Corporate insolvency & restructuring report 2021: Denmark
Kristian Gustav Andersson and Anne Hansen-Nord, Lundgrens Law Firm
The Danish Bankruptcy Act contains procedural as well as substantive provisions in relation to formal insolvency proceedings.
The formal reconstruction process is often criticised for being both expensive and troublesome. However, the changes proposed by the Danish Bankruptcy Council to the rules on restructuring may alleviate these issues. The proposed changes got implemented in a legislative proposal and enacted on March 23 2021. The purpose of the legislative amendments is to improve the chances for companies that are viable but have temporary financial difficulties resulting in continuation instead of being declared bankrupt to limit financial losses and prevent job losses.
It is expected that the amendments will increase the incentive to undergo restructuring. Among other things, the proposal suggests that the requirement for compulsory security in any subsequent bankruptcy proceeding is removed and that employees’ guarantee fund coverage must take effect at the very beginning of the reconstruction proceedings. The amendment to the Bankruptcy Act seems to be especially welcome as the recent Covid-19 crisis has affected the cash flow in otherwise well-run companies.
“The Danish Bankruptcy Act distinguishes between bankruptcy, formal reconstruction, and rescheduling of debt.”
The Danish Bankruptcy Act distinguishes between bankruptcy, formal reconstruction, and rescheduling of debt. Bankruptcy and formal restructuring proceedings are available for legal entities as well as individuals, while debt rescheduling on its own is only obtainable by individuals. Insolvency proceedings under the Danish Bankruptcy Act can be launched only once a company is insolvent. A company is insolvent when it cannot fulfil its obligations as they fall due, and when this inability to pay is not temporary.
Instead of initiating a formal restructuring process, an insolvent company may seek to enter into an arrangement with its creditors, and in this way obtain a percentage reduction of the debt, a lapse of the claims, a postponement of the payments or a combination of all of these, via an informal restructuring process. It is important that certain creditors are not given preferential treatment at the expense of other creditors, as this may result in legal liability for the management.
The management of a distressed company is not automatically liable if insolvency proceedings are initiated against the company. The management is only liable, if it has failed to comply with its managerial duties or if the management have violated legal regulations.
The management is obligated to ensure that the company’s capital reserves are sufficient to fulfil its present and future obligations as they fall due. If the capital reserves are not sufficient, the management must restore the reserves or file for insolvency proceedings.
However, it is important to note that management often is tasked with complex decisions. Consequently, Danish law operates with the so-called ‘business judgment rule’. This legal principal is a presumption of innocence if management has acted in good faith and with care, and the management reasonably believed the actions taken were in the best interest of the company.
The formal filing and issue of a bankruptcy or restructuring order has several impacts on the creditors. The creditors are subject to limitations concerning proceedings taken by creditors individually, as the creditors cannot seek satisfaction in the debtor’s assets. Therefore, execution or attachment may not be levied against property comprised by the estate.
The trustee can decide to maintain contracts that have not yet been fulfilled, unless this is contrary to the very nature of the contract. In restructuring proceedings, the trustee can additionally decide to maintain a contract that has been terminated within the last four weeks leading up to the initiation of the restructuring, provided that the contractual party has not yet acted upon the termination. If a contract is maintained, all claims arising out if it will be elevated in the estate’s priority of claims. If the contract is not maintained, the contractual party may terminate the contract and file its claim.
Priority, dissenters and asset sales
The order of the priority of claims is in general as follows:
Costs of the estate administration (pre-preferential claims)
Claims in relation to previous restructuring or liquidation processes (preferential claims)
Claims from the debtor’s employees (preferential claims)
Certain tax claims (preferential claims)
Any remaining claims, including invoice claims (ordinary claims)
Claims of interest, fines, gifts etc. (deferred claims)
Creditors with valid and enforceable security do not form part of the ranking. However, if the security does not fully cover a creditor’s claim, they are viewed as an unsecured creditor in relation to the unsecured part of their claim. Post-petition debt or costs incurred by the estate will be considered pre-preferential debt, which will be covered at the same level as costs of the estate administration.
