The Supreme Court has ruled in the widely publicized case A/B Duegården in liquidation vs. Nykredit Bank A/S and Nykredit Realkredit A/S.

A/B Duegården is a cooperative association established in 2007 shortly before the financial crisis. The association was financed by way of SWAP loans, which subsequently turned out to be a poor financial decision as the interest rate dropped drastically. A/B Duegården choose to wing up the association by way of a solvent liquidation. But it quickly became clear that the association was unable to pay its creditors, which is a requirement in order to carry out a solvent liquidation.

The liquidators in A/B Duegården therefore filed a petition for bankruptcy with the Bankruptcy Court.

The question presented to the Supreme Court was whether A/B Duegården was insolvent and could commence bankruptcy proceedings when the major creditors, Nykredit Bank A/B and Nykredit Realkredit A/B, requested that the association remain in solvent liquidation.

In December 2014, the Bankruptcy Division of the Maritime and Commercial High Court issued a bankruptcy order against A/B Duegården. The Western High Court set aside the Bankruptcy Court's ruling in July 2015 with the effect that A/B Duegården withdrew from the bankruptcy and "went back" into solvent liquidation.

THE INSOLVENCY CONCEPT UNDER THE BANKRUPTCY ACT AND THE PARTIES' INTERESTS

The primary points of dispute related to section 17 of the Bankruptcy Act, which concerns for instance the requirement for the so-called "legal interest" in the bankruptcy proceedings and the scope of the insolvency requirement.

The provision is largely dual - 1) the debtor's insolvency and 2) the petitioning creditor's legal interest in the bankruptcy.

A/B Duegården's insolvency

When a creditor wishes to commenced bankruptcy proceedings against a debtor, it is a requirement that the debtor is insolvent within the meaning of the Bankruptcy Act. The parameter based on which insolvency is measured is illiquidity and whether this is a temporary situation. When a debtor is considered in negative equity - meaning that the debtor's liabilities exceed the assets - it is not sufficient if current payments are effected as they fall due.

A/B Duegården's only important assets was the property. The property was overmortgaged, and the Nykredit group was the mortgagee.

The High Court found that A/B Duegården was not in a position to pay its liabilities as they fell due. However, Nykredit had accepted to provide economic support to the association until the end of 2021 meaning that the operation in this period would be sound and not unprofitable.

A/B Duegården would have sufficient liquidity to pay its liabilities as they fall due. The fact that the property's debt exceeded the property's value did not speak in favour of bankruptcy proceedings as it was uncertain where this would also be the case at the end of 2021.

The legal interest

Section 17 of the Bankruptcy Act also contains a requirement that the petitioning creditor must have a legal interest in the commencement of the bankruptcy proceedings.

Section 4 of the Act on Cooperative Housing Associations regulating that the members will become lessees at the time of the property's sale (and perhaps already at the time of the bankruptcy of the association) was not attached any importance by the High Court when assessing whether A/B Duegården had a legal interest in the bankruptcy.

The members' interests in becoming lessees at market rent could therefore not change the fact that the requirement of the Bankruptcy Act was not considered fulfilled. Whether this was simply a consequence of the lack of insolvency proceedings or whether the members' conversion into lessees did not constitute a legal interest is unclarified.

The member were therefore left in a gap between two different possibilities of winding up - a solvent winding up was impossible according to the association and the liquidators, and bankruptcy proceedings were stopped by the Eastern High Court.

Further, it is very rare that section 17 of the Bankruptcy Act is applied as the creditor's tool, and not the debtor's tool when opposing to bankruptcy proceedings.

SUPREME COURT RULING

The Supreme Court disregarded the High Court ruling with four judges against three.

The Supreme Court found that the liquidators had had a legal interest in filing a petition for bankruptcy against the association. The association's original decision to dissolve was valid, and as a consequence of the conditions for the planned solvent liquidation not holding water, it was the liquidators' obligation to file a petition for bankruptcy in order not to increase the debt.

The important issue was the the consideration of the insolvency, and like the Bankruptcy Court and the Eastern High Court, the Supreme Court was of the opinion that the association was insolvent without Nykredit's commitment to grant financial support.

The most important issue was therefore whether Nykredit's commitment resulted in the association being insolvent.

A Supreme Court majority found that Nykredit's commitment was to be considered an offer requiring acceptance from the association. As opposed to the Supreme Court minority, which found that the association had implicitly accepted the offer, the majority found that Nykredit's commitment could not be considered a binding agreement between the parties. Importance was attached to the fact that the commitment could not be considered to be unilateral, but it was an offer which implied that the association had to act in a specific way, which lied outside a contracting party's general duty of loyalty.

Further, the majority found that the commitment's expectation of "a permanent solution with the association" did not imply a specific and secure solution to the payment problems.

The Supreme Court ruled that A/B Duegården was "allowed" to go bankrupt.  

COMMENTS

During the entire case, the legal system's view on the insolvency requirement was quite clear and not new. Illiquidity is an important parameter for insolvency, and a negative balance is simply an indicator.  What is spectacular about this case is that the roles of the creditor and the debtor were switched. The debtor fought for its right to go bankrupt, and the creditor fought against this right.

The case was decided upon based on a specific assessment of Nykredit's commitment of financial support, but the Supreme Court ruled that a creditor may have a legitimate interest in preventing a debtor from going bankrupt in order to prevent or postpone a sale of the debtor's assets.
The creditor and the debtor may have legal interests in their individual results, but obviously, the legal entity cannot be solvent and insolvent.

With the Supreme Court ruling, the initiative seems, however, to lie with the cooperative associations. If an association is insolvent, it will be difficult for the creditors to counter an association's wish to commence bankruptcy proceedings.

contacts

Piya Mukherjee

Partner

Nicolai Dyhr

Partner

Stefan Simmelsgaard Hansen

Attorney