COVID-19 and debt restructuring
The Norwegian Government aims to prevent unnecessary COVID-19 bankruptcies by reforming the current rules for debt settlement negotiation.
Gorvernment preposes to reform the current rules for debt settlement negotiation.
On Wednesday, April 15, 2020, the Norwegian Government proposed to reform the current rules for debt settlement negotiation, in order to help viable businesses now effected by the Covid-19 situation. One stated goal is to provide vulnerable companies with more tools and a more relaxed process when negotiating with creditors than under the current legislation.
- Introduction – debt settlement negotiations
- The background for the proposal
- Outline of the proposed Act
- Going forward
Introduction - debt settlement negotiations
Companies that are unable to fulfil their obligations have the opportunity to petition for court-supervised negotiations with creditors on voluntary or coercive debt settlement, in accordance with the rules of the Norwegian Bankruptcy Act. Petition for such debt negotiation is addressed to the District Court, which then initiates a process related to possible debt settlement negotiations. The outcome of the negotiations will either be a voluntary debt arrangement (for example, with deferral of payments and / or reduction of debt), a coercive debt settlement or bankruptcy. Debt negotiations can of course also be carried out outside of court.
The institute of debt settlement proceedings are seldom used under current legislation. The reason is mainly assumed to be that the companies, at the time of debt negotiations, already have too financially distressed, indicating that there will not be sufficient means to find a solution for the company and its creditors.
Background for the proposal
In light of the critical and immediate challenges businesses is facing as a result of the Covid-19 situation, a new temporary act on "restructuring to remedy financial problems resulting from the outbreak of covid-19" (the Restructuring Act) was proposed on Wednesday. The main purpose of the Act is to reduce the risk of unnecessary bankruptcies in otherwise viable businesses that are affected by immediate revenue loss as a result of the outbreak, and that jobs are being secured. Thus, the rules can help to distinguish between companies that can be profitable under normal conditions and companies that are generally not profitable.
The proposal is based on a report on restructuring and debt settlement under the Bankruptcy Act from 2016, where extensive amendments to the Bankruptcy Act's rules on debt settlement negotiations were proposed. Partly due to new EU legislation, the report and its recommendation has not yet been followed up.
As a result of the Covid-19 situation, the Norwegian Government now wants to implement swift measures related to debt settlement negotiations. The Government further states that the need for rapid measures means that the rules are now proposed as a temporary act, rather than extensive amendments to the Bankruptcy Act. If the proposal is passed, the rules (as long as the act is in force) will replace the Bankruptcy Acts rules on debt settlement negotiation. However, it appears from the proposal that the temporary rules on reconstruction can be further developed into permanent rules.
Outline of the proposed Act
The Norwegian Government emphasizes that the aim of the proposed changes is to give vulnerable companies more tools in negotiations with creditors than under current legislation. The Government emphasizes that:
- Restructurings can be initiated at an earlier stage, and while the debtor still has sufficient cash flow (is liquid). Today, debt settlement negotiation can only be requested when the debtor is unable to fulfil his obligations as they fall due. The proposal allows for restructuring to be requested from debtors who "have or will have serious financial problems in the foreseeable future."
- Creditors will also be able to petition for debt restructuring negotiations, but only if the debtor is no longer considered liquid (unable to fulfil his obligations as they fall due).
- It will be easier to adopt a so-called restructuring plan.
- Greater access to full or partial sale of the business and conversion of debt into share capital.
- Possibility to make temporary exemptions from the authorities' right of preference for claims related to unpaid tax and VAT.
- Possibility to grant superior priority for loans during the restructuring, with priority ranking ahead of other mortgagees.
- The debtor's protection will be strengthened against e.g. bankruptcy during restructuring negotiations.
The proposed Act has been presented to the Norwegian Parliament. It is assumed that the Act will be debated and handled as soon as possible.
The temporary Act, if passed in its proposed form, will apply to all petitions received by the District Court after the entry into force of the Act, as well as petitions filed to the District Court before the entry into force but not yet processed by the District Court. If debt negotiation is opened pursuant to the Bankruptcy Act after March 1 2020, the case can be handled under the new rules if the debtor so requests it and no proposed voluntary debt settlement has been made.
We will continuously update when there are changes that affect Norwegian companies. If your company has any questions, contact us!