The Norwegian insolvency and restructuring market is undergoing significant shifts in 2023 and into 2024. The central bank’s response to rising inflation has led to a series of interest rate hikes, impacting borrowing costs for both consumers and businesses. This has prompted financial institutions to place greater emphasis on risk assessment and creditworthiness in their lending criteria. As a result, it is anticipated that more companies in Norway will need to undertake restructuring and refinancing processes. Looking ahead to 2024, the central bank is expected to continue monitoring economic indicators, potentially leading to further adjustments in interest rates. This will likely have implications for borrowing costs and lending conditions, urging enterprises and consumers to exercise prudent financial management in the coming years.

In terms of sector-specific developments:

• Real estate: The Norwegian real estate market experienced substantial growth until Q2 2022, driven by rising rental prices and favourable discount factors. The real estate sector constitutes over 50% of the total outstanding debt for companies in Norway, with bank loans comprising around 85% and bond financing about 15%. However, many of these bank loans will approach maturity between 2024 and 2026, coinciding with increasing borrowing costs. This is expected to lead to a significant surge in refinancing and restructuring activities within the real estate sector.
• Lodging and hospitality, automotive industry, retail and wholesale trade: These sectors, which previously relied on government support during the COVID-19 pandemic, are now facing new challenges. These include rising interest rates, higher energy costs and increased inventories. As a result, there has been a notable increase in insolvencies in the lodging and hospitality sector, as well as in the automotive industry, retail and wholesale trade.
• Oil, gas and shipping: Higher demand and rising energy prices driven by recent geopolitical and macroeconomic uncertainties have led to a rapid recovery within these sectors. Recent transaction levels and volumes indicate a renewed optimism for the years to come on the back of several years of underinvestment in these sectors since the oil price plunge in 2014. Several companies are expected to refinance their debts in 2024-2026.

The statutory laws that apply to restructurings, reorganisations, liquidations and insolvencies are spread across several laws. The following is a non-exhaustive list of the most important laws and a brief explanation of what they regulate:

• The Norwegian Bankruptcy Act of 8 June 1984 No. 58 (the “Bankruptcy Act”) (No. konkursloven): The Bankruptcy Act is the primary legislation governing insolvency (liquidation) proceedings. It sets out the various procedures to be followed, including how to commence bankruptcies, appointments, the debtor’s obligations, distributions, etc.
• The Norwegian Provisional Reconstruction Act of 7 May 2020 No. 38 (the “Reconstruction Act”) (No. rekonstruksjonsloven): The Reconstruction Act was originally implemented to avoid unnecessary bankruptcies in businesses due to sudden loss of revenues as a result of the COVID-19 outbreak, and remains in effect until 1 July 2025, whereafter it will be replaced by a permanent new legislation. The main objective of the Reconstruction Act is to reduce the risk of unnecessary bankruptcies of viable businesses.
• The Norwegian Creditors Recovery Act of 8 June 1984 No. 59 (the “Recovery Act”) (No. dekningsloven): The Recovery Act contains, inter alia, provisions on priority of claims and revocation of certain pre-liquidation transactions.
• The Norwegian Liens Act of 8 February 1980 No. 2 (the “Liens Act”) (No. panteloven): The Liens Act provides a legal basis for the creation of security interest over various assets, such as real estate, movable property, shares and other financial instruments and receivables/monetary claims.
• The Norwegian Enforcement Act of 26 June 1992 No. 86 (the “Enforcement Act”) (No. Tvangsfullbyrdelsesloven): The Enforcement Act regulates the enforcement of security interests and court judgments. It outlines procedures for creditors to compel payment or other forms of compliance with a court order. This includes measures such as attachment of assets, forced sale of property, wage garnishment, and other means to ensure court decisions are executed.
• The Norwegian Financial Collateral Act of 26 March 2004 (the “Financial Collateral Act”) (No. Lov om finansiell sikkerhetsstillelse): The purpose of the Financial Collateral Act is to strengthen the financial market and safeguard the consideration of financial stability by contributing to secure, orderly and efficient financial collateral. The law applies to agreements concerning, including enforcement of, financial collateral.
• The Norwegian Private Limited Liability Companies Act of 13 June 1997 No. 44 (No. aksjeloven)/the Norwegian Public Limited Liability Companies Act of 13 June 1997 (No. allmennaksjeloven) (as applicable, the “Companies Act”): The Companies Act regulates the formation, operation and dissolution of private/public limited liability companies. It includes provisions related to mergers, demergers and winding-up of companies.
• The Norwegian Unlimited Liability Partnerships and Limited Partnerships Act of 21 June 1985 No. 83 (the “Partnership Act”) (No. selskapsloven): The Partnership Act governs the formation, operation and dissolution of various types of partnerships, including general partnerships and limited partnerships.

Voluntary Proceedings

• Debt settlement, consensual and other out-of-court workouts and restructurings: This is a voluntary process where a debtor negotiates with its creditors to restructure or reduce its debt, with the overall aim of avoiding bankruptcy and/or avoiding in-court reconstruction proceedings.
• Reconstruction: A law-regulated “instrument” by which the debtor may seek bankruptcy protection and protection from debt recovery proceedings, with the aim of reorganising the business and reaching a composition agreement with the creditors pertaining to its ordinary unsecured debt in accordance with the Reconstruction Act.

The key feature of the reconstruction proceedings is that all creditor collection steps are suspended. This includes that payment of pre-petition debt is suspended and that the debtor is protected from creditor-initiated bankruptcy and debt recovery and enforcement proceedings throughout the reconstruction proceedings. The Reconstruction Act distinguishes between voluntary composition and compulsory composition. A voluntary composition may in principle include any possible arrangement or composition. However, it requires unanimity among the creditors (although with a simplified adoption procedure) and is only binding on those creditors that have participated in the composition (eg, not on “unknown” creditors).

Involuntary Proceedings

• Enforcement of claims: This is an involuntary process which allows the creditors to seek enforcement of their claims through court proceedings in accordance with the Norwegian Enforcement Act of 26 June 1992 No. 86 (the “Enforcement Act”) (No. tvangsfullbyrdelsesloven) if a debtor is unable to meet its obligations.
• Reconstruction: The Reconstruction Act distinguishes between voluntary composition and compulsory composition. In a compulsory composition there are limitations with respect to the contents of the settlement proposal. However, it is sufficient that a majority of the creditors (>50% in value) accept the proposal for the proposal to be binding on the minority of creditors, and also unknown creditors (provided that there is court approval).
• Bankruptcy: This is an involuntary liquidation process initiated by creditors or the debtor. The company’s bankruptcy estate (which is a separate legal entity) is controlled by the court-appointed liquidator (a lawyer). The liquidator is normally assisted and supervised by a creditors’ committee (and an auditor), also appointed by the court.

Specific Proceedings

For a general explanation of these regimes, see 2.6 Specific Statutory Restructuring and Insolvency Regimes.

