Norwegian restructuring law, meaning the debt restructuring provisions in the Bankruptcy Act, has for a long time been broadly considered inadequate as a restructuring tool. This has resulted in companies in distress rather seeking out-of-court restructurings, which in the vast majority of cases have been perceived as the only efficient alternative to insolvency winding-up proceedings. This is confirmed by statistics, which show that since 1 January 2017, only 12 statutory restructuring proceedings were opened in Norway, of which three were successful, five ended in insolvency winding-up proceedings and four are still ongoing. By contrast, a total of 14,456 insolvency winding-up proceedings and 4,732 forced liquidation and dissolution proceedings were opened by Norwegian courts in the same time period.
However, in May of this year, a new, temporary Reconstruction Act was enacted, providing additional reconstruction tools in order to better facilitate in-court restructuring of companies in light of the COVID-19 pandemic. As of 26 October 2020, 12 reconstruction proceedings have been opened, suggesting that the new Act is already perceived by the market as having better reconstruction tools than the old debt restructuring legislation. Regardless, the majority of cases are still handled in out-of-court restructurings.
Many larger companies, especially within the shipping and offshore sectors, have gone through out-of-court restructurings over the past few years. As a result of the COVID-19 pandemic, airline companies like SAS and Norwegian, as well as other businesses within the travel sector such as hotels, travel agencies, etc, have also been forced to restructure. Many businesses within these sectors are still struggling, and more restructurings are expected in the near future.
The negative effects of the COVID-19 pandemic have not been as dramatic for Norwegian businesses as many first expected. The reasons are assumed to be the several government-issued aid packages of loans, financial support and extension of the maximum layoff period from 26 weeks to one year. Furthermore, creditors of Norwegian businesses generally seem to be more patient with respect to initiating debt collection and enforcement steps.
The future effects are rather difficult to predict, as further state aid may be offered. It currently seems as if numerous businesses are still alive based on expectations of a restored market, combined with payment extensions and employee layoffs. Needless to say, they can only stay afloat for a limited period of time without finding lasting solutions to their accumulated debt.
The Bankruptcy Act of 1984 regulates voluntary and compulsory statutory debt restructuring proceedings, as well as insolvency winding-up proceedings. However, on 11 May 2020, the new “Temporary Act on Reconstruction to Remedy Financial Distress Caused by the Outbreak of Covid-19” (the Reconstruction Act) came into force, replacing the Bankruptcy Act's legislation on debt restructuring proceedings as long as it is in force; until 1 January 2022.
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; and the 2004 Act on Financial Security, which, inter alia, provides exceptions to the Enforcement Act with respect to financial securities such as pledged shares and bank accounts. 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 2015 Financial Undertakings Act provides regulation on insolvency proceedings in financial institutions.
The different statutory bankruptcy and insolvency proceedings in Norway are reconstruction proceedings and insolvency winding-up proceedings, as mentioned in 2.1 Overview of Laws and Statutory Regimes.
In addition, there are forced liquidation or dissolution proceedings, which may be opened due to the company not meeting certain formal requirements, such as not having delivered annual accounts on time, or not having registered the required number of directors or an auditor. These proceedings are handled in more or less the same way as insolvency winding-up proceedings.
Norwegian law has no specified time limits in respect to commencing formal insolvency proceedings; however, see information on the board of directors' duty to file for formal reconstruction or insolvency proceedings in 10 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies.
Either the debtor or its creditors may petition for reconstruction or insolvency winding-up proceedings. However, the debtor may object to a reconstruction petition filed by a creditor, which in reality gives the debtor the right to determine whether or not reconstruction proceedings should be opened.
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, meaning that it is both illiquid (without available resources to meet current obligations) and with negative net assets, in order to commence insolvency winding-up proceedings.
Insolvency is not a requirement to commence reconstruction proceedings. The prerequisite for a debtor filing for reconstruction proceedings is merely that the company has, or expects to have in the imminent future, severe financial difficulties. The prerequisite for a creditor filing for reconstruction proceedings in the case of a debtor is that the debtor cannot fulfil its obligations as they fall due.
Insolvency is not a prerequisite for forced liquidation or dissolution proceedings.
Proceedings regulated by the Bankruptcy Act and the Reconstruction Act may not be applied to banks and insurance or pension 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.