During bankruptcy proceedings, the trustee is responsible for handling the sale of assets. The trustee can carry out the sale as a sale of the individual items or as a sale of the business or of separate branches. The trustee must manage the interests of the estate to the widest extent possible, must manage the sale in such a way that the outcome for the bankruptcy estate and its creditors becomes as favourable as possible.
During a formal restructuring process, the appointed trustee must consent to the selling of the debtor’s assets, if the sale significantly impacts the restructuring. Furthermore, a business transfer must be carried out in accordance with a ratified restructuring proposal. Hence, a sale of the business or of one or more of the branches must be approved by the creditors for the restructuring proposal to be valid. The legislative change from March 2021 allows a new form of business transfer called a ‘fast-track business transfer’.
The fast-track procedure involves a business transfer, which can take place with the consent of the appointed trustee, provided that a majority of the voting creditors have no objections. Creditors have five business days to file objections. This fast-track business transfer can only be completed before the passing of a restructuring plan. Thereafter, business transfers can only be carried out after the previously applicable rules, where the final restructuring proposal is adopted unless a majority of the creditors participating in the vote, vote against it. Votes are cast in proportion to the amounts of the claims. The compulsory composition will typically include all creditors. This means that creditors may be forced to accept undesirable terms and be crammed down in accordance with an approved restructuring proposal.
A formal restructuring must contain at least a compulsory composition or business transfer. The compulsory composition may take the form of a lapse of the claims or a percentage reduction of these, it may also entail a postponement of payments.
All sectors and industries are subject to the same insolvency and restructuring regime. However, a restructuring containing a business transfer may be subject to approval from the competition authorities if the transfer triggers the merger rules.
Challenging the debtor’s transactions
Transactions carried out in the period leading up to an insolvency proceeding may be null and void. Claw-back actions can be initiated by the trustee during bankruptcy proceedings or compulsory composition proceedings that are approved in a formal restructuring. Distinction is made between so-called ‘subjective’ and ‘objective’ clawback action rules. Under the objective rules, some transactions carried out may be challenged, irrespective of knowledge of the debtor’s insolvency or fraudulent intent. Transactions such as granting of security in respect of old debt and gifts can be challenged after the objective rules, depending on the circumstances.
Under the general subjective rules, a transaction can be challenged if it fraudulently favours one creditor over another, where the debtor’s property is withheld from serving the creditors, or where the debtor’s debts are increased to the detriment of other creditors. However, a transaction can only be voided if the debtor had already become insolvent due to the transaction and the favoured party knew or should have known of the insolvency and the circumstances causing the transaction to be fraudulent.
Petitions for restructuring or insolvency proceedings can only be filed in Denmark if the debtor is engaged in commercial activity domiciled in Denmark or is otherwise subject to the jurisdiction of Denmark. Proceedings cannot be opened in respect of a foreign debtor that does not meet neither of these two requirements.
Danish legal advice on handling of any Danish assets comprised by foreign proceedings will often be relevant for foreign debtors. Additionally, some foreign insolvency or restructuring proceedings receive recognition in Denmark pursuant to Nordic and EU rules. The EU enacted a directive on restructuring and insolvency in 2019 which will be implemented in Danish law in 2022. The main purpose of the directive is the introduction of preventive restructuring frameworks which should, above all, enable debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable enterprises.
Generally, Danish assets held by a foreign debtor would be handled alongside any other asset within the debtor’s restructuring process. Transfer of certain assets such as shares, and real estate must be recorded in accordance with Danish law to have priority over third party transferees acting in good faith. Any creditor rights in Danish assets must be handled in accordance with Danish law, meaning a sale of Danish real property must respect the rights of pledgees and mortgagees as set out in Danish law.
It is important that businesses negatively affected by Covid-19 have a clear overview of their financial situation, including outstanding debts, the most critical contracts and general liquidity needs. This will help a business to address the situation in an effective manner.
A knowledge of relevant government aid packages and a general proactiveness in respect of debtors is likely to increase a company’s chances of reaching an instalment agreement with creditors, if necessary.
Furthermore, a continuous assessment of the financial situation will guide management as to the tipping point of the financial situation. This is important, as management may be held liable to pay damages to creditors if they should have realised that there was no reasonable prospect that the company would be able to survive – management must commence insolvency proceedings once it establishes that the point of no return has been reached. Continuous assessment can also help management assess what urgent steps or more long-term changes need to be made. It is also generally beneficial for a company to be transparent with its key stakeholders and creditors.
