In early 2020, the Danish economy was severely affected by the COVID-19 pandemic and the resulting government-imposed restrictions and lockdowns, which in many ways turned the economy upside down and left certain industries without any activity.
Consequently, developments in the Danish restructuring market are a result of the COVID-19 pandemic and an attempt to minimise the negative repercussions thereof. To help secure the position of companies and their employees, the government issued a number of legal changes to the restructuring rules, which were implemented in March 2021. Furthermore, the implementation of EU Directive 2019/1023 was postponed due to the COVID-19 pandemic, and the directive is therefore scheduled for implementation no later than on 17 July 2022.
In the beginning of the COVID-19 pandemic, the Danish government issued a broad spectrum of financial schemes in attempt to secure Danish businesses, their employees, and the economy in general. Furthermore, the government encouraged private and financial creditors to exercise a soft approach with their debtors.
Due to the government’s financial schemes, the number of insolvency proceedings was relatively low during the COVID-19 pandemic. This relatively low number left a lot of experts speculating whether Denmark could expect a surge in insolvency proceedings, when the financial schemes run out. At this time, no significant rise has been seen in the number of insolvency proceedings.
During the COVID-19 pandemic, the government made it possible for businesses to receive an interest-free loan from the tax authorities in the amount corresponding to their due withheld taxes of VAT. The COVID-19 loans are yet to be paid back, and the deadline for repayment has been postponed to 1 April 2022, when the companies will have the possibility to postpone payment by another 12–24 months, with interest, however. Please see the Denmark Trends and Developments article in this guide for further elaboration on the number of bankruptcies during the pandemic.
Overall, the expected rise in distressed companies still remains to be seen. However, the repayment of the COVID-19 loans may trigger a surge in the number of distressed companies, and this will test the amended restructuring regime. Due to the amendments to the rules on restructuring proceedings, it is expected that distressed companies may attempt in-court restructuring before bankruptcy proceedings.
Despite the pandemic, the economy is generally experiencing growth. The stock markets have generally been growing since the start of the pandemic. The M&A markets have had a high level of activity during the last year and the real estate sector, both commercial and private, saw an increase in activity. Despite concerns from the Danish central bank (Danmarks Nationalbank) on an overheating of the Danish private real estate market, the government has not issued regulations in order to limit the risk of a “bubble”.
Amendments to the Rules on In-Court Restructuring
At the beginning of the pandemic, the Danish Bankruptcy Council was requested to provide the Danish Ministry of Justice with a statement regarding the proposed amendments of the in-court restructuring rules. The Danish Bankruptcy Council proposed a number of amendments, most of which were implemented into law in March 2021.
Please see the Danish Trends and Developments article for further elaboration on the amendments.
There are no official statistics on the number of in-court restructurings year by year. Based on the official Danish Gazette, the number of in-court restructurings for the period October 2020 to October 2021 seems, on an overarching basis, to be on the same level as in the previous years. From July 2019 to July 2020, some 70 restructuring cases were instituted in the Danish courts, and this also illustrates the low popularity of these proceedings compared to bankruptcy proceedings. The amends to in-court restructuring are therefore yet to lead to the expected increase in the use of in-court restructuring proceedings, which was their purpose.
Status of the Implementation of EU Directive 2019/1023 (the EU Restructuring and Insolvency Directive)
Denmark has opted out of EU judicial co-operation, and Denmark is, as a general rule, not a party to the EU Regulation concerning the recognition of insolvency proceedings within the EU.
However, within the financial area, the EU rules regarding recognition of insolvency proceedings in another EU member state have been implemented in Danish law (these include the Bank Recovery and Resolution Directive (BRRD) and Bank Recovery and Resolution Directive II (BRRD II)). The Directives were implemented under the EU rules concerning the internal market and not the rules concerning judicial co-operation in civil matters, which Denmark has opted out of.
EU Directive 2019/1023 (the EU Restructuring and Insolvency Directive) will be also be implemented in Danish law under the EU rules concerning the internal market.
The deadline for implementation of the Directive has, due to the COVID-19 pandemic, been postponed by one year until 17 July 2022.
The Danish Ministry of Justice requested its advisory body, the Danish Bankruptcy Council, to assess both the legal as well as the financial consequences of the implementation of the Directive 2019/1023. If the Council finds that there is a need for legislative changes to the existing laws before it is possible to implement the Directive correctly, the Council is also asked to prepare a draft bill. The Bankruptcy Council is asked to present its considerations by 15 November 2021, but it has not yet released its considerations and assessment.
Rulings issued by insolvency courts within the EU and abroad have generally not been recognised in Denmark due to Denmark’s decision to opt out of judicial co-operation. The Danish Insolvency Act does however stipulate that the Minister of Justice may lay down rules for the recognition and binding effect of foreign insolvency proceedings as long as these rules are not obviously incompatible with Danish regulations.
The Danish Supreme Court delivered a significant ruling in September 2014 stating that a German bankruptcy estate was, according to German insolvency law, able to claw back profits paid to a Danish investor. This was significant as the time bar set out in the Danish rules on claw-back of the transaction in question would have blocked such a claw-back. However, the German rules did not contain the same time bar, allowing for a claw-back of the transaction if the other conditions were fulfilled. The Supreme Court noted that concern for the equal treatment of the creditors of the German bankruptcy estate – and the fact that the German insolvency law was not incompatible with Danish regulations – meant that the case should be determined under the German rules. The ruling confirms the principle of lex concursus and shows that foreign insolvency law may be applicable in relation to matters in Denmark, and may be ruled on by Danish courts, as long as the foreign rules are not irreconcilable with Danish insolvency law.