The Financial Undertakings 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 have been preferred by market participants in Norway for decades, due to a general perception among stakeholders, including financial institutions, that such processes best preserve both the value of the business and the value for the stakeholders. Since the debt restructuring rules were issued in 1984, only a few statutory debt restructuring cases have been filed each year, the outcome of which has in most cases been unsuccessful, meaning the proceedings have been transformed into insolvency winding-up proceedings. This might change now that the new Reconstruction Act has come into force, but with only about six months' experience of the new legislation, it is too soon to tell.
Stakeholders tend to be supportive and give companies that are experiencing financial difficulties time to negotiate an out-of-court restructuring solution, as long as the various stakeholders' positions are not materially affected and the financial creditors/banks are aligned. It is common for financial institutions in Norway to have pledges/mortgages in most or all of the debtor's assets, and the bank will thus typically weigh its involvement in a consensual out-of-court restructuring or statutory reconstruction against the probable outcome of the bankruptcy sale of the secured assets.
As mentioned in 1.1 The State of the Restructuring Market, the Norwegian in-court restructuring rules have been considered inefficient and inadequate and, as a result, out-of-court restructurings and the resale of the debtor's business operations from the estate to its owners in insolvency winding-up proceedings, have been the preferred restructuring tools in Norway. Out-of-court restructurings will normally follow the main principles of the restructuring legislation, especially with respect to the treatment of creditors/claims and their priority, including paying wages and taxes in full. However, larger restructurings tend to take a different approach with respect to trade creditors, paying them in full as their debt falls due and leaving the financial creditors and closely related parties/owners to take a haircut.
There are no rules imposing a duty to negotiate with creditors before the commencement of a formal statutory reconstruction or insolvency process.
A company will normally introduce a standstill of its debt if it is unable to pay all its debt as it falls due, except for the critical running costs necessary to keep the business going, while attempting to negotiate a restructuring plan. The standstill may be applied to all creditors, or only to the financial creditors, some of the largest/key stakeholders and/or closely related parties.
Informal steering committees have been formed and/or co-ordinators have been appointed in some of the largest consensual restructuring proceedings over the last few years, particularly in larger company group restructurings within the shipping and offshore sector where the debtors often have syndicated loans. However, 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 and/or joint meetings.
Creditors normally expect to receive information about the company's economic situation and the future prospects for the business, as well as the expected outcome for the creditors. Financial institutions may demand even more detailed information, and will often require that the shareholders contribute new capital.
An out-of-court restructuring must be based on consensus. Unless otherwise agreed through negotiations, all the debtor's contracts and security interests must be respected, and all the creditors must agree to the plan.
In out-of-court restructurings, it is unusual that anyone besides existing shareholders or financial institution creditors will contribute new money.
There is no specific legislation regulating out-of-court restructuring processes.
Applicable principles imposing duties on creditors or on the debtor and creditors or third parties, include, inter alia:
Furthermore, all parties are bound by a 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.
A formal statutory process is needed to bind dissenters, and both the Reconstruction Act and the Bankruptcy Act contain cram-down features.
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 sewage 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.
In reconstruction proceedings, there is an automatic stay against creditor enforcement, except for the enforcement of financial collateral, which lasts throughout the duration of the proceedings. However, enforced sales may be initiated and carried out with the reconstructor's consent.
A plan worked out in a reconstruction proceeding must safeguard the interests of any secured creditors. Furthermore, secured creditors are not included in the plan and have no voting rights, as far as their secured claim is covered within the value of the secured assets.
During the first six months of insolvency winding-up proceedings, secured creditors are prevented from enforcing their security interest due to an automatic stay set out in the Bankruptcy Act.
In insolvency winding-up proceedings, encumbered assets may only be sold by the bankruptcy estate without the consent of the secured creditor if:
Pledged assets may not be sold in a statutory insolvency or reconstruction proceeding without the secured creditors' consent, with certain exceptions. See 4.2 Rights and Remedies and 6.7 Restrictions on a Company's Use of Its Assets.
The various classes of secured and unsecured creditors in insolvency winding-up proceedings are as follows (listed by priority):
In reconstruction proceedings subject to the temporary Reconstruction Act, tax claims, except for employees’ tax deduction, do not have preferential rights, meaning that such claims are treated on the same level as unsecured claims.
Secured creditors have priority in terms of any coverage from the relevant secured asset, while any remaining claim after utilising that security is a regular claim, both with respect to insolvency winding-up proceedings and reconstruction proceedings.