A company experiencing financial difficulties in Norway must, among other issues, comply with:

• the Bankruptcy Act and the Reconstruction Act and the obligation to file for bankruptcy proceedings or reconstruction proceedings;
• the Companies Act and the requirements pertaining to a sound equity ratio and the duty of care of the board; and
• the Norwegian Penalty Act of 20 May 2005 No. 28 (the “Penalty Act”) (No. straffeloven).

The authority and responsibility to declare bankruptcy in a limited company (whether public or private) has been placed with the board (cf. Section 6-18 of the Companies Act, Section 60 of the Bankruptcy Act and Section 407 of the Penalty Act). The obligation to file for bankruptcy applies from the moment the company becomes insolvent (see 2.5 Requirement for Insolvency).

The board has a general obligation to evaluate the financial situation of the company and act if the equity requirement is not in accordance with prevailing regulations.

If the board is unable to impose or present specific proposals which will ensure continued operations with sufficient equity and the company is insolvent, the board has an obligation to file for bankruptcy.

The obligation to file for bankruptcy does not, however, apply unconditionally. The board is entitled to initiate informal rescue negotiations (refinancing, restructuring, raising new capital, sale of assets, etc) so that the business can continue, provided however that the aim of the process is to improve the company’s financial situation for the benefit of all creditors and the proposed solution does not appear to be entirely unrealistic.

The board is therefore not required to cease business activities as long as it, after having evaluated the company’s financial position and the alternatives available, has a reasonable expectation or hope of implementing measures which will, within a reasonable timeframe, improve the company’s situation. The board is, in this respect, granted rather wide discretion to find a solution for continued operations and not just petition for bankruptcy.

The board and the general manager have an obligation to act in the interests of the company, its creditors and its shareholders. Section 17-1 of the Companies Act sets out the basis for liability of the board in a general provision pertaining to liability for loss incurred by the company, shareholders and others, including creditors.

In addition, the non-statutory rules on compensation set out the basis for liability for loss incurred by creditors or other third parties, as a result of the board continuing business operations in breach of its duty of care and beyond the applicable equity ratio requirements.

The board may be subject to criminal liability pursuant to Sections 19-1 and 19-2 of the Companies Act, which set forth general penalty provisions relating to breach of the requirements of the Companies Act, including breach of Sections 3-4 and 3-5 and the requirements relating to sound equity ratio and duty of care. The “company shall at all times have an equity ratio which is sound, based on the risk and extent of the activities of the company”. The requirement for a sound equity ratio must be evaluated on a regular basis. Pursuant to Section 3-5 of the Companies Act, the board must take immediate action if the equity ratio is deemed too low, giving regard to both the extent and the risk of the business activities, and convene a meeting. The board must within reasonable time effect or propose measures necessary to remedy the situation. In order to fulfil its duty of care, the board may impose the necessary measures, for instance a restructuring, initiating a recapitalisation of the company or a sale of all or parts of the business, etc. If the board is not capable of performing the required actions, the board must convene a general meeting, give the general meeting an account of the company’s financial position and propose measures to provide the company with a sound equity ratio.

If the board does not find grounds for proposing measures that will provide the company with a sound equity ratio, or if such measures cannot be implemented, it must propose that the company shall be dissolved or file for bankruptcy if required.

Pursuant to the “indebtedness chapter” of the Penalty Act, the members of the board may be prosecuted for neglecting their obligation to file for bankruptcy proceedings (or reconstruction proceedings) in a situation where the company is insolvent and the creditors are suffering a loss as a result of the continued operations of the company. The Penalty Act also contains provisions that prohibit the non-equal treatment of creditors, the reduction of the value of the company, etc.

Both civil and criminal liability are a personal liability of each member of the board.

Bankruptcy Proceedings

In addition to the fact that the authority and responsibility for declaring bankruptcy is placed with the board, creditors may commence involuntary bankruptcy proceedings. The requirement to open such proceedings is that the company is “insolvent” (see 2.5 Requirement for Insolvency).

Bankruptcy proceedings are opened following a petition from a creditor to the local court where the debtor has its main interests. The court will request a cash deposit of the petitioning creditor to secure court fees and basic costs related to the proceedings.

Reconstruction Proceedings

Following the COVID-19 pandemic, a new restructuring legislation, namely the Reconstruction Act, has been adopted in Norway to mitigate financial difficulties. The main objective of the legislation was to reduce the risk of unnecessary bankruptcy of viable businesses that suffered a sudden loss of revenues as a result of the COVID-19 pandemic.

Reconstruction is a law-regulated “instrument” by which the debtor may seek bankruptcy protection and protection from debt recovery proceedings (enforcement), with the aim of reorganising the business and reaching a composition agreement with the creditors pertaining to its ordinary unsecured debt as set out in the Reconstruction Act. Reconstruction proceedings may be initiated by the courts after petition from either the debtor or a creditor.

In order for the courts to open reconstruction proceedings following a petition from the debtor, it is required that the debtor is encountering, or will in the foreseeable future encounter, severe financial difficulties and it is probable that a composition with the creditors may be obtained. In practice, the courts have limited possibilities of re-examining the likelihood of a composition being obtained, unless a major creditor or a majority of creditors object to the reconstruction proceedings being opened, arguing that any settlement proposal will be voted down. The courts normally will rely on the debtor’s statement of the case.

In order for the courts to open reconstruction proceedings following a petition from a creditor, it is required that (i) the debtor is illiquid (unable to pay its debts as they fall due), and (ii) the debtor does not oppose the opening of the proceedings.

To place a debtor into bankruptcy proceedings, the court must find that the debtor is insolvent, ie, the company must be displaying a continuing non-temporary inability to pay its debts as and when they fall due (“cash flow test”), while at the same time having liabilities that exceed its assets (“balance sheet test”), cf. Section 61 of the Bankruptcy Act.

Regarding the requirement to commence restructuring proceedings, see 2.4 Commencing Involuntary Proceedings.

The regulations and insolvency frameworks for banks and financial institutions have been adopted to ensure the stability of the financial system. Pursuant to Chapter 20 of the Norwegian Act on Financial Institutions and Financial Groups of 10 April 2015 no. 17 (the “Financial Institution Act”), there is a general prohibition on opening insolvency proceedings for banks and credit institutions. However, the Norwegian Ministry of Finance has, in its capacity as the crisis management authority, the option to either adopt a resolution action plan (contingent on the fulfilment of certain other conditions) or carry out liquidation (public administration) of such banks/institutions.

Preference for Consensual and Non-judicial Processes

There is a generally positive perception among restructuring market participants towards consensual, non-judicial and informal restructuring processes. These methods are often viewed as preferable to statutory processes, as they tend to preserve value for stakeholders. Consensual processes are typically more flexible and allow for a more tailored approach to the specific circumstances of the distressed company.

