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The outbreak of the Covid-19 virus will have a large negative impact on Norwegian companies and their economy. Norwegian authorities have launched a number of measures in order to mitigate this impact by improving companies' liquidity in the time ahead. One measure which is hoped to have a positive effect, is more efficient regulations for debt negotiations and settlement (hereinafter called "restructuring").
On 28 April 2020, the Norwegian Parliament therefore passed an act on restructuring (the "Restructuring Act"). The Restructuring Act will replace relevant provisions of the Debt Negotiation and Bankruptcy Act of 1984 (the "DNB Act"), as well as other acts, until its date of expiration on 1 January 2022. The Restructuring Act was sanctioned by the King on 7 May 2020 and will already be effective as of 11 May 2020.
The main purpose of the Restructuring Act is to prevent businesses from going bankrupt, when the businesses are profitable under normal circumstances, but are now facing sudden and presumably temporary financial difficulties resulting in an inability to pay its creditors. However, businesses that are generally non-profitable may also apply for restructuring under the act. The proposal introduces a more flexible legal framework for continued business operations in close cooperation with the creditors.
Below is a summary of Norwegian restructuring legislation with a focus on new regulations pursuant to the Restructuring Act.
When a debtor is unable to fulfil its obligations as they fall due (illiquidity), the debtor may petition the court to commence restructuring proceedings in order to negotiate with its creditors regarding restructuring. Restructuring can be voluntary or compulsory for the creditors. In voluntary restructuring, all creditors must as a main rule approve the restructuring plan. Compulsory restructuring means that a majority of the creditors may adopt the plan on behalf of all creditors involved.
Naturally, voluntary restructuring allows for more flexible solutions (see item 5 below on what a restructuring plan may entail). For efficiency, the procedural regulations in the Restructuring Act do not however differentiate between voluntary and compulsory restructuring. This means that the petition to open restructuring proceedings does not need to specify whether voluntary or compulsory proceedings are being requested.
Pursuant to the DNB Act, the debtor has to be in a situation in which it is unable to pay its debts as they mature in order to apply for and be granted a court ordered restructuring process. Under the Restructuring Act, negotiations may now be applied for at an earlier stage and when the debtor has, or in the near future is expected to encounter, serious economic difficulties. Initiating a court-sanctioned debt restructuring process at an earlier stage is expected to increase the likelihood of a successful outcome, as the debtor still has liquidity and thus a better chance at negotiating with its creditors.
Under the Restructuring Act, creditors may also petition the court for restructuring. The reason for this is that creditors might in some cases assess the debtor's economy and need for help at an earlier stage and more correctly. The threshold to open proceedings is however higher, as the creditor must be able to substantiate that the debtor is illiquid in order for restructuring to be opened. As protection, the debtor may also refuse restructuring, in which case the petition shall not automatically be treated as a petition for bankruptcy. The proposed Restructuring Act also contains provisions which protect the debtors from bankruptcy and debt enforcement during the period of negotiations.
The court may order that the petitioner pays an adequate advance payment to cover costs related to the proceedings or provides security for such payment. As restructuring may now be petitioned by a creditor, it is important to note that the creditor might be ordered to provide such payment or security, however so that the creditor will only remain liable for the excess part of the advance payment not covered by the debtors assets.
If the court approves the petition, the restructuring negotiations are considered opened as of the date of the court's decision. The opening shall be published in the Norwegian Business Register's electronic announcement portal.
Close cooperation with creditors is a prerequisite for successful restructuring. Upon ordering the proceedings, the court must therefore appoint a restructuring committee consisting of one leader (a lawyer) and a minimum of three creditor representatives (a creditor committee). The debtor's employees may also require that the court appoints one employee representative as a member of the creditor committee.
The restructuring committee will be responsible for assisting the debtor during negotiations, while at the same time maintaining the interests of the creditors. The committee is also responsible, in collaboration with relevant authorities, to ensure that the interests of affected employees are regarded during the process.
To simplify the process, the court may under the Restructuring Act omit to appoint a creditor committee if the debtor's business is small or the court for other reasons finds that the proceedings can be handled by the leader of the restructuring committee alone. The Norwegian government may pass secondary legislation with further exemptions from the requirement to appoint a creditor committee, as long as the regulations ensure that the interests of the employees are maintained by other means.
The Restructuring Act regulates that there shall be a court-supervised creditor meeting within four weeks of opening, however the meeting may be postponed and even not held if the court finds it appropriate. The time and place of the meeting shall be notified in the announcement by the Business Register. In the meeting, the debtor shall present a draft of a restructuring plan for the creditors' comments. Unless a majority of the creditors reject the draft, negotiations will continue on the basis of the draft. Note that the Restructuring Act allows for creditor meetings to be held electronically without physical presence, in line with general governmental guidelines related to the corona virus.