Any distribution to the creditors will be applied in "waterfall" payments based on 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 reconstruction proceedings has been delivered to the court, there is an automatic stay of any new or pending bankruptcy petitions against the debtor, as well as any creditor enforcement such as execution liens or enforced sales. The stay lasts throughout the proceedings.
A bankruptcy petition filed by at least three creditors entitled to dividend payment, and whose claims amount to at least half of the total owed to all known creditors entitled to dividend payment, is exempt from the stay for bankruptcy petitions. Furthermore, petitions based on claims that arise after the opening of the proceedings are generally exempt from such stays.
A creditor may petition for a temporary seizure ("arrest") 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. Such an arrest order may be granted under the general Civil Procedure Act. Alternatively, one could petition for a restriction on the disposal of assets order under the Bankruptcy Act, pending the outcome of a creditor's petition for insolvency winding-up proceedings.
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.
Before any distribution from the estate to the creditors can take place, all costs related to the handling of the bankruptcy proceedings have to be paid in full, including fees to the trustee, the creditors' committee and estate auditor, in addition to the costs incurred by the bankruptcy estate after proceedings have been opened.
No claims have priority over a secured creditors' right to receive the purchase price from a sale of secured assets, except for the bankruptcy estate's statutory lien of 5%, see 4.1 Liens/Security.
In reconstruction proceedings, the company, represented by its board of directors, remains in control while being supervised by a court-appointed reconstructor and one to three creditor representatives, together forming the reconstruction committee. They are granted access to the company’s financial information, and have decisive powers and authority to give instructions in certain matters. An auditor may also be appointed to assist the reconstruction committee.
A creditors' meeting is normally held within four weeks from the opening of proceedings. The meeting may be postponed or bypassed, at the discretion of the court in each case. If a meeting is held, the debtor shall present a draft reconstruction plan for any comments from the creditors before the debtor continues to work on the plan. If such a meeting is not held, a draft reconstruction plan shall be sent to the creditors within four weeks from the opening of proceedings. Unless a plan has been presented within a reasonable amount of time, the reconstruction committee shall give a status report to the court.
The proposed plan
The reconstruction plan to be proposed to the creditors may be for either a voluntary reconstruction, where one creditor voting against the plan can overturn the entire plan, or for a compulsory composition, where 50% of the total amount of claims (of creditors with voting rights) bind the remaining creditors. Certain groups of creditors will not have voting rights, such as secured creditors within the value of the secured asset, closely related parties, and employees as far as they have preferred claims for wages etc.
In a voluntary reconstruction, the company has full liberty with regards to how the plan is composed and is not required to treat its creditors equally. However, it is sufficient to obtain 75% (in amount) of the votes for the plan, as long as no one explicitly votes against the plan.
In a compulsory composition, the plan must include one or more of the following:
The creditors shall be given at least two weeks to respond to the suggested plan.
If a plan is overturned, the company may suggest a new plan. However, the court may dismiss a plan even if the voting requirements to accept the plan have been met, if the plan appears offensive or is unfair or unreasonable towards the creditors.
The end result
A central element in the reconstruction committee’s and court’s evaluations of a plan is that it must give a better result for the creditors than bankruptcy would.
A failed reconstruction proceeding will transform into a bankruptcy/winding-up proceeding, unless the debtor can prove to the court that the company is solvent.
A reconstruction proceeding may either end with a successful plan, be finalised without the opening of insolvency winding-up proceedings if the debtor can show that it is solvent, or otherwise end in insolvency winding-up proceedings.
When restructuring proceedings are opened, payment of already accrued debt as of the petition date is stayed. There is further an automatic stay for creditor enforcement of such claims against the debtor, see 5.3 Rights and Remedies for Unsecured Creditors.
The company usually continues "business as usual" and a reconstructor is appointed by the court. See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
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, with the exception of super-priority financing as mentioned in 3.3 New Money, or if accepted by the reconstruction committee.
Creditors are only divided into the separate creditor classes specified in the legislation according to their preferential status or whether they are closely related parties, for the purpose of paying out dividends according to the waterfall payment rules, see 5.1 Differing Rights and Priorities. Preferential claims that must be paid in full, closely related parties, as well as creditors with contingent or disputed claims, do not have a right to vote, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation. The classification of creditors based on distinct interests is not generally allowed, but there is a narrow opportunity to allow for differential treatment of creditor groups in the reconstruction plan.
Creditors are not organised, other than any representation in the aforementioned reconstruction committee.
