SECTION 1: Market overview
1.1 Please provide a brief overview of your jurisdiction's corporate insolvency and restructuring environment and its versatility in cross-border cases. Are there any significant current concerns/debates taking place in the market?
Norway has seen an increased number of out-of-court restructurings over the past few years, especially in the shipping/offshore industries after the drastic drop in oil prices in late 2014. A number of companies operating in or in close proximity to the oil and offshore industries have had severe challenges, and bank and bond loan facilities have been renegotiated and extended for a large number of these companies. Only a few have had to petition for formal statutory bankruptcy proceedings.
A total of 4,511 winding-up proceedings and 1,582 forced dissolution proceedings were opened in Norway in 2017. Only three judicial restructuring proceedings were opened, of which one has so far ended in winding-up proceedings and the other two are ongoing. A number of companies initiated out-of-court restructurings, many of which are still attempting to carry out a successful restructuring plan.
As of April 15, a total of 1,520 winding-up proceedings have been opened in 2018. The most affected sectors are construction and retail.
The low oil prices took their toll on the Norwegian economy, and for several years there was little economic growth. The economy now appears to grow, and the unemployment rate is decreasing. The key policy rate remains historically low, and in May 2018, Norway's central bank, Norges Bank, decided to keep the rate unchanged at 0.5%. The rate is expected to increase after the summer of 2018.
1.2 What have been the key recent market trends and/or legal developments in the area that practitioners should be aware of?
The Norwegian market is heavily dependent on the oil industry, and following the latest oil crisis, suppliers to the oil industry executed cost reduction measures and large workforce cuts, causing ripple effects in other related industries as the demand for goods and services decreased. Recent numbers show that the oil industry and related industries are stabilising and are expected to grow over the next few years.
There have been and continue to be several large and complex out-of-court restructurings/refinancing cases, such as Seadrill, Havila Shipping, REM Offshore and Polarcus. Large company groups within the shipping and offshore sector negotiated relief from their financial obligations in 2015 and 2016, to a large extent by way of waivers and extensions that expired in 2017 and will expire 2018 and 2019, leaving them exposed to a second round of restructuring or refinancing. It remains to be seen how the financial market will react to the many refinancings of large offshore businesses. In any event, the shipping and offshore market is not ready to be declared healthy, to a large extent by way of waivers and extensions that will expire in 2019-2021, leaving them exposed to a second round of restructuring.
The statutory restructuring scheme in Norway is under review. Subject to a mandate given by the Ministry of Justice, judge Leif Villars-Dahl with the Oslo Court of Probate and Enforcement delivered a report on March 1 2016 suggesting legislative changes, aiming to facilitate a more flexible restructuring scheme to save more businesses and preserve jobs. The report has been subject to a formal hearing and the next step in the process is for the Ministry to present a proposal for legislative changes.
Further, in June 2016, the Norwegian Parliament approved a proposition for changes to the Bankruptcy Act, implementing new rules on international bankruptcies including effects of foreign insolvency proceedings in Norway, jurisdiction and choice of law rules and recognition and enforcement rules. The new rules are not yet in effect, and a date has not been set for them to enter into force.
1.3 Please review any major (recent/current) restructuring cases or initiatives that are influencing activity or court decisions regarding insolvency and/or restructuring cases that have set precedents.
On June 28 2017, the Supreme Court gave a ruling regarding the scope of the Lugano Convention, jurisdiction and choice of law in a cross-border insolvency matter, stating that matters which are subject to the insolvency exception and therefore exempt from the scope of the Lugano Convention, as a general rule should be considered to have jurisdiction in Norway.
A Norwegian bankruptcy estate had sued a foreign creditor in Norway. The creditor asserted to hold a pledge in the debtor's receivables, and the bankruptcy estate claimed that i) the pledge was invalid; ii) the pledge did not have legal protection; and iii) the pledge was in any case avoidable. The creditor held that the case should be dismissed from Norwegian courts and that the matter should be subject to English jurisdiction and English law, which was agreed between the debtor and the creditor in the pledge documents.
