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Insolvency in Norway

A special report prepared by Marius Moursund Gisvold of Wikborg Rein, published on www.konkursradet.no with the kind permission of Mr. Gisvold  (Updated Feb. 2012).

The main Norwegian insolvency legislation is found in two acts: the Debt Negotiation and Bankruptcy Act (1984) (the DNB-Act) and the  Act  (1984) (the Act). The Mortgage Act (1980), as well as the special provisions regarding mortgages and liens in other acts, such as the Maritime Act and the Aviation Act,  is also of high importance when evaluating the creditor positions in insolvency.

Together, the two main acts represent a structure for approaching the issues concerned  in the breakdown of a debtor's finances intended to be tuned to the  requirements of a modern business environment. It should be noted, however, that the DNB-Act's system for dealing with the situations where a moratorium and/or a partial forgiveness of debt may prevent liquidation and form the basis for the continued healthy operation of the debtor,  has not become the popular success envisaged  in 1984. This part of the legislation is built on the same principles as the U.S. "Chapter 11"-procedure, but does not go as far in providing the court with flexibility to steer the process to a result which is seen as acceptable by all involved. Also, despite the fact that the debt negotiation procedures are supposed to be non-public, they generally become very public almost instantly upon commencement. This often steers debtors into out-of-court negotiations as a means of solving the problems, either as a final solution or as a preamble to introducing a "ready-made" solution into the legal system after agreeing with the main creditors, in particular in businesses involving international suppliers or customers, where the scope of the jurisdiction is not wide enough to capture all involved.

The DNB-Act sets out the requirements for the opening of the various insolvency procedures, the rules for their conduct and their finalization.

The Recovery Act broadly determines to which assets the creditors of an insolvent have access, the cut-off dates, the priority between creditors, and which claims are allowable. It also sets out the rules governing the fate of the debtor's contracts and auditing/revocation of certain insolvency motivated dispositions during the period leading up to insolvency. It should be noted, however, that the fate of international contracts with a valid choice of  law and venue outside the grasp of the Norwegian courts may create complications when  it comes to the enforcement of the generally applicable main rule:  That the estate has the right to step into (novate) the debtors contracts and thus unilaterally forcing the third party in question to be bound.

In Norwegian insolvency law the terminology used is slightly but significantly different from the English terminology. The term "illikvid", here translated 'insolvent' signifies the (not merely temporary) inability to pay debts as they fall due. The term "insufficient", signifies the fact that liabilities exceed assets. For full liquidation/bankruptcy proceedings to be opened in Norway a debtor must be both insolvent and  insufficient, whereas insolvency is sufficient for the opening of debt negotiations.

In Norway, the terminology between personal and corporate bankruptcy is indistinguishable. The term "bankruptcy" used hereinafter thus covers both bankruptcy and liquidation as used in English terminology. Under the new system all proceedings take place under the auspices of the Probate Court, with various court-appointed bodies strongly influenced by the creditors having supervisory, controlling and advisory roles in the various stages of insolvency proceedings.

Initiating insolvency procedures

Bankruptcy proceedings may be initiated in Norway by application to the Probate Court by the debtor or an (wholly or partly) unsecured creditor. The debtor must be insolvent and insufficient for such proceedings to be opened, and this must be documented. Acknowledgement by the debtor, general cessation of payments and unsuccessful debt enforcement attempts during the last three months constitute legal presumptions of insolvency and  insufficiency, as does non-payment of undisputed due debt following the service of a 'bankruptcy notice' demanding payment.

Debt negotiation proceedings may only be initiated by a willing and to some extent able debtor who can show the court that he is insolvent, but yet demonstrate that it is not unlikely that he will obtain a composition with his creditors. These proceedings contain three steps; an initial non-public phase during which the debtor's financial situation is assessed and he prepares his composition proposal together with the court-appointed Supervisory Committee; a second (public) phase wherein he negotiates for a voluntary composition of a wide possible scope, dependent on full unsecured creditor approval; and/or a third (also public) phase during which he negotiates for a compulsory composition, dependent on 60 or 75 per cent unsecured creditor approval (by numbers and claims) according to the proposed composition (over 50 pence in the pound or 25-50 pence in the pound respectively). A composition  of  less than 25 pence in the pound is not possible in a compulsory composition. New in the legislation is that the court may open forced composition proceedings directly (Phase 3) without going via the two first phases.

