restructuring proceedings must safeguard the interests of any secured creditors.
In winding-up proceedings, encumbered assets may only be sold by the bankruptcy estate if:
The timeline for enforcing a secured claim depends to some degree on the nature of the security and the caseload of the local court, but it usually takes at least two to three months to conclude a forced sale of encumbered assets through an execution officer or the court. In non-consumer contracts, a financial institution may agree on a quicker and easier enforcement process for financial securities, such as bank accounts and shares, as long as the agreement is made in writing.
There are no special procedures or impediments that apply to foreign secured creditors.
Pledged assets may not be sold in a statutory insolvency or restructuring proceeding without the secured creditors' consent, with certain exceptions. See 6.7 Restrictions on a Company's Use of or Sale of Its Assets.
The various classes of secured and unsecured creditors are as follows:
Secured creditors have priority in terms of any coverage from the relevant security, while any remaining claim after utilising that security is a regular claim in the estate.
Any dividend payment to the creditors is a waterfall payment, according to the order of priority set out above.
It is not uncommon in Norway for informal and consensual restructuring negotiations to be carried out only between the key stakeholders, leaving the unsecured trade creditors unaffected.
After a petition for voluntary statutory debt-restructuring proceedings has been delivered to the court, there is an automatic stay of any new or pending bankruptcy petitions against the debtor. The stay lasts for three months after proceedings have been opened, but may be prolonged by the court at the debtor's request, if the court finds it likely that the debtor will be able to carry through a successful plan.
If compulsory judicial debt-restructuring proceedings are opened, the debtor is protected from bankruptcy petitions throughout the proceedings.
A bankruptcy petition filed by at least three creditors entitled to dividend payment, and whose claims amount to at least two fifths of the total owed to all known creditors entitled to dividend payment, is exempt from the aforementioned stays. Furthermore, petitions based on claims that arose after the opening of the proceedings are generally exempt from such stays.
Unless the court has decided otherwise, creditors cannot attach an execution lien to the debtor's assets for claims which arose prior to the opening of debt-restructuring proceedings.
A creditor may petition for temporary seizure of the debtor's assets pending a court hearing or enforcement of their claim, if there is reason to believe that the debtor will dispose of its assets before the creditor has had time to obtain security or a judgment.
Furthermore, someone with an alleged claim which is not a monetary claim against another party may petition for a temporary injunction to secure the claim and prevent any damaging action while awaiting a judgment or enforcement decision.
The Maritime Act of 1994 provides rules on the arrest of vessels.
An undisputed claim could form direct grounds for a petition for attachment of an execution lien, while a disputed claim will first need to be confirmed through a judgment.
Once an execution lien is attached to the debtor's assets, the creditor may claim enforcement by way of a forced sale.
The time it takes to put through an enforcement petition depends on the efficiency and capacity of the relevant execution office. In general, it takes two to three months from when a petition is sent until an execution lien is established.
Thereafter, the creditor must petition for enforcement of the execution lien. The timeline for a forced sale of an asset depends on, inter alia, the type of asset, and might take several months. During this process, the court's decision may be subject to appeal, possibly delaying the process for months or sometimes even years.
In winding-up proceedings, the bankruptcy estate is initially not bound by any tenancy agreement, but must pay rent on a day-by-day basis as a preferential claim until the estate gives notice to the landlord that it will no longer be a party to the contract and puts the property at the landlord's disposal. If the trustee fails to take these steps within the first four weeks of the winding-up proceedings, the estate automatically becomes a contractual party to the tenancy agreement.
The landlord's right to evict tenants who are not paying their rent is subject to the automatic stay in bankruptcy proceedings, see 5.3 Rights and Remedies for Unsecured Creditors.
Except for the above-mentioned day-by-day payment of rent, as well as any balance in a deposit account, the landlord's claims/losses are unsecured and do not rank in priority.
There are no special procedures or impediments that apply to foreign creditors.
See 5.1 Differing Rights and Priorities.
Before any distribution from the estate to the creditors can take place, all costs related to the handling of the bankruptcy proceedings are to be covered, ie, fees to the trustee, the creditors' committee and estate auditor, in addition to costs incurred by the bankruptcy estate after proceedings have been opened.