Support From Banks, Credit Funds and Lenders

Banks, credit funds and other lenders are supportive of borrower companies experiencing financial difficulties. They may be willing to work with distressed companies to assess their financial position and explore potential restructuring solutions before resorting to formal insolvency proceedings. This approach is often seen as beneficial for all parties involved, as it can help preserve the value of the business and potentially lead to a more favourable outcome.

Interaction of Laws With Restructuring Strategies

The applicable insolvency, bankruptcy and creditor rights laws in Norway play a significant role in influencing the viability, desirability and choice of informal/consensual out-of-court restructuring and workout strategies. These laws provide the legal framework within which restructuring processes must occur. Market participants must navigate these regulations to ensure compliance while implementing restructuring solutions.

Mandatory Consensual Restructuring Negotiations

As of the time of writing, there is no mandatory requirement for consensual restructuring negotiations before the commencement of a formal “statutory process” in Norway. However, and as mentioned under 2.3 Obligation to Commence Formal Insolvency Proceedings, the board and the shareholders should make efforts to find an out-of-court solution for the benefit of all the company’s creditors, even though it may be uncertain (but not entirely unrealistic) whether the solution will be successfully implemented.

The Board – Considerations and Options

The board and the shareholders should make efforts to find an out-of-court solution for the benefit of all the company’s creditors, even though it may be uncertain (but not entirely unrealistic) whether the solution will be successfully implemented. Furthermore, the board has a duty to the company to find a solution for continued operations, not simply consider its possible liabilities and thus petition for bankruptcy/reconstruction proceedings.

The following points are typically essential should an attempt be made to reach a consensual/out-of-court restructuring:

• The board must carefully consider the circumstances, the possible options, etc.
• The board must be realistic in its assessments and consider the chance of success of each of the alternative solutions.
• The board must obtain the necessary information to form the basis for its decisions, and perform a qualified analysis of the information material and the consequences of each alternative solution.
• The board must carefully consider the position of the company’s creditors, and what costs and expenses will be incurred while exploring the options for a viable solution.
• The board must implement measures which in the short term prevent the creditors from incurring a loss in the restructuring period, for instance, seizure of payments, stop in supplies and other purchases, etc.
• The board must keep the pace in negotiations etc – time is of the essence.

The measures that are implemented should be as complete and extensive as possible. Exceptions might be required, inter alia, to allow for supply of services or goods of vital importance to the continued operations; however, to the extent possible these supplies should be paid in cash or up front so that the company does not incur new debt.

The board must at all times ensure that it has sufficient information to make an informed and responsible analysis of the company’s financial situation and the alternatives available, and keep the required pace in the process.

Should one or more of the measures or options for a viable solution fail, the board may continue its efforts to succeed with its alternative measures and solutions. However, as time goes by, the board has a duty to consider how and whether the fact that various options are failing will influence the chances of succeeding with the alternative solutions. The fact that some solutions or elements of a solution prove not to be viable may also affect the realistic prospects of succeeding with the alternative options.

The measures and costs incurred must also be considered in relation to the company’s size, revenue, assets, etc. The board, although it has been granted rather wide discretion to find a solution and relevant remedial measures have been implemented, is not free to explore any and all additional solutions while the creditors’ position is constantly deteriorating.

The board must exercise particular due diligence and care to avoid any unequal treatment of creditors within one group of priority (waterfall in bankruptcy), or to avoid payments of claims of a lower priority at the expense of claims ranking higher in priority. Nevertheless, the board may under the circumstances prioritise payment of costs of vital importance to the business operations for a shorter period of time.

Use of Consensual “Standstills” and Credit Agreement Default Waivers

Standstill agreements are often utilised to temporarily halt certain actions, providing a window for negotiations. In addition, credit agreement default waivers are usually negotiated to allow the debtor more time to address financial issues without immediate consequences from breaching obligations.

Undertakings and Obligations of a Debtor Company

The debtor company typically agrees to various undertakings and obligations during an informal and consensual workout/restructuring process. These may include commitments to provide regular financial updates, implement cost-cutting measures or divest non-core assets.

Role and Functions of Creditors’ Committees

Creditors’ committees may be established to represent the interests of different creditor groups. The appointment, formation and organisation of these committees can be ad hoc and depend on specific circumstances. These committees may or may not receive indemnities or fees from the company. Factors for their selection often include the significance of the creditor groups, as well as their relative positions in the capital structure of the debtor company.

Information Flow to Creditors, Committees and Stakeholders

During the restructuring/workout process, various levels of information may be requested by and provided to the creditors, their committees and other stakeholders. This can include financial statements, cash flow projections, business plans and updates on the progress of negotiations.

Contractual Priority, Security/Lien Priority and Intercompany Priority Rights

The treatment of contractual priority, security/lien priority and intercompany priority rights will be negotiated. Parties will discuss how these rights will be respected or potentially modified to accommodate the restructuring plan. This could involve discussions on debt-to-equity conversions, amendments to security arrangements, or other adjustments to the capital structure.

Timelines

The timeline of a consensual restructuring can vary widely depending on the complexity of the situation, the willingness of parties to negotiate, and the specific details of the restructuring plan. It may range from a few months to several years.

In consensual restructuring processes, new money is typically injected by existing shareholders, lenders or other external investors. In certain restructurings, new money is provided with super-priority liens or rights. Super-priority may be granted to new money as part of a reconstruction proceeding in order to secure funding for the operations during the proceedings etc (similar to “dip-financing”), according to Section 19 of the Reconstruction Act.

There are legal principles and doctrines that may impose duties and obligations on creditors, companies, and other parties involved in restructuring or workout processes.

• Duty of good faith: In contractual relationships there is a general duty of good faith (No. lojalitetsplikt) implied by law.
• Minority shareholder protection: While not specific to creditors, Norwegian company law includes provisions that protect minority shareholders from oppressive or unfair treatment by the majority shareholders or the company’s management.
• Debtor’s duties: The debtor company is generally obligated to provide accurate and complete financial information to creditors during the restructuring or workout negotiations.
• Equality of creditors: The principle of equality of creditors is fundamental and requires that creditors within the same class are treated equally and fairly in terms of the distribution of assets or the terms of a restructuring plan.

The restructuring and workout processes typically involve negotiations between the debtor and its creditors, with the aim of reaching a consensual agreement. The ability to bind dissenting creditors can depend on various factors, including the specific terms of the credit agreements, the nature of the creditors’ claims, and the applicable legislation.

• Majority approval: Credit agreements may include clauses that allow a majority or super-majority of lenders to bind dissenting lenders to changes in credit agreement terms.
• Consensual restructuring: In many cases, informal consensual processes can be effective in reaching agreements among creditors and the debtor without the need for a formal statutory process.
• “Cram-down” mechanisms: While informal consensual processes are preferred, there are legal mechanisms in place to deal with dissenting creditors if a consensual agreement cannot be reached. Norwegian law includes statutory provisions for restructuring and insolvency proceedings that can, in some cases, provide a “cram-down” feature for unsecured creditors. In such cases, the court may approve a restructuring plan, even if not all creditors agree to it. Thus, the statutory provisions may work as a threat in out-of-court financial restructuring.
• Formal statutory processes: If the parties cannot reach a consensual agreement, formal statutory processes may be initiated. These can include court-supervised restructuring processes, as set out in the Bankruptcy Act or the Reconstruction Act. In a reconstruction proceeding, the court may have the authority to approve a restructuring plan over the objections of some creditors if the plan is deemed fair and equitable.

