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What are the implications of the proposed provisional Restructuring Act?

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The Ministry of Justice and Public Security has proposed new restructuring legislation to mitigate financial difficulties resulting from the COVID-19 outbreak.

The Ministry of Justice and Public Security has on 15 April 2020 proposed new legislation in Legislative Proposition 75 (2019–2020); Proposition to the Storting (Proposed Enactment of Legislation) - "Provisional Act relating to Restructuring to Alleviate Financial Difficulties Resulting from the COVID-19 Outbreak (the Restructuring Act)".

The proposals in the proposition are largely based on Judge Leif Villars-Dahl’s report "Restructuring in Turbulent Times – Dynamic Measures to Address Financial Difficulties", which was circulated for consultation in the autumn of 2016, and these proposals have suddenly been brought to the top of the legislative agenda in response to the COVID-19 outbreak. It is proposed the restructuring provisions will be implemented in a separate provisional act (the "Restructuring Act"), which will, subject to certain exceptions, replace Part I of the Bankruptcy Act on debt restructuring for as long as the Restructuring Act remains in effect.

The main objective of the proposed legislation is to reduce the risk of unnecessary bankruptcy of viable businesses that have suffered a sudden loss of revenues as the result of the COVID-19 outbreak. The immediate impact of the outbreak on the Norwegian economy and Norwegian businesses means that many Norwegian companies will have an imminent need for a regulatory framework which is conducive to constructive negotiations with creditors to alleviate financial difficulties.

The Ministry also states in its proposition that the long-term focus should be on developing permanent restructuring provisions, which will be based on, and refine, the solutions in the proposed Restructuring Act, and which will replace Part I of the Bankruptcy Act.

Proposed amendments

The existing debt restructuring provisions in the Bankruptcy Act have not been extensively used in practice. The criticism of the existing provisions has been, briefly summarised, that debt restructuring proceedings are initiated too late, that debt restructuring proceedings under the Bankruptcy Act are not conducive to constructive negotiations with creditors or to the facilitation of restructuring, and that debt restructuring proceedings under the current provisions will in most cases end in bankruptcy.

The proposed Restructuring Act is intended to rectify this. The following is quoted from the proposition:

"It is the assessment of the Ministry that the proposals in the present proposition will, all in all, improve the prospects for successful restructuring. Proposed amendments to procedural provisions, amendments to how the restructuring plan is adopted, new tools for funding the restructuring period, amendments to the provisions on satisfaction of creditor claims and provisions allowing government to waive preferred claims, may improve liquidity during the restructuring proceedings and improve the prospects for a successful outcome. The proposals will mean that proceedings are initiated at an earlier stage than at present, that adoption of the final plan will get easier, that the restructuring may involve other arrangements than only a reduction of outstanding debts, and that operations can be funded in other ways than at present."

The main amendments proposed through the Restructuring Act are as follows:

  • The institution of restructuring proceedings shall not be conditional upon the debtor being unable to pay its debts when due.
  • Creditors may, on certain conditions, file a petition for institution of restructuring proceedings.
  • Provisions to ensure funding of the debtor’s operations during the restructuring period.
  • Improved prospects for converting debt into equity in connection with restructuring.
  • Authorisation of new administrative regulations to grant exemptions from the statutory priority of corporation tax claims, Value Added Tax claims, etc.
  • The current requirements for equal treatment of creditors upon voluntary composition and a minimum dividend upon compulsory composition are abolished.
  • Amendments to the provisions on adoption of a restructuring proposal.

Details on the proposed legislation

Section 1 of the Bankruptcy Act stipulates that the debtor must be in a situation in which it "is unable to pay its debts when due" in order to institute debt restructuring proceedings. Under the proposal, the institution of restructuring proceedings at the request of the debtor only requires that the debtor "is encountering, or will in the foreseeable future encounter, severe financial difficulties", and one of the objectives is to get restructuring proceedings underway at a sufficiently early stage. The same consideration also lies behind the proposal that creditors may file a petition for restructuring proceedings. However, restructuring proceedings cannot be instituted against the will of the debtor.

The Bankruptcy Act and the Mortgages and Pledges Act currently provide no scope for conferring special priority on security interests established to secure loans granted to fund the continuation of operations during the debt restructuring period. The absence of such scope for conferring special priority does in practice represent an obstacle to the funding of operations for the duration of the debt restructuring proceedings, and thereby also to completion of the debt restructuring proceedings. The proposal includes provisions conferring so-called "super priority", i.e. priority ahead of existing security interests, on any security interests established in accounts receivable, inventories, machinery and plant to secure loans granted to fund the continuation of operations during the restructuring period, as well as to fund the restructuring proceedings themselves, cf. the current provisions on statutory security interest to secure the administration costs of estates in bankruptcy.

The Restructuring Act includes provisions allowing for debt to be converted, in full or in part, into equity in connection with restructuring, which will require exemptions from, inter alia, the current provisions of the Private Limited Companies Act, the Public Limited Companies Act and the Bankruptcy Act. It is proposed that a simple majority shall be required for the Shareholders’ Meeting to pass resolutions on share capital increase, share capital reduction and issuance of financial instruments when such resolutions are passed in connection with a restructuring of the company. As far as creditors are concerned, it is proposed that the conversion of debt into share capital shall as a main rule be voluntary for each creditor. However, the proposal also includes a safety valve authorising the Court to decide that such conversion shall apply to all creditors if there are weighty reasons for doing so and those creditors that have objected to conversion obviously have no reasonable cause for such objection.

One of the main challenges under the current debt restructuring framework is that the priority provisions imply, in conjunction with the security interest provisions, that there are in many cases very limited funds left for completion of any composition. The Ministry has considered whether the provisional Restructuring Act should entail amendments to the existing statutory priority of corporation tax claims, Value Added Tax claims, etc., under Section 9-4 of the Satisfaction of Claims Act, but has concluded that this issue has not been examined in sufficient detail. In order to limit the fallout from the COVID-19 outbreak, the Ministry has instead proposed to authorise the granting, in administrative regulations, of temporary exemption from the statutory priority of corporation tax claims, Value Added Tax claims, etc. Such exemption may be granted in full or in part, and may be limited to restructuring only. It is emphasised in the proposition that the authorisation of such administrative regulations shall be considered a temporary and special measure in connection with the COVID-19 outbreak, which is not being considered for continuation in any subsequent and permanent legislative amendment.

The Ministry is proposing to implement the report’s suggested abolition of the requirement for equal treatment of creditors upon voluntary composition, as well as abolition of the requirement for a minimum dividend of 25% upon compulsory composition. The objective is to provide parties with more flexibility in exploring negotiated solutions, thereby increasing the prospects for successful restructuring.

As far as voluntary restructuring is concerned, it is proposed to retain the unanimity requirement applicable to voluntary composition under the current provisions, although with a simplified adoption procedure. As far as compulsory composition is concerned, it is proposed to replace the current qualified majority requirements with a simple majority requirement. Besides, it is proposed that the Court may refuse to affirm a restructuring proposal which includes compulsory composition if it would be offensive to affirm it or if the Court finds that the proposal is not reasonable and fair to the creditors.

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