If there are further means in the estate after covering these costs and fees, they will be distributed to the creditors in the waterfall sequence listed in 5.1 Differing Rights and Priorities.
No claims have priority over secured creditors' claims to coverage from assets posed as security, except for the bankruptcy estate's statutory lien of 5%, see 4.1 Liens/Security.
Test for Insolvency
In Norway, there is a two-step test for insolvency; illiquidity and negative net assets. To open statutory restructuring proceedings, the court only applies an illiquidity test, and a company can thus be solvent upon petitioning for debt-restructuring proceedings. The winding-up proceeding described in 7 Statutory Insolvency and Liquidation Proceedings, is the only bankruptcy proceeding in Norway requiring that the debtor is insolvent.
Only the debtor may file a petition for statutory debt-restructuring proceedings. A court decision to open such proceedings is public, and cannot be appealed.
The court appoints an administrator (in practice, a lawyer) and a creditors' committee, forming a debt-restructuring committee with the administrator as leader. The members of the creditors' committee are usually representatives from large creditors, and in some cases, employee representatives.
The debtor's business operations normally continue as usual, and the board of directors upholds its functions and duties and attempts to work out a plan to propose to the creditors while being supervised by the debt-restructuring committee. The court tends to take a very passive role.
Voluntary and Compulsory Proceedings
Statutory debt-restructuring proceedings can be either "voluntary" or "compulsory". One main difference between voluntary and compulsory restructuring proceedings is that a plan in a voluntary proceeding must be accepted by all creditors, whereas in a compulsory proceeding, creditors may be crammed down. A voluntary proceeding is hence successful if all creditors whose claims are affected vote for the plan. If certain conditions are fulfilled, including that no one votes against the plan, the plan can also be carried through if creditors representing at least three quarters of the total claims agree to the plan.
In a compulsory proceeding, a majority may cram down the minority of creditors entitled to vote. If the proposed plan entails a dividend payment of at least 50% of the unsecured claims not ranking in priority, it is approved if at least three fifths of the voting creditors accept and if they represent at least three fifths of the total debt entitling voting rights. If the proposed plan entails a dividend payment of less than 50% and more than 25%, the composition is approved if at least three quarters of the voting creditors accept and if they represent at least three quarters of the total debt entitling voting rights. Any plan entailing less than a 25% dividend payment will need to meet the voting requirements of a voluntary debt-restructuring proceeding.
Creditors with security in the debtor's assets will not have voting rights for any part of a claim that is fully secured. Furthermore, no voting rights are granted for claims ranking in priority or any other claim which is to be paid in full, as well as contingent claims and claims from creditors who are closely related parties to the debtor.
Outcome of Proceedings
A second proposal may be put forward if the plan does not reach the voting requirements, subject to certain conditions. If the restructuring attempt is unsuccessful, winding-up proceedings will "automatically" be opened by the court. Thus, there are only two outcomes of statutory debt-restructuring proceedings; a successful plan or winding-up proceedings.
There are no limitations to the contents of a proposed restructuring plan, as long as the plan, with certain exceptions, includes all creditors and treats them equally, and the plan is accepted by the creditors in accordance with the above-mentioned voting rules.
The statutory restructuring scheme in Norway is generally not considered very practical or useful, since such proceedings are rarely successful and usually end in winding-up proceedings. The statutory restructuring scheme is currently under review.
When restructuring proceedings are opened, payment of already accrued debt as of the petition date is stayed. There is further an automatic stay for enforcement of such claims against the debtor, see 5.3 Rights and Remedies for Unsecured Creditors.
As mentioned in 6.1 Statutory Process for a Financial Restructuring/Reorganisation, the company usually continues "business as usual" and an administrator/trustee is appointed by the court.
The company is not in a position to take on new financial obligations while under statutory restructuring proceedings, and may not borrow new money during the process unless accepted by the administrator/creditors' committee.
Creditors are divided into separate creditor classes for the purpose of voting, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation, and for the purpose of paying out dividends according to the waterfall payment rules, see5.1 Differing Rights and Priorities.
Creditors are not organised, other than any representation in the aforementioned creditors' committee.
