Boris Frederiksen and Morten Plannthin of Poul Schmith assess the bankruptcy and insolvency regime in Denmark
Section 1: PROCESSES AND PROCEDURES
1.1 What reorganisation and insolvency processes are available for debtors in your jurisdiction?
The Danish Bankruptcy Act provides for three different judicial insolvency procedures: bankruptcy, restructuring and debt relief. Outside these three judicial insolvency procedures, a variety of non-judicial rescue/ reorganisation arrangements can be completed with creditor consent.
The bankruptcy procedure is based on a bankruptcy order by the bankruptcy court. The order can be based on a petition by the debtor or a creditor. Both natural and legal persons can be taken into bankruptcy. It is necessary that the debtor is insolvent, as defined in the Danish Bankruptcy Act. The bankruptcy court will appoint a trustee who is authorised to act in all matters on behalf of the bankruptcy estate. The trustee's primary assignment is to liquidate the debtor's assets and to distribute the proceeds between the creditors under an order of distribution described in the Danish Bankruptcy Act. During the bankruptcy procedure creditors will not be able to enforce their claims against the bankruptcy estate's assets. Creditors may file their claims with the trustee who will assess the validity of the claims. The trustee's assessment of a claim may be brought before court by the creditor who has filed the claim or by other creditors in the bankruptcy estate. The final distribution of proceeds to creditors and the trustee's fee for administrating the bankruptcy estate are subject to approval by the bankruptcy court.
The restructuring procedure is based on a decision by the bankruptcy court. The purpose of the procedure is to examine the possibility of a compulsory composition and/or a business transfer. The restructuring procedure can be commenced with respect to both natural and legal persons. It can be based on a petition by the debtor or a creditor. However, a restructuring procedure which is based on a creditor's petition (and not endorsed by the debtor) may only be commenced with respect to legal persons.
Once a restructuring procedure has begun, the outcome will either be a compulsory composition, the bankruptcy of the debtor, or that the debtor becomes solvent. To commence the restructuring procedure, the debtor must be insolvent. The bankruptcy court will appoint a restructuring administrator and a restructuring accountant. The debtor maintains control of his/her assets during the restructuring procedure, but the debtor is not allowed to enter into transactions of material significance without the consent of the restructuring administrator. As a general rule, during the restructuring procedure, creditors are not allowed to enforce their claims against the debtor's assets. The debtor cannot be taken into bankruptcy while the restructuring procedure is going on. The outcome of the restructuring procedure (compulsory composition and/or a business transfer; or bankruptcy) will depend on the restructuring administrator's proposal and a creditor's vote on whether the proposal should be rejected. As a general rule the proposal is considered to be adopted unless a majority of the creditor claims (as per the size of the claims) participating in the voting meeting in the bankruptcy court vote to reject the proposal.
Judicial debt relief is only available to debtors who are natural persons. Judicial debt relief may – subject to the bankruptcy court's decision – involve the full or partial relief of the debtor's debt.
1.2 Is a stay on creditor enforcement action available?
The judicial insolvency proceedings of bankruptcy and restructuring will – with a few exceptions – prevent creditors from enforcing their claims against the debtor's assets. Furthermore, a 'stay of execution' can be agreed between the debtor and his creditors or between the creditors.
1.3 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?
During the judicial restructuring procedure, the restructuring administrator will prepare a restructuring plan. No later than four weeks after commencement of the restructuring procedure, the creditors vote on whether to adopt or reject the plan. The plan is considered adopted unless a majority of the claims (as per the size of the claims) represented at the meeting in the bankruptcy court vote to reject the restructuring plan and this group of claims represents at least 25% of the total known debt. If the plan is adopted, the restructuring procedure will continue and the restructuring administrator will prepare a restructuring proposal in accordance with the overall terms of the restructuring plan. The proposal will contain the terms of a compulsory composition and/or a transfer of the debtor's business. The proposal is subject to a creditors' vote in a meeting at the bankruptcy court which will be held no later than six months after commencement of the restructuring. The proposal is considered adopted unless a majority of the claims (as per the size of the claims) represented at the voting meeting in the bankruptcy court vote to reject the proposal.
