The position of monetary claims in bankruptcy
1.1 Introduction
 A creditor is a
person with a claim against a third party, e.g. for the payment of money. The party against whom the claim is directed
and by whom the claim must be met is termed the debtor
The nature of the
claim may be such that the debtor is required to pay a sum of money (typically
in the case of a loan), to release an item (typically in the case of a
purchase) or to perform a service (for example in the form of work) for the
creditor. The basis for the claim is
frequently an agreement between the debtor and the creditor, although the claim
may also be based on statute (for example a claim by the State against an
employee for taxes) or the actions of the debtor (for example a claim for
damages).
Introduction
The procedure for registering claims
Review and approval of claims
The distribution of funds amongst creditors
Creditors with
security interests (liens etc.)
Creditors with a
right of set-off
The position of debt that cannot be covered by the assets of the estate
1.2 The purpose of bankruptcy proceedings
 If a party with an obligation fails to fulfil this
obligation voluntarily, the counterparty may enlist the aid of the legal system
in ensuring that the claim is met. This
aid is provided under the rules on enforcement.
If the debtor is unable to fulfil his obligations as they come due and these obligations exceed the value of his assets, cf. Section 61 of the Debt Reorganisation and
Bankruptcy Act, the debtor may be declared bankrupt. If so, it will no longer be possible for individual creditors to
enforce their claims. Instead the
assets of the debtor will be converted to monetary amounts by the bankruptcy
estate, and these funds will then be distributed amongst the creditors in
accordance with the provisions of the Creditors Recovery Act and the Debt
Reorganisation and Bankruptcy Act.
1.3 Mutually burdening contracts
As a rule,
agreements are mutually burdening. In
the case of a purchase, for example, the vendor supplies the goods and the
purchaser must pay the purchase price.
In a bankruptcy the situation is frequently such that the solvent party
has fulfilled his part of the agreement, but the debtor has failed to do
so. The supplier of goods, for example,
may have provided the goods, but the debtor has failed to pay the purchase
price. This is a typical situation and
is discussed below.
A situation may
also arise where neither party performs the obligations provided for in the
agreement: The vendor/debtor has failed
to supply the goods and the purchaser has failed to pay the purchase
price. For further information on
situations of this type, readers are referred to the Norwegian Advisory Council
on Bankruptcy’s information on the position of non-performed contracts in
bankruptcies.
If the debtor has
fulfilled his side of the agreement prior to bankruptcy but the other party has
failed to do so, the bankruptcy estate will assume the debtor’s claim for
performance of the agreement.
1.4 Non-monetary
claims
 As a general rule
all claims against the debtor must be converted to monetary values, see Section
6-4 of the Creditors Recovery Act. If,
for example, the debtor was to have supplied goods that had been paid for in
advance, the purchaser’s claim for the release of the goods will be converted
to a monetary claim. This means that
the item must be valued in order to ascertain the correct monetary amount of
the claim.
In some case,
however, a creditor may claim the release of an object. This would be the case
where a creditor has legal protection for his claim, i.e. the debt is secured
by a fixed charge on assets, see The position of non-performed contracts in
bankruptcy. The claim for the release
of an object etc. may also be a preferential claim, cf Section 9-2 of the
Creditors Recovery Act.
1.5 Contingent
claims not yet due
All claims
against the debtor will be deemed to have come due for payment when bankruptcy
proceedings commence, see Section 6-2 of the Creditors Recovery Act. Contingent claims - i.e. claims that will be
covered only if a particular condition is fulfilled, for example a guarantee
that takes effect by the failure of a party to meet his commitments - are also
recognized in a bankruptcy. However, a
dividend will be paid only if the condition in question occurs, see Section 133
of the Debt Reorganisation and Bankruptcy Act.
