New rules on preventive restructuring - adopted on 9 June 2022
The rules in force
Today, the opening of a restructuring procedure through the courts entails a number of mandatory matters, including publication, appointment of a restructuring administrator, prohibition against seeking satisfaction in the debtor’s assets (ie individual (unsecured) creditors cannot levy execution in, seize etc the assets of the debtor), and that restructuring can only (following the adoption of a restructuring plan) take place by confirmation of a restructuring proposal (compulsory composition and/or business transfer)
The new rules
The rules on preventive restructuring allow a debtor to react to signs of a financial crisis at an earlier stage – already when there is only a likelihood of insolvency – and to address such financial challenges by way of the restructuring arrangement before insolvency becomes a reality.
The procedure entails, for example, less publicity and no mandatory appointment of a restructuring administrator, an option to withdraw from the restructuring also after the adoption of a restructuring plan but prior to the adoption of a restructuring proposal, and the voting rules related to the adoption of restructuring proposals are amended. At the same time, access to compulsory composition in bankruptcy proceedings is reintroduced.
Opening of a preventive restructuring procedure
The conditions for opening a preventive restructuring procedure are that:
- The debtor carries on business activities
- The debtor files a request (a request for a restructuring procedure may still also be filed by the creditor)
- Probability of the debtor's insolvency exists
Filing of a request or opening of a preventive restructuring procedure does not take precedence over a petition for restructuring or bankruptcy proceedings. However, the bankruptcy court may decide to postpone the review of a request for restructuring or bankruptcy proceedings if the debtor files a petition for a preventive restructuring procedure.
Less publicity and a possibility of changes in the debtor's capital situation
The opening of a preventive restructuring procedure is not published until a restructuring proposal is submitted, ie the restructuring plan will not be published unless a prohibition against seeking satisfaction in the debtor’s assets is requested.
The rules thus comply with the wish for less publicity during the introductory phase so that debtors may seek solutions to their financial challenges without creditors and business partners having to be informed first.
The new rules also include an expansion of the content of the restructuring proposal, as the proposal may contain “other steps” which are likely to cause the insolvency/the probability of insolvency to cease. As an alternative to a business transfer (asset sale), the insolvent debtor’s share capital may be reduced and at the same time increased by new (cash) share capital in accordance with the rules of the Danish Companies Act on cash contributions. The new share capital may be subscribed by investors, creditors or former shareholders.
This addition enables a more flexible restructuring procedure.
Prohibition against seeking satisfaction and floating charges
If a prohibition against seeking satisfaction in the debtor’s assets is put in place, the preventive restructuring is published, and a restructuring administrator is appointed who must consent to essential transactions.
The prohibition against seeking satisfaction in the debtor’s assets applies to all creditors except for employees’ privileged claims and non-voidable secured creditors.
A floating charge is not “frozen” in case of a prohibition against seeking satisfaction in the debtor’s assets. Accordingly, the enterprise will still be able to separate assets which are subject to the floating charge as part of regular operations, and the floating charge will also comprise assets acquired by the enterprise during the preventive restructuring procedure.
Amended voting rules
The new rules introduce new voting rules for large enterprises (and small enterprises (SME), if requested by such enterprise) so that votes are cast in voting classes instead of the creditors voting individually according to weight (amount of the claim).
Grouping into voting classes is new and its purpose is to ensure a higher degree of protection for small creditors who may have other interests than most creditors. In addition, the class formation is to ensure, for example, that rights which are substantially similar are treated equitably.
The rules entail that, other things being equal, small creditors may have more of a say if the restructuring proposal is put to the vote.
Claims secured by a pledge are grouped into separate and the same voting classes while unsecured creditors are to be grouped according to commonality of interests based on “verifiable criteria”. The nature of verifiable criteria is not specified and therefore they must be determined in practice. It is stated in the directive implemented by the new rules that the class formation should be carried out in in such a way as to reflect the creditors’ rights, the seniority of their claims and interest. The class formation principle originally derives from the USA and is also known from, for example, English law where the grouping is merely based on legal and financial interests.
The debtor submits a proposal for the class formation which is ensured by the bankruptcy court. The bankruptcy court’s decision in terms of the class formation cannot be appealed.
If a majority of the voting classes vote in favour of the restructuring proposal, the restructuring proposal is deemed to have been approved. It means that the restructuring proposal may be adopted even if the creditors who have voted in favour (in their respective voting classes) represent a lower amount that the creditors who have voted against the proposal.
Other amendments
The new rules reintroduce the possibility of obtaining compulsory composition during bankruptcy proceedings and they standardise the rules governing discharge of debt in and outside bankruptcy and restructuring proceedings.
In addition, the new rules entail that debtors who have been disqualified in general are denied discharge of debt, and a discharge of debt order is withdrawn if creditor is disqualified due to their conduct of business prior to the discharge of debt order.