The second phase will be left out if the court finds it unlikely to succeed, as will often be the case. One can also proceed directly from the assessment phase to bankruptcy if the Court finds it unlikely that the requirements for a composition will be met (or the debtor gives up the attempt).

In the second and/or third phases the debtor is overseen by a Composition Committee acting under the auspices of the Court, generally a continuation of the Supervisory Committee. The day-to-day work of the company, both in respect of its attempt to put together a proposal for a composition and in respect of its "ordinary" operations is generally supervised by a Trustee acting on behalf of the Committee and the Court.

An application for opening of debt negotiation proceedings, if granted, will generally stay a bankruptcy application for (initially) three months, unless it is supported by enough unsecured creditors to show that a forced composition will not succeed.

Upon a written application for bankruptcy, the Court will call a hearing wherein it will decide whether the requirements have been met. Any applicant (generally and creditors specifically) must provide security for the costs of proceedings. Exceptions are made when  a company applies for its own liquidation and  in some other cases, such as when the applicant is an employee or union representing unpaid salary claims. If an application is upheld, bankruptcy is opened with retroactive effect from the time of the application (or if it has been preceded by debt negotiation proceedings, with effect from the time of such application) – termed  "the cut-off date" (or more precise: "the cut-of-moment", since the exact time is registered).

Debt negotiation proceedings are opened by the Court after a similar procedure. The evidence requirements are, however, more rigorous, as the procedure gives the debtor the Court's protection from bankruptcy and from enforcement of individual claims for a period.

Bankruptcy proceedings

In bankruptcy proceedings all the debtor's assets which the creditors have access to are confiscated and  turned  into money for distribution between the creditors. The debtor loses control of these assets from the time of application for bankruptcy. The bankruptcy is made public, registered in public registries, newsletters etc.

The practical side of bankruptcy proceedings is carried out by an Creditors Committee, normally led by a lawyer, with representatives of the creditors and an employee representative if requested by unions. A separate auditor is normally appointed to audit both the debtor's business prior to bankruptcy and the business of the estate.

In bankruptcy all (wholly or partly) unsecured creditors will receive dividends on a strictly mathematical parity basis, save for:

Claims with better priority:

  • Costs related to proceedings and the like;
  • Certain pension and wage related claims for a period of up to six months;
  • Income tax, VAT and NIC not paid in; and

Claims with lower priority than 'ordinary' claims:

  • Interest after the cut-off date;
  • Subordinated debt;
  • Penal taxes or fines;
  • Gifts promised but not fulfilled.

Lack of sufficient funds for the Trustee  to carry out the necessary and proper work of the bankrupt estat has been a problem over the years. In many cases, the reserves of the bankrupt have been totally drained before bankruptcy is declared, and all property has been mortgaged. Thus, in 2004, provisions were added to the Mortgage Act, giving the bankrupt estate a legal and automatic 1st priority lien over 5% of all assets of the debtor which is mortgaged as security for costs of the estate (thus partly eroding the rights of the mortgagees), limited to a certain amount which is index regulated (currently abt. USD 100.000,-. (The 1st  priority mortgagee  by agreement may release this legal lien by laying out the amount, thus gaining control of the object).

In bankruptcy the debtor is virtually put on the sideline. However, he is obliged to assist the Court and retains formal party rights in the proceedings. After the proceedings are closed, the debtor remains liable for debt not covered by dividend payments. For a limited company this is academic as it shall be dissolved and struck off the Company Register upon closure of the proceedings.

Fully secured creditors generally remain unaffected by the bankruptcy save for the effect of the 5% legal lien for costs of the bankruptcy; although they must accept that there will be delays in enforcement. Mortgagees will also have to accept that the mortgaged asset can be sold by the trustee as part of a realization of the business of the bankrupt (or part thereof), without having the possibility to prevent this, and also with the effect of extinguishing the unsecured part of a mortgage claim. Normally, however, the Trustee will "abandon" any asset mortgaged for a claim exceeding its value in favor of the mortgagee.