The future implementation of the EU Directive 2019/1023 and the Supreme Court ruling from 2014 indicate that Danish insolvency law may move towards more harmonisation within the EU.
The principal piece of legislation underpinning Danish insolvency law is the Danish Insolvency Act (Consolidated Act No 775 of 3 January 2021 as amended), which contains procedural as well as substantive provisions pertaining to formal insolvency proceedings, including provisions on the opening of insolvency proceedings, appointment of a trustee/restructuring administrator, claw-back/avoidance, creditor voting rights, priority of claims, etc. In 2021 the Act’s rules on in-court restructuring were amended in an attempt to make the rules more flexible and thus to incentivise debtors to make use of restructuring proceedings rather than bankruptcy proceedings.
The Danish Insolvency Act also contains rules on “insolvency quarantine”. Pursuant to these rules, the trustee of a bankruptcy estate must investigate whether the management of the bankrupt business has grossly mismanaged the business and is therefore deemed unfit to participate in the management of other businesses. If relevant, the trustee must make a petition to the bankruptcy court to initiate separate insolvency quarantine proceedings against the management and inform the general body of creditors of the quarantine petition.
Underpinning the Insolvency Act is the Danish Administration of Justice Act (Consolidated Act No 1445 of 29 September 2020), which supports the coherence between the bodies of law on formal insolvency proceedings (eg, the Insolvency Act) initiated in the interest of the entire body of creditors, and individual enforcement proceedings before an enforcement court, initiated in the interest of a single creditor. Furthermore, the Danish Companies Act (Consolidated Act No 763 of 23 July 2019) contains provisions regarding the responsibilities of the management of public and private limited companies. Furthermore, the Danish Criminal Code (Consolidated Act No 1650 of 17 November 2020) and the Danish Act on Bookkeeping (Consolidated Act No 648 of 15 June 2006 as amended) both support the overall regulation of insolvency matters.
Danish insolvency law affords distressed debtors two different in-court insolvency proceedings: traditional bankruptcy proceedings and the recently amended in-court restructuring proceedings.
In bankruptcy proceedings, the executive management and board of directors of the bankrupt company are relieved of their duties, and the trustee appointed by the insolvency court assumes control of the business and all its assets. The trustee is entrusted with preserving the value of the assets, liquidating the assets and distributing the proceeds equally throughout the order of priority of creditors. There is no statutory timeframe dictating how long or short the bankruptcy proceedings may be from start to finish. The trustee must at all times seek to preserve and maximise the value of the assets to the benefit of creditors, and the trustee should not conduct speculative business. Historically, it has not been uncommon to carry through a restructuring of the business through bankruptcy proceedings involving an asset sale of the entire, or part of, the business as the rules governing bankruptcy proceedings are somewhat more flexible than the rules of formal in-court restructuring proceedings described below.
In the recently amended in-court restructuring proceedings, the executive management and board of directors retain control of the business, and a restructuring administrator appointed by the insolvency court assists the business in the restructuring process and acts as an overseer during this process. It is also possible for the court to appoint a restructuring accountant who will have to approve the financial parts of the restructuring plan and proposal set forth by the administrator. With the 2021 amendment of the restructuring rules, it is – among other things – no longer obligatory to have an accountant appointed.
Role of the administrator
Danish in-court restructuring proceedings are quite similar to other debtor-in-possession proceedings in the sense that management retains control of the affairs of a debtor. The administrator does not, generally, have any influence over how the management conducts the day-to-day business during the restructuring process. However, the administrator must consent to all material actions taken by the debtor. The practical reality surrounding restructurings is, however, quite different as a successful restructuring requires that the administrator confirms to the court and the creditors that the management has been fully co-operative throughout the process, which, in practice, means that the administrator is often heavily involved in the day-to-day affairs of the debtor and not only the major and material actions.
If the administrator has faith in the business case, but not in the executive management and board of directors, the administrator may request that the insolvency court replace them with the administrator, effectively side-lining management, and hand full control of the business over to the administrator.
The administrator may choose to maintain contracts which have not yet been fulfilled unless it would be contrary to the very nature of such contracts. If a contract is not maintained, the contract party may terminate the contract and file all claims arising therefrom with the estate/restructuring administrator. In restructuring proceedings, the administrator may also maintain a contract which has been terminated within the last four weeks preceding the initiation of the restructuring process provided the contract party has not acted upon the termination; eg, if leased inventory has not yet been retrieved.
An in-court restructuring must contain either a compulsory composition or a sale of business. In the restructuring proceedings, the creditors must – at meetings in the insolvency court – vote and approve first a restructuring plan and later a restructuring proposal (though these can be put to the vote at the same meeting).
Unlike bankruptcy proceedings, restructuring proceedings must adhere to strict timelines and can therefore not be extended beyond a total of 11–12 months from start to finish. The timeframe for an in-court restructuring process (though not a fast-track business transfer as discussed below) is as follows.
Under the newly amended rules, a debtor can, if no restructuring plan has been adopted, within the first four to eight weeks after the commencement of the proceedings, exit the restructuring process and return to normal operations, but beyond this point the exit opportunity is not available. Unlike the previous rules, the debtor is not automatically declared bankrupt if no restructuring plan is approved. If a restructuring plan is approved, but not the subsequent restructuring proposal, the debtor will automatically be declared bankrupt. The approved restructuring proposal is manifested by the court in a court order, having binding effect on all contracting parties and creditors of the debtor.
