The Rules on Reconstruction

Date 1 apr. 2011

 

On 4 June 2010, the Danish Parliament passed the revised insolvency act, act no. 718, hereby implementing the new rules on reconstruction. The new rules will come into force on 1 April 2011.

 

In the following, a number of the most important provisions on reconstruction are reviewed along with the changes which these new rules may result in. Businesses must especially focus on the consequences which the new rules on reconstruction may have in relation to the agreements made with a business under restructuring.

 

Reconstruction in general

The new rules on reconstruction have been adopted based on recommendation 1512/2009 on reconstruction submitted by the the Advisory Council on Bankruptcy. Against the background of the adopted bill, the present rules on suspension of payments and compulsory composition negotiations are abolished. In future, a business will no longer go into registered administration, but reconstruction process may be commenced.


Among other things, the purpose of the change is for viable businesses to be kept in operation and, simoultaneously, for the interests of the claimants to be considered. The continuation of viable businesses will thus secure jobs and production.


A reconstruction must contain at least one of the following elements, cf. Section 10 of the Bankruptcy Act:


1.      Compulsory composition, cf. Section 10(a) of the

          Bankruptcy Act

2.      Transfer of business, cf. Section 10(b) of the Bankruptcy Act


The purpose of a compulsory composition may be reduction or lapse of the claim against the debtor, postponement of payment (moratorium), liquidating composition or a combination of these. E.g. a percentage reduction of the claims against the debtor combined with a postponement of the time of payment.


The transfer of business may take place in full or in part. Decisive of whether a transfer of business is considered to have taken place is that the buyer becomes the owner of the business, so that the business maintains its identity. Consequently, transfer for leasing or pledging is not included.


The course of reconstruction in outline

Reconstruction may be commenced when the debtor is insolvent, cf. Section 17 of the Bankruptcy Act, and upon request from the debtor or a creditor. Submission of a request for reconstruction also establishes the date of presentation of a petition.


At submission, security for the administration of the reconstruction must be provided. However, the security is secondary in that the debtor’s assets cover first. It must be assumed that the security constitutes DKK 30,000 which is common practise concerning petitions for liquidation. If a floating charge has been registered, pledgee must continue to provide the usual security of DKK 50,000.


The bankruptcy court commences the reconstruction process immediately if the request has been submitted by the debtor or by a creditor with the consent of the debtor. If consent is not given, the bankruptcy court summons the debtor to a meeting at which the request is treated.


The bankruptcy court also appoints one or more reconstructors and an accounting expert.


The bankruptcy court determines a date for a meeting with the claimants which will be held no later than four weeks after the commencement of the reconstruction process. At the meeting, the claimants must vote on the reconstruction plan.


No later than six months after the holding of the 4-week-meeting, a new meeting must be held at which the participants vote on the reconstruction proposal. The bankruptcy court may extend the time-limit for voting on the reconstruction proposal with two months twice. The reconstruction process may thus not go beyond 11 months.


The reconstructor and the shop steward

The reconstructor is most often an attorney who meets the independence requirements, cf. Section 238 of the Bankruptcy Act.


The request for reconstruction must contain a suggestion for a reconstructor. The bankruptcy court is not bound by the suggestion, but often chooses to follow the suggestion.


The work of the reconstructor involves great responsibilities in that the reconstructor must possibly take over the day-to-day management of the business – depending on the circumstances. The creditors must request that the reconstructor takes over the management of the debtor’s business if the business in question is an investment trust or a similar organisation in which the participants are not personally liable.


The shop steward who is skilled in accounts, and who is also appointed by the bankruptcy court, must not be connected to the debtor. In most cases, the accounting expert is state-authorised or a registered public accountant.


It is also required that the accounting expert has not worked as an advisor to the debtor during a period of two years before the reconstruction. Similarly, the accounting expert must not work as an advisor to the debtor for a period of two years after the reconstruction.

