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Bankruptcy in limited companies

Information for the management of the company

The purpose of liquidating the estate is to realize the assets of the company and to distribute the proceeds amongst the creditors in accordance with the rules contained in the Creditors Recovery Act of 8 June 1984 No. 59. In addition public law investigations are conducted with a view to ascertaining whether criminal offences have been committed in connection with the business and whether there are grounds for imposing a period of disqualification on any of the parties involved. The liquidating of bankruptcy estates is regulated in the Debt Reorganisation and Bankruptcy Act of 8 june 1984 No. 58.

- The subject of the bankruptcy proceedings
- The rights of the debtor
- The effects of bankruptcy seizure
- The business activities of the company
- The duties of the directors and the chief executive officer
- Announcement and registration in the Register of Bankruptcies
- The duties of the board of trustees
- Reviewing claims
- Period of disqualification
- Compulsory composition in bankruptcy
- Completion of the bankruptcy proceedings - Appeals against decisions

The subject of the bankruptcy proceedings

When a limited company is declared bankrupt, it is the company that is bankrupt - not the physical persons behind the business.

The company's shareholders are not liable for the debts of the limited company. Their liability is limited to payment of the share capital for which they have subscribed. If share capital has been subscribed but not paid up, it must be paid up after bankruptcy proceedings have commenced.

In some cases directors, owners and others may be liable for compensation as a consequence of their actions in connection with managing the company. Guarantee liability may also exist in respect of some of the creditors, e.g. as a consequence of directors and/or shareholders having given personal guarantees for the debts of the company.

The rights of the debtor

The law gives the debtor certain rights during the bankruptcy proceedings. As a general rule these rights are exercised by the directors of the company. Some of the rights may also be exercised by the chief executive of the company. For example, the debtor is entitled to be present when mail addressed to the company is opened, to comment on the proposal presented by the board of trustees and to dispute claims during the review of claims. The directors may also present proposals for compulsory composition or the release of the estate.

The effects of bankruptcy seizure

Bankruptcy entails that all the assets of the company are seized for the benefit of its creditors. Once the Bankruptcy Court has adopted a ruling that bankruptcy proceedings should commence, all parties acting on behalf of the company will immediately lose their right of disposition over the assets of the company, i.e. right to control the assets. The right of control is transferred to the bankruptcy estate in the person of the trustee. The term "assets" means all wealth including cash, bank deposits, real property, vehicles, operating assets, amounts receivable, inventory, registered trademarks and patent rights etc. Moreover debt may not be paid and settlement may not be accepted from parties owing moneys to the company, and agreements may not be concluded on behalf of the estate, nor may debt be incurred for the estate.

If any of the assets of the company have been mortgaged for amounts in excess of their value, the bankruptcy estate will as a general rule waive seizure (abandon) of such assets or transfer them to the lien-holders. For example, a piece of real property may have a value of NOK 800,000 whereas the bank has a lien on the property in the amount of NOK 1 million. If bankruptcy seizure is waived, the right to control these assets will revert to the company represented by the directors. The lien-holders may then apply for enforced coverage in the assets in question pursuant to the Enforcement Act.

The business of the company

Unless the bankruptcy estate sells all or part of the business to new owners, a bankruptcy will result in the closure of the business.

Nevertheless the business may continue to trade for some time after the commencement of bankruptcy proceeding if the Bankruptcy Court or the trustee (the board of trustees if a creditors committee has been appointed) adopts a decision that trading should continue for the account of the estate. The company will be deleted from the Register of Business Enterprises once bankruptcy proceedings have been completed.

