New Act relating to restructuring of Norwegian companies in financial difficulties (the Restructuring Act) effective
In Norway, companies in financial difficulties have, to a large extent, only had a voluntary out-of-court restructuring process as an alternative to bankruptcy due to a lack of flexibility under the existing legislation governing court driven composition proceedings. Covid 19 has accelerated the need for modernization of the Norwegian composition proceedings and the Norwegian Parliament has now adopted the Restructuring Act, which entered into force 11 May, making court driven composition procedures more relevant in Norway.
In response to the scale of financial distress resulting from Covid-19, the Norwegian Parliament has adopted the Restructuring Act, which will suspend and replace the composition regulations under the Norwegian Bankruptcy Act. The Restructuring Act is currently temporary and will last until 1 January 2022. The legislator hopes to gain valuable experience during this interim period and aims for permanent legislation to be enacted subsequently.
The Restructuring Act is expected to make a judicial restructuring process more relevant and applicable to companies in financial difficulties. The Restructuring Act also allows companies which are currently seeking composition proceedings (i.e. before the act entered into force) to be processed in accordance with the new legislation.
The Restructuring Act includes several changes to the existing debt settlement rules. The following key points are worth highlighting:
Lower threshold for access and ability for creditors to file
Restructuring proceedings will only be available for a debtor with its main seat of business located in Norway.
Both debtors and creditors can request restructuring proceedings, in contrast to the previous composition legislation, which only gives the debtor that opportunity.
In order for a debtor to request restructuring proceedings, the requirement is that the debtor has, or for the foreseeable future will have, serious financial difficulties. This is a lower requirement compared to the previous legislation. A stricter requirement applies upon a request from a creditor, as the creditor must prove that the debtor will be unable to meet their obligations as they fall due.
Appointment, control and supervision
If restructuring proceedings are opened by the court, the court will appoint an administrator (a qualified Norwegian lawyer) and will require the formation of a creditors’ committee. The administrator, together with the creditors’ committee, will form the restructuring committee. A restructuring auditor may also be appointed at the request of the restructuring committee.
The debtor (with superior responsibility resting with the board of directors) will remain in control of the business and operations ("debtor in possession") under the supervision of the restructuring committee. Important decisions will require approval from the restructuring committee.
Automatic stay during proceedings
An automatic stay against enforcement of certain types of asset security/mortgages will apply for the entire restructuring period. The automatic stay will not restrict enforcement of financial collateral such as share pledges or account pledges created in accordance with the Norwegian Financial Collateral Act. The restructuring period will, as a starting point, last for six months, but may be extended by decision of the court.
Restriction on contractual termination
A contracting party's termination of its contract with the debtor will be ineffective if (i) the termination is made in the last four weeks prior to the request for restructuring proceedings being received by the court and (ii) such termination was based on the debtor's payment delay. Exemptions apply if the other counterparty to the contract had made disposals in accordance with such termination.
Financing the restructuring - super priority loans
The Restructuring Act allows for so-called super priority loans to finance necessary operating and restructuring costs. Such loans will be possible to be secured by security interests over inventories, machinery and plant and outstanding receivables in priority to existing established security interests in the said assets. In addition, the Restructuring Act provides such loans with a statutory lien over any existing secured assets of the debtor with up to 5% of the value of any such assets, but in amount limited to 700 times the legal fee (currently NOK 820,400) if the secured asset is registered in an asset register. This means that any such statutory lien will take priority over any existing security interests within the limits as described.
Financial collateral such as share pledges and account pledges established in accordance with the Norwegian Financial Collateral Act, are excluded from being primed by such statutory lien. In addition, if a debtor upon an unsuccessful restructuring subsequently enters into liquidation proceedings, liquidation costs in such proceedings will only be secured by a fresh statutory lien not already utilized in the restructuring proceedings. For this purpose, in any subsequent liquidation proceedings, the statutory lien will also extend to security provided by third parties and consequently has a wider scope compared to that in the restructuring proceedings contemplated under the Restructuring Act.
No minimum dividend and wider scope of possible solutions
The Restructuring Act does not include a minimum dividend requirement (as per the previous legislation) and provides a wider scope of available solutions that may form part of a compulsory restructuring plan, including:
- payment deferral (compulsory moratorium);
- percentage reduction of debt (general compulsory composition);
- full or partial conversion of debt into equity (compulsory composition through conversion);
- transfer of all or part of the debtor's business and assets to a new owner, without the debtor's business being liquidated (restructuring transfer);
- transfer and liquidation of all or part of the debtor's business and assets in exchange for the debtor being released from the part of the debt not covered by liquidation (compulsory composition liquidation),
or a combination of the above listed solutions.
Lower consent threshold
The existing consent requirement for the adoption of a restructuring proposal by creditors through compulsory composition is lowered to a requirement that creditors representing at least 1/2 of the total amount of the outstanding (unsecured portion of the) debt with voting rights shall vote in favour of the proposal. Secured creditors will only have voting rights for the part of their claim not secured by the value of underlying secured assets which has been provided by the debtor.
A compulsory composition will be binding on all known creditors with claims arising prior to initiation of the restructuring proceedings. However, it will not be binding on claims with legal priority right, claims secured by underlying collateral provided by the debtor to the extent that the claim falls within the underlying collateral value and claims that may be subject to set-off.
As regards compulsory composition through debt conversion, such a scheme may only include creditors who have consented thereto. However, the Restructuring Act includes certain cram-down rights for the court towards creditors who have refused to consent without satisfactorily demonstrating reasonable grounds to do so.
If a debt conversion is proposed, such conversion will still require approval by the debtor's general meeting, but the consent requirement is reduced from 2/3 to at least 1/2 of both (i) the votes cast and (ii) the share capital represented at the general meeting. The Restructuring Act does not provide an opportunity to force conversion if the reduced majority requirement at the general meeting is not achieved, for example, in a situation where it is clear that the equity is lost or there are clearly no reasonable grounds for the general meeting to refuse such conversion.
Valuation of (secured) assets
The Restructuring Act also provides that the court appointed administrator in cooperation with the estate's auditor shall prepare a valuation of the debtor's assets, where appointment of an expert to assist with such valuation is possible but not required. In a compulsory composition, the restructuring committee shall also prepare a valuation of secured assets, and similar to the principle included in the existing legislation, any part of the security interest in respect of secured liabilities not covered by the secured property value will lapse/be discharged.
Simplified rules for smaller enterprises
The Restructuring Act also provides, through regulations, for more simplified rules for smaller companies.
Waiver of certain priority claims
The Norwegian State's preferential second-class ranking for certain tax, tax-refund and VAT claims has also been waived by regulation (the priority status for claims connected to employees' tax deduction has not been waived).
The restructuring proceedings will end either by:
- the composition being approved by the required majority of creditors and sanctioned by the court;
- a decision by the court to discontinue the proceedings upon the request from the debtor provided that there is a majority support from the creditors with voting rights;
- a decision by the court to discontinue the proceedings if the debtor proves to be solvent; or
- a decision by the court to discontinue the proceedings and open bankruptcy if the court finds it unlikely that the debtor will succeed in a composition, or the debtor has not complied with specific obligations set forth in the Restructuring Act.
Also worth highlighting is that no changes have been proposed to the rules governing employee rights, except possible rules to ensure protection of employees' interests upon implementation of simplified rules for smaller enterprises.
Although there are still some unresolved questions and issues, including issues relating to cross-border matters, Schjødt sees the Restructuring Act as a step in the right direction to establish a more effective regulatory framework for judicial restructuring processes in Norway.