“Many businesses find that the formal restructuring scheme – similar to a US Chapter 11 bankruptcy – is too formal in the sense that the procedures hinder in particular a transfer of the business.”
Beyond the short-term consequences of the Covid-19 crisis, creditors and other stakeholders are now looking into its long-term consequences. The crisis has also meant an increased focus on force majeure clauses as many deliveries have proven difficult.
Various aid packages for businesses have been introduced by the Danish government to help mitigate the negative economic effects of Covid-19. Although the Covid-19 restrictions have been in place for a long time, they have not led to an increase in the number of restructurings initiated. The reason for this is undoubtedly the aid packages, which have given companies compensation for fixed costs, subsidies for wages and extended the deadline for settlement of VAT and tax, etc.
The aid packages are not endless, and when they cease a number of companies will most likely be pressured on their liquidity. The number of distressed companies will therefore presumably increase when Covid-19 aid packages is no longer available and when the companies must start repaying the deferred VAT and tax liabilities.
Finally, on July 3 2020, the Danish Bankruptcy Council proposed a series of changes to the rules on restructuring, some directly due to Covid-19. The suggestions became a legislative proposal and came into force on March 29 2021. Overall, the amendment to the law aims to make the restructuring rules more flexible and less costly, including mitigating the economic consequences of Covid-19.
The amendments can be summarised as follows:
There is no requirement to appoint a restructuring accountant on commencement of the restructuring proceedings;
Four to eight weeks controlled ‘time out’ will be introduced to explore the possibilities of a restructuring;
The company will not automatically be subject to bankruptcy proceedings if a restructuring plan is not adopted during the time out;
No obligatory security is required for subsequent bankruptcy proceedings; and
Coverage from the Employees’ Guarantee Fund will be available as soon as restructuring proceedings are initiated.
It is expected that in the wake of the pandemic, there will be a wave of insolvency, which is why the rapid introduction of new restructuring rules hopefully can avert some future bankruptcies.
Many businesses find that the formal restructuring scheme – similar to a US Chapter 11 bankruptcy – is too formal in the sense that the procedures hinder in particular a transfer of the business. Also, the procedural scheme makes it an expensive process. A business with its main assets pledged to a bank or another creditor, will have to turn to a third party financing to finance its operations during the reconstruction process. These issues could to some extent be alleviated by the changes to the restructuring scheme recently enacted. It is expected that the rules will be amended again in the near future as a result of the implementation of the EU directive.
As a result of Covid-19, in addition to short- and long-term liquidity, creditors are now also looking into a debtors’ adaptability and ability to cut expenses on short notice while still maintaining a running business.
Expectedly there will be an increase in the number of distressed M&A transactions in the wake of Covid-19. Hopefully, the new set of restructuring rules will increase the appeal of the restructuring institute to distressed companies resulting in fewer bankruptcies.
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Kristian Gustav Andersson
Lundgrens Law Firm
T: +45 2524 5117
Kristian Gustav Andersson is head of the reconstruction and insolvency department at Lundgrens. He specialises in advising on insolvency and restructuring matters, including company pledges and other securities.
Kristian is a trusted advisor to leading Danish banks, as well as many Danish and international corporate clients. He acts as trustee, as appointed by major Danish banks in several restructuring and insolvency matters. He also has a broad range of experience in M&A and negotiation, where he advises on all types of major transactions.
Kristian graduated with a law degree from Copenhagen University and completed a LLM at King’s College London.
Lundgrens Law Firm
T: +45 3010 3909
Anne Hansen-Nord is a director in the reconstruction and insolvency department at Lundgrens. With more than 10 years’ experience advising on M&A transactions, capital markets and corporate law, she is a highly valued advisor on out-of-court restructurings and distressed M&A transactions.
Anne also advises on listings on First North and ongoing compliance. She is a part of the firm’s oil and gas team, and advises major players on the industry’s legal issues and M&A.
Anne graduated with a law degree from Copenhagen University and spent a semester at ESADE Business School.