John Sommer Schmidt and Morten L. Jakobsen review the developing insolvency market in Denmark, providing an overview of current practices and suggesting changes to the restructuring rules within the legal framework.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
The general trend is that there is significantly fewer insolvency matters in Denmark compared to just a couple of years ago.
The Danish economy has picked up during the last few years with low interest rates, low unemployment and, recently, also a significant rise in house prices as well as increased consumer spending.
We still, however, see specific sectors that have major difficulties and a high number of insolvencies.
As a result of the financial crises, we still see real estate insolvencies that are either based on standstill agreements from the financial crisis that is not being continued or “expensive” pre-financial crisis financing.
Perhaps the biggest problems we see are in agriculture, where, in particular, the areas of dairy and animal production are struggling due to a combination of expensive pre-financial crisis investments and low prices.
Also, the huge drop in oil prices has put the entire oil sector and related sectors under pressure. We are currently handling the bankruptcy of the former listed Danish oil-trading company, OW Bunker; this particular bankruptcy has had a major impact on both the shipping and oil sector in Denmark and internationally.
Finally, low rates are still causing insolvencies in the shipping industry. We recently assisted the listed Danish shipping company, TORM, in a major out-of-court restructuring where a UK scheme of arrangement was implemented as one of the tools to reach the best solution for TORM and its creditors. Recent years have featured a number of out-of-court restructurings and debt rearrangement schemes in respect of other significant shipping companies.
2. What is the market view on prospects for the coming year?
In 2016/2017, we believe that we will see much of what we saw in 2015; a general decrease in insolvency matters, but with some sectors still struggling. We also believe that it will be the same sectors that will struggle since there are no indications of a rise in oil prices, shipping rates or prices of agricultural products.
Finally, even though the economy is improving, there is still a lot of uncertainty as well as risks; for example, risks associated with a slowdown in the Chinese economy and migration into Europe as some of the major factors.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
There are not many tools available in Denmark to achieve a corporate restructuring.
Generally, a restructuring can be achieved either through a formal court-driven restructuring process (in Danish: “rekonstruktion”) or through a voluntary out-of-court restructuring, typically in the form of a debt composition and often with an equity-related upside possibility.
A formal in-court restructuring in accordance with the Danish Bankruptcy Act is an insolvency procedure which applies to insolvent debtors. A debtor is regarded as insolvent if the debtor is unable to meet its obligations as they fall due, unless the inability to pay must be considered to be of a temporary nature. The final decision is based on an assessment of the debtor’s liquidity – a cash flow test. Whether the debtor’s liabilities exceed its assets is not generally of importance. The process is initiated if the debtor or a creditor files a petition for restructuring with the competent Bankruptcy Court.
A formal restructuring process must involve a compulsory composition and/or a business transfer. A compulsory composition may constitute a percentage decrease in, or total withdrawal of, the claims against the debtor and/or a moratorium. A business transfer must include the transfer of ownership of the debtor’s business (assets and activity) to another legal entity. Generally, focus is on restructuring of the business, i.e. the economic activity, jobs, etc., either through a compulsory composition of the debts (restructuring of the debtor), after which the debtor becomes solvent and resumes ordinary operations, or a sale of the debtor’s activities and assets (restructuring of the business), after which the debtor (the legal entity) is liquidated through a formal bankruptcy procedure. This also means that an initiated restructuring procedure cannot be withdrawn, and it will, accordingly, end up in either a successful compulsory composition (with or without a prior transfer of the business) or in liquidation bankruptcy proceedings.
A restructuring does not, as such, establish an estate to be administered and the debtor remains in possession. However, an administrator (in Danish “rekonstruktør”), typically a lawyer, is appointed by the Bankruptcy Court with the task of running the restructuring process and supervising the management during the process. In addition, an accountant (in Danish “tillidsmand”) is appointed by the Bankruptcy Court with the task of preparing and approving the economic/financial material required for and supporting the restructuring procedure. If deemed necessary by the administrator or the creditors, the Bankruptcy Court can decide to replace the board of directors and executive officers of the debtor (it must be a legal entity and not a personal debtor/business) with the administrator.
The administrator presents a proposal to the creditors of how to restructure the debtor/the business (compulsory composition of the debtor’s debts or a sale of the debtor’s business, or a combination of the two) and the creditors will, at a meeting in the Bankruptcy Court, vote to approve or reject the proposal. The creditors – one class of all unsecured creditors – will vote on amounts only and the proposal is regarded as adopted unless rejected by a majority of the creditors (as per a claim amount tally). To reject the proposal, more than 50 per cent of creditors (as per a claim amount tally) present and participating in the vote must vote against the proposal. If the proposal is approved, it will be binding on all creditors regardless of whether they have voted against or participated in the process at all. Since (i) all privileged debts must be paid in full, (ii) all secured debts left unaltered, (iii) all subordinated debts are lost (only debt which is subordinated to all other creditors of the debtor), and (iv) the shares not involved, consent is needed from the general unsecured creditors only.
The process is court sanctioned, and the final restructuring proposal must be approved by the court which will always happen if the process has been consistent with the Bankruptcy Act and the outcome is equitable. The process, as such, is not supervised by the court, but is in all aspects run and controlled by the debtor and/or the appointed administrator.
A “pre-packaged” sale is, in principle, possible under a formal restructuring. However, a pre-packaged sale is, in practice, difficult using the restructuring procedure since a formal and quite lengthy procedure, which includes providing information to creditors, having meetings with different time intervals and the presentation of a plan and the final proposal, which is to be approved by the creditors, is required.
