Denmark. Chapter. Gorrissen Federspiel. 1 Issues Arising When a Company is in Financial Difficulties. 2 Formal Procedures

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1 Chapter Lars Grøngaard Gorrissen Federspiel John Sommer Schmidt 1 Issues Arising When a Company is in Financial Difficulties 1.1 How does a creditor take security over assets in? Security over assets can be obtained by agreement between the creditor and the debtor. Protection from third party claims calls for an act of perfection to be performed depending upon the nature of the asset involved. Security granted over real and personal property, including motor vehicles, must be recorded in the official registry. Security in debts is achieved by notification to the debtor. In certain instances, e.g. negotiable securities, perfection is accomplished by taking possession of the asset. It is also possible to grant a floating charge (called a company charge), providing security over the various assets owned by a company from time to time, including inventories. A floating charge can also be granted in form of a receivables charge, providing security in amounts owed to the company from time to time. Protection against third party claims is obtained by recording the floating charge in the official registry. When the floating charge crystallises, the charge becomes fixed to the assets, e.g. inventories, receivables etc. owned by the company at the time of crystallisation. 1.2 In what circumstances might transactions entered into whilst the company is in financial difficulties be vulnerable to attack? Most rules governing avoidance are laid down in the Danish Bankruptcy Act. During bankruptcy proceedings, transactions may be avoided if they impair the creditors general position or result in some creditors obtaining a more favourable priority ranking to the detriment of other creditors. Most rules governing avoidance are objective in that transactions may be avoided regardless of whether the debtor was insolvent and regardless of whether the creditors may have had any knowledge thereof. However, a subjective rule governing avoidance also exists to the effect that transactions may be avoided if the debtor at the time of the transaction was or became insolvent, and the favoured creditor had knowledge of both the debtor s insolvency and the fraudulent preference. The making of gifts, payment of unreasonably high salaries, extraordinary repayments of unsecured debts, and provision of security, including a floating charge, without a new credit being granted may be avoided for objective reasons (it does not matter if the creditor had knowledge of the preferable nature of the action and the debtor s insolvency). The transfer of assets that fraudulently gives preference to a creditor to the detriment of the other creditors or actions that in general results in the other creditors position being impaired may be subjectively avoidable (if the creditor knew or should have known about the preferable nature of the action and the debtor s insolvency). The ordinary limitation period for avoidance is three months. However, as regards to transactions carried out with connected persons, the limitation period is 6 or 24 months. For avoidance under the subjective rule, in principle no time limit applies. 1.3 What are the liabilities of directors (in particular civil, criminal or disqualification) for continuing to trade whilst a company is in financial difficulties in? The Danish Companies Acts contain provisions concerning the liability of the board of directors and management in companies that operate a business in financial difficulties. These rules are founded on the ordinary principles of Danish law governing liability for damages. A board of directors and/or management that intently or negligently causes financial injury to a company or its creditors may incur personal liability for damages. The directors and managers may incur liability if they continue to operate a business at a time where it should be evident that the company is insolvent and that its operations cannot possibly be continued without losses being suffered by the creditors. However, the management is usually allowed certain latitude to test various reorganisation solutions in its attempt to reconstruct a company. When a company becomes insolvent, the duties of the directors and managers changes from primarily looking out for the interests of the shareholders to looking out for the interests of the creditors. If a criminal offence is committed as the management continues the operations of a insolvent company, the management may as a part of the punishment be disqualified from carrying on business activities requiring particular public authorisation or approval. In addition, the directors and managers may be disqualified from acting as directors or managers of a company. 2 Formal Procedures 2.1 What are the main types of formal procedures available for companies in financial difficulties in? Bankruptcy is the main instrument within the insolvency