Secured creditors may take various types of liens or security interests over different types of assets. The most common types of security interests that can be taken by secured creditors in Norway are mortgages over real estate (immovable property), pledges over shares in companies, pledges over intellectual property such as patents, trade marks and copyrights, pledges over monetary claims, and floating charges over inventory, operating assets, vehicles and construction machinery and trade receivables.

Outside of Restructuring or Insolvency

The rights and remedies of secured creditors, both in and outside of a restructuring or insolvency context, are subject to Norwegian law and any contractual agreements between the parties involved.

Secured creditors have the right to enforce their security interests in accordance with the terms of their agreements and applicable Norwegian law (the Liens Act, the Enforcement Act and the Financial Collateral Act). This typically involves taking possession of or selling the collateral to satisfy the outstanding unpaid debt. The rights and remedies of secured creditors can be subject to an intercreditor agreement. These agreements may stipulate the priority of different classes of creditors and outline how security interests will be enforced in a specific order.

Restructuring or Insolvency Context

When a debtor is facing financial difficulties, it may initiate a formal restructuring or insolvency process, such as debt restructuring or bankruptcy. Secured creditors can have significant influence in restructuring or insolvency processes, especially if they hold substantial security interests. However, they cannot unilaterally block or disrupt formal voluntary or involuntary proceedings. The outcome depends on the specific circumstances and negotiations among creditors and the debtor.

In formal insolvency proceedings, Norwegian law provides for an automatic stay on enforcement actions pursuant to the Enforcement Act against the debtor’s assets once insolvency proceedings are initiated. This provides the debtor with breathing space to develop and implement a restructuring plan. The duration and scope of the stay can vary depending on the type of proceedings.

The rights and remedies of secured creditors in a restructuring or insolvency context may also be influenced by creditor agreements and intercreditor arrangements. These agreements may address the treatment of secured creditors and their claims during the proceedings.

In practice, secured creditors often play a significant role in the negotiation and approval of restructuring plans. Their consent may be required for the plan to be accepted, particularly if the plan involves a debt-for-equity conversion or other significant changes to the creditors’ rights.

Secured creditors are in general not part of the restructuring proceedings. This applies to the extent their claim is fully secured.

There are, however, certain requirements related to the security, eg, the debtor’s right to sell (secured) assets during the proceedings, and the obligation of the reconstructor to prepare a plan to safeguard the interest of the secured creditors.

Fully secured creditors are assumed to receive full settlement of their claims, and will normally not be included in the reconstruction plan and thus not be entitled to vote. Any unsecured part of a creditor’s claim will be treated as an ordinary unsecured claim, and the creditor will be entitled to vote on this part.

Secured creditors have the same right to receive information etc as unsecured creditors.

In bankruptcy proceedings, the bankruptcy estate will normally seek to realise (preferably through an ordinary sale) all the assets of the company that are comprised in the bankruptcy seizure and that are not charged (no security interests). As for charged assets, the liquidator of the estate may abandon (give up) the seizure of assets that are of no financial value to the estate (eg, because they are over-encumbered – their value is less than the secured claim). Though it is highly unusual, the liquidator may also, under strict conditions, initiate a sale of assets that are over-encumbered. This option applies in particular where charged assets are sold together with other assets and a joint sale is bound to result in a higher price, or the assets are part of a sale of the whole or of a part of the debtor’s business as a going concern.

Please note that under both reconstruction and bankruptcy proceedings a stay applies, during which a forced sale pursuant to the Enforcement Act may not be carried out without the express permission of the reconstructor/administrator.

The rights and priorities of creditors in insolvency and restructuring proceedings are generally determined by the type of creditor and the legal framework governing the proceedings.

• Priority of claims: Secured creditors generally have a “higher priority” than unsecured creditors. They have a specific security interest in the collateral they hold, which gives them right to the value of the relevant collateral before other creditors. Unsecured creditors generally have a lower priority in the distribution of assets in insolvency proceedings. They are paid after secured creditors and have to wait until higher-priority claims are satisfied. Unsecured creditors may receive a portion of their claims, but the recovery is typically lower compared to secured creditors. The exact amount they receive depends on the available assets and the hierarchy of claims. For the priority (waterfall) of the unsecured creditors pursuant to the Recovery Act, see 5.5 Priority Claims in Restructuring and Insolvency Proceedings.
• Enforcement rights: Secured creditors have the right to enforce their security interests independently of the insolvency or restructuring proceedings. However, this right may be subject to an automatic stay when such proceedings are initiated, providing temporary protection to the debtor. The automatic stay does not apply to enforcement of financial collateral pursuant to the Financial Collateral Act.
• Voting rights: In general, secured creditors (in relation to secured claims) do not have voting rights in bankruptcy and reconstruction proceedings (cf. 4.3 Special Procedural Protections and Rights). Unsecured creditors have the right to participate in voting on matters related to the insolvency or restructuring plan.

Unsecured trade creditors are typically not guaranteed to be kept whole during a restructuring process. The outcome for unsecured trade creditors in a restructuring or insolvency process can vary widely depending on the specific circumstances of the case.

Generally, larger financial out-of-court restructurings target financial debt (both secured and unsecured) and ordinary trade debt is often kept whole. In in-court processes such as bankruptcy and reconstruction, all ordinary unsecured debt is targeted. This may include both financial debt and trade debt as they will be in the same “group” of creditors with the same priority. It is, however, not uncommon to include a “floor” below which amounts are kept whole.

Unsecured creditors typically have the right to participate in restructuring and insolvency proceedings. They may attend creditors’ meetings, be included as members in the creditors’ committee, receive information about the proceedings, and have the opportunity to vote on certain matters, such as the approval of a restructuring plan. They can object to proposed restructuring plans or other actions that may affect their interests adversely. They can voice their concerns and seek modifications to protect their rights.

Unsecured creditors are entitled to receive payments from the assets of the insolvent estate after the satisfaction of higher-priority claims.

In reconstruction proceedings, a minimum of three creditors representing at least 50% of the unsecured claims (entitled to dividend) may file for bankruptcy proceedings irrespective of the stay.

Pre-judgment attachments are available as a legal remedy to secure a creditor’s claim before a final judgment is rendered in a legal dispute. They are a means for creditors to protect their interests by securing the assets of the debtor pending the resolution of a legal claim.