If a restructuring proposal containing a business transfer is approved and carried through, the company – now having sold the business – will be declared bankrupt, and a bankruptcy trustee will be appointed to liquidate any remaining assets. The restructuring administrator will usually also be appointed as bankruptcy trustee.
Fast-track business transfer
Under the newly amended rules, a fast-track business transfer scheme has been introduced. In accordance with these new rules, a business transfer can be executed by the restructuring administrator prior to a restructuring plan having been approved. Furthermore, such a business transfer cannot be deemed void at a later point if no creditors object within five days after having received notice of the transfer from the administrator.
The management is responsible for ensuring that a company has sufficient working capital in order to continue trading. A poorly capitalised company can continue trading (without management risking liability) provided the management has a reasonable expectation that the financial situation can be rectified within a foreseeable timeframe.
Once a company reaches the point-of-no-return/point of hopelessness, the management (both the board of directors and the executive management) has an obligation to cease the operations of the company, ensure the equal treatment of creditors, not take on further liability towards any creditor, and initiate the necessary insolvency proceedings.
If a company or natural person is deemed insolvent, its management or creditors may apply to the insolvency court to open either bankruptcy or restructuring proceedings. The company or person can challenge a petition for insolvency proceedings filed by a creditor, but if the court also finds the company to be insolvent, the company cannot block either of the mentioned proceedings. A petition for involuntary in-court restructuring filed by a creditor will, however, most likely entail the sidelining of the current management.
Danish insolvency law is limited in its application to insolvent debtors; ie, debtors who are unable to service their debts as they fall due, and where this inability is not merely temporary.
The Danish criteria for insolvency are based on the principle of illiquidity as opposed to the principle of insufficiency. Therefore, a balance sheet deficit is not a defining characteristic of insolvency under Danish law, irrespective of its high indicative value in determining insolvency.
The Danish Insolvency Act is the principal piece of legislation underpinning Danish insolvency law and contains the procedural as well as substantive provisions regarding insolvency proceedings for both companies and natural persons.
The Financial Sector
As stipulated under 1.1 Market Trends and Changes, the EU rules (especially BRRD and BRRD II) regarding recovery and resolution of credit institutes and investment firms have been implemented into Danish law. The EU rules stipulate a number procedural and material provisions for the recovery and resolution of credit institutes and investment firms and the recognition of insolvency proceedings within the EU in the financial sector.
Under the special provisions for certain financial institutes, the Governmental Limited Liability Company (Finansiel Stabilitet A/S) will initiate recovery and resolution actions to minimise negative repercussions. The recovery and resolution tools may include a transfer of the assets and select portions of the liabilities of the bank to a designated buyer, leaving only the remaining portions of the bank eligible for bankruptcy proceedings under the Insolvency Act.
Besides the special recovery and resolution actions on the financial area, financial institutions must observe stricter solvency requirements, which have been laid down for financial institutions in the EU. The relevant legislation for financial institutions is the Danish Financial Business Act, The Danish Act on the Governmental Limited Liability Company (Finansiel Stabilitet) and the Danish Act on restructuring of Certain Financial Enterprises. For certain major institutions that hold a significant bearing on the Danish economy (so-called systemically important financial institution or SIFIs), some stricter requirements apply.
Non-life Insurance Companies
For non-life insurance companies, the policyholders and insured persons have a first right to receive dividends before the other simple/unsecured creditors (mainly trade creditors), though their claims still rank after costs associated with the insolvency proceedings. Private/consumer policyholders and insured persons, plus injured third parties, are under certain conditions entitled to coverage from Danish Guarantee Fund for Non-life Insurers. The Guarantee Fund has a specific right to receive reinsurance payments triggered by the coverage provided by the Guarantee Fund, and these assets are thus excluded from the bankruptcy proceedings.
From mid-2021, the Guarantee Fund has also covered certain claims covered by work-related accident insurance issued by bankrupt insurance companies or companies that have had their licence to issue such insurance withdrawn. This coverage was previously provided by the official Danish Labour Market Insurance (AES).
In general, Danish parties prefer statutory restructuring processes to consensual or out-of-court restructurings. Therefore, even when a consensual restructuring is attempted or suggested, there will usually be an expectation that it will be structured to reflect the basic principles laid out in the Danish Insolvency Act. There is no requirement to attempt or even consider informal restructuring before formal judicial insolvency proceedings are initiated.
Danish banks, financial institutions, etc, are usually reluctant to engage in talks about the restructuring of a distressed business. If approached with a restructuring request from a debtor, the bank will ask that debtor to procure or produce the necessary documentation on its financial position. Only in relation to customers/debtors with significant engagement with the bank will the bank procure the necessary documentation and take a more active role in the restructuring process. It should be noted, however, that significant debtors are very often kept out of formal insolvency proceedings using inter-creditor or inter-bank agreements, enabling the major creditors to have direct control over how the value of the debtor’s assets should be preserved and/or liquidated. This is usually as formal restructuring proceedings have difficulty in preserving the value of the debtor’s assets. From a legislative and judicial perspective, over the last ten years, there has been building momentum towards gearing formal insolvency proceedings (principally in-court restructuring proceedings, but also bankruptcy proceedings) to be able to better preserve the assets’ values, jobs and the business, whereas previously there was a strong focus on the protection of creditors’ rights.
In Denmark, there is no tie between formal and informal restructuring efforts/proceedings. Therefore, since informal restructuring efforts have no stay on singular enforcement proceedings, an informal restructuring requires the business and/or major lenders to either pay out small and aggressive creditors or otherwise persuade such small creditors to participate in the restructuring.