Bankruptcy entails that the jobs in the company will cease to exist. If the company continues to trade during bankruptcy, the estate will automatically assume the position of the company in contracts of employment unless the trustee decides within three weeks of the commencement of bankruptcy proceedings that the estate should not do so. The period of notice will commence when the estate sends out notice. Unpaid pay and holiday pay for employees is guaranteed by the State up to specified limits. This includes holiday pay and pay during the period of notice, including the period after the commencement of bankruptcy proceedings. The Wage Guarantee Scheme does not encompass pay to employees who alone or in combination with associates own at least 20% of the company. Nor does the Wage Guarantee Scheme cover the pay or fees of the chief executive officer or directors elected by shareholders. The trustee is required to inform employees of details of the Wage Guarantee Scheme and assist in processing matters encompassed by the Wage Guarantee Act.

The duties of the directors and the chief executive officer

The board of directors of the company and its chief executive officer (or managing director, manager or business manager, if applicable) are required to provide the Bankruptcy Court, trustee and if applicable auditor of the estate with exhaustive information on the financial affairs of the company and on its business management before and during bankruptcy. They must cooperate with the trustee in his/her work on mapping the assets of the estate. As soon as bankruptcy proceedings commence they must contact the trustee and make all assets available to the trustee by handing over keys etc. The debtor is required to participate in the immediate securing of accounting material. Concealing funds from the bankruptcy estate is a criminal offence. Furthermore correspondence, accounting vouchers, minutes of board meetings and other documents of significance to the bankruptcy proceedings must be surrendered. Pay claims from the employees must be certified.

The trustee may require directors or the chief executive officer to attend all general meetings of creditors. These persons must not leave the country during bankruptcy proceedings without the consent of the Bankruptcy Court. After the commencement of bankruptcy proceedings, proceedings will be held to register the assets of the company. The board of directors is required to nominate one or more persons, for example the chairman of the board and/or the chief executive officer, to attend the registration proceedings if requested by the Bankruptcy Court or the trustee. These persons must provide information on all the assets of the company during the registration proceedings.

The same obligations as outlined above apply to past directors or chief executive officers of the company. However, if the involvement of these persons took place more than one year prior to the bankruptcy petition, their assistance will be required only if decided by the Bankruptcy Court.

If any person who is subject to a duty of information fails to fulfil this obligation, the Bankruptcy Court may decide that the person in question should be seized and held in prison or subject to other restrictions on his/her personal freedom.

Any person bound by the above duties may be assisted by an attorney at law. Even if the services of an attorney at law are retained, the Bankruptcy Court and the trustee may approach the person in question directly. The cost of legal assistance will not be born by the bankruptcy estate.

Announcement and registration in the Register of Bankruptcies

The commencement and completion of bankruptcy proceedings is announced in the local press and in "Norsk Lysningsblad" (the Norwegian Gazette). The bankruptcy is also registered in the Register of Bankruptcies.

The duties of the board of trustees

When bankruptcy proceedings commence, the Bankruptcy Court appoints a trustee, usually an attorney at law. The trustee takes over the management of the estate. A creditors committee comprising representatives of the creditors may be appointed at the first general meeting of creditors. The employees of the company may request that a representative of the employees be appointed to the creditors committee. To do so, an application to this effect must be submitted to the Bankruptcy Court by a majority of the employees or by the local trade union(s) representing the majority of the employees. The trustee and the creditors committee make up the board of trustees. As a general rule the Bankruptcy Court must also appoint an auditor to the estate. However, in practice, a lack of funds will often mean that no auditor is appointed.

The trustee will inter alia examine whether any of the transactions of the company prior to the commencement of bankruptcy proceedings can be voided. Matters to be considered will include extraordinary payments to creditors, security furnished for older debt and execution in the final period prior to the commencement of bankruptcy proceedings.

The trustee is entitled to examine mail received by the company. It is customary for mail to be readdressed to the office of the trustee. The directors and the chief executive officer are entitled to be present when mail is opened. In such cases an agreement should be reached with the trustee on how this should proceed in practice.

