Cooperative Housing Association allowed Bankruptcy

Date 18 maj. 2016
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11 May 2016, the Supreme Court pronounced a fundament ruling in a case on whether the cooperative housing association Duegården in liquidation could go bankrupt despite the fact that its bank and mortgage bank Nykredit had committed to provide financial support to the cooperative housing association.

 

Since its founding in 2007, the cooperative housing association had not been able to finance its operations and had consequently financed the operations through loan financing.

 

In June 2013, the cooperative housing association entered into liquidation as a result of its financial problems. After an unsuccessful attempt to liquidate the association, the cooperative housing association filed for bankruptcy in June 2014.

 

In December 2014, the Bankruptcy Division of the Copenhagen Maritime and Commercial Court commenced bankruptcy proceedings of the housing cooperative association. Nykredit appealed the ruling to the High Court of Eastern Denmark, and the High Court repealed the Bankruptcy Division’s ruling in July 2015. The cooperative housing association brought the High Court of Eastern Denmark’s ruling before the Supreme Court, and on 11 May 2016 the Supreme Court pronounced its ruling.

 

The Supreme Court concentrated on two issues: In part whether the cooperative housing association had any legal interest in becoming subject to bankruptcy proceedings, and in part whether the condition for insolvency was fulfilled in order to pass the bankruptcy order. The Supreme Court was divided by four against three.

 

The majority of the Supreme Court took into account (i) that the cooperative housing association’s decision to dissolve was valid; (ii) that the assumptions taken into account at the founding of the cooperative housing association proved to be incorrect; and (iii) that the liquidators on the basis of the cooperative housing association’s financial situation were obligated to file for bankruptcy on behalf of the cooperative housing association. Based on this, the cooperative housing association had a legal interest in a possible pronouncement of a bankruptcy order regarding the association.

 

In relation to the issue concerning the cooperative housing association’s insolvency, both the majority and minority were convinced that without the commitment from Nykredit, the cooperative housing association was insolvent.

 

It was the assessment of the Supreme Court’s majority that the financial commitment from Nykredit was of such a nature that it was possible to pass a bankruptcy order regarding the cooperative housing association. The commitment from Nykredit involved, among other things, a number of unclear requirements to the cooperative housing association, including the operations of the cooperative housing association. Because the commitment contained these unclear requirements, it was the opinion of the Supreme Court’s majority’s that the commitment was of such a nature that it was to be considered an offer to the cooperative housing association which required the cooperative housing association’s consent before it could be regarded as having been accepted between Nykredit and the cooperative housing association. The Supreme Court’s majority did not find that the cooperative housing association had given such acceptance, nor given it by implication, which is why the Supreme Court’s majority voted for the Bankruptcy Division of the Copenhagen Maritime and Commercial Court to process the bankruptcy order again.

 

The Supreme Court’s minority did not address the question of any legal interest. Contrary to the Supreme Court’s majority, the assessment of the minority was that the commitment was of such a nature that it gave the cooperative housing association the necessary assurance to continue a safe operation of the association. Moreover, it was the minority’s assessment that the cooperative housing association had by implication accepted the offer from Nykredit and that the cooperative housing association would not be entitled to refuse such a commitment in that the commitment would ensure the continued operation and maintenance of the association without further debt and without any increase in property tax.

 

The Supreme Court ruled by the majority’s decision, and thus the case was referred back to the Bankruptcy Division of the Copenhagen Maritime and Commercial Court for the purpose of processing the bankruptcy order.

 

Our Assessment

Based on the ruling it has been established that any creditor’s commitment to not collect its own outstanding debts and to support the operation of the business/property/association will only be sufficient to avoid bankruptcy provided that the commitment does not at the same time contain any requirements to the debtor. Thus any debtor will be entitled to go bankrupt, unless there is an unconditional and clear commitment from a creditor to refrain from collecting its own outstanding debts and to support the operation of the business/property/association.

 

See the Supreme Court’s judgment here (in Danish).

 

If you have any questions or would like additional information regarding any of the above, please contact Partner Thomas Weitemeyer (twe@mwblaw.dk) or Senior Associate Anders K. D. 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 any reader’s use of the above as a basis for decisions and considerations.