2 proceedings system in. The debtors assets are liquidated and the proceeds distributed to the creditors pursuant to a priority ranking of claims. In connection with bankruptcy, an estate is established by order of the Bankruptcy Court. The Bankruptcy Court also appoints a trustee, which is typically a lawyer. The trustee replaces the board of directors and managers and gains full control of the company. The suspension of payments scheme is aimed at supporting attempts to avoid bankruptcy in favour of debt arrangements. A notice of suspension of payments is a solution that may be used in order to obtain a result that offers better prospects for both the debtor and his creditors. The suspension of payments scheme does not as such involve administration of the debtors estate. However, a supervisor, typically a lawyer, is appointed by the Bankruptcy Court. The Bankruptcy Act sets out particular rules governing compulsory composition arrangements with the company s creditors. Compulsory composition schemes are generally rarely applied and will not be described in further detail in this article. 2.2 What are the tests for insolvency in? A debtor is regarded as insolvent if he is unable to meet his obligations as they fall due for payment, unless the inability to pay is considered to be of a temporary nature. The final decision is based on an assessment of the debtor s liquidity (a cash flow test). The fact that a company s liabilities exceed its assets is not generally of importance. 2.3 On what grounds can the company be placed into each procedure? Bankruptcy is the creditors final resort to collect outstanding amounts. Any creditor in a company can therefore present a petition for bankruptcy. Moreover, the company itself may file for bankruptcy. In order for the Court to pronounce a bankruptcy order, the debtor must be insolvent. If a debtor finds himself unable to meet his obligations, he can file for suspensions of payments. The suspension of payments must have a purpose, e.g. to agree on a voluntary arrangement or a compulsory composition with the creditors or to sell the company s activities and subsequently liquidate the company through the formal bankruptcy procedure. 2.4 Please describe briefly how the company is placed into each procedure. Bankruptcy proceedings are initiated by the debtor s or a creditor s filing of a bankruptcy petition. The debtor s petition for bankruptcy must contain a statement of assets and liabilities as well as a list of creditors. The Bankruptcy Court decides whether to commence bankruptcy proceedings and in order for the Bankruptcy Court to do so, the debtor must be insolvent. Suspension of payments proceedings are commenced by the company s filing of an application to the Bankruptcy Court. Only the debtor can file for suspension of payments. The application must set out the debtor s proposal for the appointment of a supervisor. The filing company is presumed to be insolvent, however, the Bankruptcy Court conducts no investigations with a view to verifying if this is the case. 2.5 What notifications, meetings and publications are required after the company has been placed into each procedure? Immediately after the bankruptcy order, the Bankruptcy Court appoints a trustee and inserts an announcement in the Danish Official Gazette that is available on the internet. The trustee appointed immediately sends a letter to the company s creditors informing them of the bankruptcy and encouraging them to file a claim with the estate within 4 weeks. The Bankruptcy Court may at its own initiative or upon request from a creditor or the trustee decide to convene a creditors meeting with the purpose of electing another trustee and/or a creditors committee. Three weeks after the bankruptcy order has been pronounced, the trustee must distribute a preliminary statement of the estate s assets and liabilities to the creditors. The preliminary statement must be followed - as soon as possible and not later than four months after the issue of the bankruptcy order - by a balance sheet and report explaining the most important reasons for the bankruptcy, the estate s financial situation and a description/explanation of any major differences between the company s latest annual statement and the estate s financial situation. The trustee will hold meetings for scrutiny of claims filed. If possible, a meeting for scrutiny of claims should be held within 4 weeks form the expiry of the 4-week period during which the creditors were invited to file their claims. Subsequently, the trustee must present semi-annual accounts on the state of affairs of the estate, and the Bankruptcy Court can convene creditors meetings if deemed necessary. Once the administration of the bankrupt estate has been concluded, the trustee prepares the final accounts and a proposal for dividends to be distributed to the creditors. When a company has applied for suspension of payments, the Bankruptcy Court immediately appoints a supervisor. Within one week of his appointment, the supervisor will send a letter to all known creditors announcing the suspension of payments. The letter must be accompanied by the debtor s latest annual accounts. The letter must also contain information on the debtor s most important assets and liabilities, a list of creditors, information on the debtor s bookkeeping as well as a statement of the reasons and purpose of the suspension of payments. A notice of suspension of payments will not be published in the Official Gazette. However, all known creditors will be notified of the suspension of payments by the supervisor. A meeting with the creditors must be held within three weeks from receipt of the notice of suspension of payments. At the creditors meeting, the Bankruptcy Court decides whether to sustain the suspension of payments scheme. The period of suspension of payments is 3 months. The Bankruptcy Court may upon request from the company extend the suspension of payments to up to 3 months at a time. The creditors must be informed of such extensions. The period of suspension of payments can last one year at the most. The creditors must be informed of transactions of particular importance contemplated by the company with the supervisor s approval, e.g. sale of the company s business activities. The Bankruptcy Court submits a notice of bankruptcy and suspension of payments to the Danish Commerce and Companies Agency and to other public authorities. Therefore, in public registers accessible from the internet, the company will be recorded as a company in bankruptcy or suspension of payments. Also, during both bankruptcy and suspension of payments the company must in all written material add the words in bankruptcy