 

The Reconstruction Plan

The claimants must vote on the reconstruction plan at the 4-week-meeting. In order for the claimants to be able to make an informed decision, the reconstructor must forward information to the claimants on the type of reconstruction to be carried out, the important steps to be taken, the challenges to be overcome and the shop steward’s opinion on any discrepancies in the latest annual report, no later than one week before the meeting.


The reconstruction plan must be approved by the debtor.


The reconstruction plan must be decided, changed or rejected. Rejection or changes require a simple majority from the creditors present who must constitute at least 25% of the creditors.


If the motion is not passed, the petition for reconstruction is considered a petition for liquidation proceedings which is tried immediately.


The motion for reconstruction

The motion for reconstruction, which must be available no later than six months after the 4-week-meeting, must contain the motion (which may be changed by the reconstructor until it has been passed), an overview of assets and liabilities and a statement from the reconstructor and the shop stewart.


The debtor and the reconstructor must be present at the meeting. If the debtor fails to turn up, the reconstructor takes over the management of the company.


The claimants present vote on the motion – according to the amounts of the claims – and may be rejected by simple majority.


Conclusion of reconstruction

The reconstruction ends if the motion is affirmed by the bankruptcy court, the motion is rejected by the claimants or if the bankruptcy court refuses to affirm the motion.


The reconstruction also ends if the debtor is not insolvent, the debtor does not cooperate loyally, the debtor requests this or the reconstruction is futile.


Legal effects of reconstruction

During the reconstruction process, payment of debt may only take place according to the order of priority of creditors in bankruptcy or to avoid losses.


As a main rule, debtor maintains the disposal. Important decisions – including transfer of business – require the reconstructor’s consent.


If the debtor is a legal person with limited liability, the reconstructor may take over the management of the debtor if the debtor does not consent to the reconstruction, if the claimants so request or if there is a risk that debtor will act in a way that is harmful to the claimants.


During the reconstruction process, a number of limitations apply regarding the claimants’ access to seek satisfaction from the debtor’s assets. For example, if a floating charge has been registered, the charge freezes at submission of the request for reconstruction, however, a separation may take place at more specific terms.


Nullity actions

In that a date when the petition for a liquidation order was presented to the court has been established, nullity actions may be filed pursuant to Section 64-80 of the Insolvency Act. The claimants vote on whether or not a nullity action should be filed. If legal steps are taken, the claimants who voted in favour of the motion are jointly liable for the expenses. The company may also sell the nullity requirements.


If the claimants agree to take legal action, the bankruptcy court appoints an attorney to conduct the case. Otherwise, any claimant who is entitled to vote may file a nullity action. Nullity actions must be filed no later than four weeks after the end of the reconstruction process.


Bilateral agreements

The reconstructor may enter into bilateral agreements.


This also apllies to agreements which have already been violated or terminated – which are caused by violation of payment terms and which have been terminated within four weeks before commencement of the reconstruction. However, the reconstructor may not enter into an agreement which has already been terminated if the other contracting party has already acted in accordance with the termination.


Futhermore, a debtor in reconstruction will have the opportunity to terminate continuous contract matters with a shortened notice.


In a continuous contractual relation, it will no longer be possible to require a deposit as security for future deliveries from a customer who is under reconstruction just as it will not be possible to terminate the agreement as a consequence of a delay in the debtor’s payment, unless the claim in question is a precedence claim and the debtor does not make payment without undue delay after the continuation of the agreement.  


Finally, the new rules on reconstruction provide the opportunity for a debtor, in reconstruction, to transfer his rights and obligations according to the contract without the joint contractor’s consent.


Practical consequences of the new rules

As a consequence of the new rules on reconstruction, we recommend that a business considers to which extent a revision of standard agreements and delivery terms and leasing agreements is needed.


Furthermore, it is our opinion that businesses should update their internal guidelines for handling a joint contractor’s insolvency to ensure that they take the new rules on reconstruction into account. 

 
 

If you have any questions or require additional information on reconstruction, please contact Partner Thomas Weitemeyer (twe@mwblaw.dk), Junior Associate Tim Rosenkrantz Buur (tbu@mwblaw.dk) or Junior Associate Anders Kjær Dybdahl Pedersen (akd@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.