2. The
procedure for registering claims
 According to the
provision of Section 78 of the Debt Reorganisation and Bankruptcy Act, an
announcement that bankruptcy proceedings have commenced must be drafted. This however is only a regulation. The announcement must be published in
"Norsk lysningsblad" (The Norwegian Gazette) and in a newspaper that
is widely read in the place in question.
Moreover, the trustee must send the announcement to all known creditors
of the estate.
The announcement
of the commencement of bankruptcy proceedings must contain a request to
creditors to report their claims against the debtor to the interim
trustee. Claims must be reported within
a specified time limit, normally four to six weeks after the commencement of
bankruptcy proceedings. This follows
from Section 109 of the Debt Reorganisation and Bankruptcy Act.
As a general
rule, it is the responsibility of creditors to register their own claims. Even if a creditor fails to comply with the
time limit, the claim may still be reviewed, although the creditor may be
required to pay any additional costs resulting from the failure to meet the
time limit. No claims may be registered
after winding up of the estate has commenced, see Section 133 last
sentence of the Debt Reorganisation and Bankruptcy Act.
Creditors with
satisfactory security in the assets of the debtor or of third parties, or
creditors with a full right of set-off are not required to register their
claims. Nevertheless, creditors of this
type are also advised to register their claims and their security interests in
respect of the estate, amongst other reasons to allow the trustee to decide
questions of abandonment and whether the party in question has the right to
register a residual claim, see Section 8-14 of the Creditors Recovery Act.
Furthermore, the
creditors must document their claims, e.g. submit receipts, invoices or other
evidence of an outstanding claim against the debtor. Creditors must also document any security for their claims e.g.
in the form of a mortgage certificate.
If a creditor fails to do so, there may be evidentiary consequences when
the claim is reviewed. Furthermore, the
creditor should state what he views the priority/ranking of the claim against
the estate to be.
3. Review and approval of claims
 The
trustee will draw up a list of claims filed against the estate. Section 110 of the Debt Reorganisation and
Bankruptcy Act provides that the debtor and creditors are entitled to
familiarize themselves with the list.
3.1 Cases
in which claims are not reviewed
Where an estate
does not have funds available for payments to creditors, the claims of
creditors are not reviewed. Claims are
only recommended for payment to the extent that there are funds available to
cover the class of creditors in question, see Section 110 third para and
Section 130 second para of the Debt Reorganisation and Bankruptcy Act. Claims for which only modest cover could be
provided may be withdrawn from consideration.
In practice this means that unsecured claims and claims ranking last by
order of priority will rarely be reviewed.
3.2 The
procedure for reviewing claims
The claims are
reviewed by the trustee or by the board of trustees if a creditors committee
has been appointed, see Section 111 of the Debt Reorganisation and Bankruptcy
Act. Review may also take place at a general meeting of creditors. The debtor, creditors whose claims have been
recommended and the estate’s auditor may also give their views and attend when
the claims are reviewed.
If the trustee
recommends the approval of a claim and no objections have been received, the
claim will be approved, see Section 113 of the Bankruptcy Act.
Section 114 of
the Debt Reorganisation and Bankruptcy Act provides rules on situations in
which a claim is disputed by the trustee, the debtor or other creditors. Firstly, the creditor in question (the filer
of the claim) must be given a time limit within which to provide further details
in support of the registered claim. If
no such details are forthcoming within the expiry of the time limit, or if the
trustee upholds his recommendation despite the grounds given, the trustee must
report the matter to the bankruptcy court.
The bankruptcy court will then give the creditor a time limit of at
least three weeks to bring a complaint.
The bankruptcy court must inform the creditor that the recommendation of
the trustee will be adopted if no complaint is filed. The procedure followed in reviewing claims is described in
further detail in the Norwegian Advisory Council on Bankruptcy’s publication :
The bankruptcy court’s processing of bankruptcy petitions and bankruptcy
estates, section 10.
4. The
distribution of funds amongst creditors
4.1 General
comments
Some creditors
have liens or other security interests.