The creditors are informed of the opening of proceedings. If the debt-restructuring committee and any court-appointed auditor find that there are prospects for the debtor being able to carry out a restructuring plan, they will distribute to the creditors – along with the proposed plan – a report on the debtor's economic affairs, informing the creditors whether or not they recommend the plan and explaining the outcome for the creditors if the plan is not accepted.
The claims of a dissenting class of creditors may not be modified without their consent.
A creditor may as a general rule sell its claim at any time during a restructuring or insolvency proceeding, as long as the position of the debtor and other creditors remains unaffected.
There are no corporate group insolvency rules under Norwegian law.
During a restructuring process, the debtor is not allowed to sell or rent out its real property, its business premises or any asset of significant value, without the prior consent of the debt-restructuring committee.
The debtor may sell inventory/stock, machinery and plant, and motor vehicles and machines while under statutory debt-restructuring proceedings, as long as this is part of the debtor's regular business operations. This also includes pledged assets, as long as the secured creditors' security interests are not significantly impaired. Any asset the debtor acquires while under statutory debt-restructuring proceedings will not be included in any pre-existing general pledge without the consent of the debt-restructuring committee.
The debtor executes any sale of assets while under debt-restructuring proceedings. The debt-restructuring proceedings do not prevent a purchaser from acquiring good title in a sale, free and clear of claims, if the debt-restructuring committee and the security holders agree (or the secured claim is paid in full), see 6.7 Restrictions on a Company's Use of or Sale of Its Assets.
There is no legislation in Norway which regulates credit-bidding or pre-packed sales.
In a voluntary statutory debt-restructuring proceeding, security and other claims can only be released upon consent from the creditor, unless paid in full.
In a compulsory restructuring proceeding, any pledges exceeding the estimated value of the pledged asset are annulled if the proceeding is successful. The value of the pledged assets is determined by the debt-restructuring committee, but a pledgee may, under certain circumstances, deliver a demand for a valuation to the court, see 14 Importance of Valuations in the Restructuring and Insolvency Process.
Priority new money may not be made available to the company according to the restructuring procedure, nor can it be secured in the company's assets unless accepted by the creditors and the debt-restructuring committee on a voluntary basis.
Norwegian judicial debt-restructuring proceedings are not suitable as a forum for determining the value of claims and which creditors have an economic interest in the debtor company. Such issues are treated as part of the process of establishing each creditor's dividend payment and voting rights upon the finalisation of the proceedings.
A voluntary debt-restructuring plan is final and binding when the voting requirements have been met, while a compulsory debt-restructuring plan is binding when the court has affirmed the plan in a court decision and the time of appeal has expired.
No general fairness test is applied, but the court may dismiss the plan in certain situations, eg, if the debtor has committed criminal offences while doing business, or if a creditor has benefited at the cost of others, or if the plan is not in the creditors' common interest.
Neither the company nor an office holder is given wider permission to reject or disclaim contracts in a restructuring procedure than they had during regular business operations.
Any guarantor for claims against the debtor could be released of their liabilities through a successful debt-restructuring, since any settlement or reduction of the guaranteed claim would reduce the guarantor's liability accordingly.
Creditors with a right to set off their claim before proceedings have opened are, as a general rule, also entitled to do so after proceedings have opened. However, if the debtor's claim falls due before the opening of proceedings, while the creditor's claim has not yet fallen due by the opening of proceedings, set-off is not permitted.
A creditor who has acquired a claim against the debtor less than three months prior to when the petition for proceedings was received by the court, or acquired a claim earlier than this while knowing that the debtor was insolvent, cannot set off such a claim with a claim that the debtor owned when the creditor acquired its claim.
If a creditor has obtained a claim against the debtor in a way that is comparable to a transaction eligible for claw-back, set-off is prohibited.
Claims ranking last by order of priority cannot be used for set-off unless the claims have arisen out of the same legal relation, eg, the same contract, or all other claims ranking higher in priority are covered in full. The right to set-off is also limited if the creditor's claim is contingent.
The accepted/court-approved plan is binding on all creditors who are affected by it, and if the debtor fails to follow the plan, creditors may collect their claim according to ordinary debt-collection rules.
If winding-up proceedings are opened before the plan has been fulfilled, any creditor who has not received full payment according to the plan will have a right to calculate their dividend payment from the full amount of their original claim; however, any dividend payment from the bankruptcy estate may never exceed the amount accepted as full payment under the composition plan.
