Insolvency & reconstruction
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Pursuant to Danish law, suspension of payments and bankruptcy are the two main possibilities for insolvent companies to restructure their business. Another option that is rarely made use of is to make compulsory composition arrangements with the creditors of the company. The formal framework for such restructuring efforts is laid down in the Danish Bankruptcy Act.
When is a debtor considered insolvent?
The insolvency test is based on an assessment of the debtor’s liquidity. The debtor is regarded insolvent if he is unable to meet his obligations when they become due for payment. However, if the inability to pay is considered to be of temporary nature, the debtor is not regarded insolvent.
How do you file for suspension of payments?
A debtor can file for suspension of payments if he finds himself unable to meet his obligations. The purpose of suspension of payments is to avoid bankruptcy in favour of debt arrangements, typically based on a voluntary arrangement or a compulsory composition with the creditors or a sale of the company activities.
The debtor must file an application for suspension of payments to the Bankruptcy Court. The company is presumed to be insolvent, but the Bankruptcy Court does not conduct an insolvency test or perform further investigations to verify whether this is the case.
What happens when the suspension of payments is initiated?
The Bankruptcy Court will immediately appoint a supervisor to supervise the management and the continued business and transactions of the company. Material transactions cannot be carried out without the prior approval of the supervisor. The primary focus of the management must be to safeguard the interests of the creditors as the company in suspension of payments is assumed to be insolvent.
What happens to the employees?
The management and the supervisor have to decide whether it is necessary to dismiss all or some of the employees of the company as part of the reconstruction or in connection with a sale of the company.
The employees can demand that the debtor provides adequate security for due salary provided that it concerns the time after the application for suspension of payment is filed.
Will the suspension of payments be made public?
The Bankruptcy Court will submit a notice of suspension of payments to the Danish Commerce and Companies Agency and other public authorities. The company will be registered as a company in suspension of payments. An announcement of the suspension of payments will not be inserted in the Danish Official Gazette. Furthermore, the company must add “in suspension of payments” to its name.
What will the supervisor do?
Within one week following the suspension of payments, the supervisor sends a letter to all known creditors. In this letter, the supervisor informs about the most important assets and liabilities of the debtor, and the supervisor makes a statement of the main causes and purpose of the suspension of payments. The supervisor must also provide a list of known creditors, the debtor’s latest annual account and relevant information on the debtor’s bookkeeping.
Should the creditors file their claims?
The supervisor will normally encourage the creditors to file their claims in order to obtain a foundation for the potential reconstruction of the company. However, the creditors are not obliged to file their claims during the suspension of the payment period.
Will there be a creditors’ meeting?
A creditors’ meeting must be held within three weeks following the notice of suspension of payments. The Bankruptcy Court decides whether to sustain the suspension of payments at the meeting with the creditors.
How long is a suspension of payments period?
The suspension of payments period is three months, during which time the supervisor must inform the creditors of any transactions of significant substance contemplated by the company with the supervisor’s approval.
Upon request from the company, the suspension of payments may be extended by the Bankruptcy Court with up to three months at any time. However, the period of suspension of payments cannot exceed one year. The creditors must be informed of such extensions.
How does the suspension of payments end?
If the management and the supervisor succeed in restructuring the company, the suspension of payments will discontinue. However, if the reorganisation efforts are not successful, the suspension of payments scheme will usually be replaced by bankruptcy proceedings.
How to file for bankruptcy?
Bankruptcy is the main instrument within the Danish insolvency proceedings system. A petition for bankruptcy can be filed by a creditor or by the company itself. If the Bankruptcy Court finds that the debtor is insolvent, it can decide to commence bankruptcy proceedings.
What happens when a bankruptcy order is issued?
When a bankruptcy order is issued by the Bankruptcy Court, the debtor loses the rights to dispose of the assets. Thus, an estate will be established and a trustee appointed. The trustee will act as the management and is granted full right of disposal of the company. The trustee is required to wind up the company activities in the best possible way, and is entitled to carry out transactions without the creditors’ approval.
Will the bankruptcy be made public?
The Bankruptcy Court makes an announcement of the bankruptcy in the Danish Official Gazette, and a notice of the bankruptcy is submitted to the Danish Commerce and Companies Agency and other public authorities. The company will be registered as a company in bankruptcy. Furthermore, “in bankruptcy” must be added to the company’s name and will appear in all written material.
What will the trustee do?
The trustee immediately sends a letter to all known creditors of the company. In this letter, the trustee must inform the creditors of the situation of the company. After three weeks, the trustee must send a preliminary statement of the assets and liabilities of the estate to the creditors.
What happens to the employees?
Immediately after the bankruptcy order, the trustee has to decide whether the estate wants to affirm the employment contracts with the employees of the company. If the trustee decides to affirm an employment contract, the estate will be bound by the terms and conditions of the contract. An employee will be entitled to cancel the employment, if the trustee decides not to affirm the employment contract.
How to file a claim?
The creditors are encouraged to file their documented claim with the estate within four weeks following the bankruptcy order. It is, however, possible for a creditor to file a claim with the estate after the four-week period. Certain specific rules apply when filing a claim against the estate, and the creditor must provide documentation substantiating the claim, thus assistance from a legal advisor could be necessary.
How are the claims ranked?
The Bankruptcy Act sets up a ranking of the claims that can be filed with the estate. Claims that have risen during or in connection with the administration of the bankrupt company and the estate – the so-called pre-preferential claims – will be met before all other claims. The next type of claims in the priority are the so-called secondary pre-preferential claims, which concern costs that occur when an attempt has been made to restructure the company, including obligations undertaken with the approval of the supervisor during a suspension of payments. Claims from the employees are next in the priority as preferential claims. After the employees’ claims have been met, certain suppliers’ claims will also be met as preferential claims. All other claims are so-called unsecured claims, which will be met equally and covered by the remaining dividend, if any. Last in the priority are the deferred claims such as interest on unsecured claims, which will, however, only be met in rare cases.
Creditors with claims that are secured by mortgage or in other ways will be fully covered to the extent that the security provided suffices.
What happens with agreements entered into by the company?
Pursuant to the Bankruptcy Act, the trustee is entitled to decide whether to affirm or reject executive company agreements. If the trustee decides to affirm an agreement, the estate will be bound by the terms and conditions, and the other party’s claims in that respect will be ranked as pre-preferential claims. If an agreement is rejected by the estate, the other party may cancel the agreement and file a claim for consideration or damages, which will be ranked as an ordinary unsecured claim.
What information will the creditors receive?
No later than four months following the bankruptcy order, the trustee must send a report which describes the most important causes of the bankruptcy. This report must also include a balance sheet and information regarding the latest annual account and the accounting figures. Hereafter, the trustee sends semi-annual accounts on the situation of the estate and a description of the work that has been undertaken by the trustee in the period.
What happens at the end of the bankruptcy proceedings?
The trustee will normally conclude the bankruptcy proceedings with a statement of affairs and accounts for the estate, including a proposal for distribution to the creditors. If the statement is approved, the creditors will receive dividends of their claims, and the company will be erased from the company register of the Danish Commerce and Companies Agency and other public registers.
The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.