With the newly amended in-court restructuring rules it is now possible to carry through a fast-track business transfer. This is expected to provide for greater use of pre-packed solutions. Please refer to 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 6.8 Asset Disposition and Related Procedures for further detail.
In instances where a consensual restructuring is feasible, a debtor will confer with major and/or secured creditors on the content and timing of the contemplated restructuring. The major creditors will often form an ad hoc steering committee in the sense that the success of the restructuring is dependent upon all these creditors agreeing to the restructuring plan.
Standstill agreements are not uncommon in, or leading up to, a restructuring but they also occur as a form of defence of a lender’s mortgage rights; ie, as an attempt to postpone or avoid a debtor’s full-blown financial breakdown.
Usually, a debtor will nominate a lawyer and/or an accountant to assist in the restructuring, and provided the suggested advisors are reputable, major creditors will not object. Depending on the amounts involved, major creditors will often insist that their advisor (typically a lawyer) is hired by the debtor to work in conjunction with the debtor’s advisors and, seeing as these types of restructuring processes are trust-driven, the debtor will never object. The board of directors in question will also sometimes hire a separate lawyer to advise them on their duties to the company and ultimately to the creditors.
The formal proceedings almost always serve as the benchmark against which consensual restructurings are measured, so they are only successful if there is an appreciable upside for major creditors. If such an upside cannot be reasonably quantified, the creditors will most likely terminate their participation in the out-of-court proceedings.
Danish insolvency law does not afford new money super-priority as such, although an inter-creditor agreement may afford super-priority for new monies (which of course only applies to the participating creditors). Capital injection as part of an informal restructuring is usually made pro rata between major creditors in order to keep a debtor afloat, or by parties closely related to the debtor in order to support the restructuring.
Danish claw-back rules, however, do allow for such new capital to be duly secured against the debtor’s assets without risk of subsequent claw-back/avoidance of that security.
There is no law that dictates the duties of creditors to one another. Creditors are free to vote as they see fit. The only restriction is that a creditor’s vote in restructuring proceedings may not be influenced by a debtor, or any third party, giving that creditor preferential treatment of any kind. Non-compliance with this restriction will lead to the insolvency court refusing to confirm a restructuring proposal, or, if already confirmed by the insolvency court, rejecting the restructuring proposal.
Danish law does not provide for a cram-down of an out-of-court restructuring towards dissident creditors. Dissident creditors must either be paid in full or otherwise be persuaded to co-operate. Also, the formal Danish restructuring regime through the insolvency court is not geared to provide a separate cram-down process; ie, the relevant rules do not allow for only the cram-down parts of the regime to be invoked. This lack of cram-down enforcement of a consensual restructuring is due to the desire of the Danish legislature and insolvency courts to encourage distressed businesses to seek assistance through formal insolvency regimes.
A mortgage over real estate must be registered with the Land Register.
A pledge over non-negotiable and unlisted shares must be registered with the company in the register of shareholders. A mortgage over negotiable unlisted shares or over listed shares must be registered with the financial institution which keeps the company’s register of shareholders.
A mortgage over movable property (aside from aircraft and ships) must be registered with the Land Register.
Historically, Danish law has not allowed for the creation of floating charges, and mortgage rights, therefore, had to attach to specific identifiable assets. One of the few exceptions to this rule is floating charges over a business’s outstanding debtors, inventory, operating equipment, livestock, intellectual property and certain vehicles (in Danish: virksomhedspant). Such a floating charge must also be registered with the Land Register. Due to the all-encompassing nature of this floating charge, it has become a matter of semantics if the general rule is one of acceptance or disallowance of floating charges.
Danish law distinguishes between two types of securities; eg, pledges and mortgages. A security right consisting of a floating charge covering receivables is considered a pledge even though a floating charge covering, for instance, inventory and operating equipment is considered a mortgage.
A creditor secured by way of a pledge is free to enforce their pledge irrespective of either a bankruptcy or a restructuring.
A creditor secured by way of a mortgage is, in the event of an in-court restructuring of a debtor, not allowed to enforce their security right over the assets, provided a debtor services the secured debt. If the debt is only partially secured; ie, the asset does not provide full security for the secured claim, a debtor is only required to service the secured proportion of the debt. Only in the event of a debtor failing to service the secured (part of the) debt may a creditor enforce the mortgage. In the event of a debtor’s bankruptcy the trustee is afforded a period of six months to liquidate the assets of the estate, including mortgaged assets. Once the six-month period elapses, any mortgagee may request the trustee to put the mortgaged asset up for public auction and the trustee is required to comply with such a request immediately.
A fully secured creditor is not eligible to participate in any voting at creditor meetings and is therefore not able to disrupt the process. A partially secured creditor may exercise voting rights proportionate to the unsecured portion of their claim.
A trustee must adjudicate the creditor’s security and verify the merits of a claim, but other than that no special procedural rules apply to secured creditors.
Danish insolvency law does not divide creditors into classes apart from, respectively, (fully) secured and unsecured creditors.
Only unsecured debt carries voting rights.
In a formal restructuring process, trade creditors are equal to the other unsecured creditors of the debtor.
Unsecured creditors may ask the insolvency court to hold an election for the trustee of an estate, but this right is limited to the first few weeks after the opening of bankruptcy proceedings.
After that point, creditors have, in general, no formal possibilities other than filing a complaint regarding the trustee with the insolvency court.