In Norwegian debt restructuring, there are no rules whereby existing equity owners receive or retain ownership or other property on account of their ownership interests.
Either the debtor or its creditors may file a petition to the court for bankruptcy (winding-up) proceedings. The court will open proceedings if the debtor is insolvent, meaning that:
If a creditor files for bankruptcy based on a contested claim, the court will make a pre-judgment as to whether the claim exists and can serve as grounds for the bankruptcy petition. Proceedings will not be opened, however, if the petitioning creditor has adequate security for its claim.
Timeline and Appointments
If the debtor files for bankruptcy, the court rarely overrules the petition and it usually only takes a few hours, or at most a day or two, until proceedings are opened.
A creditor-initiated petition for winding-up proceedings will usually be processed by the court within one to two months. It may, however, take longer, depending on the nature of the claim, whether the debtor raises any objections, the efficiency/capacity of the court, etc.
The court appoints a trustee to handle the estate (in practice, always a lawyer). The court may also appoint an auditor for the estate and a creditors' committee. An auditor is usually only appointed in larger cases.
The debtor is stripped of any powers over the business operations and assets, and the court-appointed trustee and creditors' committee decide whether or not the business operations shall continue after proceedings are opened and how and when the debtor's assets should be realised.
The court sets a deadline, of approximately six weeks from the opening of proceedings, for the creditors to file their claim with the bankruptcy estate. The deadline is not time-barring, and any claim filed later but before the bankruptcy proceedings have been finalised will usually be duly registered.
Most claims which arose prior to the opening of proceedings are entitled to a dividend payment, including contingent claims.
The trustee and creditors' committee test registered claims only if and when it is determined that there will be a dividend payment to settle those claims. If a claim is disputed, the trustee is to inform the court of the matter and the court will set a deadline for the creditor to take legal action. If the creditor does not take legal action, the court rules in favour of the estate. When all claims have been tested, a meeting will be held where all creditors with approved claims receiving dividend payments will have a right to participate and give comments. The court then confirms the distribution in a decision which can be appealed.
Creditors are free to trade their claims at any point while the debtor is under winding-up proceedings. The transfer should be notified and documented to the trustee.
The creditors' right to set off their claim against the debtor's claim follows the same rules as those for statutory debt-restructuring proceedings, see 6.14 Rights of Set-off.
The Bankruptcy Estate
The bankruptcy estate is a separate legal entity from the debtor. As a result, a creditor cannot set off a claim against the debtor with a claim held by the bankruptcy estate, such as a claw-back claim. Furthermore, the bankruptcy estate does not automatically become a party to any ongoing court proceedings or any of the debtor's contracts.
If the debtor is a plaintiff in a pending court proceeding, that proceeding is automatically stayed. If the debtor is a defendant, the proceeding is not stayed, and the plaintiff has the right to bring the bankruptcy estate into the court proceeding as a party, even if the bankruptcy estate has no desire to become a party to the dispute.
Though not a party by default, the bankruptcy estate has a right to become a party to all the debtor's contracts, and may practice "cherry-picking", only entering into those contracts which are beneficial to the bankruptcy estate. Upon becoming a party, the estate is only bound with effect from the opening of bankruptcy proceedings, and the estate does not have to pay any contractual claim the other party might have which arose before proceedings were opened. Such claims will have to be filed in the bankruptcy estate.
There are two exceptions to the main rule of a bankruptcy estate not automatically becoming a party to the debtor's contracts – employment contracts and tenancy agreements. If the trustee fails to declare otherwise to the contractual parties within three and four weeks, respectively, the bankruptcy estate is bound by the contract.
The bankruptcy estate is granted an extraordinary termination right pursuant to the Satisfaction of Claims Act, allowing for a customary notice period or, at most, a notice period of three months, disregarding any less favourable termination clause in the contract.
The trustee delivers an initial report to the court which includes information about the debtor, any discovered assets, potential claims and liabilities, etc. The report is also normally presented orally to the court in a hearing, usually scheduled within the first month after proceedings are opened. Creditors may attend the hearing. Furthermore, the trustee and creditors' committee submit an annual report with annual accounts for the estate. The trustee and creditors' committee also submit to the court a final report with final accounts for the estate when the proceedings are ready to be finalised. Creditors will receive these reports, and will also receive certain other information from the estate.