It is not possible under a formal restructuring – or any other formal Danish insolvency procedure – to include the shareholders, e.g. make a debt for equity swap or the like. Either the shareholders remain in possession of their shares in the company after restructuring of the debts or the share value is lost when the company, after a sale of the business, enters into liquidation bankruptcy. Therefore, it is only possible to make a restructuring that includes the shareholders by the use of corporate rules, e.g. by entering into an agreement involving debt for equity swaps or the dilution of existing shareholders along with a new injection of funds as part of an out-of-court voluntary restructuring.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
As stated above, in-court restructuring aims to serve the interests of the creditors rather than the interests of the shareholders. Hence, it is the creditors only that may vote to adopt or reject the restructuring plan presented by the administrator, and, as the main rule, it will only be the creditors that will receive payment of part of their claim against the debtor in connection with the adoption of a restructuring plan involving a compulsory composition.
Obviously, if the restructuring aims at securing the survival of the debtor, the shareholders may be inclined to contribute to a solution, typically by way of an injection of funds, and thereby secure a least some value on their shares. As also stated above, an out-of-court restructuring may involve shareholders.
Lenders holding security over the debtor’s assets are, as the main rule, not included in an in-court restructuring for such part of their claim that is covered by security and, accordingly, such lenders are not affected by a restructuring plan involving a compulsory composition. Unsecured lenders will, on the other hand, as the main rule, be included in an in-court restructuring, unless such lenders have provided generally subordinated loan capital to the debtor, i.e. loans subordinate to all other creditors of the debtor. In that case, the lenders’ claim will lapse, insofar as a restructuring plan is adopted, unless the respective loan agreement otherwise provides.
Even though secured lenders are not, at the outset, included in an in-court restructuring, such lenders will often be involved one way or the other, in as much as assets held as security by senior lenders often will be of vital importance to the continuation of the debtor’s business during the restructuring process and thereby be a decisive factor in making it possible for the administrator to present a feasible restructuring plan to the (unsecured) creditors.
In case of a dispute over the value of security held by senior lenders, the Bankruptcy Court may, upon request, determine the value of such security, albeit this does not apply to certain kinds of assets, e.g. real estate. Assets of the said kind cannot be included in an in-court restructuring on a valuation basis. Only values-in-fact can be applied for in-court restructuring purposes in respect of the said asset types. Accordingly, the final result of an in-court restructuring will have to await the eventual sale of the subject assets.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
Over recent years, larger Danish companies have taken an increasing interest in alternative funding (i.e. other funding than an ‘ordinary’ bank loan) where the bond market has caught attention, in particular, the Nordic, EU and U.S. markets. There have been few Danish market bond issues, and these are limited to issues by blue chip companies and a very few high-yield issues. The U.S. market has attracted many interested Danish companies, in particular within the shipping sector, but the number of issues in fact is quite low. Many Danish companies, including several shipping companies, have looked to Norway for issues through Norway’s well-established and simple documented Nordic Trustee system.
The bank retreat in Denmark is not as grave as it reportedly is in other, mainly larger, jurisdictions, and the Danish banks are generally willing to lend to Danish companies; however, with varying enthusiasm.
For somewhat larger finances, we do tend to see a change in choice of law. English law has always been the preferred choice for some Danish banks, depending on the circumstances, but, in general, with Danish law prevailing. However, the tendency now seems to be that the choice of English law prevails; such choice is being driven by the lenders.
Also, over recent years, the banks have had much more focus on risk allocation within each facility. Accordingly, we tend to see more banks in the syndicates/clubs, and with such banks having full flexibility to sell off loans, also outside of distressed situations. More banks in the syndicates, and more distressed funds buying the banks’ participation, is likely to complicate voluntary restructurings/debt work-outs and may lead to matters that are fit for out-of-court arrangements ending up within the courts.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
Over the last couple of years, we have experienced a significant increase in sales of distressed debt to distressed debt funds. Where Danish banks would not under normal circumstances sell distressed debt, particularly if owed by Danish companies, we now see some activity in this respect. As far as we see it, the market for selling off distressed debt in Denmark has increased significantly, both in connection with restructurings and during liquidation bankruptcy proceedings.
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
One thing that investors should bear in mind is that once the rules in the Danish Bankruptcy Act have been applied to the restructuring and an in-court restructuring procedure has been set in motion, it is not possible to abort the procedure, i.e. either the restructuring of the debtor is successful or the debtor is put into liquidation bankruptcy.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
The restructuring rules in the Danish Bankruptcy Act are subject to a law surveillance programme conducted by the Danish Ministry of Justice. The programme entails the monitoring of various pieces of legislation with the purpose of evaluating the effectiveness and adequacy of the legislation in question. For the time being, no suggestions for the amendment of the restructuring rules in the Bankruptcy Act have been put forward.
If it was up to you, what changes would you make?
One which should be considered is, as mentioned in question 4 above, the fact that real estate, vessels and aircraft cannot be included in an in-court restructuring on a valuation basis, but only with actual values. As the actual values can be established only in connection with a sale of same, a restructuring would either only take full effect with the correct values or not be effected until a sale of the subject assets is completed. This will potentially, and has actually, put an end to in-court restructurings of distressed companies which are driven by the said asset types.
Moreover, Denmark ought, in our opinion, be party to the EU Insolvency Regulation, however, due to the result of the recent Danish referendum concerning Denmark’s reservations with respect to participation in certain areas of the legal framework within the EU, this is not possible at present.
The authors would like to thank Peter Carlstedt Nørtved for his contribution to the preparation of this chapter. Peter is a senior legal counsel and member of Gorrissen Federspiel’s Restructuring and Insolvency group. He has extensive experience with respect to Danish bankruptcy and restructuring law and all aspects of dispute resolution and litigation. Email: email@example.com.