The priority or “waterfall” of claims in reconstruction and bankruptcy proceedings is:

(i) Secured claims (which are covered to the extent of the value of the secured asset; any balance is “transferred” to “ordinary claims”)

(ii) Claims which arise during the bankruptcy proceedings, liquidator’s costs, obligations of the estate (“super-priority claims”)

(iii) Salary claims – wages and holiday pay for a certain period of time (first priority claims)

(iv) Tax claims – taxes relating to the debtor’s income and wealth, employees’ tax deductions, VAT, social security tax, etc (second priority claims)

(v) Ordinary claims (pari passu: unsecured debt, trade creditors, indemnity claims, etc)

(vi) Subordinated claims

The priority clauses simply state that first preferential claims must be covered in full before any dividend is payable to the first priority claims, the first priority claims must be covered in full before any dividend is payable to second priority claims, and all second priority claims must be covered in full before any dividend is payable to ordinary unsecured claims.

None of the above-mentioned claims have priority over secured creditors. Secured claims are covered up to the value of the asset in question. Any claims exceeding the value of the relevant security (“under-secured amounts”) are transferred to “ordinary unsecured claims”. Any amounts realised (or value) in excess of the secured claim, from a secured asset, will be distributed among ordinary unsecured creditors.

The statutory process for reaching and effectuating a financial restructuring or reorganisation plan in Norway (reconstruction proceedings) is set out in the Reconstruction Act. The key aspects of the process are:

• Thresholds and “cram-down”: The statutory procedure includes mechanisms that allow for the approval of a plan over the objections of dissenting creditors, known as a “cram-down”. Under certain conditions, if a majority of creditors (in terms of both number and amount of claims) vote in favour of a plan, it can be imposed on dissenting minority creditors. The threshold for approval is 50% of the claims (by value).
• Objectives and purposes: The primary objectives of reconstruction proceedings are to enable the distressed company to continue its operations and avoid bankruptcy while ensuring that creditors are treated fairly and equitably. The process aims to provide a platform for negotiating and approving plans that are in the best interests of both the company and its creditors.
• Court supervision: The court appoints an administrator to oversee the process. There is normally limited court involvement, but the court’s approval is required for certain decisions.
• Binding effect: When the plan is approved by a majority of creditors and the court, it is binding on all creditors. This ensures that the plan can be implemented effectively.
• Challenges: Creditors or other stakeholders may challenge the plan on procedural or substantive grounds. Such challenges are typically addressed by the court overseeing the proceedings.
• Approval and distribution: The plan is subject to approval by creditors and the court. Once approved, the plan is implemented, and value is distributed to creditors according to the terms of the plan. The process concludes when the plan has been fully executed and the company emerges from financial distress.

Formal procedures, such as reconstruction proceedings under the Reconstruction Act, provide the distressed company with certain rights and protections to facilitate the restructuring process, including automatic stay on claims asserted against it. This stay is designed to provide the company with a “breathing space” to negotiate and implement a restructuring plan without the immediate threat of legal actions or enforcement by creditors (bankruptcy and enforcement proceedings). Further, the company can generally continue to operate its business under formal restructuring procedures. The ability to continue operations is a fundamental aspect of these proceedings, as they aim to preserve the value of the business and facilitate its recovery.

The court appointment of an administrator (a reconstructor) is part of the court decision when deciding on the commencement of either reconstruction or bankruptcy proceedings. The reconstructor’s role is to oversee the restructuring process, facilitate negotiations and ensure that the interests of all parties are considered.

The company may be allowed to borrow money during the restructuring process, subject to approval from the reconstruction committee. These borrowings are intended to provide the company with the necessary funds to continue operations and implement the restructuring plan (similar to “dip-financing”).

Creditors will normally play an important role in formal restructuring proceedings, but their roles and organisation may vary depending on the nature of their claims and interests. The roles and organisation of creditors during these procedures are typically as follows:

• There is no formal classing of creditors in Norwegian restructuring procedures other than the priority (waterfall) of claims as described under 5.5 Priority Claims in Restructuring and Insolvency Proceedings. Creditors may, however, form informal groups and have discussions with other creditors with similar claims and interests.
• In out-of-court restructurings it is normal that certain creditors, typically financial institutions, form ad hoc groups in order to create a forum for discussions and to put additional pressure on either the debtor or other creditors.
• In an in-court proceeding for reconstruction or bankruptcy, a creditors’ committee is appointed by the court following a request either put forward by a relevant creditor or the reconstructor/administrator. Together with the appointed reconstructor/administrator, the creditors’ committee forms the reconstruction committee/bankruptcy estate committee.
• The committee members have a duty to act in the best interests of the creditors as a whole and shall participate in discussions and certain decisions of importance.
• The expenses of creditors’ committees, including legal and advisory fees, are typically borne by the debtor as part of the administrative expenses of the restructuring. These expenses are subject to court approval and must be reasonable and necessary for the effective representation of the creditors’ interests.
• Creditors are entitled to receive information about the restructuring process, the financial status of the debtor, and the terms of the proposed restructuring plan. This information is typically provided through reports and updates filed with the court or communicated directly to creditors. The level of detail and frequency of reporting can vary but are generally intended to keep creditors informed and ensure transparency in the process. There are normally limited court hearings during the proceedings.

Reconstruction proceedings allow for the modification of claims of dissenting creditors without their consent under certain conditions. This will apply to creditors holding ordinary unsecured claims. As there is no classing of creditors, besides the priority of claims, no inter-class cram-down is available.

• Majority approval: The proposal for a compulsory composition is considered approved when it has been accepted by creditors representing a simple majority (>50%) of the total claims (amounts) comprised by the proposal.
• Court approval: In addition to creditor approval, court approval is required to implement the modification. The court will review the proposed modification to ensure that it is fair and equitable and that it does not unfairly prejudice the dissenting creditors.
• Challenge: Creditors that believe that the proposed modification unfairly prejudices their interests may challenge it in court.

Claims against a company undergoing a formal procedure can typically be traded or transferred. However, there may be certain requirements and considerations to keep in mind when trading claims in such proceedings.

• While claims trading is generally allowed, there may be disclosure and approval requirements depending on the specific terms of the underlying agreement with the debtor, the restructuring plan and potentially court orders. Creditors that wish to trade their claims should notify the debtor, the administrator and other relevant parties. This notification ensures transparency in the process and allows for the proper recognition of new claimholders (and perfection of the transfer).
• Claims trading can occur at various stages of the restructuring or insolvency process.
• It is important to note that the transfer of claims may also affect voting rights in restructuring proceedings. The transferee of a claim typically acquires the voting rights associated with that claim. This can impact the outcome of creditor votes on the restructuring plan.

Both out-of-court and in-court restructurings may be used to reorganise a corporate group. Note, however, that in-court restructuring is done on an entity-by-entity basis, and that no group restructuring procedure, as such, is available. Thus, larger financial restructurings of corporate groups are normally done out of court, sometimes in combination with (or under the threat of) reconstruction and/or bankruptcy proceedings in relation to certain entities of the group.