Any distribution to the creditors will take place after the court has passed a decision to conclude the proceedings and accept the proposed distribution plan, and after the one-month time limit for an appeal has expired. If it is clear that the estate has sufficient funds to pay all claims within a priority class in full, eg, all claims ranking first in priority, distributions are to be made as soon as possible, even if the bankruptcy proceedings have not yet been finalised. Furthermore, any payment to security holders upon the sale of encumbered assets will normally be made immediately after those assets are sold.
The duration of the proceedings depends on the size of the estate. Larger bankruptcy proceedings are more likely to go on for years, depending on, for eg, when all the assets have been realised and the conclusion of any court disputes related to claw–back or liability claims.
Forced Liquidation or Dissolution
Forced liquidation or dissolution proceedings in accordance with provisions in the Limited Liability Companies Act of 1997 are opened by the court and follow the same rules and are treated in the same way as insolvent winding-up proceedings. The grounds for forced dissolution proceedings include not submitting annual accounts and not having an auditor or a board of directors in compliance with statutory requirements.
In distressed disposals, the trustee executes the sale of assets or the business operations. The bankruptcy proceedings as such do not wipe out any security holders' rights in the debtor's assets, but if the assets are sold as a whole or as part of the debtor's business operations with intent to continue the operations, the assets may be sold free of any pledge or security rights which supersede the value of the asset.
Norwegian law has no rules on credit-bidding or pre-packed sales. Any pre-packed sale must be done non-judicially and could be subject to claw-back rules and the consent of the trustee.
See 6.15 Failure to Observe the Terms of Agreements.
As the Norwegian liquidation proceeding involves liquidating and dissolving the company, and not restructuring it, the only financing an estate would need is the financing of the costs of handling the proceedings and the sale of assets. It is not uncommon that secured creditors enter into agreements with the administrator of a bankruptcy/liquidation estate to guarantee or cover the administrator's costs related to the sale of secured assets, investigation of certain affairs of the company prior to bankruptcy, etc. However, this is a voluntary agreement between the estate and the entity contributing with funds or a guarantee, and is not regulated by law.
There is no statutory insolvency proceeding in Norway that can be utilised to liquidate a corporate group on a combined basis. If bankruptcy proceedings are opened in more than one company in a group, there will be a separate bankruptcy estate for each of the companies in the group. It is common practice that the court appoints the same trustee for all bankruptcy estates within the same group or in affiliated companies.
The court appoints the members of the creditors' committee, usually one to three members following suggestions from the trustee. Employees may have the right to appoint a representative. The creditors' committee is usually only involved in the most important decisions to be made during the proceedings, and has more of a controlling function. Any remuneration paid out from the estate is usually limited.
All assets are automatically seized by the bankruptcy estate, and the trustee will take the decision to use or sell the assets without being required to seek permission from the court.
Foreign bankruptcy proceedings are not recognised by Norwegian courts unless there is a mutual agreement with the bankruptcy venue. Norway has only entered into one cross-border agreement with regard to insolvency proceedings, which is the Nordic Convention on Bankruptcy of 1933 between Norway, Denmark, Finland, Iceland and Sweden. This Convention provides regulation on insolvency proceedings within these states, including rules on recognition, enforcement and choice of law in various situations.
The courts in Norway have not entered into any protocols or other arrangements with courts in other countries to co-ordinate proceedings in cross-border cases.
Besides the Nordic Convention on Bankruptcy, only the Bankruptcy Act has rules on foreign or international bankruptcy proceedings.
In Norway, foreign creditors are in general not dealt with any differently from domestic creditors in insolvency proceedings.
In either bankruptcy or similar proceedings in Norway, only one person, generally referred to as the trustee, is appointed by the court to handle the proceedings. The court-appointed trustee is always a lawyer.
The court may also appoint a creditors' committee with one or more representatives for the creditors, as well as an estate auditor.
The trustee more or less functions as a "chairperson" of the bankruptcy estate, with the creditors' committee as the "board of directors". The trustee's main objective is to operate in the creditors' common interest and, inter alia, to safeguard and realise the debtor's assets, handle creditors, including employees, and their claims, investigate and assess whether any of the debtor's transactions may be subject to claw-back, and whether the board of directors of the debtor has exercised any fraudulent behaviour, etc.
