Proposed changes to rules on restructuring
On 3 July 2020, the Danish Bankruptcy Council (an advisory board to the justice department) proposed to change the rules on restructuring to make them more flexible and easier to use for the intended purpose. Some of the proposals are previous proposals which are now being reintroduced by the Bankruptcy Council and some of them are new, being necessitated i.a. by the impact of the COVID-19 pandemic on Danish businesses. Below is a summary of the proposed changes.
Practitioners like us have been calling for new rules for a long time; today, we frequently have to choose not to apply the existing restructuring rules but use alternative measures when helping companies in distress.
We believe that most of the proposals will contribute to making the rules on restructuring more flexible. Particularly, the possibility of coverage by the Employees' Guarantee Fund in connection with a transfer from a business under restructuring will enable more jobs to be saved. Also, the proposed possibility of completing a transfer without waiting for prior approval of a restructuring proposal is a much-awaited tool that can save many businesses and jobs.
The Bankruptcy Council’s proposal may be summarised as follows:
- A controlled “time out” period of 4-8 weeks will be introduced to explore the possibilities of a restructuring.
- If a restructuring plan is not adopted during the time out, the company will not automatically be subjected to bankruptcy proceedings.
- No obligatory security will be required for any subsequent bankruptcy proceedings.
- No requirement for appointment of a restructuring accountant on commencement of the restructuring proceedings.
- Coverage by the Employees’ Guarantee Fund will be available as soon as restructuring proceedings are commenced.
- Where a floating company charge has been created, it will not automatically "crystallize" on commencement of restructuring proceedings.
The Bankruptcy Council recommends implementation of the changes as soon as possible, but it is still uncertain when an actual bill proposing the changes to the relevant legislation will be tabled.
Controlled time out for 4-8 weeks
Under the current rules, the company must, together with the administrator and the restructuring accountant, present a restructuring plan no later than 4 weeks after commencement of the proceedings, explaining which type of restructuring is sought and which steps will be taken to implement it.
The Bankruptcy Council proposes to change the existing "loophole" making it possible to postpone the presentation of a restructuring plan for 4 weeks in extraordinary circumstances and to allow such postponement without further explanation at the administrator’s request. To avoid abuse of this right, the request for a postponement must be discussed at the meeting with the creditors to be held within 4 weeks. At this meeting, the bankruptcy court may ask the administrator to explain the reason for the request, and the creditors may vote against it as under the current rules.
No automatic bankruptcy if the restructuring attempt fails
Under the current regime, bankruptcy proceedings are automatically commenced if the restructuring attempt fails.
The Bankruptcy Council proposes to change this rule, because it is believed to deter companies from seeking a restructuring. If the changes are adopted, a bankruptcy order will no longer automatically be issued if the company decides not to proceed with the restructuring following a vote on the restructuring plan, i.e. after expiry of the proposed 4-8 weeks’ controlled time out. Instead, the Bankruptcy Council proposes to safeguard the creditors’ interests by rules on information to the creditors on the discontinuation of the restructuring proceedings, thus allowing them to file a petition in bankruptcy at which the same reference date as initially set on commencement of the restructuring proceedings is preserved.
No mandatory provision of security for bankruptcy costs or appointment of a restructuring accountant
When commencing restructuring proceedings today, security must be provided for the costs related to any subsequent bankruptcy proceedings, and a restructuring accountant must be appointed.
The Bankruptcy Council proposes to remove the requirement for provision of security for the bankruptcy costs and for appointment of a restructuring accountant, because the current rules unnecessarily tie up liquidity that could be better used to keep the distressed company going.
The Bankruptcy Council recognises that the restructuring accountant has a reassuring and confidence-building role when the administrator and the creditors assess the validity and quality of the accounting records that form the basis for the restructuring proposal (i.e. the final proposal).
The Bankruptcy Council's proposal imply that the company may request the appointment of a restructuring accountant, while the administrator and the creditors may make such request only at the meeting for discussion of the restructuring plan as this is where reassurance is required.
Coverage by the Employees’ Guarantee Fund from the beginning of the restructuring process
At present, the Employees’ Guarantee Fund is required to pay certain employee claims only when a bankruptcy order has been issued. Under a restructuring, this means that employees may not receive their arrears of salary before a bankruptcy order has been issued or before a compulsory composition has been completed. Thus, it may take up to a year from the restructuring process starts until such claims are paid. Also, the buyer of a business which is being transferred as a result of a proposed restructuring will be liable for all employee claims relating to the period before commencement of the restructuring process. Had the transfer instead been made by a bankruptcy estate, then the buyer’s liability would have been limited to the period after the bankruptcy order, and the Employees’ Guarantee Fund would have been liable for the claims relating to the period before the issue of the order.
The Bankruptcy Council proposes, in line with its previous proposal (1555/2015), that compensation from the Employees’ Guarantee Fund should be available from the very beginning of the restructuring process. It means that employees will receive payment from the Employees’ Guarantee Fund as soon as the proceedings are commenced. Thus, the buyer of a business under restructuring will have the same rights as the buyer of a business in bankruptcy. If the proposal is adopted, the buyer will therefore only be liable for those employee claims that relate to the period after commencement of the restructuring process, while the Employees’ Guarantee Fund will pay the liabilities relating to the pre-restructuring period.
At present, the implementation of a non-voidable business transfer as part of a restructuring process is subject to the presentation and adoption of a restructuring proposal and compliance with a large number of formal requirements. This system has been heavily criticised, because it is considered to delay the process and thus reduce the value of the assets to be transferred.
The Bankruptcy Council proposes, in line with its previous proposal (1555/2015), that it should be possible to complete a non-voidable business transfer with the administrator’s consent if the administrator finds it appropriate in order to protect the value of the business and if a majority of the creditors do not object. For the purpose of the latter, no vote on the transfer will have to be held in the bankruptcy court; the administrator will merely have to ensure that a majority of the creditors do not object to the transfer.
A floating company charge will not automatically "crystallize" at the commencement of the restructuring process
Under the current rules, a floating company charge created before commencement of the restructuring proceedings does not encompass assets acquired by the company after the proceedings have started. Also, assets cannot be released from the charge through use in the normal course of business. This is referred to as crystallization of the charge.
The Bankruptcy Council proposes that a restructuring process should not automatically result in crystallization of the charge; instead, it should be for the company and the charge holder to decide if the charge should be crystallized. If the charge does not crystallize, it will be possible to have the assets released from the charge without the charge holder’s consent and to add further assets under the charge if they are acquired in the normal course of business during the restructuring proceedings.
Kromann Reumert follows the development closely and contributes to the legislative work based on our experience in administering the existing rules, which entered into force in 2011. We are available to answer any questions you may have in relation to the proposed changes.