3 or in suspension of payments respectively to its name, so as to signal to outsiders the company s situation. 3 Creditors 3.1 Are unsecured creditors free to enforce their rights in each procedure? During a period of suspension of payments or following the issue of a bankruptcy order, unsecured creditors cannot levy execution on the company s assets with a view to satisfying their claims. This applies to all claims, irrespective of whether they have arisen before or during the relevant procedure. 3.2 Can secured creditors enforce their security in each procedure? During bankruptcy, it is in principle possible for mortgagees and other secured creditors with a non-avoidable mortgage to enforce their security interest. If the claims are ordinary mortgage claims, realisation of the mortgaged assets cannot be effected without the contribution of the estate in bankruptcy. However, if the estate has not within 6 months after the issue of the bankruptcy order submitted a petition of a forced sale, any mortgagee with an overdue claim may request that the estate effects a forced sale without undue delay. To the contrary, pledged assets can be realised directly by the secured creditor without the involvement of bankrupt estate. During suspension of payments, it is the general rule that holders of secured claims can enforce their secured right following the normal procedure. However, this general rule only applies to secured claims that would not be vulnerable to avoidance in bankruptcy. However, if deemed necessary in the light of the object of the suspension of payments, the Bankruptcy Court may decide at the request of the debtor and the supervisor that no execution shall be levied or satisfaction sought based on secured claims. In such case, the company must on a current basis pay any instalments due on the secured claims. 3.3 Can creditors set off sums owed by them to the company against amounts owed by the company to them in each procedure? Claims incurred prior to the bankruptcy or the suspension of payments may be set off against claims also incurred prior to the bankruptcy or the suspension of payments. Similarly, claims incurred after the filing for bankruptcy or suspension of payments may be set off against claims also incurred after the bankruptcy or the suspension of payments. In contrast, a creditor cannot set off claims incurred prior to the company s bankruptcy or suspension of payments against the company s claims incurred after the bankruptcy or the suspension of payments has been declared. However, there is access to effect set-off against connected claims. The Bankruptcy Act contains provisions restricting the access to set off claims, e.g. where one of the company s debtors acquires a counterclaim at a time where the bankruptcy was imminent. Equally, set-off is not possible in instances where a corresponding payment would be voidable. 4 Continuing the Business 4.1 Who controls the company in each procedure? In particular, please describe briefly the effect of the procedures on directors and shareholders. Once bankruptcy proceedings have been commenced, the trustee appointed is in charge of the company and assumes the duties of the board of directors and the managers. The shareholders have no influence on the company as their claim is of no value. During the period of suspension of payments, the shareholders, the board of directors and the managers retain their usual duties and responsibilities for running the company. As the company must be assumed insolvent, the management also has a duty to safeguard the creditors' interests. The Bankruptcy Court appoints a supervisor to supervise the transactions of the company and the management. The management is not entitled to carry out material transactions without the approval of the supervisor. 4.2 How does the company finance these procedures? Costs defrayed in connection with a bankruptcy, such as the trustee s fee, are paid from unencumbered cash and proceeds from the sale of assets. Under a suspension of payments, the company may use unencumbered cash and proceeds from normal corporate activities to pay additional costs defrayed in connection with suspension of payments. The company is allowed to take out loans against security in the company s assets. It is also possible for the company get a loan from the Danish Employees Guarantee Fund of up to net DKK 80,000 per employee, specifically for the payment of net wages and salaries. 4.3 What is the effect of each procedure on employees? The issue of a bankruptcy order or notice of suspension of payments has fundamentally no impact on the employees employment with the company that will continue. During bankruptcy, the trustee decides immediately after the issue of a bankruptcy order whether the employment agreements entered with the company s employees will be affirmed by the bankrupt estate. If the bankrupt estate affirms an employment agreement, the estate will be bound by the terms of the agreement, including the provisions concerning notice etc. However, particular provisions allow a bankrupt estate to adjust very long periods of notice to the ordinary period of notice. If the bankrupt estate decides not to affirm an employment agreement, the employee is entitled to cancel the employment immediately and file a claim with the estate for unpaid salaries during the notice period. During a period of suspension of payments, the management and the supervisor will have to consider whether to dismiss the company s employees or some of the employees if deemed expedient as a part of a reconstruction. Employees whose salaries are paid in arrears are entitled to demand that the company provides security for the first remuneration due from time to time.