Furthermore, non-judicial restructuring plans can be agreed between the debtor and one or more of his creditors. A non-judicial restructuring plan may – but does not necessarily have to – describe a plan to sell in whole or in part the debtor's assets and business activities. It may describe how the proceeds from the sale of certain assets are to be distributed between the creditors. It may contain: provisions concerning extension of payment obligations (moratorium); a partial debt relief; a stay of the participating creditors' right to commence enforcement proceedings; financing of the non-judicial restructuring process; the participating creditor's consent with respect to the debtor's payment of minor creditor claims; subordination of certain debt, and/or the establishment of security in certain assets concerning new debt of the debtor. In order for a non-judicial restructuring plan to be successful, the debtor – or perhaps a steering committee acting as a link between the debtor and his creditors – should seek accession to the plan from all of his/her major creditors.
1.4 How can a creditor or a class of creditors be crammed-down?
In bankruptcy, secured creditors will receive the proceeds from the sale of secured assets. Unsecured debt will be covered in accordance with the order of distribution described in the Danish Bankruptcy Act. A natural person who has been in bankruptcy will still be liable for debt that has not been covered by the proceeds of the bankruptcy. A legal person that has been in bankruptcy will cease to exist after the bankruptcy procedure has been completed.
In a judicial restructuring procedure, secured debt can comprise a compulsory composition as part of an adopted restructuring proposal. This means that the part of the debt not covered by the value of the assets in which the creditor holds a security interest will be reduced on the same terms as other unsecured creditors of the same class. The bankruptcy court may, on the request of the debtor, fix the value of certain secured assets with a binding effect for a creditor who holds a security interest in these assets. This means that the unsecured part of the creditors' claim which will be subject to the compulsory composition can also be fixed.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
A judicial restructuring procedure allows for the possibility of a sale of the debtor's assets and/or business as part of the restructuring proposal.
During the first six months of a bankruptcy procedure, a forced sale of pledged assets can only be completed on the request of, or with the consent of, the bankruptcy estate. This period allows for the trustee to examine whether it is possible to sell the debtors' pledged assets in a free sale at a higher price than what is to be expected if the assets are sold in a forced sale.
1.6 What are the duties of directors of a company in financial difficulty?
Numerous Danish court cases have involved the question of whether the management of a company is liable to pay damages due to the management's actions or failure to take action during a period of financial difficulties. Three themes in particular have been addressed in Danish case-law. The management of a company in financial difficulty may become liable to pay damages if:
(i) the management sells the company's assets at far below-market prices;
(ii) the management is responsible for an uneven distribution of the company's assets in favour of certain creditors and at the expense of others; and,
(iii) the management has failed to halt the company's operations after the point at which management should have realised that there was no reasonable prospect for the company to be able to continue.
1.7 How can any of a debtor's transactions be challenged on insolvency?
In bankruptcy, certain transactions completed by the debtor before the bankruptcy may be declared void under the rules in chapter 8 of the Danish Bankruptcy Act. Generally, the rules governing voidance of transactions concerns: (a) transactions that have benefited one creditor at the expense of other creditors; and, (b) transactions that have reduced the value of the debtor's assets at the expense of all creditors. The conditions for declaring a transaction void depend on a number of factors including:
(i) what kind of transaction the bankruptcy estate seeks to have declared void (for example, gifts, payments or provision of a security interest in the debtor's assets);
(ii) when the transaction was carried out;
(iii) whether the beneficiary of the transaction is a related party;
(iv) whether the debtor was insolvent at the time of the transaction; and,
(v) whether the beneficiary of the transaction knew or should have known that the debtor was insolvent at the time of the transaction.