The trustee or, if applicable, the board of trustees, must submit a report to the bankruptcy court. The same duty applies to the estate's auditor. The directors of the company must submit a declaration stating that to the best of their knowledge the information contained in the report concerning the financial affairs of the company is correct and exhaustive. If the report contains comments on this subject with which the directors disagree, this must be stated in the declaration. The report must contain information on whether the directors or the chief executive officer can be assumed to have concealed assets during the bankruptcy proceedings, committed criminal offences in connection with the financial affairs of the company etc. Information must also be provided as to whether circumstances exist that would justify sanctions by the Banking, Insurance and Securities Commission in respect of the auditor of the company. If so, the report must also be sent to the police or the Banking, Insurance and Securities Commission.

The reviewing of claims

Claims that are likely to be paid in full or in part must be reviewed during the bankruptcy proceedings. The directors of the company may give their views before the claims are approved. If the directors object to a claim, the Bankruptcy Court will decide whether it should be approved.

Disqualification period

In the report to the Bankruptcy Court the trustee must provide information on whether there are circumstances that suggest that a disqualification period should be imposed. Directors, deputy directors and the chief executive officer may be subject to a period of disqualification. The same applies to persons who have de facto exercised the powers of such offices. The period of disqualification may be imposed if there are reasonable grounds for suspecting that the person in question has committed a criminal offence in connection with the bankruptcy or the business that led to the bankruptcy. A period of disqualification may also be imposed if there are reasons for concluding that improper business conduct makes the person in question unfit to establish a new company or to serve as a director or the chief executive officer of such a company. The Bankruptcy Court decides whether a person should be subject to a period of disqualification. Before a period of disqualification is imposed the person in question will normally be given the opportunity to give his/her views.

A person who is subject to a period of disqualification may not form a limited company, the business division of a foreign company, a commercial trust, a house- building association, housing association, cooperative society etc. or undertake the office of or de facto exercise the powers of a member or deputy member of a board of directors or the chief executive officer of such a company. The person in question may also be removed from any such offices that he/she already holds. A period of disqualification normally lasts for two years from the commencement of bankruptcy proceedings or from the time of imposition and will be registered in the Register of Bankruptcies. It is a criminal offence to breach the rules governing a period of disqualification. A period of disqualification will not entail a prohibition against conducting new business activities in the form of a one-man business or general partnership.

Compulsory composition during bankruptcy

The company may present a proposal to the board of trustees for a debt settlement scheme in the form of compulsory composition. Compulsory composition must involve the payment of at least 25% of the amounts owed to ordinary creditors. Today companies rarely have sufficient funds to pay such a high dividend. However, the dividend may be paid in instalments if the creditors so agree. The composition proposal must be accepted by a qualified majority of the creditors counted in terms of amounts and the number of creditors who participated in the vote.

If all creditors so consent, the company may also apply for the bankruptcy proceedings to cease and for the estate to be released.

Conclusion of the bankruptcy proceedings

A proposal for fees for the trustee, the creditors committee and the auditor to the estate must be submitted to the board in the person of the chairman of the board for comment before the fees are adopted by the Bankruptcy Court. If there are insufficient funds to continue the bankruptcy proceedings, the Bankruptcy Court will discontinue the proceedings. If not, the bankruptcy proceedings will be concluded in the form of the distribution of the assets of the estate amongst the creditors in such a way that the creditors receive proportionate coverage of their claims. Nevertheless, preferential claims such as pay, claims for VAT etc. will receive full coverage before a dividend is paid to ordinary creditors.

Appeals against decisions

The main decisions adopted by the Bankruptcy Court during the bankruptcy proceedings may be appealed to the Court of Appeal. This applies inter alia to the Bankruptcy Court's decisions to institute with bankruptcy proceedings. The time allowed for an appeal is generally one month. A fee is payable for the processing of appeals. The Bankruptcy Court will provide further details on the right of appeal.

If a decision adopted by the trustee, board of trustees or general meeting of creditors conflicts with the rights of the debtor or a third party or is clearly unreasonable, the directors of the company may apply to the Bankruptcy Court for the decision to be overturned or changed.

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