4 4.4 What effect does the commencement of any procedure have on contracts with the company and can the company terminate contracts during each procedure? A bankrupt estate is entitled to decide whether to affirm or reject executory contracts. In the event that the estate decides to reject an agreement, the other party to the contract may cancel the contract and file a claim for consideration or damages as an ordinary unsecured claim in the estate in bankruptcy. If the estate decides to affirm an agreement, the estate will be bound by its terms, and claims filed by the other party in respect of the agreement rank as pre-preferential claims in the bankrupt estate. If the debtor has entered contracts of a continuing nature with particularly long notice periods, both the estate and the other contracting party may cancel the agreement with the ordinary or reasonable notice. During the period of suspension of payments, the rights and obligations arising out of agreements entered prior to the suspension of payments continue to apply to the company. Often the parties with whom the company has entered contracts may be in a position to demand that the company for current payments provide security. 5 Claims 5.1 Broadly, how do creditors claim amounts owed to them in each procedure? During bankruptcy proceedings, claims held by creditors must be filed with the trustee, and the creditor must provide documentation substantiating the claim. In connection with the issue of a bankruptcy order, the Bankruptcy Court inserts an advertisement in the Danish Official Gazette encouraging the creditors to file their claims with the trustee within a period of three months. However, this does not prevent a creditor from subsequently filing a claim. The creditors need not file their claims during the period of suspension of payments. In order to obtain a satisfactory foundation for carrying through a potential reconstruction of the company, it is usual practice that the creditors are encouraged to file their claims. 5.2 What is the ranking of claims in each procedure? In particular, do any specific types of claim have preferential status? The Danish Bankruptcy Act governs the ranking of claims. Prepreferential claims, i.e. claims arisen during or in connection with the administration of the bankruptcy, will be met before all other claims according to an order of priority. Next, the secondary prepreferential claims concerning costs incurred in an attempt to restructure the company and obligations undertaken with the approval of the supervisor during suspension of payments will be met. Thereafter, all employee claims and connected tax claims etc. will be met as preferential claims. After the employee claims, certain supplier claims, i.e. supplier claims for duties on dutiable goods that must be settled by the supplier regardless of the fact that the buyer is a bankrupt company, will also be met as preferential claims. After the preferential claims listed above, all other claims, the so-called unsecured claims, are met. Claims secured by mortgage or in other ways will be covered to the extent that the security provided suffices. If the security provided does not fully cover the secured claim, the uncovered part of the claim will be an unsecured claim. After the unsecured claims, deferred claims such as interest on unsecured claims and fines etc. will be satisfied in an order of priority. Each claim of each group shares in equal proportions and each claim of a group must be paid in full before any claims in the next group receives any dividend. Therefore, only in very rare cases will deferred claims receive dividend. There may be different purposes for suspending a company s payments. One purpose may be to obtain a voluntary or compulsory arrangement with the company s creditors. In such cases, claims will be satisfied in accordance with the specific terms governing the arrangement. In other instances, the purpose will be to save the business activity and sell it to a third party, where after the empty company on its own initiative will be declared bankrupt. In such case, the creditors claims will be met in accordance with the bankruptcy rules. 5.3 Are tax liabilities incurred during each procedure? Companies in bankruptcy are taxed according to the Danish Bankruptcy Tax Act. The taxable income is computed in compliance with the ordinary tax rules. However, the tax authorities will determine to what extent a positive income is subject to tax. Often bankrupt companies will have suffered significant losses during the years preceding the bankruptcy, and they therefore rarely have a positive income. Commonly, the tax authorities will decide that the estate is not to be liable to tax. During suspension of payments, the company is subject to the ordinary tax rules. 6 Ending the Formal Procedure 6.1 Is there a process for cramming down creditors who do not approve proposals put forward in these procedures? In bankruptcy cases, creditor approval is not required for transactions carried out by the trustee. The trustee has a free hand to wind up the company s activities in the best possible way. In a suspension of payments case, the company s management will continue. The supervisor appointed by the Bankruptcy Court must approve all material transactions. As regards transactions of particular substance, e.g. sale of the company s business activities, the supervisor must also obtain creditor approval. Creditor approval is governed by special rules providing among other things that transactions of particular substance can be effected only if a majority of the creditors votes in the affirmative. The creditors are granted voting rights in proportion to the size of their claim. 6.2 What happens at the end of each procedure? Bankruptcy proceedings are normally concluded by the trustee preparing a statement of affairs with accounts for the bankruptcy and proposal for distribution of dividend to the creditors. Once the statement of affairs has been approved and the creditors have received dividend, a request will be made to the Danish Commerce and Companies Agency and other registers to erase the company. The suspension of payments period runs for three months and may be extended, however, not for more than a total of one year. If the reorganisation efforts carried out during the suspension of payments are successful, the suspension of payments will be discontinued, and the company will continue to carry on its activities outside the

