Utskriftsvennlig versjon

A special report prepared by Marius Moursund Gisvold of Wikborg, Rein & co, Oslo Published on the Internet with the kind permission of Mr. Gisvold.

The Bankruptcy Act and the Debt Reorganisation Act were amended with effect from January 1st, 2000. Our site will be updated within shortly

The main Norwegian insolvency legislation is found in two acts: the Debt Reorganisation and Bankruptcy Act (1984) (the DRB-Act) and the Act on Creditors' Access to Assets (1984) (the Access Act). Together, the two acts represent a new structure for approaching the issues concerned in the breakdown of a debtor's finances, tuned to the requirements of a modern business environment.

The DRB-Act sets out the requirements for the opening of the various insolvency procedures, the rules for their conduct and their finalisation.

The Access Act broadly determines to which assets the creditors of an insolvent have access, the cut-off dates, the priority between creditors, and which claims are allowable. It also sets out the rules governing the debtor's contracts and auditing/revocation of certain insolvency motivated dispositions during the period leading up to insolvency.

In Norwegian insolvency law the terminology used is slightly but significantly different from the English terminology. The term "illikvid", here translated 'insolvent' signifies the (not merely temporary) inability to pay debts as they fall due. The term "insufficient", signifies the fact that liabilities exceed assets. For full bankruptcy proceedings to be opened in Norway a debtor must be both insolvent and insufficient.

In Norway, the terminology between personal and corporate bankruptcy is indistinguishable. The term "bankruptcy" used herein thus covers both bankruptcy and liquidation as used in English terminology. Under the new system all proceedings take place under the auspices of the Probate Court, with various court-appointed bodies strongly influenced by the creditors having supervisory, controlling and advisory roles in the various stages of insolvency proceedings.

Bankruptcy proceedings may be initiated in Norway by application to the Probate Court by the debtor or an (wholly or partly) unsecured creditor. The debtor must be insolvent and insufficient for such proceedings to be opened, and this must be documented. Acknowledgement by the debtor, general cession of payments and unsuccessful debt enforcement attempts during the last three months constitute legal presumptions of insolvency and insufficiency as does non-payment of undisputed due debt following the service of a 'bankruptcy notice' demanding payment.

Debt reorganisation proceedings may only be initiated by a willing and to some extent able debtor who can show the Court that he is insolvent, but yet demonstrate that it is not unlikely that he will obtain a composition with his creditors. These proceedings contain three steps; an initial non-public phase during which the debtor's financial situation is assessed and he prepares his composition proposal together with the court-appointed Supervisory Committee; a second (public) phase wherein he negotiates for a voluntary composition of a wide possible scope, dependent on full unsecured creditor approval; and/or a third (also public) phase during which he negotiates for a compulsory composition, dependent on 60 or 75 per cent unsecured creditor approval (by numbers and claims) according to the proposed composition (over 50 pence in the pound or 25-50 pence in the pound respectively). A composition of less than 25 pence in the pound is not possible in a compulsory composition.

The second phase will be left out if the court finds it unlikely to succeed, as will often be the case. One can also proceed directly from the assessment phase to bankruptcy if the Court finds it unlikely that the requirements for a composition will be met (or the debtor gives up the attempt).

In the second and/or third phases the debtor is overseen by a Composition Committee acting under the auspices of the Court, generally a continuation of the Supervisory Committee.

An application for opening of debt reorganisation proceedings, if granted, will generally stay a bankruptcy application for (initially) three months, unless it is supported by at least three unsecured creditors representing at least 40 per cent of the claims.

Upon a written application for bankruptcy, the Court will call a hearing wherein it will decide whether the requirements have been met. Any applicant (generally and creditors specifically) must provide security for the costs of proceedings. If an application is upheld, bankruptcy is opened with retroactive effect from the time of the application (or if it has been preceded by debt reorganisation proceedings, with effect from the time of such application) - the cut-off date.

Debt reorganisation proceedings are opened by the Court after a similar procedure. The evidence requirements are, however, more rigorous, as the procedure gives the debtor the Court's protection from bankruptcy for a time.