Coverage of their claims from the values of the assets on which they
hold the lien or security interest will have preference. Other creditors may have rights relating to
secured debts, see the Norwegian Advisory Council on Bankruptcy’s information
on the position of non-performed contracts in bankruptcy.
Apart from this,
the assets of the debtor will be sold and the funds will be distributed amongst
the creditors. Chapter 9 of the
Creditors Recovery Act contains rules on how the funds are distributed. These
rules are briefly discussed below.
4.2 Preferential
claims
 Claims against
the estate arising after the commencement of bankruptcy proceedings are known
as preferential claims. Section 9.2 of
the Creditors Recovery Act provides a full overview of the various types of
preferential claims. One example of
such claims is costs incurred in processing the estate. Other typical preferential claims are the
charges of the bankruptcy court and the trustee’s fee. If the estate continues the business of the
debtor after the commencement of bankruptcy proceedings, operating expenses
incurred after the commencement of these proceedings will constitute
preferential claims. Furthermore, preferential
claims may also be non-monetary in nature, for example the claim for the
delivery of an object that was sold by the bankruptcy estate. Interest accruing on preferential claims has
the status of a preferential claim.
Preferential claims must be met in full before the remaining funds of
the estate are divided amongst the creditors.
4.3 Preferred
claims of Class 1
After
preferential claims have been met in full, claims for pay or other remuneration
for services performed for the debtor will be covered. See Section 9-3 of the Creditors Recovery
Act. If the estate does not have
sufficient funds to cover pay claims, these will, with certain exceptions, be
secured through the State run Wage Guarantee Fund. The State assumes the claims for pay when payments are made
through this scheme, see Section 6 of the Wage Guarantee Act. For further information on the legal
position of employees in the event of the bankruptcy of their employer, see the
Advisory Council on Bankruptcy’s information on employees of bankrupt
businesses and the Advisory Council on Bankruptcy’s recommendation: Processing
pay claims in bankruptcies.
However, pay
claims from company management do not have priority but will, if applicable, be
covered as unsecured dividend claims.
Detailed rules on this can be found in Section 9.3 of the Creditors
Recovery Act.
4.4 Preferred
claims of Class 2
Under Section 9-4
of the Creditors Recovery Act, taxes to the State or municipality on assets or
income and sums assessed together with taxes, Value Added Tax, taxes withheld
(in accordance with the legislative provisions on liability for tax
withholdings) and claims for refunds pursuant to Section 31 para 5 of the
Tax Act as regards personal income must then be covered. Interest on the claims is not a preferred
claim.
For a claim to be
preferred, the ordinary due date of the claim must not lie further back in time
than six months before the filing date.
Older claims are not preferred. For further details on time restrictions
relating to preferred claims, refer to Section 9-4 second para of the Creditors
Recovery Act.
If the assets of
the estate are not sufficient to cover all Class 2 claims in full, the claims
will receive pro rata coverage with equal preference, see Section 9-4
third para of the Creditors Recovery Act.
4.5 Unsecured
claims
 The remainder of
the estate’s funds must then be divided on an equal ranking basis between the
unsecured creditors (ordinary dividend claims), see
Section 9-6
of the Creditors Recovery Act. Typical
examples include debt to suppliers, older tax claims and unsecured loans to the
debtor. Claims for interest which have
been registered are unsecured up until the filing date, see Section 1.2 of the
Creditors Recovery Act. In practice
there will rarely be sufficient funds to cover any of these claims.
If other parties
are jointly and severally liable with the debtor for the debtor’s debts, a
creditor may still register and claim a dividend on the full amount. Part payment by other co-debtors will not
reduce an unconditional creditor’s dividend claim against the estate. The rules on this can be found in Sections
8-7 et seq of the Creditors Recovery Act. These rules are fairly detailed.
If the estate’s
funds are not sufficient to meet all unsecured claims in full, the claims will
receive proportionate coverage on an equal ranking basis.
