SECTION 1: Market overview
1.1 What have been the recent bankruptcy and reorganisation trends or developments in your jurisdiction?
The Norwegian market is heavily dependent on the oil industry, and after the drastic drop in oil prices in autumn 2014 and continued low oil prices, companies operating in this sector have been especially exposed. Suppliers to the oil industry have executed cost reduction measures and large workforce cuts, causing ripple effects in other related industries as the demand for goods and services have decreased. Banks and other financial institutions see an increased number of problem cases within the oil service and shipping industries, of which most have resulted in debt refinancing and rescue plans, while a few have ended in winding-up proceedings.
There have been several large and complex out-of-court restructuring/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 will expire in 2017 and 2018 (so-called amend, extend, pretend), leaving them exposed to a second round of restructuring/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 far from being declared healthy.
The total number of statutory bankruptcy proceedings in 2016 was 4,544; somewhat higher than the 4,462 openings in 2015. As of April 7, a total of 1,349 such proceedings had been opened in 2017, a clear majority in the construction sector. Other especially exposed sectors are the retail, accommodation and dining industries.
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 in 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.
1.2 Please review some recent important cases and their impacts in terms of precedents or shaping current thinking.
Two Supreme Court decisions from the past year are especially relevant for bankruptcy estates: HR-2017-33-A regarding legal protection for a non-registered transfer of real estate; and HR-2017-370-A regarding a bankruptcy estate's assessment of possible clawback claims.
In the first decision, a real estate property had been transferred by way of a demerger instead of a sale-and-transfer agreement, in order to avoid having to pay stamp duty. The change of ownership to the property was therefore not registered with the Land Registry. When the selling company years later went bankrupt, the bankruptcy estate claimed that the transfer did not have legal protection since the transfer of title was not registered, and hence that the property could be seized by the estate. The Supreme Court ruled in the bankruptcy estate's favour, confirming that a transfer of real property must be registered in the Land Registry to obtain legal protection, and thus clarifying a much debated legal question and establishing a wider protection against transactions seeking to bypass the formal requirements.
In the second verdict, the Supreme Court implied in an obiter dictum that when assessing whether or not a transaction is sufficiently substantial to be avoided by a bankruptcy estate (see 2.7), payments/transactions to two or more recipients can be added up and viewed as a whole, establishing a wider clawback possibility. The court underlined that such an approach may only be applied on exception, and only when the recipients have a close financial cooperation or can be seen as a group. An obiter dictum is a statement that is not essential to or necessarily based on the facts in that particular case, and will not be considered as precedence.
SECTION 2: Processes and procedures
2.1 What reorganisation and insolvency processes are typically available for financially troubled debtors in your jurisdiction?
There are two main categories of statutory bankruptcy proceedings in Norway, both regulated by the Bankruptcy Act of June 8 1984: winding-up proceedings and statutory debt negotiation proceedings. Statutory debt negotiation proceedings can be either voluntary or compulsory, subject to 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 (in a position where it cannot meet its financial obligations as they fall due). It is, however, not a requirement that the company is insolvent (both 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.
2.2 Is a stay on creditor enforcement action available?
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 who 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 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?
While under statutory debt negotiation proceedings, the debtor has an exclusive right for a period of time to propose a reorganisation plan, though subject to the creditors' committee's approval. The debtor has no right to propose a reorganisation plan while under winding-up proceedings, but may request that the administrator proposes a compulsory composition.
In voluntary statutory debt negotiation proceedings, the reorganisation plan must be accepted by all creditors. A compulsory composition, however, is only legally binding to all creditors if the following requirements are met (the numbers referring to creditors and claims that are granted voting rights, i.e. excluding certain secured claims, conditional claims and claims from certain closely related parties):
- If the dividend payment is a minimum of 50%, the plan must be accepted by at least three-fifths of the creditors with a total of at least three-fifths of the total debt;
- If the dividend payment is less than 50% but a minimum of 25%, the plan must be accepted by at least three-quarters of the creditors with a total of at least three-quarters of the total debt.
2.4 How 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, the minority voters are crammed down by the majority voters (see 2.3). However, claims ranking in priority and claims that are fully secured may not be crammed down as they are entitled to full payment.
2.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
While 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.
2.6 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 insufficient considering the size and risk of the business operations, or if the equity capital is lower than half of the share capital. 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 power to manage the company. Instead, the directors have a duty to provide information and documentation to the administrator, such as financial statements.
2.7 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 ten-year time limit).
2.8 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 employees' 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, establish new securities or sell assets of a significant value, without accept from the administrator and creditors' committee.
2.9 Is there a different regime for credit institutions and investment firms?
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 of December 6 1996. 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: International/cross-border issues
3.1 Can reorganisation 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 Comi (centre of main interest) principle in the EC Insolvency Regulation. Norway is not, however, a member of the EU and has not ratified the EC Insolvency Regulation.
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 in this case 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; 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 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?
Norway 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 established 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 could have a material impact on the outcome of the reorganisation?
In statutory debt negotiation proceedings, secured creditors' interests must be respected, and the continuing business operations of the company 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 2017
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 (Norway's central bank) latest quarterly report of March 14 2017, the market continues to stabilise after the fall in oil prices in 2014 and financial growth in 2017 is expected to be higher than previously anticipated. The market trends indicate that the oil prices will stay close to the present level in the years to come, and Norges Bank believes that maintaining the key policy rate at or close to its current low level (0.5 %) will contribute to an increased price growth.
However, market predictions vary between the numerous market participants and specialists. Considering the fact that large company groups within the shipping and offshore sectors are entering their second round of refinancing (see 1.1), and knowing from previous financial crises that it usually takes a few years until a crisis' full effect on the market becomes evident through more winding-up proceedings, we might see an increase in the number of (larger) winding-up proceedings in Norway in 2017 and 2018.
|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|
Senior lawyer, Kvale
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.