In bankruptcy proceedings all the debtor's assets which the creditors have access to are confiscated and turned into money for distribution between the creditors. The debtor loses control of these assets from the time of application for bankruptcy. The bankruptcy is made public, registered in public registries, newsletters etc.

The practical side of bankruptcy proceedings is carried out by an Estate Board, normally led by a lawyer, with representatives of the creditors and an employee representative if requested by unions. A separate auditor is normally appointed to audit both the debtor's business prior to bankruptcy and the business of the estate.

In bankruptcy all (wholly or partly) unsecured creditors will receive dividends on a strictly mathematical parity basis, save for:

Claims with better priority:

• Costs related to proceedings and the like;
• Certain pension and wage related claims for a period of up to six months;
• Income tax, VAT and NIC not paid in; and

Claims with lower priority than 'ordinary' claims:

• Interest after the cut-off date;
• Subordinated debt;
• Penal taxes or fines;
• Gifts promised but not fulfilled.

In bankruptcy the debtor is virtually put on the sideline. However, he is obliged to assist the Court and retains party rights in the proceedings. After the proceedings are closed the debtor remains liable for debt not covered by dividend payments. For a limited company this is academic as it shall be dissolved and struck off the Company Register upon closure of the proceedings.

Fully secured creditors generally remain unaffected by the bankruptcy, although they must accept that there will be delays in enforcement. Creditors, who in good faith had obtained an actual right of set-off prior to the cut-off date, retain this right.

Certain assets are exempt from access by the creditors, such as personal belongings, tools, clothes etc with a value limitation and wages, contributions, damages in tort etc to the extent necessary for the upkeep of the debtor and his family.

The debtor's right to retain a home to live in is also protected to a certain extent.

Private agreements limiting creditors' right of access in bankruptcy are generally not enforceable.

Certain of the debtor's dispositions prior to bankruptcy may be revoked, such as bankruptcy motivated dispositions and, on a strict basis, gifts, renouncements of inheritance, extraordinary payments of debts, or provisions of security for existing debt during the period prior to the cut-off date (generally three months).

Provisions in the debtor's contracts giving the other (solvent) party a right to terminate in case of bankruptcy (or debt reorganisation) are not generally enforceable as the estate has an extensive right to step into the debtor's contracts as long as these do not have a strong personal element. The solvent party may, however, force the estate to declare its position, and if the estate does not accept termination of the contract the estate becomes party to the contract and its obligations thereafter get priority as costs of bankruptcy proceedings.

In the first phase of DRP, a Supervisory Committee (of the same coinposition as an Estate Board) and an auditor supervise and assess the debtor's business. The proceedings are not public and the debtor remains outwardly fully authorised. Third parties contracting diligently and in good faith get title.

The debtor is not, however, as towards the Court and his creditors, entitled to undertake or renew debt, mortgage, sell or rent real property or any asset of significance without the Committee's approval. He is in other words restricted to minor cash business unless he gets approval. He is also under the Committee's general supervision.

The debtor's finances will in this phase be audited and assessed and his proposal for a composition prepared in co-operation with the Committee. The latter will make recommendations to the Court and protect creditors' interests.

The debtor's proposal for composition will only be forwarded if it has at least 40 per cent backing in a test-vote among creditors by numbers and unsecured claims, and the Court finds it likely to succeed.

Voluntary composition (phase 2) is rare, as it requires full creditor agreement. If a composition proposal is forwarded in good time, it is usual to proceed to phase 3 - negotiations for compulsory composition. Creditors here vote by numbers and size of unsecured claims. If a composition proposal is not forwarded, then bankruptcy is opened.

A compulsory composition must offer at least 25 pence in the pound to all creditors. It may propose that all claims are paid up to a certain sum. (This will eliminate all small creditors from vote and thus reduce problems). It may consist of

• a moratorium;
• a percentile reduction of all debt;
• a liquidation of all debtor's assets or a clearly defined part thereof and distribution thereof; or
• a combination of the above.