4.6 Claims
ranking last by order of priority
Section 9-7 of
the Creditors Recovery Act distinguishes certain types of claim that are
covered only after all other claims have been paid. There are five major types, see Nos. 1) - 5), where the most
significant in financial terms will normally be claims for interest after the
filing date. The provision applies an
internal "order of priority" whereby there will for example not be
coverage for No. 2) unless all claims in No. 1) have been paid in full.
All claims
against the debtor are deemed to have come due for payment with the
commencement of bankruptcy proceedings, see item 1.5. If the claim was not interest bearing, the creditor would receive
an arbitrary payment. The law takes
account of this in that ordinary dividends on non-interest bearing claims are
based on nominal value less an estimated interim rate of interest, at present
10%. The interim interest is calculated
from the filing date and up until the original due date of the claim, and
according to Section 9-7 No. 1 b of the Creditors Recovery Act, it will rank
last by order of priority.
There will in
practice normally not be sufficient funds to cover claims ranking last by order
of priority.
5. Creditors with security interests
(liens, etc.)
5.1 General comments
Creditors
with rights of lien, rights of retention and the like are in a special position
as regards bankruptcy. The statutory
rules are for the most part found in Sections 8-14 to 8-17 of the Creditors
Recovery Act. For the sake of
simplicity this section confines itself to the position of lienholders in
respect of the debtor’s bankruptcy.
5.2 Creditors
with a lien on the assets of the debtor
 If the creditor
has a valid lien with legal protection (that cannot be reversed) for his claim,
he will in theory not be affected by the bankruptcy. It should be noted however that lienholders are advised to
register their claim against the estate, see item 3 above. If the estate is not required to respect the
lien, for example because it lacks legal protection, the creditor may register
the entire claim against the estate as an unsecured claim.
If the creditor’s
claim lies within the value of the collateral, the creditor may receive full
coverage of the entire claim with the addition of interest and expenses, if
any. Expenses and interest are
encompassed by the lien within the terms of Section 1-5 a) and b) of the Liens
Act. If the collateral does not cover
the creditor’s claim in full, the residual claim may be registered as a
dividend claim, see Section 8-14 of the Creditors Recovery Act. A pre-condition for this, however, is that
the lienholder has a personal claim against the debtor in addition to the lien
right, as will is normally be the case.
The lienholder is entitled for a dividend to be temporarily set aside on
amounts that exceed the amount of the claim for which it is clear that the
collateral will provide coverage. Thus
the lienholder will not suffer as a result of doubt about the value of the
collateral. The lienholder is not entitled to payment of a dividend until it is
clear how great a part of the claim can be covered by the collateral.
Under Section 1-9
letter c) of the Liens Act, the claim will inter alia come due for payment if
bankruptcy proceedings commence in respect of the debtor, even if the ordinary
due date has not arrived and even if the debtor has paid interest and
instalments on time. If a claim is not
paid, the lienholder may require the collateral to be realized (compulsorily
sold) pursuant to the Enforcement Act.
There are however two limitations in this right of realization: firstly
there is a time limit of six months, see Sections 117 and 17 of the Debt
Reorganisation and Bankruptcy Act, second para in both cases. Secondly, the estate may prevent a
compulsory sale by paying off the lienholder who petitioned for the sale, see
Section 8-16 of the Creditors Recovery Act.
When the collateral is subsequently sold, the estate will receive the
amount that would otherwise accrue to this lien creditor.
The estate may
also sell a mortgaged asset even if the lienholder does not receive full
coverage, see Section 117a of the Debt Reorganisation and Bankruptcy Act. The estate may do so if it is convenient to
sell the mortgaged asset together with other non-mortgaged assets with a view
to achieving a higher sales price, or if the sale forms part of a transfer of
all or parts of the business.
The estate may
also abandon the mortgaged asset to the debtor, i.e. the bankruptcy seizure
will be reversed and the collateral will revert to the debtor, see Section 117b
of the Debt Reorganisation and Bankruptcy Act.