The creditors' committee, together with the trustee, maintains the common interests of the creditors, and especially ensures that the interests of the employees and society are maintained. The committee also supervises the trustee.
An estate auditor goes through and comments on the debtor's accounts and business conduct, and will in most cases issue a report with an overview of the debtor's financial development over the past few years before bankruptcy proceedings were opened, and an assessment of the debtor's business conduct, time of insolvency, etc.
Local courts in Norway usually have a shortlist of attorneys who are frequently appointed as trustees of bankruptcy estates. Someone filing for proceedings may ask the court to consider appointing their choice of one or more specific lawyers as trustee, and in many cases (not all) the court adheres to the debtor's or creditor's wishes and appoints one of those suggested.
Members of the creditors' committee as well as the trustee auditor are usually appointed by the court upon recommendation from the trustee.
In statutory restructuring proceedings, the creditors' committee merely supervises the debtor and works together with the debtor's board of directors to come up with a plan.
In liquidation proceedings, any contact between the trustee/creditors' committee and the company management/directors is usually related to collecting information and documentation about the debtor.
In order to serve as a trustee, an estate auditor or member of the creditors' committee, one must be competent, have no conflict of interests, and not be a related party to the debtor. The trustee is usually an attorney and the estate auditor must be an authorised auditor. There are no specific requirements for becoming a member of the creditors' committee.
The court-appointed trustee is normally a lawyer.
The court-appointed trustee may employ any adviser necessary in order to carry out their duties. Such advisers are usually only appointed in larger cases, and often no such advisers are engaged.
In a bankruptcy proceeding, advisers are usually employed and compensated by the estate, often authorised by the creditors' committee. In certain scenarios, one or more creditors may have requested that the estate hires a professional and may have given a financial guarantee to cover the cost.
In out-of-court restructurings, as well as in statutory debt-restructuring proceedings, such officers are employed and compensated by the debtor. Any employment must be approved by the creditors' committee.
In a statutory proceeding, depending on the type of employment and cost involved, the employment of external advisers has to be authorised either by the trustee alone or by the creditors' committee. No court approval is required.
In a voluntary out-of-court restructuring proceeding, the company may need approval other than from those authorised to make decisions on behalf of the company (usually the board of directors and/or CEO), depending on the specific scenario.
External professional advisers normally owe duties and responsibilities to the bankruptcy estate or the debtor company.
It depends on the nature of each case whether or not external professional advisers are appointed, as well as what types of advisers are appointed in each case. Typically, external advisers are appointed in relation to investigations, evaluations and/or legal disputes, and are often either attorneys or accountants/economists. Chief restructuring officers are usually only appointed in restructurings handled out of court.
Arbitration cannot be utilised in relation to restructuring, liquidation and administration matters as such, but an estate could in some cases be involved in arbitration proceedings at the discretion of the trustee (not conflicting with the principle that bankruptcy proceedings are to remain public) or if the trustee decides to pursue a claim on the debtor's behalf which arises from a contract with an arbitration clause.
If an estate wishes to pursue a claim under one of the debtor's contracts and that contract has an arbitration clause, the estate might not have any other choice than to agree to arbitration. Otherwise, the estate will rarely, if ever, agree to solve a dispute through arbitration, mainly since such proceedings are generally more costly than regular court proceedings.
The courts will never order mandatory arbitration or mediation in a judicially supervised insolvency or restructuring proceeding.
Pre-insolvency agreements to arbitrate disputes may be enforceable in statutory proceedings.
The Arbitration Act of 2004 governs arbitrations, while the Dispute Act of 2005 regulates mediations; both in court and out of court.
According to the Arbitration Act, unless otherwise agreed between the parties, there should be three arbitration judges. As far as possible, the parties should jointly agree on whom to appoint as arbitration judges. If the parties cannot agree, and the tribunal shall consist of three judges, each party selects one judge, and these two judges select the third, who will be the leader of the tribunal.
If the required number of arbitration judges cannot be appointed in accordance with the mentioned rules, either or both of the parties may request that the court appoints the remaining judges.
