In two judgments, the Eastern High Court recently rejected restructuring of personal debtors with reference to the fact that the proposed compulsory composition was contrary to the purpose of the rules on restructuring.

The purpose of these rules, which came into force on 1 April 2011, is primarily to improve the possibilities of saving and continuing companies in financial difficulties instead of declaring them bankrupt. In a judgment of 18 December 2015, the Eastern High Court confirmed that the rules on restructuring may also be applied by personal debtors.

RESTRUCTURING AS AN ALTERNATIVE TO DEBT RESTRUCTURING

A hopelessly indebted person is normally forced to apply for debt restructuring to obtain a financial arrangement with his creditors. But the courts may reject debt restructuring if the debtor has for instance systematically accumulated debt due to speculation, owes money to public authorities, has committed a crime or simply has an unclarified financial situation.

These reasons to reject debt restructuring do, however, not apply in relation to a registered restructuring where adoption of the restructuring proposal depends on the creditors.

Irrespective of whether the debtor is prevented from obtaining debt restructuring based on one of the above reasons, the debtor may conduct restructuring proceedings if a simple majority of the creditors (based on the creditors with unsecured debt) vote in favour thereof. Further, the bankruptcy court must affirm the restructuring proposal and assess that the proposal is not unlawful.

Personal restructuring has been called “luxury debt restructuring” or “first-class debt restructuring” as the bankruptcy court affirms that the personal debtor's debt is significantly reduced, often all the way down to a dividend of 1-10% of the debt.

TWICE, THE EASTERN HIGH COURT REFUSED TO AFFIRM “LUXURY DEBT RESTRUCTURING”

Two recent judgments from the Eastern High Court show that the courts are increasingly using the opportunity to refuse affirmation of an adopted restructuring proposal, for instance if the proposal is out of proportion to the debtor’s financial situation, see section 13 e (5) of the Bankruptcy Court.

In the judgment of 27 September 2017, the Eastern High Court refused to affirm a restructuring proposal of a personal debtor on the grounds that the proposal was not in accordance with the purpose of the restructuring rules. In the specific case where the debtor had been the executive officer of five companies, had owned several companies and had been convicted of embezzlement, the High Court refused to affirm the restructuring proposal on the grounds that an affirmation would be out of proportion to the purpose of the restructuring rules as these rules do not solely aim at improving the debtor’s legal position.

In a judgment of 22 February 2018, the Eastern High Court refused to affirm another restructuring proposal of a personal debtor referring to the purpose of the restructuring rules and the debtor’s financial situation.

The Eastern High Court attached special importance to the size of the debtor's assets and liabilities, and that the debtor had prospects of receiving a pension of DKK 916,584 in 2021. The High Court further emphasised that the purpose of the rules on restructuring, especially that the intention of the rules was not to improve the debtor’s legal position, should be included when assessing whether to dismiss affirmation. As an improvement of the debtor’s financial situation was only found contrary to the purpose of the restructuring rules, the High Court refused to affirm the restructuring proposal.

As the creditors appealing against the bankruptcy estate’s affirmation to the High Court submitted that the debtor, prior to the restructuring, had had a high consumption and spent substantial funds which is a reason for dismissing debt restructuring under section 197 (2), no. 2, paragraph c of the Bankruptcy Act. The fact that the High Court refrained from considering this fact may reflect that creditors cannot rely on the grounds of refusal in the debt restructuring rules analogously.

THE COURTS HAVE FOCUS ON “LUXURY DEBT RESTRUCTURING”

The two recent judgments show that the court have special attention on “luxury debt restructuring” of personal debtors who cannot obtain debt restructuring if the terms of the restructuring proposal are out of proportion to the debtor’s financial situation. Consequently, the creditors’ objections and the consideration for the creditors may make a decisive difference when the bankruptcy court is to decide whether an adopted restructuring proposal should be affirmed or rejected resulting in bankruptcy.

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Nicolai Dyhr

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