The Supreme Court firstly ruled that the matters at hand were excluded from the scope of the Lugano Convention, in accordance with article 1, no. 2, b), and stated that a number of reasons support the view that matters which are excluded from the scope of the Lugano Convention should be heard by the courts in the bankruptcy venue. The Supreme Court said that as a general rule, the connection requirement in § 4-3 of the Norwegian Civil Procedure Act will be fulfilled in matters which are covered by the insolvency exception in the Lugano Convention. Consequently that there is no need for a further assessment of whether or not the connection to Norway is sufficient to establish jurisdiction here. Hence, the Supreme Court decided that Norwegian courts had jurisdiction.
Next, the Supreme Court decided that the case should in its entirety be governed by Norwegian law, even though the pledge documents stated English law, due to a need for predictability and clarity. It reasoned that those who have given credit usually will have done so in accordance with the laws of the country where the pledgee has its domicile/main place of business, which normally will be the same as the bankruptcy venue. A determining factor for the Supreme Court was that the parties should not be able to affect the questions of validity and legal protection for an asset pledge through a jurisdiction/choice of law clause.
SECTION 2: Processes and procedures
2.1 What restructuring and insolvency processes are typically available for financially troubled debtors in your jurisdiction? Do groups of companies receive special treatment?
There are two main categories of statutory bankruptcy proceedings in Norway, both regulated by the Bankruptcy Act of June 8 1984, namely winding-up proceedings and statutory debt negotiation proceedings (either voluntary or compulsory, with slightly different legislation).
It is only the debtor itself who may petition for statutory debt negotiation proceedings. Winding-up proceedings may be petitioned either by the debtor or by a creditor. The court decides whether the relevant conditions to open proceedings are fulfilled.
It is a requirement to file for statutory debt negotiation proceedings that the company is illiquid. This means the company is in a position where it cannot meet its financial obligations as they fall due. It is, however, not a requirement that the company be insolvent, meaning both being illiquid and with negative net assets.
It is a requirement for the opening of winding-up proceedings that the company is insolvent.
The court appoints an administrator whom in practice is always an attorney. In statutory debt negotiation proceedings, the administrator has more of a supervisory function, while the debtor carries on its business operations and retains legal powers over its assets, and the board of directors maintains its duties.
In winding-up proceedings, the bankruptcy estate is established as a separate legal entity with automatic seizure of all the debtor's assets. The administrator controls and has legal powers over the bankruptcy estate and over the debtor's assets and rights.
A creditors' committee may be appointed with one or a few representatives for the creditors, with a function comparable to a board of directors with the administrator as chairman.
Groups of companies do not receive special treatment; each company in the group is evaluated separately, and each company which is taken under bankruptcy proceedings results in a separate bankruptcy estate. The court often decides to appoint the same administrator for all bankruptcy estates within one company group. However, the court is not obliged to do so and might decide to appoint different administrators for different estates; especially if the companies' operations are based in different legal venues.
2.2 What is the impact on creditors of a formal filing? Are contractual termination rights affected? Are security or individual enforcement actions stayed?
Upon the opening of statutory debt negotiation proceedings, there is an automatic stay of any bankruptcy petitions based on debt already incurred by the debtor. The stay lasts for three months but may be prolonged at the discretion of the court upon request from the debtor. If compulsory composition proceedings are opened, the automatic stay lasts throughout the proceedings.
The stay is not effective against a bankruptcy petition filed by at least three creditors who together represent at least two-fifths of all claims entitled to dividend payment.
Execution liens may not be attached to the debtor's assets after statutory debt negotiation proceedings have been opened, and there is an automatic stay against enforcing any security rights during the first six months after statutory debt negotiation proceedings are opened or winding-up proceedings are filed, unless the creditors' committee agrees to such enforcement.
The automatic stay is binding on all parties except for financial institutions, which are allowed to agree on alternative enforcement procedures with respect to financial collateral if the customer or lender is a professional party and the agreement is made in writing.
2.3 Can a creditor or a class of creditors be crammed-down?
In voluntary debt negotiation proceedings, an objecting creditor or class of creditors cannot be crammed down. In a successful compulsory composition, any minority voters are crammed down by the majority voters. Claims ranking in priority and claims that are fully secured cannot be crammed down, as they are entitled to full payment.
2.4 Is there a process or practice for facilitating the sale of a distressed debtor's assets or business?
While being under statutory debt negotiation proceedings, the debtor may initiate a sale of assets through a going-concern reorganisation plan, subject to the approval of the administrator and creditors' committee as well as any security holder.
