An alternative to ordinary composition

Date 22 jun. 2010

In recent years, focus on insolvency law rules of composition has increased. When the composition is mentioned, most people think of the ordinary composition, which is a percentage reduction of the non-preferential debts.

 

However, alternatives exist that may help companies in connection with a reconstruction and, to some extent, it is possible to combine these alternatives.

 

The various types of composition

The Danish Act of Insolvency Section 157 operates with three different types of composition

 

1)      Compulsory composition

2)      Liquidation composition

3)      Moratorium

 

Compulsory composition

Compulsory composition is authorised by The Danish Insolvency Act, Section 157 no. 1. When operating with compulsory composition it must be specified to which percentage the ordinary claims are reduced. The ordinary claims may not be reduced to less than 10% of the respective amounts, unless very special circumstances or the consent of the creditors exists, cf. The Danish Insolvency Act, Section 161.

 

Adoption of the compulsory composition is regulated by The Danish Insolvency Act, Section 176. The provision implies that the lower the level to which the ordinary claims are reduced the higher the majority for adoption has to be.

 

In practice, this means that the adoption of composition requires that at least 60% of the creditors who participate in the vote vote in favour of the adoption, cf. The Danish Insolvency Act, Section 176(1).

 

Moreover, the creditors who join the compulsory composition must represent at least the same percentage of the total amount that gives the right to vote as the offer is lower than 100%, however, at least 60% and no more than 75%, cf. The Danish Insolvency Act, Section 176(2), no. 1.

 

Liquidation composition

The consequence of liquidation composition is that the company winds up and the dividend that is offered to the ordinary creditors is not determined before the winding-up is enforced.

 

Adoption of the liquidation composition must be accepted by at least 60% of the creditors who participate in the vote.

 

In addition, the creditors who vote for the liquidation composition have to represent at least 75% of the total amount that gives the right to vote, or if a lower minimum coverage is granted in the composition as many percent as this offer is less than 100%, however, at least 60% and no more than 75%, cf. The Danish Insolvency Act, Sections 176(1) and (2), no. 2.

 

Moratorium

The consequence of moratorium is that the debtor is not granted any cancellation of the debt, but a postponement of payment is accepted by the creditors.

 

In practice, the main rule is that the moratorium proposition will imply that interest will not be paid from the cut-off date, but nothing prevents, that interest shall continue to accrue and be paid.

 

Moreover, adoption of a moratorium requires that the creditors who vote for the composition must represent at least 60% of the amount that gives the voting right and 60% of the creditors who participate in the vote must vote for adoption of the moratorium. 

 

Commencement of compulsory composition, liquidation composition or moratorium

In order for the bankruptcy court to review an application of composition, it is required, that debtor has contacted the nominees appointed by The Danish Court Administration cf. The Danish Insolvency Act, Section 164, cf. Section 165(1).

 

The Danish Court Administration appoints professional nominees for composition for a specific length of time decided by The Danish Court Administration. Chartered and registered accountants may be appointed without nomination as professionals in regard to accounting cf. The Danish Insolvency Act,Section 164(1). Furthermore, the bankruptcy courts may appoint other persons than the nominees appointed by The Danish Court Administration, as long as it is for a specific composition. 

 

The main rule is that an accounting expert and a professional within the debtor’s specific field must be appointed, but the bankruptcy court may allow that only one person participates.

 

When the nominees are appointed, they register all of the debtor’s assets and liabilities, including surety obligations, and prepare an overview of the debtor’s financial status cf. The Danish Insolvency Act, Section 165(2)

 

Furthermore, the nominees prepare a statement on the primary reasons for which the debtor is seeking a composition, which includes a detailed description of the debtor’s business conduct and accounting and consider if transactions or legal actions that should be reversed exist.

 

Combination of the different types of composition

In practice, it is possible to combine the different types of composition, which means that it is possible to combine a compulsory composition with a moratorium.

 

It may be an advantage to combine a compulsory composition and a moratorium when the status prepared by the nominees shows a high dividend, but the debtor’s liquidity is poor and the possibilities of financing the composition through a bank are not present.

 

Especially, when the debtor has assets which can not be immediately realized this possibility of combination ought to be considered.

 

For the reconstruction, a balance of the assets and liabilities is established. This is used to calculate a possible dividend in case the debtor is declared bankrupt. At the same time, the potential dividend for the moratorium is calculated.

 

In this way, the creditors may see the advantage of accepting the compulsory composition – including a moratorium.

 

The reason why the dividend will be different at a moratorium and a bankruptcy may be that the sale of assets in the free market rather than compulsory sale may result in a higher price.

 

Furthermore, in these situations it may be possible to obtain external funding in case the moratorium is accepted whereas this will not be possible at a bankruptcy.

 

 

If you have questions regarding the above or require additional information on compulsory compositions, please contact attorney Thomas Weitemeyer (twe@mwblaw.dk) or trainee Tim Rosenkrantz Buur (tbu@mwblaw.dk).

 

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 or considerations.