In-Court Restructuring Proceedings
In the restructuring process, the creditors’ role in moulding the proceedings is more noticeable as the general body of unsecured creditors is the body to vote on whether a proposed restructuring plan and the final restructuring proposal should be adopted. The restructuring proposal prevails unless it is opposed by a qualified majority of the unsecured creditors and unless the insolvency court rejects it.
Pre-judgment attachments are available. The Administration of Justice Act and the Danish Insolvency Act provide for interim measures including arrest of assets. Such interim measures are, however, precluded once formal insolvency proceedings are opened.
The order of priority of claims in formal restructuring are:
In bankruptcy proceedings, the bankruptcy administration costs and debts incurred during the bankruptcy rank prior/over all the above, but other than that the waterfall scheme is the same.
New money added during a formal restructuring process is considered debt incurred with the consent of the administrator and therefore ranks very highly in the order of priority of claims. Likewise, new money added during a bankruptcy is considered debt incurred during the bankruptcy and therefore ranks even higher in the order of priority of claims.
Under Danish law, there are only two forms of formal insolvency proceedings: bankruptcy and in-court restructuring. It is not uncommon to carry out a restructuring process by means of a business transfer through the bankruptcy proceedings rather than through formal restructuring proceedings. Both types of proceedings require a debtor to be insolvent in the sense that the debtor is unable to service their debts as they fall due.
Bankruptcy proceedings may be commenced either by a creditor or the debtor petitioning the insolvency court to do so. Once the court receives such a petition, the debtor and the creditor filing the petition are summoned to a court hearing which is not publicly announced. If the court finds that there is a basis for issuing a bankruptcy order, it will do so, likewise the court may choose to stay the hearing for a finite period of time. If bankruptcy proceedings are commenced, the court appoints a trustee, who assumes control of the assets and liabilities of the debtor in place of management. The trustee must seek to preserve the value of the assets as best as possible and dispose of these assets to the benefit of creditors. The trustee must, at regular intervals, issue creditor information letters, whereby the status of the affairs of the estate are accounted for.
Restructuring proceedings may be commenced either by a creditor or the debtor petitioning the insolvency court to do so. As with bankruptcy proceedings, the parties are summoned to a hearing not publicly announced. If the debtor is a natural person, however, the debtor cannot be unwillingly forced into restructuring proceedings, and the debtor may therefore choose to have the petition converted into a bankruptcy petition against him or herself. If the court finds that the statutory requirements have been met, the principal requirement being the debtor’s insolvency, the court will immediately commence restructuring proceedings and appoint a restructuring administrator, and possibly also a restructuring accountant, and schedule the first creditors’ meeting. The administrator is then tasked with notifying all known creditors of the proceedings and the time and place for the first creditors’ meeting.
Please see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership for further information on in-court proceedings.
Please see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
The restructuring proceedings effectively block enforcement proceedings against a company, effectively offering a de facto moratorium, and under the new rules offering a four to eight week timeout for the debtor. This does, however, only extend to pre-existing claims as new claims stemming from continued operations have priority and must be honoured continuously.
In bankruptcy proceedings, a qualified minority of creditors may require the formation of a creditors’ committee consisting of up to three members. The insolvency court decides how the members of such a committee are to be elected so as to ensure a diverse representation of the general body of creditors.
The trustee must inform the creditors’ committee of any significant actions taken and, unless doing so would be detrimental for the estate, inform the creditors’ committee of any particularly significant planned actions to be taken.
The creditors’ committee is strictly of an advisory nature to the trustee and the insolvency court and wields no special powers. The trustee must suggest to the insolvency court how the members of the creditors’ committee are to be remunerated. The costs are borne by the estate alongside the trustee’s remuneration in the order of priority of claims.
The principle of pari passu regarding creditor rights and responsibilities is subject to certain modifications, since creditors are only equal with creditors of the same ranking in the hierarchy defined by the Insolvency Act’s waterfall schedule of dividend distribution (see 5.5 Priority Claims in Restructuring and Insolvency Proceedings).
Danish insolvency law does not distinguish between different classes of creditors as such (apart from secured and unsecured creditors and apart from the subclasses of the unsecured creditors). A passed restructuring does, however, imply a cram-down imposed on dissenting creditors as it is – by virtue of law – globally binding for all unsecured creditors (known or unknown).
There are no restrictions on debt trading in place, and it can therefore take place at any time. Once a transfer has been made, the purchaser is recognised as the rightful creditor. It should be noted that closely related creditors cannot vote, even if they have acquired a claim from a creditor that was entitled to vote based on the transferred claim.
There are no group restructuring proceedings available, but it is possible to co-ordinate the separate restructuring proceedings for each company and thereby achieve a somewhat similar result to actual group proceedings.
The court-appointed restructuring administrator must consent to all actions of significance for the restructuring process, including sales of assets. Such consent is usually given explicitly in writing, but can also be given implicitly by way of the restructuring administrator’s actions.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
In bankruptcy proceedings, the trustee is responsible for the sale of assets, either through sale of individual assets or through a sale of the business as such. If a mortgagee refuses to consent to a sale of a mortgaged asset, the trustee may request that the mortgaged asset be sold by way of a public, forced sale.
In both bankruptcy and restructuring proceedings, anyone, including the pledgee/mortgagee, may bid on the asset in question. A bid “within” the pledgee/mortgagee’s own security right is effectively set-off against the secured debt. The only party who may not acquire the assets is the administrator/trustee/restructuring accountant.
The restructuring proceedings do not, as such, clear pledges and mortgages, and the sale of encumbered assets (which do not represent any excess value) must therefore be co-ordinated with such stakeholders. Such secured creditors can either demand cash payment or accept that the purchaser assumes the rights and responsibilities of the seller regarding the underlying debt.
