New Restructuring Act
For many years, Norway has lacked a robust regulatory framework to help businesses overcome financial difficulties. Successive governments have not heeded calls from professional circles to improve the rules on debt negotiations in Part I of the Bankruptcy Act. The crisis caused by the coronavirus (COVID-19) has changed this, and on April 15, 2020, the government presented a proposal for a new Reconstruction Act (Temporary Act on Reconstruction to Alleviate Financial Problems Resulting from the Coronavirus (Covid-19)) in Prop. 75 L (2019-2020). The Act was considered by the Storting in a short time and entered into force on May 11, 2020.
The primary purpose of the law is to provide better tools to businesses that were operating soundly before the coronavirus crisis but are now threatened with bankruptcy as a result of the outbreak. However, the law is broad in scope and will also provide other businesses with better assistance in making operational and financial adjustments so that they can survive.
The Act has the same structure as the rules on debt negotiations in Part I of the Bankruptcy Act—which it is intended to replace on a temporary basis—but the provisions have been amended in several respects to make the regulations more practical. Terminologically, the established term “debt negotiation” has been replaced with “reorganization.” According to the government’s proposal, this was done to emphasize that the scheme involves more than just relief from debt obligations. The rules are intended to facilitate a more comprehensive change or reorganization of the business’s operations.
Initiation of reorganization proceedings and case management
Under the existing law, companies often sought debt restructuring too late, when their problems had become too severe and their resources to resolve them were too limited, with the result that the negotiations frequently ended in bankruptcy. Whereas previously a company had to be illiquid to seek debt restructuring, the threshold in the proposal has been lowered to the point where the debtor “...has or will face serious financial problems in the foreseeable future.” Hopefully, this will lead companies to seek restructuring at a stage when they still have some liquidity and “steering power” left, which increases the likelihood of a successful restructuring process.
A new feature of the proposal is that a creditor may also initiate a reorganization and file a petition for reorganization proceedings. It is assumed that the creditor’s petition will be presented to the debtor, who may object to the opening of reorganization proceedings. Since a successful reorganization in practice depends on ongoing and active cooperation on the part of the debtor, we assume that reorganization proceedings in most cases will be opened upon the debtor’s petition.
As is currently the case, the company retains control of its operations during the negotiations, but under the supervision of a court-appointed reorganization committee consisting of a reorganization administrator and a creditors’ committee. The reorganization administrator—like the current chair of the Debt Settlement Board—will typically be an attorney specializing in bankruptcy cases, whose role is to ensure that the law is followed during the negotiations.
The proposal calls for stronger protection against the initiation of bankruptcy proceedings and the enforcement of compulsory liquidation during restructuring negotiations. The proposal does not set a final deadline by which the negotiations must be completed.
The proposal provides greater opportunities to finance continued operations during restructuring negotiations and to cover the costs of those negotiations. This includes the establishment of new collateral in inventory, operating equipment, and accounts receivable with “super priority” for both loans to continue operations during the restructuring period and the financing of the restructuring negotiations. The collateral takes precedence over existing mortgagees.
Proposed reconstruction
As in the current law, a distinction is made between proposals for voluntary reorganization and proposals for reorganization through a compulsory composition.
In the case of voluntary reorganization, the requirement for equal treatment of creditors is waived, while the requirement for unanimity among the creditors is maintained. A general observation from such cases is that equal treatment can simplify the decision-making process. A proposal for unequal treatment of creditor groups must therefore be well-founded in order to have a reasonable chance of being approved.
With regard to proposals for restructuring through a compulsory composition—where a majority of creditors overrules a minority—the current requirement for a qualified majority is replaced by a requirement for a simple majority. Furthermore, the requirement for a minimum dividend is eliminated.
The proposal also allows for debt to be converted into shares if more than half of the shareholders consent. In cases where there is little to distribute as dividends, this can increase the chances of getting creditors to agree to a restructuring.
One factor that could have significant practical implications is that the government—for the time being, for a limited period related to the COVID-19 crisis—proposes to enact a legal basis for temporarily suspending Section 9-4 of the Recovery Act, which gives priority to claims by public authorities for VAT and withholding tax. The elimination of the differential treatment of public and private creditors—where the public sector is to receive full payment for VAT and taxes before private creditors receive anything—could, in many cases, result in increased dividends for unsecured creditors and thereby increase the likelihood of the proposal being adopted.
Conclusion of restructuring negotiations
The main ways in which negotiations are concluded are expected to be the same as under the Bankruptcy Act, whereby the debtoreitherachieves voluntary reorganization, has a reorganization confirmed through a compulsory composition, or failsto reorganize, after which bankruptcy proceedings are initiated. As is the case today, the risk of bankruptcy will be a sword of Damocles hanging over the negotiations, which may motivate the debtor to make an effort to reach a solution with the creditors.
As a new provision, the proposal allows a debtor to terminate restructuring negotiations without entering bankruptcy by demonstrating its own solvency.
Furthermore, the negotiations may be suspended at the debtor’s request and with the written consent of a majority of the creditors.
The last two alternatives mentioned should probably be viewed as safety valves that will rarely be used.
It is proposed that specific statutory authority be established to issue regulations for the implementation and enforcement of the Act, including simplified administrative procedures for small businesses such as restaurants, hair salons, shops, etc.
The law is intended to be temporary, but there is reason to believe that its main principles will be incorporated into permanent legislation once experience with the rules has been gained and they have been aligned with EU regulations (Directive 2019/1023).
The law firm Rasmussen & Broch has extensive experience in bankruptcy and insolvency matters and is prepared to handle cases under the Restructuring Act once it takes effect.
Gunnar A. Haahjem