1.8 What priority claims are there and is protection available for post-petition credit?
The ranking of claims in bankruptcy under Danish law is as follows:
(i) the costs of the bankruptcy proceedings and debt that has occurred after commencement of the bankruptcy procedure;
(ii) reasonable costs relating to an attempt to restructure the debtor, other debt incurred by the debtor during a judicial restructuring procedure with consent from the restructuring administrator, and reasonable costs relating to a liquidation of a company before the bankruptcy;
(iii) employee claims and related tax claims;
(iv) certain supplier claims regarding charges claimed in respect to certain goods;
(v) all other unsecured debt; and,
(vi) interest claims concerning non-preferential unsecured debt, and fines and penalties.
Secured creditors will receive the proceeds from the sale of the assets forming their security interest (after payment of costs, a sales fee and an administration fee to the bankruptcy estate).
A bankruptcy estate may obtain a loan during the bankruptcy procedure. A claim concerning repayment of such a loan will be considered preferential debt which should be covered at the same level as other costs relating to the bankruptcy procedure.
1.9 Is there a different regime for credit institutions and investment firms?
The Danish Financial Services Act and the Danish Act on Restructuring and Winding-Up of Certain Financial Institutions contain specific rules concerning the winding-up of and bankruptcy of financial institutions.
Section 2: INTERNATIONAL/CROSS-BORDER ISSUES
2.1 Can reorganisation or insolvency proceedings be opened in respect of a foreign debtor?
As a general rule, a foreign debtor who resides in Denmark or who operates a business in Denmark can be taken into bankruptcy in Denmark.
2.2 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?
Denmark is not bound by the EU Bankruptcy Regulation because of Denmark's 'opt out' status with respect to the EU's justice and home affairs system. In addition, Denmark has not implemented the Uncitral Model Law on Cross-Border Insolvency. According to the Danish Bankruptcy Act, the Danish Ministry of Justice has authority to grant binding effect to foreign court decisions concerning bankruptcy, restructuring and similar judicial insolvency procedures. The Ministry of Justice has not, however, used this authority. This means that most foreign court decisions concerning bankruptcy, restructuring and similar judicial insolvency proceedings are not recognised in Denmark. A creditor may thus enforce a claim against the debtor's assets in Denmark, even if the debtor is subject to judicial insolvency proceedings in another country.
Denmark has acceded to the Nordic Bankruptcy Convention which means that a bankruptcy in Sweden, Norway, Finland or Iceland will also comprise the debtor's assets and liabilities in Denmark.
Section 3: OTHER MATERIAL CONSIDERATIONS
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Major stakeholders in many insolvency procedures include the Danish tax authorities (due to the size of their claim in many bankruptcy estates) and the Danish employees' guarantee fund (due to the fact that the fund will cover most employees' claims against a bankruptcy estate and consequently take over the employees' claims against the bankruptcy estate).
Section 4: CURRENT TRENDS
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction
On December 3 2015, the Danish people voted 'no' in a referendum on whether to change Denmark's existing opt out status with regard to certain areas of the justice and home affairs system into an opt in status. A change would have resulted in Denmark being bound by certain EU legislation relating to justice and home affairs. The result means that Denmark will probably not be bound by the EU Bankruptcy Regulation for the foreseeable future.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Boris Frederiksen is head of Law firm Poul Schmith/Kammeradvokaten's insolvency and restructuring department. He represents public and private clients in all matters relating to insolvency and restructuring. He is appointed as trustee in some of the country's largest bankruptcy estates, including bankruptcies in the financial sector and the commercial property sector. He also handles complex litigation cases concerning insolvency-related disputes.
About the author
Morten Plannthin is a partner in Law firm Poul Schmith/Kammeradvokaten's insolvency and restructuring department. He represents public authorities, financial institutions and other clients in all matters relating to insolvency and restructuring. Areas of expertise include restructuring of insolvent companies, bankruptcy administration, asset tracing, complex debt collection proceedings, securing assets through attachment proceedings and dispute resolution. He often conducts cases before the Danish city courts and the Danish high courts concerning insolvency-related disputes, management liability, commercial disputes, finance law and M&A.