5 framework of this procedure. However, if the reorganisation efforts are not successful, or if the company s business activities are sold to a third party, bankruptcy proceedings will usually replace the suspension of payments. 7 Alternative Forms of Restructuring 7.1 Is it common to achieve a restructuring outside a formal procedure in? In what circumstances might this be possible? Danish law allows ample opportunities for companies to restructure within the formal framework, in particular companies in bankruptcy or suspension of payments but also composition agreements. Thus, the scope of restructuring efforts outside the framework of the formal procedures is limited, mainly because informal restructuring may involve significant risks to both the management and to advisors. Informal restructuring may be opted for in connection with a socalled quiet suspension of payments, under which the company basically follow the rules of a suspension of payments but without court interference etc. A quiet suspension of payments are often chosen because an ordinary suspension of payments usually results in significant costs being incurred as well as publicity on the company s financial difficulties. 7.2 Is it possible to reorganise a debtor rather than realise its assets and business? 8 International 8.1 What would be the approach in to recognising a procedure started in another jurisdiction? The EU Bankruptcy Regulation that came into effect on 31 May 2002 has not been implemented in. Moreover, has not imported the rules in UNCITRAL Model Law on Cross- Border Insolvency. Consequently, the ordinary national Danish rules will apply to international insolvency. In principle, bankruptcy proceedings initiated in another jurisdiction will not exclude a creditor from levying execution on the debtor s assets in. This also applies to another country s insolvency procedures similar to the Danish suspension of payments regime. Also, provided that the Danish rules on venue are met, there should be nothing preventing the implementation of independent bankruptcy proceedings over a debtor s assets in, regardless of whether bankruptcy proceedings are already initiated in another jurisdiction. As regards the Nordic countries, i.e., Norway, Sweden, Finland and Iceland, has acceded the Nordic Bankruptcy Convention that is only applied in rare cases. According to the convention, a bankruptcy opened in one Nordic country comprises all assets and liabilities belonging to the debtor in the other Nordic countries. It is possible to carry out a reorganisation without selling the debtor s assets and activities. This can for instance be effected by entering into an agreement involving debt for equity swaps and the dilution of existing shareholders along with a further injection of funds. 7.3 Is it possible to achieve an expedited restructuring of the debtor by means of a pre-packaged sale? How is such a sale effected? The sale of a distressed business outside the framework of the formal procedures always involves a risk that creditors unable to obtain coverage may seek to set aside the sale. In order to avoid this, the following procedure may be followed: (1) without suspending payments or in other ways involving the public, negotiations are conducted with a potential buyer concerning the sale of a distressed business; (2) the company submits a bankruptcy petition; and (3) the trustee approves on behalf of the creditors the sale of the company that will then be effected. In this way, a prepackaged sale is combined with a relatively fast formal procedure.

6 Lars Grøngaard Gorrissen Federspiel Silkeborgvej 2 DK-8000 Aarhus C Tel: Fax: lg@gorrissenfederspiel.com URL: Lars Grøngaard is a partner at Gorrissen Federspiel and head of the firm s insolvency group. He acts as administrator of estates in bankruptcy and supervisor of companies in suspension of payments. He is a member of the International Bar Association. He is a 1984 graduate of University of Aarhus. Lars Grøngaard was admitted to the Danish Bar in 1987 and to the Danish Supreme Court in John Sommer Schmidt Gorrissen Federspiel Silkeborgvej 2 DK-8000 Aarhus C Tel: Fax: jss@gorrissenfederspiel.com URL: John Sommer Schmidt is an associate at Gorrissen Federspiel. He works in insolvency and is widely experienced within restructuring and liquidation of financially distressed companies, including bankruptcy and suspension of payments. He also advises clients on measures to be taken towards insolvent customers etc. including how to obtain a position as secured creditor. John Sommer Schmidt is a 2001 graduate of University of Aarhus. He was admitted to the Danish Bar in 2004 and to the Danish High Court in John Sommer Schmidt is a 2009 LL.M. graduate of University of California, Los Angeles. Gorrissen Federspiel is among the leading Danish law firms with strong international relations. We represent major Danish and foreign businesses and financial institutions. Our aim is to provide advice at the highest professional and ethical level, tailored to the client's individual situation and requirements. We are accessible whenever our clients need our assistance. Our practice areas cover all branches of Danish and EU commercial law. We maintain close relations with leading lawyers worldwide and, at short notice, are able to provide our clients with the professional assistance wherever they need it. We are a fully integrated law firm that works internationally. We have offices in Copenhagen and Aarhus. More than half of our 330 employees are lawyers who possess both broad educations and exactly the competencies relevant to our clients.