With an offer exceeding 50 pence in the pound a 60 per cent approval by numbers and unsecured claims is required for approval. With an offer between 25 and 50 pence, 75 per cent is required.

After the approval of the Court of a proposal having received sufficient votes, the debtor is relieved of the uncovered debt, provided he duly fulfils the composition.

If the negotiations fail at any stage, the Court will open bankruptcy ex officio, normally on the advice of the Committee.

The Supervisory/Composition Committee and/or the Estate Board will invite claims to be made and will in all proceedings represent the creditors collectively against third parties, the debtor and each creditor individually.

All claims must be documented. If the Committee or the Board refuses to accept a claim in whole or in part, or alternatively, if there is a dispute over its priority or security rights, the claimant must request the General Meeting of Creditors and eventually the Probate Court to decide the dispute, subject to appeal, much in the same way as any private law dispute before the Courts.

The Estate Board (the Board) is appointed by the Court, but is generally very strongly influenced by the large creditors. In practice a lawyer will chair the Board, and generally act as its executive (liquidator). His role is that of primus inter pares, and he is authorised to bind the estate. The other representatives (normally one to three) will be creditor representatives. Employees may apply to have a representative.

The Board generally has five tasks:

1. to assess the assets of the estate, secure these and protect them against other pretenders;
2. to collect outstanding claims;
3. to preserve, enhance and realise the assets in the best possible manner;
4. to compile and assess claims including their priority; and
5. to propose a dividend distribution for the Court's approval.

In disputes between creditors, between the estate and third parties (including the debtor) or between a creditor and the Estate Board, the position to be taken by the estate as such will be determined by a vote by size of claims in a General Meeting of Creditors. The Court will supervise and ensure that no resolution violates the right of the debtor, a creditor or a third party or is illegal or obviously unfair.

Bankruptcy can be opened in Norway in respect of all debtors domiciled in Norway (including the estate of persons so domiciled upon their death) and companies registered in the Company's Register and/or having their principal place of business in Norway.

Internal Norwegian law maintains the principle of universality, although all assets located outside Norway itself can only be accessed through the assistance of the debtor (which he or his directors have a duty to render) and/or foreign courts.

It should be noted that Norway has treaties on bankruptcy with the other Nordic countries (the 1933-Convention).

A foreign bankruptcy will, in principle, have no effect in Norway, except for bankruptcies instituted in the other Nordic countries and which have a direct effect on the debtor's assets in Norway.

Foreign judgements will not be conclusive in determining claims in a Norwegian bankruptcy, except if this follows from treaties. Norway has some such treaties on civil law judgements, notably with the UK and the Nordic countries. In any case a judgement of a foreign court will normally have a strong evidential effect, and may be held to constitute prima facie evidence of a claim, as long as the procedure can be considered safe and the case has been contested in court.

In corporate bankruptcy the directors will have to fulfil the debtor's duty of co-operation. They no longer have any authority in the running of the debtor, but may ask the Court to intervene if they think the Board is mishandling the estate.

They must give all information required by the Court, the auditor and the Board with respect to financial and business information, assist in providing complete files, accounts, vouchers and documents of significance to the estate.

The directors may be requested to meet in General Meetings of Shareholders and their movements may be periodically restricted if unethical behaviour is suspected.

The Board is responsible for preparing advice to the Court on the debtor's activities including recommendation for criminal prosecution and/or quarantine and/or civil liability for the debtor or its directors and shareholders.

Directors may be prosecuted for attempting to withhold assets or for failing to apply for debt reorganisation or bankruptcy when the debtor is insolvent, thereby exposing creditors to excess losses.

The debtor and/or its directors may be quarantined and barred for a period of up to two years from starting new business/accepting new directorships if thought unfit or if they are under criminal investigation. The court may also disqualify the debtor/a director from other existing directorships.

A director or a shareholder may become liable to pay damages in tort to creditors on the basis of negligence or wilful misconduct in their roles as directors and shareholders respectively.