Prior to bringing legal action, a bankruptcy estate and a creditor had agreed on payment of security in relation to the action. The creditor provided security for the costs of the action against payment of 50 % of any proceeds from the outcome of the action. The Supreme Court found that there was no basis for setting the agreement aside.

The bankruptcy estate wished to bring action, but lacked sufficient funds. Usually, any creditor providing security vis-á-vis a bankruptcy estate may accept to receive proceeds from the outcome of the action distributed proportionally according to the bankruptcy estate’s other creditors under the general distribution principle of the law. The bankruptcy estate notified the other creditors of the offer, which implied an imbalance in relation to the other creditors. As the bankruptcy estate’s creditors did not object to the offer, the creditor provided security against payment of 50 % of the proceeds.

During the action, the defendant objected to this agreement. On 23 March 2017, the Supreme Court ruled that, in the specific circumstances, there was no basis for setting aside the agreement between the bankruptcy estate and the creditor, which then received 50 % of the proceeds gained as a consequence of the positive outcome.

WHEN CAN SUCH AN AGREEMENT BE MADE?

With this judgement, the Supreme Court confirms that bankruptcy estates may make agreement on provision of security against a more specified remuneration if the below requirements are met:

  • It is assumed that the bankruptcy estate does not have the funds to bring action.
  • Prior to the agreement, the trustee must provide the bankruptcy court and the creditors with a detailed description of the agreement and give a reasonable time limit for any objections.
  • The trustee must investigate the possibilities of a better offer than provision of security as the trustee is responsible for the administration of the estate on behalf of the creditors.
  • The trustee must thoroughly consider and decide on the justification of any objections received as these must be presented to the bankruptcy court in the event of disagreement.
  • The agreement must be valid under the general rules of Danish law.

A MORE FLEXIBLE FRAMEWORK FOR SECURITY OPENS UP FOR MORE LEGAL ACTIONS FROM BANKRUPTCY ESTATES

The Supreme Court’s acceptance of the possibility of making flexible agreement concerning provision of security opens up for far more attractive terms for the creditors or other persons that may have an interest in financing legal action concerning bankruptcy estates’ claims than is the case under the general rules of the Bankruptcy Act.

The Supreme Court’s judgment shows that the trustee may make flexible agreements concerning provision of security with external financing sources where a creditor, in addition to a separately agreement remuneration, may also demand to receive its general dividend under the rules of the Bankruptcy Act.

Consequently, a larger number of legal actions from bankruptcy estates should be expected in the future as this judgment gives the seal of approval to agreements on legal action which the trustees have so far given up on due to lack of provision of security for the costs of the action. As long as the above requirements are met, it must be assumed that there will be wide limits for agreeing on significantly more advantageous terms than stipulated in the Bankruptcy Act for the person who wishes to provide security for the bankruptcy estate's action - whether it is a creditor or an independent lender.

contacts

Nicolai Dyhr

Partner

Piya Mukherjee

Partner