In out-of-court mediations, the parties may agree who should serve as mediator and how the mediator should be appointed.
The mediator in an in-court mediation is usually a judge, or someone appointed by the court.
Each arbitration judge or mediator in an out-of-court mediation should be independent and impartial, and qualified for the position. Otherwise, there are no statutory requirements or limitations as to whom can serve as an arbitrator or out-of-court mediator.
In-court mediators have to fulfil the same level of independence as a court judge.
A limited liability company must at all times have reasonable equity and liquidity, given the size and risk attached to the company's business operations. Furthermore, the equity may not be lower than half the share capital. If these requirements are not met, the board of directors must immediately call for a general meeting to give information about the company's financial situation and suggest correctional measures. If the board of directors cannot suggest any measures, or if the available measures are considered unfeasible, the board of directors must propose to dissolve the company or petition for statutory bankruptcy proceedings.
If the board of directors intentionally or with gross negligence omits to carry out these duties, this may give grounds for liability for damages. Furthermore, this may give grounds for a fine and/or up to two years' imprisonment if the omission has:
Furthermore, a creditor may hold the board members and the general manager liable for damages if they have misled the creditor to provide credit which is not likely to be settled.
A bankruptcy estate may pursue a claim for damages against directors and other persons in leading positions (as well as the debtor's auditor and accountant) for actions or omissions deemed to have inflicted economic loss on the company and/or all the creditors.
If a loss is inflicted on only one or a few creditors, this/these creditor(s) must themselves pursue their claim for damages.
Although appointed in only a few cases so far, there seems to be an increasing trend towards appointing CROs in larger consensual restructuring proceedings.
The legal concept of shadow directorship does not exist in Norwegian legislation.
Owners/shareholders are not liable to creditors.
Transactions undertaken by the debtor prior to the opening of proceedings may on various grounds be set aside or annulled ("clawed back") by the bankruptcy estate.
"Extraordinary payments", meaning any payment of debt made prior to the opening of proceedings with extraordinary means of payment – ie, prior to its due date or with an amount which considerably diminishes the debtor's ability to meet their obligations – may be set aside unless the payment is considered to be ordinary.
"Security for old debt", ie, any pledge or other security established by the debtor prior to the opening of proceedings, may be set aside to the extent that it secures debt accrued before the security was agreed, or if legal protection has not been obtained without unnecessary delay.
Any execution lien established in the debtor's assets less than three months prior to when the court received the petition for opening proceedings has no legal effect towards the estate.
Certain cases of set-off, unreasonable payments to closely related parties and gift transactions could also be set aside.
"Bad faith transactions" – meaning transactions that improperly benefit a creditor at the expense of other creditors, or that withhold the debtor's assets from serving as settlement to the creditors, or that increase the debtor's debt to the detriment of the creditors – may be clawed back. In other words, they may be set aside if the debtor's financial standing was already weak or was severely weakened by the transaction, and if the beneficiary knew or should have known about the debtor's weak financial standing and those circumstances make the transaction improper.
The general look-back period for claw-back is three months (one year for gifts). However, if the receiver/beneficiary is closely related to the debtor, the look-back period is usually extended to two years, and in the case of a "bad faith transaction" it is extended to ten years. The extended look-back period will usually be subject to a test, excluding transactions made during a time when the debtor was without doubt solvent.
Only the bankruptcy estate represented by the trustee can bring such claims. In addition, these claims may only be brought in compulsory judicial debt-restructuring proceedings (by the debt-restructuring committee) and in winding-up proceedings.
Security holders and other stakeholders often require valuations and economic assessments in order to assess their position and the chances of a successful out-of-court restructuring plan. In judicial debt-restructuring processes, valuations as well as an exhaustive list of the debtor's assets and obligations are required, while in winding-up proceedings, the trustee decides whether or not formal valuations will be made.
In judicial debt-restructuring processes, the debt-restructuring committee will, in co-operation with any debt-restructuring auditor, evaluate the assets and record them in an exhaustive list. In winding-up proceedings, the trustee will initiate valuations if such a step is found to be necessary.
Valuation jurisprudence in a restructuring and insolvency context is not very developed under Norwegian law, and is mainly limited to what is described in 14.1 Role of Valuations and 14.2 Initiating a Valuation.