In restructuring, a sale of the business or a separate branch of the business may only take place through the new fast-track rules on a business transfer or as a result of an approved and confirmed restructuring proposal. If a sale of the business takes place based on a confirmed restructuring proposal, the sale can include a statutory forced debtor change so as to include both pledged/mortgaged assets as well as the underlying financing.
If the insolvency court has made a binding determination of the value of a pledged asset, then the pledge and accompanying financing pass to the purchaser on a statutory basis. In essence, the “surplus pledge” is removed, and the determined pledge and financing is passed on.
Pre-packed sales are not uncommon as such, but the administrator/trustee must somehow ensure that the sale is made on arm’s length terms. The new rules on fast-track business sales in restructuring proceedings might over time increase the use of pre-packed sales.
It is – also without using the fast-track rules – possible to prepare a restructuring in such a manner that a pre-packed sale is executed within a very short period of time. With the permission of the court, the two mandatory creditors’ meetings can be scheduled back to back limiting the restructuring proceedings to a mere few weeks. Such a request to the court will require that the debtor and administrator clearly quantify that the compressed timeframe will not unduly affect any creditor’s position; eg, demonstrate a clear picture of the body of creditors and a clear show of support from a majority of the creditors for the restructuring proposal and for the compressed timeframe.
Other claims, including secured creditor liens and security arrangements, can be released only if the secured creditor accepts the release.
New money can be secured against the company’s assets to the same extent that the company could otherwise do so.
It is not possible to use the statutory restructuring process to determine the value of a claim and creditors.
A restructuring proposal adopted by the majority of the creditors is not valid or binding until it has also been confirmed by the insolvency court. The insolvency court may reject a restructuring proposal even though it carries the majority vote if it is disproportionate to the debtor’s financial situation. The court is required to reject a restructuring proposal if there has been any procedural misconduct, incompleteness of significant factual statements made by the debtor or non-compliance with the Insolvency Act, or if one or more creditors have been given preferential treatment outside the restructuring so as to influence the vote.
Danish legislation does not contain rules on out-of-court creditor agreements of restructuring or reorganisation of a debtor.
A statutory procedure cannot release non-debtor parties from liabilities.
Creditors may, in general, perform set-off if both the main claim and the counterclaim are created either prior to or after the reference date and/or the opening of insolvency proceedings. In in-court restructuring proceedings, some restrictions of the right to set-off do, however, exist.
If a company is in significant violation of the terms of a passed restructuring, the restructuring may be lifted, which in turn would resurrect any claims which have been subject to a haircut, thereby exposing the company to possible bankruptcy proceedings.
Existing equity owners may receive or retain ownership of their shareholdings in the debtor. Equity owners cannot receive or retain ownership of property on account of their ownership interests.
Please refer to 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Please refer to 6.8 Asset Disposition and Related Procedures.
Please refer to 5.5 Priority Claims in Restructuring and Insolvency Proceedings and 6.3 Roles of Creditors. The Danish Insolvency Act contains rules allowing creditors to form a creditors’ committee during a bankruptcy process; however, this happens very rarely.
Denmark is, due to its reservation from judicial co-operation in the EU, not part of or bound by the EU Regulation on Insolvency Proceedings and, consequently, there is no general statutory framework in place with regard to recognition of foreign insolvency proceedings.
Denmark does, however, by virtue of the Nordic Bankruptcy Treaty, recognise other Scandinavian insolvency proceedings.
As described in 1.1 Market Trends and Changes, Denmark has, within the financial area, implemented the EU rules regarding recognition of insolvency proceedings in another EU member state (among these are the BRRD and the BRRD II). These rules are implemented according to EU rules concerning the Internal Market and not judicial co-operation. In the future, more EU directives are expected to be enacted under the EU rules regarding the Internal Market.
However, it has been seen that Danish insolvency courts have entered into singular agreements/protocols with foreign insolvency courts on a case-by-case basis when there was a need to do so.
Even though it has happened on a case-by-case basis, the Danish courts – as a general rule – do not liaise with foreign courts.
Seeing that, in general, Danish law does not recognise foreign jurisdiction in insolvency-related matters, Danish private international law stipulates the laws by which a contract is governed. Even then, Danish insolvency law will still apply with regard to certain foreign insolvency-related matters; eg, perfection of security, claw-back, etc, based on the principle of lex concursus.
In Denmark, foreign creditors are dealt with in the same manner as Danish creditors.
Denmark is, due to its reservation from judicial co-operation in the EU, not part of or bound by EU regulation within the judicial area.
However, Denmark has chosen to opt in (and implement into Danish law) to the Brussels I/EU Regulation No 1215/20212 on jurisdictions and the recognition and enforcement of judgments in civil and commercial matters. Furthermore, Denmark has adopted the Lugano Convention (on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) and the Hague Convention (of 30 June 2005 on Choice of Court Agreements).
Judgments from courts in countries that are not parties to these international conventions and treaties are not recognised in Denmark and cannot be enforced in Denmark. The foreign party in question will need to obtain a court order/judgment from a Danish court.
In bankruptcies, one or more trustees are appointed. In restructurings, one or more administrators and possibly also a restructuring accountant are appointed.
A trustee is responsible for handling all aspects of an estate, be it liquidating the assets, adjudicating claims made against the estate, executing claw-back claims etc. The trustee reports to the general body of creditors by way of creditor information letters at set intervals and to the insolvency court through the same letters, among other things.