Creditors, who in good faith had obtained an actual right of set-off prior to the cut-off date, retain this right.

Assets available for recovery in insolvency proceedings

Certain assets are exempt from access by the creditors, such as personal belongings, tools, clothes etc with a value limitation and wages, contributions, damages in tort etc to the extent necessary for the upkeep of the debtor and his family.

The debtor's right to retain a home to live in is also protected to a certain extent.

Private agreements limiting creditors' right of access in bankruptcy are generally not enforceable.

Certain of the debtor's dispositions prior to bankruptcy may be revoked, such as bankruptcy motivated dispositions (generally going back two years, I certain cases longer) and, on a strict basis, gifts, renouncements of inheritance, extraordinary payments of debts, or provisions of security for existing debt during the period prior to the cut-off date (generally going back  three months).

Provisions in the debtor's contracts giving the other (solvent) party a right to terminate in case of bankruptcy (or debt negotiation) are not generally enforceable as the estate has an extensive right to step into the debtor's contracts as long as these do not have a strong personal element. The solvent party may, however, force the estate to declare its position, and if the estate does not accept termination of the contract the estate becomes party to the contract and its obligations thereafter get priority as costs of bankruptcy proceedings.

Debt negotiation proceedings (DNP)

In the first phase of DNP, a Supervisory Committee (of the same composition as an Estate Board) and an auditor supervise and assess the debtor's business. The proceedings are (theoretically) not public and the debtor remains outwardly fully authorized. Third parties contracting diligently and in good faith get good title.

The debtor is not, however, as towards the Court and his creditors, entitled to undertake or renew debt, mortgage, sell or rent real property or any asset of significance without the Committee's approval. He is in other words restricted to minor cash business unless he gets approval. He is also under the Committee's general supervision.

The debtor's finances will in this phase be audited and assessed and his proposal for a composition prepared, in co-operation with the Committee. The latter will make recommendations to the Court and protect creditors' interests.

The debtor's proposal for composition will only be forwarded if it has at least 40 per cent backing in a test-vote among creditors, both by numbers and by size of  unsecured claims, and the Court finds it likely to succeed.

Voluntary composition (Phase 2) is rare, as it requires full creditor agreement. If a composition proposal is forwarded in good time, it is usual to proceed to Phase 3 - negotiations for compulsory composition. In Phase 3, creditors vote by numbers and size of unsecured claims. If a composition proposal is not forwarded, then bankruptcy is opened.

A compulsory composition must offer at least 25 pence in the pound to all creditors. It may propose that all claims are paid up to a certain sum. (This will eliminate all small creditors from vote and thus reduce problems, as only those who stands to lose get to vote). It may consist of

  • a moratorium;
  • a percentile reduction of all debt;
  • a liquidation of all debtor's assets or a clearly defined part thereof and distribution thereof; or
  • a combination of the above.

With an offer exceeding 50 pence in the pound a 60 per cent approval by numbers and unsecured claims is required for approval. With an offer between 25 and 50 pence, 75 per cent is required.

After the approval of the Court of a proposal having received sufficient votes, the debtor is relieved of the uncovered debt, provided he duly fulfils the composition.

If the negotiations fail at any stage, the Court will open bankruptcy ex officio, normally on the advice of the Committee.

It should be noted that there is a separate legislation for simplified debt negotiations available to private persons in the Debt Settlement Act (1992), generally providing for private persons to extinguish their residual debt by entering into a five year downpayment period where the live on minimum subsistence  and contribute all excess earnings to their creditors. This is not available to persons who have property of any significance, and not is a major part of the debt originates from tax claims, other "public" debt or if the approval is – very generally speaking - considered "unfair" to the creditors due to the history behind the debt. Any person may only apply once for this measure, which is established primarly to provide a way back to a dignified life for people of few means who have – possibly due to losing their job or other life changing experiences – have ended up as slaves of debt.

