The Norwegian Reconstruction Act for restructuring of companies and debt
We work with distressed companies, their creditors and other stakeholders to handle financial and operational challenges. In some cases, filing for a reconstruction under the Norwegian reconstruction scheme can be an appropriate measure to initiate. At the same time, one has to face that a reconstruction is not always the best path forward.
In this article we have seen at some of the pros and cons with filing for a reconstruction under Norwegian law.
1. When should you consider filing for a reconstruction?
Your company may be facing financial challenges for a multitude of reasons; local or global market fluctuations may lead to a fall in demand and lead to reduced revenue, at the same time as salaries and prices on energy and e.g. raw materials increase. Until the operations of the company have been properly adjusted for the new market situation, the company suffers significant losses on its contracts, and it may take some time to complete a turn-around. The company may be struggling with weak liquidity, and actions to remedy this must be initiated.
Regardless of the causes for the company's financial challenges, the board of directors and the management have a duty to keep themselves informed about the company's financial position in order to ensure that the company has adequate equity and liquidity. If you are not confident about the financial situation, you should consult advisers to identify the measures that are available. Claims for indemnification against the board and management following insolvency situations and bankruptcies have become increasingly more common in Norwegian courts, not the least from contractual counterparties who have suffered losses.
When we assist companies with financial challenges, we use a wide range of different tools. A request for reconstruction of the company under the Norwegian Reconstruction Act is one of them, but your company may also be in a financial situation where reconstruction according to the Norwegian rules is not the best solutions. The choice of measure may depend on e.g. the composition of the company’s debt, the asset situation, the character of the operational challenges, ownership situation, relation to other group companies, and financing opportunities that may be available.
Below we will give a brief introduction to the pros and cons with filing for a reconstruction under Norwegian law.
2. What can the company achieve by a restructuring under the Norwegian Reconstruction Act?
The company can get breathing space
A company with financial challenges is likely to be under pressure from its creditors. From a management and board position, it can be a question whether the company is permitted to trade given its financial position. A request for reconstruction can provide some breathing space for the company, its management and the board. In order to file for reconstruction to a Norwegian court, it is sufficient that the company has, or in the nearest future will have serious financial problems. There is no longer a requirement for the company being insolvent or illiquid for it to file for reconstruction, like it was under the former debt negotiations regime.
By opening the reconstruction negotiations, the company cannot be taken into bankruptcy proceedings and a potential bankruptcy petition proceedings will be paused (see exemption below). The opening of reconstruction negotiations also halts the creditors’ rights to demand attachment (Nw. utlegg) on the company's assets securing their claims. During the negotiations, forced sale based on an existing mortgage or attachment on the company's assets requires permission from the appointed reconstructor, and in order for a bankruptcy petition to pass, it is required that the filing is supported by at least three dividend-eligible creditors who represent at least half of the dividend-eligible claims calculated by amount.
Financing with super-priority
External financing can be difficult to achieve for a financially distressed company. The Norwegian Reconstruction Act offers a so-called super-priority position to loans in such situations, meaning loans secured with security in machinery and plant, inventory and trade receivables, all with higher ranked priority than any pre-existing security rights. The act also offers a limited legal mortgage securing such financing. There is a certain application process to be followed for creditors to be granted such super-priority position for new loans, but it is fully feasible to qualify.
Deferred payment and reduction of debt
Many distressed companies face liquidity challenges, or may have too much debt. Provided the support of voting creditors who represent at least half of the total voting capital, the Norwegian Reconstruction Act opens up for deferred payment and remission of debt as two of several possible solutions. Deferred payment may get the company through a time with strained liquidity, while a remission of debt may provide more long-term relief in servicing debt.
Conversion of debt to equity
A restructuring solution can also involve converting the company’s debt into equity. One should of course keep in mind that by doing so, the creditors will get an ownership position and the influence on the business that follows being shareholders. As shareholders, creditors may, among other things, have the opportunity to receive share dividends, get access to the company's documents, and they will hold a right of first refusal that makes it easier to acquire a larger part of the shares. Conversion of debt also requires that a certain majority for the motion to be passed at the shareholders’ meeting, and creditors must, as a starting point, request such conversion.
Time to implement additional measures
The challenge for financially distressed companies is that they have assets that can be disposed of or other measures that may improve the company's situation, but these processes will take time to implement. The Norwegian Reconstruction Act also allows full or partial business transfer. In our opinion it is just as important, that during a reconstruction the company will have the time and opportunity to sell assets, raise new capital, or initiate other measures that will improve the company's financial position.
3. What are the challenges of restructuring under the Norwegian Reconstruction Act?
Although the act offers some adequate tools for restructuring, there are also potential challenges along the way:
The company must come up with the solutions itself
The company cannot rely itself on a request for reconstruction, and then hope that the court and the reconstructor will figure out how to solve the situation. It is the company itself that must come up with a plan for how the financial problems are to be solved, and then the court and the reconstructor will consider whether or not they deem the plan to be realistic. It is therefore important to get advice and assistance to prepare the request for reconstruction in a thorough and good manner, and to present a viable plan for the reconstruction that meets all the requirements set by law.
The company must find solutions with the financial creditors
Our experience is that most companies that seek a reconstruction will have significant secured debt to banks and other financial creditors. Finding solutions for this debt may be crucial, and the law has limited measures when it comes to secured debt. The company should therefore choose advisers with thorough expertise in finance, in order to improve the chance of finding good solutions with the financial creditors. This can be the key to the success under a reconstruction.
The company is subject to a strict regime during a reconstruction
The Norwegian Reconstruction Act is a further development of the old debt negotiation institute, which was so rigid that no one actually used it. Although the new Reconstruction Act is better in many ways, most companies that come under the regime will probably find it invasive. The company will be subject to strict control by the court, the reconstructor and the reconstruction committee, and the appointed accountant. During the reconstruction negotiations, the company loses, among other things, the right to take on new debt or certain commitments without an approval from the reconstructor. The reconstructor also has a supervisory role to ensure that the creditors' interests are ensured in the process and in the solution that the company proposes.
If the reconstruction is not successful …
An approval of the reconstruction is dependent on the company receiving support from the voting creditors who represent at least half of the voting capital. If the company is not successful, the Norwegian Reconstruction Act allows for the reconstruction negotiations to be closed without bankruptcy (liquidation), provided that the company is solvent, or that a majority of the creditors give their consent. The risk of a bankruptcy is nevertheless imminent if the reconstruction is not successful, and this may motivate the parties to reach a solution.
4. How can we help?
We experience that companies with financial problems usually reach out for legal assistance too late. As a consequence the board and management may have exposed themselves to unnecessary responsibility, and some measures and solutions may no longer be achievable because the company has become too financially and / or operationally damaged.
Engaging lawyers does not mean that the situation becomes more formal and confrontational. On the contrary, the involvement of legal counsels may allow the management and board to take a step back, and objectively consider the risk and options for finding the best way forward.
Seeking legal advice at an early stage will help the board and management to take the right steps at the right time so that the company's interests are best served with the interests of all stakeholders (i.e. creditors, shareholders and employees) in mind.
Our firm has a long tradition for handling distressed companies and bankruptcies, as advisors and court-appointed administrators. If you need legal assistance in this area of law, you are welcome to get in touch with us.
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Harald SætermoPartner / Advokat