In winding-up proceedings, any security right in the asset must be respected, except for certain going-concern sales. In agreement with the security holder, the administrator may transfer ownership of encumbered assets directly to the security holder, reducing the security holder's claim in the estate with the market value of the transferred asset.
2.5 What are the duties of directors of a company in financial difficulty?
The directors of an insolvent company must ensure that creditors within each class are treated equally and that the company does not incur debt it is unable to pay. Further, the directors should take immediate action if the company's equity is deemed unsatisfactory considering the size and risk of the business operations. Such actions include calling for a General Assembly to inform of the situation and suggest improvement measures. If the General Assembly decides against the suggested measures, or if the board of directors finds that there are no available or feasible improvement measures, the board of directors shall suggest that the company is dissolved, or ultimately file for bankruptcy proceedings.
After statutory debt negotiation proceedings are opened, the directors maintain their roles and duties, but must adhere to the administrator and creditors' committee.
After winding-up proceedings are opened, the directors no longer have a duty or legal powers to manage the company. Instead, the directors have a duty to provide information and documentation to the administrator, such as financial statements.
2.6 How can any of a debtor's transactions be challenged on insolvency?
The Satisfaction of Claims Act of 1984 regulates a bankruptcy estate's right to reverse transactions carried out within certain time limits prior to the date of filing for winding-up proceedings or compulsory debt negotiation proceedings, aiming to annul transactions that in certain ways are contrary to the principle of treating all creditors equally (usually referred to as clawback, avoidance or annulment).
There are several provisions regulating different kinds of transactions that may be avoided; for example transactions considered to be extraordinary payments, gifts, security for old debt and certain cases of set-off. In general, the transaction in question must have been performed within three months prior to the date when the court received the bankruptcy petition (for gift transactions, the general time limit is one year). However, older transactions may also be annulled if the beneficiary and the debtor were related parties (applying a two-year time limit) or the beneficiary has not acted in good faith with regard to the debtor's poor financial state and the unfairness of the transaction (applying a more subjective assessment and a 10-year time limit).
2.7 What priority claims are there and is protection available for post-petition credit?
Claims entitled to dividend payment from the estate are generally ranked as follows: preferential claims (such as costs incurred by the estate); claims ranking first in priority (mainly employee claims for wages); claims ranking second in priority (mainly recent tax and VAT claims); regular claims (claims with none of the other priorities); and claims ranking last in priority (such as interest accrued after proceedings were opened). The remaining claims from security holders that are not covered by the proceeds of the secured assets will fall into the relevant above-mentioned categories.
While under statutory debt negotiation proceedings, a debtor may not incur new debt or establish new securities without accept from the administrator and creditors' committee.
2.8 Are there any sectors or industries with their own or modified insolvency and restructuring regimes?
Banks, insurance companies and certain other financial institutions as well as parent companies of such entities are subject to separate rules on insolvency proceedings, subject to the Guarantee Schemes Act. The government has the authority to place such financial institutions under public administration, either if they cannot fulfil their obligations as they fall due and they do not have sufficient funds to secure future operations, or if they are not capable of fulfilling capital adequacy requirements.
If public administration proceedings are opened in a financial institution that is a parent company in a financial group, the other companies in that financial group may also be included in the proceedings.
SECTION 3: Cross-border cases
3.1 Can restructuring or insolvency proceedings be opened in respect of a foreign debtor?
Bankruptcy or reorganisation proceedings may only be opened for a foreign debtor if that debtor has its main office of business in Norway – similar to the so-called Comi (centre of main interest) principle in the European Insolvency Regulation (which Norway has not ratified).
On July 8 2014, the Supreme Court passed a ruling in a case where the Norwegian tax authorities had filed a petition for winding-up proceedings in Norway against a Polish company. The claim referred to unpaid VAT from sales in the company's Norwegian branch. The court applied the Comi principle, stating that bankruptcy proceedings may only be opened in Norway when the business' Comi is located in Norway. The bankruptcy petition was declined because the company was deemed to have its Comi in Poland.
It has been quite common for Norwegian entrepreneurs to establish an empty foreign holding company without any other business than owning a Norwegian branch carrying out the entrepreneurs' operations; a Norwegian-registered foreign business enterprise (NUF). Such foreign holding companies may be taken under bankruptcy proceedings in Norway since the actual business operations are based in Norway.
