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 bankruptcy processes are available for financially troubled debtors?
The Danish Bankruptcy Act provides for three different juridical insolvency procedures: bankruptcy, restructuring and debt relief. Outside the three judicial insolvency procedures, a variety of non-judicial rescue and 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 persons and legal persons may be taken under bankruptcy. It is necessary that the debtor is insolvent (as per the definition in the Danish Bankruptcy Act) meaning that the debtor is unable to pay his obligations as they fall due and that the inability to pay is not only of a temporary nature. 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 as described in the Danish Bankruptcy Act. During the bankruptcy procedure – which can take from a few months to several years depending on the complexity of the bankruptcy estate – creditors will not be able to enforce their claims against the bankruptcy estate's assets. Creditors may file their claim with the trustee who will assess the validity of the claim. 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 is subject to approval by the bankruptcy court.
The restructuring procedure is based on decision by the bankruptcy court. The purpose of the procedure is to examine the possibility of a compulsory composition or a business transfer. The restructuring procedure can be commenced with respect to both natural persons 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. A decision to commence a restructuring procedure cannot be reversed. Once a restructuring procedure has been commenced the outcome will either be a compulsory composition, the bankruptcy of the debtor or that the debtor becomes solvent. In order to commence the restructuring procedure, it is necessary that the debtor is insolvent. The bankruptcy court will appoint a restructuring administrator and a restructuring accountant. The debtor maintains control of his assets during the restructuring procedure, but the debtor is not allowed to enter into transactions of material signifi-cance without the consent of the restructuring administrator. During the restructuring procedure, creditors are – as a general rule – not allowed to enforce their claims against the debtor's assets. The debtor cannot be taken under bankruptcy as long as the restructuring procedure is ongoing. The outcome of the restructuring procedure (compulsory composition 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. The proposal is generally 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. A restructuring procedure can take from seven months to a year depending on the complexity of the debtor's affairs.
Judicial debt relief is only available to debtors who are natural persons. Judicial debt relief may – subject to the bankruptcy court's decision – involve a full or a 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. Further, a stay of execution can be agreed between the debtor and his creditors or between the creditors.
1.3 What are the key features of a reorganisation plan and how is it approved?
During the course of 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 are to 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 represent 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 or a transfer of the debtor's business. The proposal is subject to a creditors' vote on a meeting in the bankruptcy court which – as a general rule – shall 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.
Further, 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 of 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, and 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 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 major creditors.
1.4 Can a creditor or a class of creditor 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 that has been under bankruptcy will still be liable for the debt that has not been covered from the proceeds of the bankruptcy. A legal person that has been under bankruptcy will cease to exist after the bankruptcy procedure has been completed.
In a judicial restructuring procedure, secured debt can be comprised by a compulsory composition as part of an adopted restructuring proposal, meaning that the part of the debt which is 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 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 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?
A large number of 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 have – in particular – been addressed in Danish case law. The management of a company in financial difficulty may become liable to pay damages: (i) if the management sells the company's assets at far below-market prices; (ii) if 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) if the management have failed to discontinue the company's operations after the point in time where management should have realised that there was no reasonable prospect that the company would be able to continue.
1.7 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 prior to 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 comprised by 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.
1.8 Is there a different regime for banks and other financial institutions?
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 bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
A foreign debtor who resides in Denmark or who operates a business in Denmark can – as a general rule – be taken under bankruptcy in Denmark.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
Denmark is not bound by the EU Bankruptcy Regulation because of Denmark's 'opt out' with respect to the area of justice and home affairs; and Denmark has not implemented the United Nations Commission on International Trade Law (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. This authority has, however, not been utilised by the Ministry of Justice. This means that most foreign court decisions concerning bankruptcy, restructuring and similar judicial insolvency proceedings are not recognised in Denmark. Creditors may therefore enforce their claims 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) and the Danish employee's 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 March 17 2015, five of the major Danish political parties entered into a political agreement whereby they agreed to seek converting the opt-out system for justice and home affairs matters into an opt-in system to allow Denmark to opt in with respect to certain EU legislation. The five political parties identified the EU Bankruptcy Regulation as one of the EU regulations that Denmark should seek to be bound by if the opt-in system becomes a reality. In order for the opt-in system to materialise, a referendum will have to be held, the date of which is yet to be fixed.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Boris Frederiksen is a partner and head of 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. Frederiksen also handles complex litigations concerning insolvency-related disputes.
About the author
Morten Plannthin is a partner in Poul Schmith/Kammeradvokaten's insolvency and restructuring department. He advises public and private clients on all matters relating to insolvency and restructuring. His areas of expertise include restructuring of insolvent companies, bankruptcy administration, asset tracing, complicated debt collection proceedings, securing assets through attachment proceedings and dispute resolution. He often conducts cases before the Danish city courts and High Courts concerning insolvency-related disputes, management liability, commercial disputes, finance law and M&A.