The claims

The Supervisory/Composition Committee and/or the Estate Board will invite claims to be made and will in all proceedings represent the creditors collectively against third parties, the debtor and each creditor individually. Generally speaking, an individual creditor may not make a claim on his own against third parties which have contributed to his loss through the bankrupt debtor, but he may sue on behalf of and in the name of the Estate (for the benefit of the Estate, but for his own account if he doesn’t recover the costs) if the Trustee refuses to do so.

All claims must be documented. If the Committee or the Board refuses to accept a claim in whole or in part, or alternatively, if there is a dispute over its priority or security rights, the claimant must request the General Meeting of Creditors and eventually the Probate Court to decide the dispute, subject to appeal, much in the same way as any private law dispute before the Courts.

The Estate Board

The Estate Board (the Board) is appointed by the Court, but is generally very strongly influenced by the large creditors. In practice a lawyer will chair the Board, and generally act as its executive (Trustee). His role is that of primus inter pares, and he is authorized to bind the estate. The other representatives (normally one to three) will be creditor representatives. Employees may apply to have a representative.

The Board generally has five tasks:

  1. to assess the assets of the estate, secure these and protect them against other pretenders;
  2. to collect outstanding claims;
  3. to preserve, enhance and  realize the assets in the best possible manner;
  4. to compile and assess claims including their priority; and
  5. to propose a dividend distribution for the Court's approval.

In disputes between creditors, between the estate and third parties (including the debtor) or between a creditor and the Estate Board, the position to be taken by the estate as such will be determined by a vote by size of claims in a General Meeting of Creditors. The Court will supervise and ensure that no resolution violates the right of the debtor, a creditor or a third party or is illegal or obviously unfair.

International relations

Bankruptcy can be opened in Norway in respect of all debtors domiciled in Norway (including the estate of persons so domiciled upon their death) and companies registered in the Company's Register and/or having their principal place of business in Norway.  A company may well be deemed to have its principal place of business in Norway even if it is incorporated somewhere else.

Internal Norwegian law maintains the principle of universality, although all assets located outside Norway itself can only be accessed through the assistance of the debtor (which he or his directors have a duty to render) and/or foreign courts.

It should be noted that Norway has treaties on bankruptcy with the other Nordic countries (the 1933-Convention).

A foreign bankruptcy will, in principle, have no effect in Norway, except for bankruptcies instituted in the other Nordic countries and which have a direct effect on the debtor's assets in Norway.

Foreign judgments will not be conclusive in determining claims in a Norwegian bankruptcy, except if this follows from treaties. Norway has some such treaties on civil law judgements, notably with the UK and the Nordic countries and is a party to the New York Convention on recognition of arbitration awards. In any case a judgment of a foreign court will normally have a strong evidential effect, and may be held to constitute prima facie evidence of a claim, as long as the procedure can be considered safe and the case has been contested in court.

The role of directors

In corporate bankruptcy the directors will have to fulfill the debtor's duty of co-operation. They no longer have any authority in the running of the debtor, but may ask the Court to intervene if they think the Board is mishandling the estate.

They must give all information required by the Court, the auditor and the Board with respect to financial and business information, assist in providing complete files, accounts, vouchers and documents of significance to the estate.

The directors may be requested to meet in General Meetings of Shareholders and their movements may be periodically restricted if unethical behavior is suspected.

The Board is responsible for preparing advice to the Court on the debtor's activities including recommendation for criminal prosecution and/or quarantine and/or civil liability for the debtor or its directors and shareholders.

Directors may be prosecuted for attempting to withhold assets or for failing to apply for debt reorganization or bankruptcy when the debtor is insolvent, thereby exposing creditors to excess losses.

The debtor and/or its directors may be quarantined and barred for a period of up to two years from starting new business/accepting new directorships if thought unfit or if they are under criminal investigation. The court may also disqualify the debtor/a director from other existing directorships.

A director or a shareholder may become liable to pay damages in tort to creditors on the basis of negligence or wilful misconduct in their roles as directors and shareholders respectively.

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