The Norwegian government proposes a new debt restructuring framework
Most Norwegian companies and other debtors facing financial distress will seek to restructure their balance sheets through informal debt workouts or, failing that, petition for the commencement of winding-up proceedings. Debtors may also petition for the opening of debt settlement proceedings, which allow companies to present a debt restructuring proposal before its creditors and, subject to the proposal receiving sufficient approval from the creditors, receive court sanction of the proposal. The company enjoys relief from certain enforcement actions during the proceedings in exchange for submitting itself to the control of a court-appointed supervisory committee.
Companies seldom pursue debt settlement proceedings. The number of such cases commenced during a year is often in the single digits. Moreover, the number of successful outcomes is even lower. The financial difficulties that COVID-19 has caused for many businesses have prompted the Norwegian government to table a legislative proposal that replaces the debt settlement proceedings with a restructuring framework. While the proposed restructuring framework retains several features of the current debt settlement framework, there are also several novel features intended to make it easier to restructure under the court-supervised proceedings.
2. The financing of the proceedings
The reform proposal seeks to facilitate access to liquidity for companies subject to restructuring proceedings. A challenge facing many distressed companies is that they are unable to borrow on an unsecured basis and, due to existing security packages, are unable to offer first-priority security to prospective lenders. In order to mitigate this issue, the proposal enables companies to offer lenders ‘superpriority’, that is, security ranking with priority ahead of existing security interests.
- First, loans granted to finance expenses and the continuation of the company’s business throughout the proceedings may be secured with priority ahead of existing security interests on the company’s inventory, machinery and plant and trade receivables.
- Second, any lender that grants loans to finance restructuring proceedings shall automatically benefit from a security interest over all of the debtor’s assets. This security interest enjoys priority ahead of existing security interests for an amount equal to the lower of (i) five percent of the value of the asset and (ii) an amount corresponding to 700 times the prevailing court fee, i.e., NOK 820,400.
The scope for granting new lenders superpriority will leave much to be desired by debtors whose main values comprise one or few high-value ships or real estate properties. For instance, a company whose only assets are three ships will at most be able to offer prospective lenders superpriority over the ships for NOK 2,461,200, an amount that in more complex cases likely could be insufficient to even finance the expenses of the proceedings. The design of the superpriority rules also means that secured lenders in traditional asset-backed deals are less susceptible to having superpriority financing relegating their claims downwards in the priority hierarchy than are e.g. lenders extending secured loans to retailers.
3. To what extent may the restructuring proposal affect existing rights?
The restructuring proceedings could culminate in a proposal that all affected creditors can agree to. However, the restructuring framework also facilitates the adoption of a debt restructuring where one or more creditors reject the proposal. The consent of a majority of the creditors affected is generally sufficient to adopt a rescheduling and/or write down of a company’s debts or a transfer of its business. Moreover, the restructuring may also comprise the conversion of the company’s debt into equity.
However, certain claims may not be encroached upon without the consent of the creditor concerned.
- Secured claims cannot be written down unless and to the extent the supervisory committee deems the value of the secured claim to exceed the value of the secured asset.
- Exempt are also debts that rank as preferential debt in winding up proceedings, that is, certain claims for unpaid wages and tax claims. However, the proposal would give the government the power to adopt regulations suspending the preferential status of tax claims.
- Claims benefitting from a right of set-off against amounts owed to the debtor are also protected against a non-consensual restructuring.
The exclusion of secured debt from the scope of a non-consensual restructuring could make restructuring proceedings unattractive for a company whose survival is contingent upon a reduction or rescheduling of its secured debt.
The above-mentioned exemptions mean that it is primarily general unsecured debt that is available for restructuring under the proposed framework. In contrast to the rigid protection of the exempted claims, the proposed framework is – at least at the outset – quite flexible as regards how general unsecured debt could be called upon to contribute to the company’s recapitalisation.
- There will not apply any explicit ‘best interest of creditors test’ that requires that dissenting creditors receive at least as much as they would receive in a hypothetical winding up of the debtor.
- Nor will there apply an ‘absolute priority rule’ mandating that losses are borne in accordance with the priority hierarchy applicable in winding up proceedings. Accordingly, the claims of dissenting creditors could be written down even if the company’s shareholders stand to retain an equity interest.
- Finally, the restructuring proposal may differentiate between different general unsecured creditors.
The courts may reject to sanction any proposal that is not reasonable and fair. Debtors proposing a burden sharing among its creditors that deviates from the priority principles applicable in winding up proceedings are therefore at risk of having their proposal struck down by the courts applying this untested fairness standard.
4. Voting over the restructuring proposal
The proposed framework does not divide the creditors into different classes for the purposes of voting over a restructuring proposal. Instead, a single vote involving the creditors affected by the proposal is carried out, and the sanctioning of the restructuring requires that creditors representing half of the affected claims vote in favour thereof.
A restructuring that includes a conversion of debt to equity also necessitates the consent of the company’s general meeting. For the purposes of voting over a debt conversion, the framework relaxes the majority requirements that generally apply for voting over the issuance of new shares.
5. Other notable features
Other notable features of the proposal include the following:
- The threshold for accessing restructuring proceedings is lower than the threshold that currently applies for the opening of debt settlement proceedings. Restructuring proceedings shall be available to companies that are facing serious economic difficulties in the near-term.
- The termination of the company’s contracts in the four weeks preceding the application for restructuring proceedings is under certain circumstances voided with retroactive effect.
- The government is to be given the power to adopt regulations setting out a simplified framework for small enterprises.