In such a situation the lienholder may enforce the claim in respect of
the collateral in accordance with the rules of the Enforcement Act or in some
other way in agreement with the debtor.
 The trustee may
also transfer a mortgaged asset to the lienholder if the asset has no financial
interest to the estate, see Section 117c of the Debt Reorganisation and
Bankruptcy Act. A transfer of this
nature requires the consent of the lienholder.
In the event of a transfer, the asset must be valued by the trustee so
that the size of the residual claim of the lienholder is known. The lienholder must cover the costs involved
in the transfer. Furthermore, the
estate may as a general rule at any time require the compulsory sale of
mortgaged assets by the execution authorities, see Section 117 first para of
the Debt Reorganisation and Bankruptcy Act and Section 8-15 of the Creditors
Recovery Act. This does not apply,
however, if there will not be a surplus for the estate and the creditor for
various reasons is not eligible for a dividend.
A creditor with a
sales lien may in the event of the debtor’s payment default require the object
of the sale to be released by the bankruptcy estate in accordance with the
rules of Chapter 9 of the Enforcement Act.
In the event of such a return a financial settlement will take place
between the estate and the creditor in that the creditor’s claim will be
reduced in proportion to the value of the object.
5.3 Creditors
with a lien on the assets of third parties
Creditors of this
type may choose whether they wish to rely on the collateral security, register
the claim (as a dividend claim) against the estate or do both. However, irrespective of the approach
chosen, the creditor must not receive more than full coverage of the claim.
Even if the
creditor opts to pursue the third party collateral first, he may register the
entire claim against the debtor’s bankruptcy estate, see Section 8-13 of the
Creditors Receovery Act.
6. Creditors
with a right of set-off
 Like lien
creditors, creditors who also owe the debtor money are in a strong
position. As a general rule such
creditors may set off their entire claim (and not merely a dividend on the
claim) against the debtor’s claim, as would have been the case had the
bankruptcy not occurred. A set-off
means that the claims will as far as possible be eliminated against one
another.
In order to
prevent speculation (for example by a creditor incurring debt to the debtor or
acquiring counterclaims from third parties if the creditor believes that
bankruptcy is imminent) Sections 8-2 and 8-3 of the Creditors Recovery Act
provide for certain restrictions in the right of sett-off.
7. The
position of debt that cannot be covered by the assets of the estate
 The debtor will
continue to be liable for any parts of the debt that are not met by the estate,
see Section 6-6 of the Creditors Recovery Act.
Debt restructuring (extinguishing) must take place in accordance with
the rules on debt reorganization or compositon, or in accordance with the Debt
Settlement Act.
However, if the
debtor is a limited company or some other association with limited liability,
the practical effect of bankruptcy will be that the remaining debt will be
extinguished when the association ceases to exist (and is deleted from the
Register of Business Enterprises, see Section 138 of the Debt Reorganisation
and Bankruptcy Act, second para) with the conclusion of the bankruptcy
proceedings. The rule that a debtor
remains liable for remaining debt therefore applies only in the case of
personal bankruptcies.
The time barring
of a creditor’s claim is interrupted when the claim is registered against the
estate, see Section 18 of the Statute of Limitations. If so, no time barring will occur while the processing of the
estate is underway, cf Section 21 No. 1 of the Statute of Limitations. If the claim against the estate is approved,
however, a new time limit of 10 years will commence with the completion of
bankruptcy proceedings, cf Section 21 No. 2 of the Statute of Limitations. If the registered claim is not approved, the
effect of interruption pursuant to Section 18 of the Statute of Limitations will
apply for one year after the decision not to approve or review the claim, see
Section 21 No. 2 of the Statute of Limitations.
The time limits
will be interrupted in the usual way.
Written by Thomas Keiserud
Art by Richard Nygaard.
(Opprettet 15/09/2002 )
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