During a formal restructuring process, the company undergoing the process may be subject to restrictions on its use of assets, and specific permissions may be required. The restrictions and conditions are typically put in place to ensure that the company’s assets are used in a manner consistent with the restructuring plan and the interests of creditors.

• Pursuant to the Section 15 of the Reconstruction Act, certain restrictions apply: the debtor is not entitled to take up new loans, mortgage its assets, or sell or rent its real property or any material assets without the consent of the reconstruction committee.
• The company is usually allowed to continue its operations in the ordinary course of business, which may include ordinary sales, making necessary payments for operating expenses, payroll and supplier payments.
• With the consent of the reconstructor, the company may sell inventory etc that forms part of any security to the extent this is done within the ordinary course of business and provided that the value of the security is not significantly diminished. The court may, following a petition by the secured party, stop such sales.
• In general, the debtor may use its machinery and plant, being part of security, as long as the value of these assets is not significantly diminished.
• The reconstructor shall prepare a plan to safeguard the interest of the secured party and may decide that the secured party shall receive parts of any sales proceeds.

A distinction must be made between sales as part of ordinary business and sales as part of the restructuring plan, eg, sales of parts of the business, subsidiaries, etc.

• Sales during the proceedings are made by the debtor under the supervision of the reconstructor (see 4.3 Special Procedural Protections and Rights pertaining to the interest of secured creditors).
• The debtor may not sell major assets without the consent of the reconstructor.
• As pre-proceedings debt is suspended, and included in the proceedings, creditors may not credit-bid (with unsecured debt) in relation to sales made during the proceedings (this may be different if the creditor has security over the relevant asset).

• Sales performed as part of the restructuring plan (following approval by the creditors and the court) are made by the debtor. The court may decide that the reconstructor shall have supervision related to the fulfilment of the approved plan, which may include the sale of assets.
• Creditors that have valid and enforceable security interests in the assets being sold may participate in the bidding process by credit bidding up to the amount of the secured claim.
• It may be possible to include and effectuate pre-negotiated sales during the proceedings, provided that these are approved as part of the restructuring plan (or, if applicable, with the consent of the reconstructor).       

Secured creditor liens and security arrangements, as well as other claims, may on certain terms be released or modified as part of a formal restructuring. The ability to release or modify such claims depends on the terms of the court-approved restructuring plan and the agreement of the affected parties. Further, the reconstructor shall do valuations of the debtor’s assets which may be decisive for the assessment of the value of a security for a secured claim. Any “under-secured” part of a secured claim will be deemed an ordinary insecure claim and be included in the proceedings.

In order for the debtor to be able to fund the continuation of operations during the restructuring period, as well as to fund the restructuring proceedings themselves (“dip-financing”), the debtor may, pursuant to Section 19 of the Reconstruction Act, with the consent of the reconstruction committee, take up loans with so-called “super-priority”, ie, secured with priority ahead of existing security interests (on any security interests established in accounts receivable, inventories, machinery and plant).

Determining the value of claims is an important aspect of the restructuring process, as it is necessary for the treatment of claims and the distribution of assets. The process, providing the debtor with bankruptcy protection and a stay against enforcement, may in theory be used to provide the debtor sufficient time to determine/clarify claims.

In a formal restructuring, the reconstruction plan is subject to an overall fairness or equitableness test. The plan typically requires approval by the court overseeing the proceedings.

The debtor is entitled to reject or disclaim contracts under reconstruction proceedings. A claim following such rejection will be part of the reconstruction plan. The debtor may in general disclaim a contract with three months’ notice.

In a statutory procedure, it is generally not within the scope of the procedure to release non-debtor parties from their liabilities. These procedures are primarily focused on addressing the financial difficulties of the debtor company and restructuring its obligations. The liabilities of non-debtor parties are typically not directly affected by the restructuring process, and non-debtors are not typically subject to discharge or release of their own obligations as part of the procedure.

As a general rule, any dividend claim (including, eg, intercompany receivables and payables) against the debtor, may be set off by the creditor against a claim which the debtor had against it at the time of the commencement of the proceedings.

Set-off is a procedural right and does not require an express or implied contractual term to that effect, although express wording in a contract may exclude the right to set-off.

Set-off would not, however, be permissible if, owing to the nature of the claim, such claim could not have been set off between solvent parties (eg, mutuality, contractual obligation excluding set-off).

To the extent the terms of an agreed (approved) restructuring plan or agreement are not observed or fulfilled, the plan or agreement may be defaulted and terminated, and the other party or parties may have a claim that may be enforced.

In a formal restructuring or insolvency proceeding, the treatment of existing shareholders can vary depending on the specific circumstances and the terms of the restructuring plan. However, there is no absolute priority rule in reconstruction proceedings, and existing equity owners may retain their equity stake (depending on the approved reconstruction plan).

Reconstruction Proceedings

Reconstruction is a law-regulated “instrument” by which a debtor may seek bankruptcy protection and protection from debt recovery proceedings, with the aim of reorganising the business and reaching a composition agreement with the creditors pertaining to its ordinary unsecured debt. The reconstruction proceedings are regulated by the Reconstruction Act.

Reconstruction proceedings may be initiated by the courts after petition from either the debtor or a creditor.

In order for the courts to open reconstruction proceedings following a petition from the debtor, it is required that the debtor is encountering, or will in the foreseeable future encounter, severe financial difficulties and it is probable that a composition with the creditors may be obtained.

In order for the courts to open reconstruction proceedings following a petition from a creditor, it is required that (i) the debtor is illiquid (unable to pay its debts as they fall due), and (ii) the debtor does not oppose the opening of the proceedings.

In debt settlement proceedings, the debtor remains authorised to carry on its business with third parties, under the supervision of a court-appointed reconstruction committee.

The key feature of the reconstruction proceedings is that all creditor collection steps are suspended, in particular:

• Payment of pre-petition debt is suspended.
• The debtor is protected from creditor-initiated bankruptcy and debt recovery and enforcement proceedings throughout the reconstruction proceedings.
• The reconstruction proceedings are “debtor in possession” proceedings, but the debtor’s business is under the supervision of the reconstruction committee. 

The aim of the proceedings is in essence a restructuring/refinancing of the debtor’s business and a restructuring of old debt (debt incurred prior to the debt settlement petition).

The Reconstruction Act distinguishes between voluntary composition and compulsory composition.

(i) A voluntary composition may in principle include any possible arrangement or composition. However, it requires unanimity among the creditors (although with a simplified adoption procedure) and is only binding on those creditors that have participated in the composition (eg, not on “unknown” creditors).

(ii) In a compulsory composition, there are limitations with respect to the contents of the settlement proposal. However, it is binding on the minority of creditors, and also on unknown creditors.

Voluntary Liquidation (Debtor-Initiated Bankruptcy)

Bankruptcy (liquidation) proceedings are governed by the Bankruptcy Act.