When the restructuring committee has obtained a sufficient overview of the debtor's assets and obligations, the leader of the committee shall provide a summary to be presented to the creditor committee. The summary including a statement from the creditor committee will be sent to all known creditors. The restructuring committee shall subsequently, in cooperation with the debtor, provide a proposal for a restructuring plan.
Although adoption of a voluntary restructuring plan will still require a unanimous decision by the creditors, a simplified procedure for adoption of the plan has been introduced; if none of the creditors have voted against the proposal, and those in favour represent ¾ of the claims included in the plan, the resolution has been adopted.
For compulsory restructuring, creditors representing a minimum of half of the total claim must have voted in favour of the restructuring plan. This is a change from the ¾ majority vote required under the DNB Act. As a safety mechanism, the Restructuring Act allows the court to reject a restructuring plan if, inter alia, it finds the plan to be offensive or unfair for the creditors. A confirmation may be appealed to the court of appeal.
Restructuring may entail postponement of debt (moratorium), percentage reduction of debt (dividend), transfer of all of or parts of the debtor's business or assets to a new owner without liquidation, or against relief of the debt not covered by liquidation, a conversion of debt into equity or a combination of these measures.
One of the more notable provisions of the Restructuring Act is the introduction of a conversion of debt into equity as a restructuring measure. Any capital increase, capital decrease or issuance of financial instruments resolved as part of a restructuring process will only require a simple majority vote on the debtor company's shareholders' meeting. The main rule is that the debt to equity swap shall only apply to creditors who agree to such conversion, even in the event of compulsory restructuring. However, if weighty reasons makes it desirable, the court may decide that the conversion shall apply to all creditors if the non-consenting creditors have no reasonable grounds for their refusal. This means that it shall not be easy for a debtor to obtain a debt into equity swap, as the main rule is consent and there are qualified requirements for applying the exemption.
For compulsory restructuring, the list of measures above is exhaustive. Voluntary restructuring however opens up for other solutions, and the Restructuring Act provides flexibility by deviation of the principle of equal treatment of creditors when the restructuring is voluntary (as all creditors must consent).
In compulsory restructuring in particular, a decision to reduce debt on a percentage basis will not be binding for creditors whose claims are prioritized by law or are secured by collateral in the debtors assets. Once prioritized and secured claims (see item 6.2 below) are covered, unsecured creditors will receive coverage of their claims on a percentage basis (dividend).
The Restructuring Act allows for a deviation of the minimum dividend requirement in the event of compulsory restructuring. Under the DNB Act, creditors could not be forced to accept dividend of less than 25 percent of their total claim. This requirement has been removed to provide flexibility, and is justified by the fact that the alternative to achieving compulsory restructuring would be bankruptcy.
If a restructuring process fails, the alternative is bankruptcy, unless the debtor has been able to overcome the financial difficulties and can substantiate that it is solvent. In order to open bankruptcy proceedings, the debtor must be insolvent. This means that the debtor must be both illiquid and insufficient. Being illiquid means that the debtor does not (over a certain period of time) have sufficient funds to pay its bills and other obligations as they fall due. Insufficiency means that the debtor's total debt liability is of greater value than the debtor's total assets.
Allocation to the debtor’s creditors depends upon the level of priority of the claims and whether or not the claims are secured. Creditors who have collateral in certain assets will have the best legal position under the bankruptcy. If there are two or more creditors having liens over the same assets, the right that was first enacted shall take precedence, unless otherwise is agreed or follows from the rules on legal protection.
Often, many of the assets of the debtor will be burdened with collateral, leaving little left to creditors without collateral (unsecured creditors). If there is anything left after the secured creditors have had their claims covered, the unsecured creditors will receive dividends (coverage on a percentage basis) on their claims, save for certain claims with better or lower priority.
Taxes and VAT claims by the state are prioritized over other claims in the event of bankruptcy, which means that a reduction of debt does not apply to such claims. The Restructuring Act allows for exemptions from this to be set out in secondary legislation, but further details on possible grounds for exemptions have currently not been introduced.
The Restructuring Act has introduced legislation which bears resemblance to the US Chapter 11. One of the main reasons why debt negotiations fail is that the businesses do not have sufficient financing to continue business operations during the negotiation proceedings, and thus are forced into bankruptcy. Naturally, banks are reluctant to provide additional financing in a situation where the debtor is on the verge of bankruptcy. Therefore, the Restructuring Act has introduced the concept of so-called "super priority" loans.
Loans with super priority means that the debtor can receive a loan to finance its operations during negotiations and to fund the actual negotiations, against collateral in the debtor's operating accessories, inventory and outstanding claims with priority over the already existing lienholders.