The main purpose of the rules on restructuring is to improve the possibilities of saving and continuing survival-suitable companies in financial difficulties. However, the Supreme Court has previously confirmed that the rules may also be applied by personal debtors.
But the bankruptcy court may reject to affirm a restructuring proposal if the terms in the proposal are out of proportion to the debtor’s financial situation, even if a majority of the creditors vote in favour of the proposal.
This has been an important question in many cases before the Supreme Court, but clear guidelines still need to be laid down as to when a restructuring proposal is out of proportion to the debtor’s financial situation.
In December 2019, two new judgments were delivered specifying when a restructuring proposal is out of proportion to the debtor’s financial situation.
The maritime and commercial high court's bankruptcy division affirms a restructuring proposal of 2.5 %
On 13 December 2019, the Maritime and Commercial High Court's bankruptcy division affirmed a restructuring proposal for a personal debtor with a dividend of 2.5 %, and, in this connection, the court decided on section 13 a (5) of the Bankruptcy Act.
A minority of the creditors claimed that the proposal almost only took into account the debtor’s interest in having the debt deleted, and that the investigation of the debtor’s bank transfers proved the debtor’s extravagant life style.
On the other hand, the debtor claimed that the restructuring proposal was the most favourable arrangement for the creditors as the spouse owned the house and the summer house according to an agreement on separate property established more than 12 years prior to the restructuring proceedings while the debtor was still solvent. The debtor, who was 63, had provided a significant part of the dividend via a loan from a third party and had offered to increase and invest a significant part of his creditor-protected capital pension scheme, provided that the compulsory composition was adopted and affirmed as the items of debt mainly consisted of guarantee obligations that had fallen due for payment more than 10 years ago, and as the debtor’s financial outlook and earnings possibilities were very limited.
The court affirmed the restructuring proposal and referred to the information on the debtor’s financial situation and earnings possibilities, including especially the debtor’s age, the debt’s age and the debtor’s very limited earnings possibilities. In addition, the court took into account that the restructuring proposal implied a dividend of 2.5 %, while the dividend in the event of bankruptcy would would be zero %, and that the claims were not a result of personal bankruptcy.
The court of Bornholm's bankruptcy division affirms restructuring proposal of 8.6 %
On 16 December 2019, the Court of Bornholm's bankruptcy division affirmed a restructuring proposal with a dividend of 8.6 % for a personal debtor.
A minority of the creditors claimed that the proposal was out of proportion to the debtor’s financial situation, and that the court ought to reject to affirm the proposal as it only took into account the debtor’s interest in having his personal debt deleted.
However, the court affirmed the proposal and took into account that the restructuring proposal implied a dividend of 8.6 %, while the dividend in the event of bankruptcy would be zero %, and that the claims were not the result of a personal bankruptcy. The court further took into account that the debt had existed for more than eight years, that the debtor had actively tried to provide for his creditors prior to the restructuring proceedings, and that the financing of the compulsory composition was provided by a loan from a third party provided that the restructuring proposal was adopted and affirmed.
Supreme court judgments in U 2018.3090 H AND U 2019.1859 H
In comparison, the Supreme Court affirmed the Eastern High Court judgment (U 2018.3090 H) and rejected to affirm a restructuring proposal with a dividend of 1.03 % as the proposal was out of proportion to the debtor’s financial situation, see section 13 e (5) of the Bankruptcy Act.
The Supreme Court affirmed the Bankruptcy Division’s judgment and adopted a restructuring proposal with a dividend of (U 2019.1859 H).
Judgments concerning restructuring proposals are based on an overall assessment
The purpose of restructuring proceedings should generally not only take into account the debtor’s interests in having his debt deleted. When determining whether the terms of a restructuring proposal are out of proportion to the debtor’s financial situation with the result that affirmation is rejected must be based on a specific overall assessment.
The requirement that a restructuring proposal cannot be out of proportion to the debtor’s financial situation must be interpreted so that the creditors are not placed in an inferior position in restructuring proceedings as opposed to bankruptcy proceedings. Consequently, the bankruptcy court should generally affirm a restructuring proposal if the dividend offered exceeds the expected dividend in case of bankruptcy proceedings.
The new judgments from the Court of Bornholm’s bankruptcy division, the Maritime and Commercial High Court's bankruptcy division and the Supreme Court in 2018 and 2019 therefore reflect that natural persons are subject to additional limitations in the right to have a restructuring proposal affirmed.
When assessing whether a restructuring proposal is out of proportion to the debtor’s financial situation, see section 13 e (5) of the Bankruptcy Act, it is decisive whether the proposal almost only takes into account the debtor’s interest in having his personal debt deleted. Importance is attached to the background of the debt, including how the debt accumulated, and whether it was in connection with a personal bankruptcy. This was the case in U 2018.3090 H where affirmation was rejected.
The two Supreme Court judgments show that a requirement for minimum dividend cannot be implied. However, the Supreme Court judgment in U 2018.3090 H points in the direction that an offered dividend which only marginally exceeds the expected dividend in case of bankruptcy is included in the assessment as an element speaking against affirmation. In the Court of Bornholm’s judgment of 16 December 2019, where dividend was 8.6 %, while dividend in case of bankruptcy would be zero %, the bankruptcy division also took into account that dividend was relatively high.
Furthermore, importance is attached to the circumstances surrounding the incurrence of debt. In U 2018.3090 H, the debt was incurred in connection with criminal and actionable actions, which was one of the reasons for rejecting affirmation. It may be assumed that affirmation will be rejected if the debt originates from grossly negligent management.
In summary, the below must be included in the assessment as to whether a restructuring proposal is out of proportion to the debtor’s financial situation:
- Does the proposal place the creditors in a (significantly) better position than the alternative - bankruptcy.
- Do the claims raised under the restructuring proceedings originate from the debtor’s personal bankruptcy.
- The circumstances surrounding the incurrence of debt, including whether the debt originates from criminal or actionable actions and the age of the debt.
- Information on the debtor’ financial situation and earnings possibilities, including especially the debtor’s age, the debt’s age and the debtor’s earnings possibilities.
- The dividend offered, including whether it is provided by way of a loan from an independent lender and/or whether the debtor furthermore shows good intentions by offering to withdraw and invest creditor-protected pension funds if the compulsory composition is adopted and affirmed.