The debtor submits an application for voluntary liquidation to the local court responsible for the company’s jurisdiction. In Norwegian limited liability companies, only the board of directors is entitled to file a bankruptcy petition on behalf of the company. The court must find that the debtor is insolvent, ie, the company must be displaying a continuing non-temporary inability to pay its debts as and when they fall due (“cash flow test”), while at the same time having liabilities that exceed its assets (“balance sheet test”).

The company’s bankruptcy estate (which is a separate legal entity) is controlled by the court-appointed administrator (a lawyer). The administrator is normally assisted and supervised by a creditors’ committee (and an auditor), also appointed by the court.

Creditors file their claims with the bankruptcy estate, and the claims are approved through an adjudication process.

The general task of the administrator is to turn all assets into cash in the manner assumed to be most profitable for the estate (the creditors) and then distribute the available cash to the creditors.

All the company’s assets will in practice be seized by the bankruptcy estate, and the debtor may not dispose of the seized assets in any way while the bankruptcy proceedings are ongoing.

Involuntary Liquidation (Creditor-Initiated Bankruptcy)

Involuntary liquidation is initiated by creditors when they seek to have the debtor declared bankrupt due to its insolvency (“cash flow test” and “balance sheet test”). Creditors file a bankruptcy petition with the local court, providing evidence of the debtor’s insolvency.

Following commencement of the proceedings, the process is the same as for debtor-initiated bankruptcy (see above).

The bankruptcy estate will normally, in the course of the bankruptcy proceedings, seek to realise (preferably through an ordinary sale) all the assets of the company that are comprised by the bankruptcy seizure and that are not charged (no security interests).

The administrator has rather wide discretion in relation to the sale of the bankruptcy estate’s assets, in the way assumed to provide the highest proceeds.

As for charged assets, the liquidator of the estate may abandon (give up) the seizure of assets which are of no financial value to the estate (eg, because they are over-encumbered – their value is less than the secured claim).

In the event of a sale of the charged asset, the pledgee/mortgagee may bid up to the amount of the secured claim without actually having to make any payment to the bankruptcy estate. As the buyer of the charged asset, the pledgee/mortgagee will be able to set off the claim against the purchase price.

The sale of assets from a bankruptcy estate is normally done on “as is” terms, which implies that a buyer may take on some risk related to, eg, retention of title etc.

Pre-pack deals are not regulated, but it is not uncommon that pre-negotiated transactions are effectuated following commencement of bankruptcy proceedings. A “claw-back” provision is, however, often included as part of the transaction when the transaction is effectuated shortly following the commencement of the proceedings.

Creditors may organise themselves during insolvency and restructuring proceedings to protect their interests, and in some cases, creditors’ committees may be formed to represent the interests of different classes of creditors.

Creditor organisation: Creditors in insolvency and restructuring proceedings may choose to organise informally or formally to collectively represent their interests. This organisation allows creditors to have a say in the decision-making process, negotiate with the debtor or debtor’s estate, and participate in the proceedings.

Creditors’ committees: In in-court procedures for reconstruction and bankruptcy, a creditors’ committee is appointed by the court following a request put forward by either a relevant creditor or the reconstructor/administrator. Together with the appointed reconstructor/administrator, the creditors’ committee forms the reconstruction committee/bankruptcy estate committee.

Powers and responsibilities: Creditors’ committees have several important powers and responsibilities, which may include participating in negotiations with the debtor or debtor’s estate, reviewing proposed reorganisation plans or restructuring agreements, making recommendations or decisions on behalf of the creditor class they represent, advocating for the interests of their constituency, and overseeing the actions of the debtor, debtor-in-possession or administrator to ensure compliance with the law and the best interests of the creditors.

Reimbursement of expenses: In some cases, the expenses incurred by creditors’ committee members may be reimbursed from the assets of the estate or the proceeds of the proceedings. However, reimbursement of expenses is subject to approval by the court or in accordance with the rules governing the specific insolvency or restructuring proceedings.

There has not been a tradition in Norway of the recognition of foreign insolvency/restructuring proceedings (except within the Nordic countries pursuant to the Nordic Bankruptcy Convention).

However, as of 1 July 2021, new regulations in Part IV of the Bankruptcy Act provide for both (a) recognition of foreign insolvency proceedings and (b) the possibility to commence separate bankruptcy proceedings in Norway (comprising the debtor’s assets in Norway).

A foreign restructuring proceeding is recognised in Norway provided that nine requirements are met:

(i) it must concern a foreign insolvency proceeding;

(ii) it must comprise the debtor’s total assets;

(iii) it must be commenced where the debtor has its main interests (centre of main interests);

(iv) it must be collective (ie, applicable to all creditors);

(v) it must contemplate that the debtor (fully or in part) is deprived of the ability to dispose of and control its assets;

(vi) it must be led by an insolvency administrator/trustee appointed to either (a) manage or realise the debtor’s assets or (b) supervise the management of the debtor’s assets and interests;

(vii) the debtor must be a legal person;

(viii) the insolvency proceeding must be commenced in a jurisdiction that recognises Norwegian insolvency proceedings (reciprocity); and

(ix) the insolvency proceeding must not lead to a result that is incompatible with fundamental principles of Norwegian law.

Recognition of a foreign insolvency proceeding implies that equivalent insolvency proceedings cannot be opened in Norway.

The new regulations in Part IV of the Bankruptcy Act do also include a right to open (“secondary”) bankruptcy proceedings comprising only the debtor’s assets in Norway (territorial bankruptcy) even if the debtor does not have its main interests in Norway.

There is limited experience relating to Norwegian courts entering into protocols or other arrangements with foreign courts to co-ordinate and facilitate proceedings. We have, however, in a few matters seen courts supporting an appointed administrator in seeking recognition in foreign jurisdictions and also, to the extent possible, in seeking to harmonise the proceedings with other jurisdictions/proceedings.

In cross-border insolvency cases, the determination of which jurisdiction’s decisions, rulings or laws govern or take precedence is typically guided by a combination of international conventions, treaties, domestic laws and established principles.

In general, the debtor’s centre of main interests will be decisive for the jurisdiction in relation to commencement etc of insolvency proceedings.

Foreign creditors are treated in the same way as domestic creditors in insolvency and restructuring proceedings in Norway. The principles of equality and fairness among creditors are typically upheld, irrespective of their nationality or origin.

The fundamental principle under Norwegian law is that foreign judgments do not carry legal force in Norway, unless stipulated by law or through an agreement with a foreign state. To determine which judgments have legal validity, one must refer to specific legislation or applicable conventions (cf. Section 19-16 of the Norwegian Dispute Act of 17 June 2005 No. 90 (the “Dispute Act”)).

In accordance with Section 4-8 of the Dispute Act, the Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, along with its protocols and appendices, adopted in Lugano on 30 October 2007 (the “Lugano Convention 2007”), is recognised as Norwegian law.

