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New rules on simplified restructuring negotiations for small businesses - "fast track" for debt restructuring

In the Norwegian Cabinet of Ministers on June 19, 2020, new rules were adopted on simplifying reconstruction negotiations for small enterprises. The goal is to limit the costs of these businesses in negotiations to avoid bankruptcy. The rules apply to all companies, both public limited companies and sole proprietorships.
Close-up of a businessmans hand

The Restructuring Act came into force on May 11, 2020. The main purpose of the new rules is to reduce the risk of unnecessary bankruptcies in viable businesses, which are affected by an acute failure in revenues as a result of the outbreak of Covid-19.

Simonsen Vogt Wiig has previously mentioned the Reconstruction Act.

Section 61, second paragraph, of the Reconstruction Act provides for the statutory authority to provide special rules for small enterprises with a view to simplifying reconstruction negotiations.

The regulation defines “small enterprises” as enterprises where:

  1. the average number of employees over the past year does not exceed ten full-time equivalents,
  2. operating revenues of the total business are less than NOK 6 million, and
  3. the company’s balance sheet total is less than NOK 23 million.

The new rules are intended to simplify and shorten the restructuring process for small businesses, thus limiting the restructuring costs for this group of debtors. Negotiations under the general rules can be too extensive and expensive for small businesses. The new rules will help several small businesses avoid bankruptcy, while at the same time aiming to safeguard the legal security of creditors, employees, contractors and other interested parties.

Both the ordinary and the simplified reconstruction rules in practice require thorough preparation before the request for reconstruction is filed with the court. It is assumed that the company has a good overview of the economy and is up to date with reports to public authorities, including that VAT assignments are submitted, etc. This is directly expressed in section 3, second paragraph of the regulation, where it is stated that the petition for reconstruction must document that: «the debtor has a surveyable economy. Hereunder, it must be documented that all tax and VAT declarations have been submitted, that the latest accounts have been submitted or prepared, and that the debtor is entered in the required registers relating to its business… ». In practice, investigations should have been conducted with the largest creditors and the bank connexion prior to filing a petition. The probes should as far as possible clarify how the bank and the largest creditors are positioned for a reconstruction. The simplified rules for small businesses stipulate that the petition should be attached to the proposal for reconstruction. Before filing the petition, it should be clarified as far as possible which creditors can be expected to vote for the reconstruction and which ones are voting against. During the vote after formal opening of reconstruction, the creditor majority can force through a reconstruction solution. Such vote will be binding on all creditors upon the district court’s confirmation.

The main features of the new rules are:

  • Small businesses can ask the court to appoint an adviser, who must be a lawyer who meets the conditions for being a reconstructor. The adviser shall assist in drafting a proposal for reconstruction at an earlier date, which may be attached to the petition for the opening of the reconstruction negotiation. This means that a proposal can be prepared and clarifying negotiations with the creditors before the court potenially opens a formal reconstruction process. The court may refuse to appoint an adviser if, according to available information, it is unlikely that the debtor will be able to obtain voluntary reconstruction or compulsory composition.
  • The adviser shall be appointed as reconstructor, if subsequent reconstruction negotiations are opened, unless special circumstances indicate otherwise. This avoids duplication of work and unnecessary costs.
  • The debtor must cover the costs of counseling before reconstruction. The court may order that an appropriate advance be paid.
  • The new rules allow for the reconstruction proposal to be sent out for voting more quickly. The court shall set a time limit for the execution of the assignment, which will be adapted to the size and complexity of the estate, but normally no longer than four weeks.
  • The Norwegian court administration, Domstolsadministrasjonen, is given the authority to prepare a template petition for reconstruction.
  • A simplified review of the debtor’s finances is sufficient, unless there are special circumstances that indicate otherwise. Simplified reconstruction negotiations are limited to companies with a surveyable economy.
  • As a rule, the court should not appoint a creditors’ committee. If a majority of the employees so request, a representative of the staff shall be consulted and any statements shall be enclosed when submitting a reconstruction proposal for a vote.
  • The court shall not appoint an auditor unless the court finds it particularly necessary.
  • The court shall refrain from holding a creditor meeting unless the court finds that there is a special need for it.
  • The court may decide that the reconstructor’s duty to send the debtor’s draft reconstruction to the creditors must be waived
  • Simplified voting rules are provided for proposals that only include postponement of payment.

The regulations will enter into force on 1 July 2020 and will apply in the first instance until 1 January 2021.