The creditors are informed of the opening of proceedings. If the reconstruction committee finds that there are prospects for the debtor to be able to carry out a plan, they will help prepare the plan and inform the creditors whether or not they recommend the plan.
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 reconstruction or insolvency proceeding, as long as the position of the debtor and other creditors remains unaffected. However, a claim against the debtor obtained after the opening of reconstruction proceedings does not give the (new) creditor voting rights.
There are no corporate group insolvency rules under Norwegian law.
During a reconstruction proceeding, 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 reconstruction committee.
The debtor may, with the reconstructor's consent, sell inventory/stock, machinery and plant, and motor vehicles and machines while under reconstruction 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 reconstruction proceedings will not be included in any pre-existing general pledge without the consent of the reconstructor. Due to these rules, the reconstructor normally enters into agreements with the security holder(s) on how receivables, inventory and stock are to be treated in ongoing business operations during the reconstruction process.
The debtor executes any sale of assets while under reconstruction proceedings. The reconstruction proceedings do not prevent a purchaser from acquiring good title in a sale, free and clear of claims, if the reconstruction committee and the security-holders agree (or the secured claim is paid in full), see 6.7 Restrictions on a Company's Use of Its Assets.
There is no legislation in Norway which regulates credit-bidding or pre-packed sales.
In a voluntary reconstruction proceeding, security and other claims can only be released upon consent from the creditor, unless paid in full.
In a compulsory proceeding, any pledges exceeding the estimated value of the pledged asset will be considered as unsecured claims subject to the dividend payment offered in the reconstruction plan. Furthermore, if the proceeding is successful, the claims subject to the reconstruction plan will be reduced according to the dividend payment proposed by the debtor.
The value of the pledged assets is determined by the reconstruction committee, but a pledgee may, under certain circumstances, deliver a demand for a valuation to the court.
According to provisions in the new Reconstruction Act, a company under reconstruction proceedings in need of financing may obtain “debtor in possession financing” with super-priority security. This financing may only be applied to cover the costs of the reconstruction work and of business operations during the reconstruction proceedings. Two kinds of security are provided:
Such financing requires consent from the reconstruction committee. The court may, however, reverse the committee’s consent, either at its own discretion or upon petition from any affected security holder whose overall security is substantially reduced by the super-priority financing, or if there is not really a need for the financing.
New funds aimed at financing the restructuring period in consensual restructuring proceedings have so far been provided by existing secured lenders and/or shareholders.
Norwegian reconstruction 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.
A voluntary reconstruction plan is final and binding when the voting requirements have been met, while a compulsory plan is considered binding when it is agreed by creditors representing claims totalling at least half of the total amount of claims with voting rights.
The court may dismiss the plan in certain situations, eg, if the plan is not considered to be fair and reasonable for the creditors, or if the debtor has committed criminal offences while doing business over the last three years.
Neither the debtor nor an office-holder is given wider permission to reject or disclaim contracts in a reconstruction procedure than they had during regular business operations.
Any guarantor for claims against the debtor could be released of liabilities through a successful reconstruction, since any settlement or payment towards the guaranteed claim could entail a reduction of the guarantor's liability.
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 acquired a claim against the debtor less than three months prior to when the petition for proceedings was received by the court, or who 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 observe the terms of the plan, creditors may collect their full claim according to ordinary debt-collection rules – ie, not only the dividend to be paid as part of the plan.
If insolvency 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 plan.
In reconstruction proceedings, there are no rules whereby existing equity owners receive or retain ownership or other property on account of their ownership interests.
Commencing Bankruptcy Proceedings
Either the debtor or its creditors may file a petition to the court for insolvency winding-up proceedings. The court will open proceedings if the debtor is insolvent. There is a two-step test for insolvency:
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.
If the debtor files for insolvency winding-up proceedings, the court rarely overrules the petition and it usually takes only a few hours, or at most a day or two, until proceedings are opened.
A creditor-initiated petition for insolvency 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 creditors' committee, together with the trustee, shall maintain the common interests of the creditors. The committee also supervises the trustee.
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.
Filing of Claims
Claims which arose prior to the opening of proceedings are entitled to a dividend payment, including contingent claims. 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.
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 shall 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 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 each of the debtor's contracts, and may practise "cherry-picking" and only accede to those contracts which are beneficial to the bankruptcy estate. Upon becoming a party, the estate is only bound with effect from the opening of insolvency winding-up 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 remain with the debtor, and can be filed as dividend claims 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 to four weeks of the start of proceedings, respectively, the bankruptcy estate is bound by such contracts.