An administrator is responsible for overseeing the management of active operations of a company and for detailing the restructuring plan and proposal. The restructuring accountant, if appointed, focuses on validating the value of assets and the overall financial aspects of the restructuring process. Both report to the general body of creditors by way of creditor information letters at set intervals and to the insolvency court.
A trustee is appointed by the insolvency court. If a trustee election has been requested by a creditor, the court will consult the majority of creditors with voting rights, and most often appoint the trustee nominated by the majority of creditors.
A restructuring administrator is appointed by the insolvency court. If the court finds sufficient grounds therefore, it may decide to appoint additional administrators or replace the current administrator.
Please refer to 2.3 Obligation to Commence Formal Insolvency Proceedings.
Please refer to 2.3 Obligation to Commence Formal Insolvency Proceedings and 11.3 Claims to Set Aside or Annul Transactions.
Chapter 8 of the Danish Insolvency Act contains provisions regarding claw-back measures against actions which constitute a breach of the basic principle of creditor equality. Such actions may be gifts, renunciations of inheritance, certain types of payment made by a debtor, provision of security for pre-existing debt and general creditor-hostile actions.
The ordinary claw-back period is usually three to six months. If the creditor in question is closely related to a debtor, the claw-back period is extended to two years and the burden of proof generally shifts from the estate to the creditor.
Claw-back (and any other types of) claims are most often brought by a trustee directly. If a trustee decides not to pursue a potential claim of any kind, any creditor may – within a timeframe laid down by the insolvency court – continue to pursue the claim at their own expense. If the creditor is successful, the proceeds will be paid to the estate, but the creditor’s reasonable expenses will be covered by the estate through the proceeds of the case.
Often a trustee will ask one or more creditors to fund further pursuit of a claim (often court cases) if the estate itself is unable to bear the associated costs. Furthermore, the use of third-party litigation funding has seen an increase during recent years, particularly in matters where no creditors were interested in funding the litigation process in question.
Such claims can be brought in restructuring and insolvency proceedings. In restructuring proceedings, the creditors must also vote on whether identified potential claims are to be pursued or not.
COVID-19, Government Aid and Insolvency in Denmark
It is not possible to think of developments in the insolvency sector without a focus on the COVID-19 pandemic that shook the world in early 2020, and which continues to be a significant part of everyday life all around the world.
As in many other countries, the Danish government issued restrictions including nationwide lockdowns of both public and private institutions and businesses in early and late 2020, which continued throughout the winter and early spring of 2021 in an effort to ease the pressure on the Danish health sector.
With no precedents from which to draw lessons, everybody held their breath and anticipated the effect which the pandemic and the lockdowns would have on the Danish economy and its businesses. It seemed inevitable that financial devastation would ensue for businesses across most sectors, especially those in retail, casual dining, entertainment, travel, and accommodation. A surge in insolvency cases was predicted as debt became due.
In an attempt to secure the future of as many Danish businesses as possible, the Danish government issued a broad spectrum of bailout schemes. Schemes of compensation for some salaried employees, business overheads and losses of revenue, etc, were issued. Furthermore, it was made possible for businesses to receive interest-free loans from the tax authorities in the amount of their due withheld taxes or VAT. These loan schemes were issued through four application rounds, the last of which closed in June 2021. The loan schemes have been popular as demonstrated by the number of businesses that applied and received approval in the third VAT loan scheme: approximately 34,000 totalling approximately DKK13.4 billion (approximately EUR1.8 billion).
Furthermore, the Danish government encouraged creditors, especially the financial ones, to take a soft approach when collecting debt from their distressed customers, and at the same time the Danish tax authorities implemented the same soft approach (in part due to the practical challenges caused by the lockdowns) in their collection of overdue taxes and VAT.
While some major insolvency cases have commenced as a direct – or at least heavily contributing – consequence of the lockdowns and restrictions; eg, the bankruptcies of the hotel group Tribe Hotel Management Denmark, the major Nordic airline Jet Time, the major building company Anker Hansen & co., the companies behind the nationwide chain of restaurants Karma and Vaca Sushi, and Repeat; the company behind a fitness-centre chain, the expected surge in bankruptcies has yet to be seen. Based on figures from the central authority on Danish statistics, Statistics Denmark, 2020 saw the lowest level of bankruptcy orders of Danish businesses in the last five years. It should, however, be noted that, at this point, the number of bankruptcies in Denmark in 2021 has been calculated until August only. The first quarter of 2021 saw a significant rise in the number of bankruptcy orders, though most of the businesses had no activity or were only minor businesses with no or few employees. In April–August 2021, the number corresponds more or less to the 2020 level of bankruptcies. Calculated based on the revenues in the last fiscal year of the bankrupt businesses and the number of people employed by them, the bankruptcies in the first eight months of 2020 were more significant than in the same period of 2021.
The initial first deadline for repayment of the first two rounds of interest-free VAT loans was 1 November 2021. Consequently, the insolvency surge was expected to appear around the repayment deadline in November 2021. However, in early September 2021, the deadline for repayment of loans relating to the two first VAT loan schemes was postponed until 1 April 2022, and from that point in time, it was made possible for the businesses to repay the loans over a 12–24 period with a 0.7% monthly interest rate, corresponding to an annual interest rate of 8.73%.
The postponement will certainly have provided some businesses with the necessary time to re-establish their positive cashflow and revenue and enable them to sustain their business. Experience demonstrates that it cannot be predicted whether a surge in insolvent businesses can be expected around 1 April 2022 and the subsequent repayment period. Certainly, some businesses will be declared bankrupt on the basis of a petition initiated due to failure to repay a VAT/tax loan, but in what numbers only time will tell.
