Temporary Reconstruction Act to prevent bankruptcy

Temporary Reconstruction Act to prevent bankruptcy

The government has proposed to amend the rules for debt negotiation in bankruptcy legislation to help viable businesses affected by loss of income as a result of the coronavirus.

The proposal entails the adoption of a new temporary Act on reconstruction negotiations. The Act is intended to replace the Bankruptcy Act's rules on debt negotiation that are seldom used in practice. The virus outbreak has actualized the need for changes in the rules.

Many companies that are otherwise viable may experience liquidity problems and deficits. The purpose of the changes is to provide effective reconstruction rules that can help save normally profitable businesses and secure jobs and values. The Government has informed that the changes in the longer term may become permanent.

In summary, the Government proposes these changes: 

  • Reconstruction negotiations may begin at an earlier stage than today, while the debtor still has the remaining funds. Today, debt negotiations can only be petitioned when the debtor is unable to fulfil his obligations as they become due. Under the new rules, the debtor can petition the opening of the reconstruction negotiation when the debtor "has or will in the foreseeable future have serious financial problems".
  • Creditors can request restructuring negotiations if they can substantiate that the debtor is illiquid. The debtor may, under certain conditions, oppose the opening of reconstruction on this basis.
  • Greater access to the conversion of debt into share capital shall be granted by requiring only a 50% majority at the company's general meeting instead of a two-thirds majority. The conversion of debt into share capital means that the creditors become shareholders in the company.
  • In case of voluntary reconstruction, the requirement for equal treatment of creditors must be removed. The reason for the change is that the proposal for reconstruction will not be adopted without all the creditors accepting the proposal. Therefore, no special protection is needed.
  • For debt settlement proceedings, the minimum dividend requirement of 25% must be removed. This means that creditors will not be entitled to a minimum payment in the event of reconstruction negotiations.
  • The Government is allowing temporary regulations to provide for temporary exemptions from the public's preferential right to value-added tax and tax. In this case, tax and duty claims will be treated equally with other creditor’s claims.
  • There is provision for the establishment of collateral for loans for continued operations during the reconstruction period and financing of the reconstruction negotiation. Collateral can be taken in operating accessories, inventories and outstanding receivables and will have priority as a statutory mortgage over all other mortgagees.
  • The debtor's protection against the opening of bankruptcy and accomplishment of enforced sale of the debtor’s assets is strengthened during reconstruction negotiations. The Government has proposed to repeal the creditor's right to petition for bankruptcy or claim enforced sale of the debtor’s assets after three and six months respectively.

The Government's proposal has not yet been processed by Stortinget (Parliament). It is therefore subject to change. See here for more information.

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