NORWAY: An Introduction to Restructuring/Insolvency
Introduction to the current situation: A record-low number of insolvencies in the wake of the pandemic
For the past two years, the COVID-19 pandemic has affected all industries, with the retail trade, restaurant and nightlife businesses, as well as art and cultural institutions being hit especially hard. Experts have long predicted a wave, if not a landslide, of bankruptcies in the Norwegian economy, but so far it has been long in coming. 2020 brought a decline in bankruptcy cases from 3842 in 2019, to 3465. Every month of 2021 brought declines compared to the previous year, totalling 2573 bankruptcies. The question is of course whether the expected wave has been avoided, or if it will wash ashore during the coming year.
Both tax authorities and private banks have allowed companies deferred payments, and many might experience that insurmountable debt will fall due during 2022. Financial support schemes will be phased out as the beer taps are reopened, flights are taking off again, and concert halls can be filled with as many as they can fit. There is reason to believe some companies are kept artificially afloat by support schemes and tax deferrals, and thus risk facing bankruptcy this year. At the same time, the Norwegian economy is remedied by low unemployment and high prices on exports. Few experts dare to predict that the landslide of bankruptcies is coming in 2022, especially looking back at the last two years where such a prediction has not materialised.
Current difficulties and solutions: How to manage company liquidity and avoid bankruptcy
As result of the situation described above, in the times ahead many Norwegian based companies will face challenges in maintaining their ability to meet current obligations. Difficult priorities will often emerge; salaries may fall due at the same time as the electricity bill or the deferred tax. Although many creditors will show understanding of the extraordinary situation the pandemic has created, some will also be affected themselves and be dependent on collecting current receivables. This can make negotiations challenging and creative thinking becomes increasingly important.
There are several measures which a company can implement in pursuit of avoiding bankruptcy. Available options include utilising public loans and support schemes and examining the possibility of obtaining more favourable terms on crisis loans, as well as renegotiating debt and running costs, and possibly requesting debt negotiations with all creditors. Some companies may be able to choose debt negotiations under foreign law, which may be more advantageous – in all cases, seeking legal advice can prove crucial when manoeuvring through a financially challenging situation.
In the work of ensuring a company's financial sustainability, close follow-up by the board is critical. In the worst-case scenario, when reviving sustainable business operations has become unattainable, the board must file for bankruptcy. If the board fails to act, its directors may be held liable for losses. In the process, it is important for the board to be able to document the basis on which decisions were made along the way. If creditors or others should wish to bring claims against board members, the case typically does not arise until a couple of years after the board's decisions were made, and the board must be able to show how they managed their formal responsibilities.
Awareness of the legal framework is especially important when the company is forced to make difficult financial priorities. For example, the company must not pay salaries to its employees without allocating the corresponding amount to cover advance taxes. Failing to allocate the employees' advance tax is considered fraudulent, and company managers risk being held personally economic liable for non-provision.
Ongoing developments in the legal regulation of corporate restructuring
Where bankruptcy proceedings aim to ensure the highest possible repayment for creditors before liquidation – or a resale – of the company, the goal of a restructuring is to ensure the company’s continued survival. However, achieving this goal has largely been out of reach when using the regulations that have so far applied to formal company restructurings in Norway, as these have offered few tools to aid the process. The industry is following the developments that are currently taking place in this area closely.
At the beginning of the pandemic, the Norwegian government proposed changing the rules for debt negotiations to ensure that companies affected by the pandemic avoided unnecessary bankruptcies. This resulted in the temporary Restructuring Act (2020), which has been extended to apply until 1 July 2023. In parallel, permanent new rules on restructuring are in the process of being formulated, with the aim of keeping the tools in the temporary legislation available for companies in financial difficulties, even after the end of the pandemic. Although the legislation is new, the work to obtain more efficient rules related to company restructuring has been long overdue. The studies, giving the framework of the temporary Restructuring Act, was already concluded in 2016.
These rules will give vulnerable companies further instruments in negotiations with creditors than those previously available. Namely, formal negotiations on reconstruction can begin earlier, while the debtor still has funds left. Before these latest legal developments, the opportunity to request debt negotiation has only been available when the debtor is unable to meet its obligations as they fall due. Furthermore, it will be easier to adopt a restructuring plan; this includes more lenient voting requirements to adopt a restructuring plan, more liberal/debtor-friendly rules on a full or partial sale of the business, and for the conversion of debt into share capital.
According to Norwegian insolvency legislation, overdue claims for public taxes, such as value added tax, are given priority over other unsecured creditors who do not have mortgage-backed claims. The new restructuring act will open for temporary exceptions from the preferential right for tax claims, paving the way for deals with other creditors in a restructuring negotiation. Furthermore, moving forward from negotiations and working towards building financial stability for the firm is made easier by the possibility for the distressed company to obtain collateral for new loans in financing of the reconstruction, that hold priority over all other mortgagees. The new legislation will also protect the company against bankruptcy proceedings during the restructuring negotiations.
Time will tell whether the introduction of these new measures will create an increase in successful restructurings in Norway in the future. So far, we have seen a few more company restructurings take place, but the experience is still very limited. We do however assume that the Restructuring Act also has an indirect effect, by speeding up negotiations before they reach the restructuring stage. There is also hope in the industry, and among restructuring lawyers, that the permanent legislation that is currently a work in progress will offer even more measures to secure continued operations for financially troubled companies.
This article was originally published in Chambers and Partners Chapter Europe
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