3.2 What recognition and assistance can be given to foreign insolvency or restructuring proceedings?
Norway has not ratified the Insolvency Regulation, but has since 1933 been part of a Nordic Convention on Bankruptcy between Norway, Denmark, Finland, Iceland and Sweden. The convention provides regulation on cross-border insolvencies within these member states, including rules on recognition, enforcement and choice of law.
It is not determined under Norwegian law whether ancillary bankruptcy proceedings to foreign main proceedings may be opened in Norway. There have been very few cases before Norwegian courts relating to foreign bankruptcy proceedings. Old case law from the late 19th century implies that ancillary bankruptcy proceedings may be opened in Norway on request from a foreign bankruptcy estate, but these court decisions have limited legal effect, being relatively old and passed by lower courts.
In 1994, a Norwegian district court opened ancillary proceedings in Norway in a foreign entity with reference to Norwegian non-statutory bankruptcy law. The court pointed out that a debtor's assets should be sold in the interest of all creditors, no matter where they are located, and ancillary proceedings are a useful instrument in that regard.
In a decision from 2013, the Supreme Court decided that an established execution lien in a Spanish debtor's assets in Norway could not be subject to clawback from the debtor's Spanish bankruptcy estate. The debtor's assets in Norway were not deemed protected by the stay against creditor enforcement actions, and the court thus decided that the Spanish insolvency proceedings did not prevent separate debt recovery proceedings against the debtor's assets in Norway. The court stated that recognition of insolvency proceedings in another state primarily has to be based on mutual international agreements or legislation, which were not in place between Norway and Spain.
SECTION 4: Other material considerations
4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
In statutory debt negotiation proceedings, secured creditors' interests must be respected, and the debtor's continued business operations must not significantly deteriorate their position.
A compulsory composition must include full payment to claims ranking in priority (mainly wages and recent tax and VAT claims).
SECTION 5: Outlook 2018
5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?
According to Norges Bank's latest quarterly report of March 14 2018, the market continues to stabilise after the fall in oil prices in 2014 and financial growth in 2017 was higher than anticipated. The outlook for 2018 is an even higher growth than in 2017, and Norges Bank is predicting a slow increase in the key policy rate over the years to come, starting after the summer 2018.
The shipping and offshore industries are still facing hardship, and large company groups within these sectors are subject to refinancing/restructuring processes. Some companies in these sectors have faced bankruptcy over the last couple of years, and it is not unlikely that we will see more – and potentially large – winding-up proceedings in Norway within these industries the next few years.
|About the author|
Stine D Snertingdalen is a partner at Kvale specialised in insolvency and restructuring and banking and finance. Snertingdalen provides legal support to some of the largest banks in Norway and assists clients with restructuring their businesses.
Snertingdalen is frequently appointed as bankruptcy administrator by Oslo Court of Probate and Enforcement, and has worked on a number of the largest bankruptcy and debt restructuring cases in Norway. She regularly lectures for the Norwegian Law Society and financial institutions and has published several articles on Norwegian insolvency law in international publications. Furthermore, Snertingdalen has been appointed by the Justice Department as a member of the expert group of four persons assisting Judge Villars-Dahl in the evaluation and reform of the Norwegian rules on restructuring and as a member of the Norwegian Advisory Board on Bankruptcy. Snertingdalen is highly ranked both in Norwegian and international rankings such as The Legal 500 and Chambers and Partners.
|About the author|
Ingrid Tronshaug is a senior lawyer at Kvale, specialising mainly in insolvency law, including restructuring, bankruptcy, debt recovery and mortgage law. In addition to a vast number of bankruptcies and other insolvency and restructuring matters, she has worked on some of the largest bankruptcy and debt negotiation proceedings in Norway. Further, she has experience with real estate and construction law and especially with cases related to the interface between construction and bankruptcy law.
Tronshaug also assists clients with various acts of enforcement of Norwegian and foreign claims. As part of her LLM in corporate and commercial law from the University of Southampton, she wrote a dissertation on international insolvency law. In 2016 she worked as a judicial intern to the Honorable Elizabeth S Stong, a judge on the United States Bankruptcy Court, Eastern District of New York. Tronshaug holds directorships and frequently lectures and publishes articles on insolvency law.