The Lugano Convention 2007 provides the basis for the recognition and enforcement of court decisions issued by a court in a Lugano member country. The parties to the Lugano Convention 2007 include the EFTA states Norway, Iceland and Switzerland (with Liechtenstein notably excluded) and the EU). The Lugano Convention 2007 imparts legal and coercive authority to decisions, subject to a few explicitly specified exceptions outlined in articles 34 and 35 (cf. article 45).

The most significant exception pertains to the ability to reject the recognition and enforcement of judgments if they contravene public policy. The public policy reservation is enshrined in article 34, paragraph 1 of the Lugano Convention 2007, which enumerates the grounds that may hinder the recognition of a judgment rendered in another Lugano member country: “if such recognition is manifestly contrary to public policy in the State in which recognition is sought”.

In Norway, two main types of statutory administrators may be appointed in insolvency and restructuring proceedings:

• Liquidator: A liquidator is appointed by court when a company or individual is declared bankrupt. The liquidator is a lawyer. The liquidator’s primary role is to administer and liquidate the assets of the debtor’s estate for the benefit of the creditors. The liquidator also investigates the debtor’s financial affairs.
• Reconstructor: A reconstructor, being an experienced insolvency lawyer, is appointed by the court when a company is taken under reconstruction proceedings. The reconstructor assists the debtor in managing and overseeing the reorganisation efforts, including the implementation of a proposed reconstruction plan.

In both proceedings, the appointed liquidator/reconstructor may be assisted by a court-appointed auditor and a creditors’ committee.

Liquidator

The liquidator is appointed by the court to administer and liquidate the assets of the debtor’s estate in a bankruptcy proceeding. The duties of a liquidator include collecting, valuing and realising the debtor’s assets, settling creditor claims, and distributing proceeds to creditors in accordance with the priority rules established by law.

The liquidator owes fiduciary duties to the creditors of the estate and is obligated to act in the best interests of the creditors as a whole. The liquidator reports to the court and communicates with creditors throughout the bankruptcy process.

Reconstructor

The reconstructor is appointed by the court to assist the debtor in managing and overseeing the reconstruction, while at the same time safeguarding the joint interest of the creditors. The reconstructor’s duties may include facilitating negotiations between the debtor and creditors, monitoring the implementation of a proposed restructuring plan, and reporting to the court on the progress of the reconstruction.

The reconstructor owes fiduciary duties to the stakeholders involved in the reconstruction process, including creditors and shareholders. The reconstructor reports to the court and may also interact with creditors and other stakeholders to facilitate the reconstruction.

Appointment and Election

The administrator (ie, liquidator or reconstructor) is typically appointed by the court. The appointment is made based on the specific insolvency proceeding at hand, such as bankruptcy or reconstruction. The court selects the administrator based on their qualifications and experience in insolvency matters. In reconstruction proceedings, the administrator is usually nominated by the debtor or a creditor and approved by the court. The appointment are, however, within the court’s discretion. The administrator should be a qualified lawyer.

Removal or Replacement

Administrators may be removed or replaced under certain circumstances, such as if they fail to fulfil their duties or if there are conflicts of interest. The court has the authority to remove or replace an administrator upon application by a party with a legitimate interest. Such removals are seldom seen in Norwegian insolvency proceedings.

Interaction With Company Management and Directors

The administrators have a significant role in managing the debtor’s affairs and may have authority over company assets. They may work closely with company management and directors, especially in reconstruction proceedings. In winding up proceedings, the liquidator’s role is to dissolve the company and liquidate assets. Their interaction with company management may be limited to matters related to the winding up process.

The board of directors (and the general manager) has an obligation to act in the interests of the company’s creditors and shareholders. Section 17-1 of the Companies Act sets out the basis for liability of the board of directors in a general provision pertaining to liability for loss incurred by the company and others (including creditors).

The board of directors may be subject to criminal liability pursuant to Sections 19-1 and 19-2 of the Companies Act, which set forth general penalty provisions relating to breach of the requirements of the Companies Act, including breach of Sections 3-4 and 3-5 and the requirements relating to sound equity ratio and duty of care.

Pursuant to Section 407 of the Norwegian Penalty Act, the members of the board of directors may be prosecuted for neglecting their obligation to file for bankruptcy proceedings (or reconstruction proceedings) in a situation where the company is insolvent and the creditors are suffering a loss as a result of the continued operations of the company.

Both civil and criminal liability are a personal liability of each member of the board of directors.

It could be said that the board of directors is “squeezed” between the various liability provisions which, in a situation where the company is financially strained and is considering reorganisation and refinancing (or sale), will motivate the board members to exercise due diligence and care.

Notwithstanding the above-mentioned rules and prohibitions focusing on the obligations of the board of directors to, inter alia, file for bankruptcy, it should be noted that the board of directors is entitled to (and in some respects obligated to) fight to preserve and salvage the company for the benefit of its creditors, employees and general community interests.

While the liability and penalty provisions motivate the board of directors to prevent any creditors or shareholders from suffering a loss, please be reminded that the board of directors is expected to take some risks and that it is not illegal to bankrupt a company, provided always that the board of directors acts responsibly, reasonably foreseeing and assessing the risks of its various actions.

If the company is in a strained financial situation, the board of directors must act with due diligence and care, and it is very important that the actions taken and the basis for the board members’ considerations are adequately documented and evidenced.

A creditor may file direct claims towards a director for any economic loss suffered, provided that the director has acted negligently (or intentionally) and there is an adequate causal connection between the loss and the negligent action or failure to act. There may, however, be an issue relating to whether a claim is a “creditor claim” or a “company claim” and who is entitled to pursue it.

Certain transactions made prior to bankruptcy may be subject to a reversal (set aside or annulled) pursuant to the Recovery Act.

Reversal of claims particularly applies to certain transactions carried out in the three-month period (up to a two-year period for closely related parties) prior to the bankruptcy, which are reversible irrespective of any irregularities (ie, on an objective basis). Such transactions include payment of certain debts, and security granted for unsecured (or “under-secured”) “old debt”. Payments of debt during the last three months prior to bankruptcy may be reversed (on an objective basis) if the payments are made by uncommon means, made before their due date, or the amount of payment has considerably weakened the debtor’s ability to pay its other debt.

A time limit of ten years applies if the creditor ought to have had knowledge of the insolvency and the circumstances which made the transaction between the creditor and the debtor improper. What is improper will have to be determined in each case. Pursuant to case law, the disposition will have to be “qualified blameable” objectively. Such an improper disposition has also been described as an unfair/disloyal disposition towards the other creditors.

The primary responsibility for initiating claims to set aside or annul transactions falls on the liquidator or the reconstructor. They have the authority to investigate and challenge transactions that may be subject to claw-back provisions, and it is only within the framework of reconstruction and bankruptcy proceedings that the claw-back provisions in the Recovery Act apply.

Creditors are not entitled to assert such claims directly, but may do so either by funding/supporting the estate in pursuing such a claim or by acquiring the claim from the estate.