Amendments to the Danish Insolvency Act due to COVID-19
Early in the pandemic, the Danish Ministry of Justice requested its advisory body, the Danish Bankruptcy Council, to provide a statement on the need for amendments of the rules on in-court restructuring of businesses. In July 2020, the Council published its statement, providing the Ministry of Justice with several possible amendments to – hopefully – incite distressed businesses to make use of the restructuring proceedings rather than declare themselves bankrupt. Some of the proposed amendments had previously been presented by the Council in its ordinary work of reviewing the existing rules, while some amendments were new.
The proposed changes were presented in a bill in October 2020, and after the formal procedure in the Danish Parliament, most of the proposed amendments were implemented in the Danish Insolvency Act on 23 March 2021. A few amendments did not enter into force immediately but are pending some practical issues to be solved.
The amendments seek to encourage businesses to choose in-court restructuring proceedings instead of trying to turn things around on their own for a little longer and ending up in bankruptcy.
In-court restructuring proceedings were introduced in Danish law in 2011 but have not had the intended effect as the rules are only very rarely used (there were fewer than 70 in-court restructuring cases in Denmark from July 2019 to July 2020). The inflexibility, the costs associated with an in-court restructuring attempt and the risk of being declared bankrupt if the attempt falls short have been some of the many points of criticism.
The adopted amendments intend to make the restructuring procedure more flexible and less costly. In short, the key points of the amendments are the following.
Some proposed amendments on the effect which the in-court restructuring procedure has on an existing floating charge over the debtor’s assets were not part of the final bill. The existing rules, where a floating charge crystallises when the restructuring process is initiated, are thus still in effect.
The amendments have, overall, been welcomed by practitioners in the Danish insolvency sector.
The need for coverage from the Danish Employee’s Guarantee Fund of salaries concerning the time before the restructuring proceedings commenced has long been on restructuring practitioners’ wish lists, as, under the previous rules, this coverage was only available once the debtor was declared bankrupt.
Under the new rules, the first creditors’ meeting in court can be postponed by up to eight weeks after the proceedings have commenced, and only after this point, and only if a restructuring plan (but not the final proposal) has in fact been adopted, will the business automatically be declared bankrupt if the restructuring is unsuccessful. This new flexibility is also a major change, which is expected to incite more businesses to try an in-court restructuring procedure rather than continue the operations until a bankruptcy is the only solution.
With the removal of obligatory appointment of a restructuring accountant, some costs have also been removed in a few restructuring matters. However, in most businesses there will still be a need for a professional accountant to assist the appointed restructuring administrator during the restructuring process, and therefore the effect is probably limited. However, the new rules will probably make smaller businesses more likely to try the restructuring process.
The fast-track business transfer scheme allows for a very fast transaction process, inviting the use of a prepacked solution. However, the process does not come without risk as the appointed administrator needs to be certain that all creditors receive the obligatory notification of the transfer, as it is necessary for the administrator to assess whether there is a majority of creditor votes against the business transfer or not. The administrator can be made liable for an erroneous assessment. It will be interesting to see whether this new tool will also be picked up by practitioners.
Third-Party Litigation Funding
A tendency in the insolvency sector during the last five to ten years has been the increased use of third-party litigation funding in cases brought by bankruptcy estates. The cases will often concern claiming claw-back of a void transaction or damages from the former management and/or advisors to the now bankrupt business.
The Danish Insolvency Act contains rules that provide a formal procedure for when bankruptcy estates cannot or will not pursue a claim further. Under these rules, the trustee will make a notification to the creditors stating that any creditor may – under timeframes laid out by the Bankruptcy Court – continue the pursuit at a creditor’s own risk and expense. A creditor’s incitement to take on the pursuit at their own risk is, however, low as a creditor is not entitled to the proceeds if the procedure is successful, but only to receive compensation for reasonable expenses in respect of the pursuit.
Often a trustee will therefore ask one or more creditors to fund the pursuit of a claim through a litigation funding agreement providing the funder with a fixed percentage of the positive outcome of the pursuit. To be certain that all creditors have got a fair chance to fund the pursuit, the trustee will often encourage the creditors through a creditor information letter to contact the trustee or even give a concrete bid on the percentage they require to fund the process. However, in many bankruptcy estates no creditor is willing to take on the funding. With several litigation funding companies having introduced themselves onto the Danish market over the last five to ten years, the use of third-party litigation funding has increased. This has certainly made several lawsuits possible during the last couple of years. If the trustee first goes through the formal procedure and then provides the creditors with the possibility to offer to fund the litigation on the terms also offered to a third-party, and no creditors are willing to provide the funding, it is difficult to find any major downsides in third-party litigation funding from the creditors’ point of view – unless the litigation is brought against a creditor. That was the case in a Supreme Court case from 2017 where the creditor disputed a litigation funding agreement providing that the funder received 50% of the proceeds awarded by the courts. The Supreme Court ruled in favour of the bankruptcy estate and did not make the funding agreement void. This court order paved the way for administrators and trustee to take litigation funding into consideration when considering whether to pursue a claim.
We expect to see a rise in the use of third-party litigation funding as the Danish insolvency market and practitioners become accustomed to this trend and more and more litigation funders introduce themselves. Increasing amounts of litigation will be funded in the future, and probably not only by the large-scale funding companies, but also by parties with other primary lines of businesses. Funding has already enabled pursuit of claims in cases that will help to develop the case law in Denmark, and this tendency will only continue.