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.
Trustee and Creditors' Reports
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.
Duration of Proceedings
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, eg, how long it takes to realise all the assets and the conclusion of any court disputes related to claw–back or liability claims.
In distressed disposals from a bankruptcy estate, the trustee of the estate executes the sale of assets or the business operations. The insolvency winding-up 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 an intent to continue the operations, the assets could, on certain terms, 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/or the consent of the trustee.
The court appoints the members of the creditors' committee, if one is formed, usually consisting of one to three members suggested by the trustee. Employees may have the right to appoint a representative.
The trustee appointed in insolvency winding-up proceedings more or less functions as a "chairperson" of the bankruptcy estate, with the creditors' committee as the "board of directors". In that sense, the creditors' committee controls the proceedings together with the trustee, but is usually only involved in the most important decisions to be made during the proceedings, and has in reality more of a controlling function. Any remuneration paid out from the estate is usually limited.
Foreign bankruptcy proceedings are not recognised by Norwegian courts unless there is a mutual agreement with the state of the court presiding over the bankruptcy case. Norway has only entered into one cross-border agreement for 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.
Norwegian courts 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 (see 8.1 Recognition or Relief in Connection with Overseas Proceedings), only the Bankruptcy Act has rules on foreign or international bankruptcy proceedings.
In general, foreign creditors are not dealt with any differently than domestic creditors.
In either insolvency winding-up proceedings or forced liquidation or dissolution proceedings, 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 of the creditors, as well as an estate auditor.
In reconstruction proceedings, the court appoints a reconstructor and a reconstruction committee with one or more representatives of the creditors. An auditor may also be appointed.
The trustee appointed in insolvency winding-up proceedings 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, investigate and assess whether any of the debtor's transactions may be subject to claw-back and/or to see whether there is any sign of fraudulent behaviour on the part of the board of directors of the debtor, etc.
The creditors' committee, together with the trustee, safeguards the common interests of the creditors. 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, period of insolvency, etc. The estate auditor further audits the estate's accounts.
The functions of a reconstructor in a reconstruction proceeding are more supervisory than those of a bankruptcy trustee. See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
In order to serve as a bankruptcy trustee or reconstructor, 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. Certain other requirements with regards to competence also apply.
The trustee is usually an attorney and the estate auditor must be an authorised auditor.
Local courts in Norway usually have a shortlist of attorneys who are frequently appointed as trustees of bankruptcy estates and reconstructors in reconstruction proceedings.
Members of the creditors' committee, as well as an auditor (in some cases), are usually appointed by the court upon recommendation from the trustee.
A court-appointed trustee, reconstructor or auditor is rarely removed or replaced. Their appointment could, however, be revoked by the court if any of those appointed prove to be unfit or for some other reason should not exercise such duties. Reasons for revoking the appointment could be inefficiency, lack of quality in their performance, that the appointee has a conflict of interests, etc. The person in question has a right to make a statement in the matter before the court decides.
In reconstruction proceedings, the reconstruction committee supervises the debtor and works together with the debtor's board of directors to work out a plan.
In insolvency winding-up proceedings, any contact between the trustee/creditors' committee and the company management/directors is usually related to collecting information and documentation about the debtor, to be utilised in the trustee's investigative work, sale of assets, etc.
A limited liability company must at all times have reasonable equity and liquidity, given the size and risk of the company's business operations. 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 insolvency winding-up proceedings.
If the board of directors intentionally or with gross negligence omits to carry out these duties, there may be grounds for liability for damages. Furthermore, there could be grounds for a fine and/or up to two years' imprisonment if:
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 any claim for damages.
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 bankruptcy 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 its obligations – may be set aside unless the payment is considered to be ordinary.
"Security for Old Debt"
"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 to open proceedings has no legal effect on the estate.
Certain cases of set-off, unreasonable payments to closely related parties and gift transactions could also be set aside.
"Bad Faith Transactions"
"Bad faith transactions" – meaning transactions that improperly benefit one or more creditors 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 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 the circumstances, making the transaction improper.
The general look-back period for claw-back claims 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 undoubtedly solvent.
Only the bankruptcy estate represented by the trustee can bring such claims. In addition, these claims may only be brought in compulsory reconstruction proceedings (by the reconstruction committee) and in insolvency winding-up proceedings.