1. Danish in-court restructuring proceedings
1.1 Restructuring proceedings in general
The current Danish restructuring rules came into force in 2010. The Danish Parliament has recently passed amendments to the restructuring rules to make it easier and more flexible to complete restructurings. The rules were adopted in view of the COVID-19 crisis in order to make the in-court restructuring rules even more useful in practise in order to increase the chances of restructuring viable businesses.
The purpose of restructuring proceedings is to continue distressed companies either by making them solvent and viable by debt adjustment (compulsory composition) or by transferring the business wholly or partly to a third party. Restructuring proceedings must consist of a business transfer and/or a compulsory composition.
We consider the in-court restructuring process a very important tool to save viable businesses, the value of the assets and thus provide the best solution for the creditors, including the employees. We welcome the new changes to the Danish restructuring rules as we suspect they will provide a better foundation for successful restructurings. We have been a part of several successful restructurings and are of the firm opinion that it has provided better dividends to the creditors in those cases. We find the professional advisors counselling any business in financial distress shall be conscious of if it is a feasible solution for the business to undergo restructuring instead of bankruptcy as the net result of restructuring could save the business assets to the benefit of all stakeholders.
The Danish restructuring rules have sometimes drawn criticism for not being sufficiently flexible and too complicated particularly in relation to business transfers, and the employees’ position could in some cases counter the application of the restructuring proceedings. The new rules endeavour to make solutions more flexible, which in our assessment will improve the possibilities of completing restructurings in the future. Not least considering the economic problems due to the corona pandemic.
1.1.1 The restructuring proceedings – restructurer and restructuring accountant
Restructuring proceedings can be commenced when a company is insolvent and thus not able to fulfil its obligations as they fall due (illiquidity).
On commencement of the restructuring proceedings the insolvency court appoints a restructurer (usually an attorney). Under the new rules it is no longer mandatory that a restructuring accountant (typically an auditor) be appointed.
The restructurer’s task is i.a. to propose a solution where the company or the viable parts of the company may continue either as the same company through debt adjustment or by transfer of the business to a new legal entity.
The restructuring accountant’s task is i.a. to verify and produce financial data to strengthen the creditors’ confidence in the financial records and bolster the endeavours to reach a viable solution.
1.1.2 Restructuring plan and proposal
The restructurer prepares a plan for the restructuring process for the creditors. The plan is to be heard at a creditors’ meeting before the insolvency court no later than four weeks after filing the petition for restructuring proceedings, also called the 4-week meeting (possibility for extension with another four weeks).
At the meeting, the creditors vote on the restructuring plan. The plan is adopted unless a majority of the creditors represented at the meeting cast their votes against the plan, provided that such creditors amount to at least 25% of the total known creditors.
No later than six months after the 4-week meeting, there must be a new meeting with the creditors to vote for the specific restructuring proposal (possibility for extensions).
The restructuring proposal includes the exact content of the restructuring: compulsory composition, business transfer or both, plus information about the purchase, transfer price, expected dividend etc. A restructuring proposal is adopted unless a majority of the creditors represented at the meeting vote against it.
2. Amendments to the restructuring rules and their importance
2.1 “Fast-track” model
Earlier, a business transfer in a restructuring process could only occur if the creditors had adopted it in a restructuring proposal. There are quite a few formal requirements to the content of a restructuring proposal, and the rules have sometimes drawn criticism for making it too intricate in terms of time and procedure to complete a business transfer in a restructuring process.
For some companies undergoing restructuring proceedings a transfer must happen quickly for the business’s survival. Liquidity may be strained, or the value of the company may drastically be reduced. In practice, bankruptcy has too often been the outcome if a business transfer had to have happened quickly.
The recent amendments to the rules now allow a business transfer immediately after commencement of the restructuring proceedings in a particular “fast-track” procedure. This procedure enables the restructurer to approve a business transfer without the transfer being adopted by the creditors as part of a restructuring proposal. Instead, the restructurer shall inform the creditors of a contemplated business transfer and provide a 5-day deadline for any objections against the business transfer.
A restructuring “fast-track” transfer requires:
- The restructurer must consent to the application of the “fast-track”
- It is considered expedient to use the “fast-track” to maintain the business’s value
- No objections against the transfer must have been received from a majority of creditors within five business days’ time limit.
- A restructuring plan must not have been adopted
The “fast-track” model will be expedient if the debtor needs cash to keep the business going during the ordinary restructuring proceedings or if the purchaser cannot await the standard procedure.
A “fast-track” transfer may only be completed until a restructuring plan has been adopted. Subsequently, business transfers may only be conducted under the rules applicable until now, i.e. as part of a restructuring proposal that still applies. But as before, it is possible to make a combined restructuring plan and proposal and complete the business transfer quickly.
2.2 The Employees’ Guarantee Fund
Employees, who do not receive their salary because the employer ceases to exist, may receive payment from the Employees Guarantee Fund (the “Fund”) of their net salary after tax of up to DKK 160,000 (2021 level) plus holiday payment, equal to approx. EUR 21,475.
Employees working for a company in restructuring will typically receive their salary from the company in the restructuring period. Previously the terminated employees had to await the conclusion of the restructuring proceedings before payment could be made by the restructured company or bankruptcy proceedings commence against the company and the employee could then receive remuneration from the Fund or the bankruptcy estate. This has in some cases been a hindrance for commencing in-court restructuring procedures as the terminated employees may find themselves in a vacuum in terms of receiving their salary for their termination period while the restructuring proceedings are pending.
Now terminated and released employees can receive payment from the Fund from the commencement of the restructuring proceedings of up to 3 months’ salary due during the restructuring proceedings and up to 1 month’s salary, which was due before the restructuring proceedings.
The new rules also limit the employee obligations that the buyer in a restructuring-business transfer agreement must assume. With the new regulations, the buyer – like in bankruptcy – only assumes responsibilities from the commencement of the restructuring proceedings and the Fund will cover the rest. The Fund can now cover any obligations from before the restructuring, as is the case in bankruptcy.
2.3 Restructuring accountant
Under the previous rules, it was mandatory to appoint a restructuring accountant together with the restructurer. However, under the new rules, a restructuring accountant is no longer mandatory as it is expected that it will be sufficient to work with the distressed company’s auditor. The purpose of the amendment is to make restructuring less costly as a formally appointed restructuring accountant must be entirely new to the company and thus will have no advance knowledge of the company.
The company in restructuring, the restructurer or 25% of the creditors may still request that a restructuring accountant be appointed.
It is expected that restructurings with no restructuring accountant will often be restructurings of companies with limited values and a limited number of creditors where the restructurer assesses that it will be safe to prepare the restructuring material with the assistance of the company’s auditor. In companies of some complexity, it will still often be prudent to appoint a restructuring accountant.
2.4 No automatic bankruptcy and no requirement for security for bankruptcy costs
With the amended rules, a company may withdraw from commenced restructuring proceedings until a restructuring plan has been adopted without automatic commencement of bankruptcy proceedings. Previously the company would automatically be declared bankrupt if the restructuring was not successful.
The last amendment we will highlight is that it is no longer a requirement to provide security for the cost of any subsequent bankruptcy proceedings. This will ease the cash flow strain to file for restructuring with DKK 30-40,000, equal to EUR 4,026-5,370.
Both more “technical” amendments may have quite significant effects both the existing rules can be hindering to a distressed company’s willingness and ability to file for in-court restructuring and instead try for out of court settlements which may increase the risk of agreements to the disadvantage to some creditors or risk of loss for the creditors.