Reversal under the Norwegian Bankruptcy Act § 5-5 – Payment of debt before bankruptcy

When a company goes bankrupt, one of the trustee's most central tasks is to investigate whether certain creditors have been favored at the expense of others in the time leading up to the bankruptcy. Reversal of extraordinary payments according to the Norwegian Creditors Recovery Act § 5-5 is an important tool to ensure equal treatment of creditors.

What Can Be Reverted?

The Norwegian Creditors Recovery Act § 5-5 first paragraph provides grounds for reversing payments of debts made by the debtor later than three months before the legal decision date, if the payment is made:

1. With unusual means of payment

2. Before the normal due date for payment

3. With an amount that has significantly impaired the debtor's ability to pay

Common to all options is that the payment still cannot be reversed if it appeared ordinary.

Unusual Means of Payment

A payment is considered made with unusual means of payment if the agreed payment method was not used. If the debtor pays with goods instead of money, this will normally be considered an unusual means of payment.

In the Supreme Court judgement, Rt. 2008 p. 1170 (the Rema 1000 case), the takeover of inventory and operating equipment as settlement for debt was considered payment with unusual means of payment, even though this was agreed as a secondary payment method in the franchise agreement.

Payment Before Normal Due Date

This option includes not only payment before the due date but also payment before "the time when the debt is assumed to have been paid if the debtor had not become insolvent," according to the preparatory works. This includes cases where a loan is called by the bank according to a due date clause due to default.

According to the ordinary reservation, payment a few days before the due date will usually be ordinary, especially if the payment is not related to payment difficulties.

Amounts That Have Significantly Impaired the Ability to Pay

The third option targets payments with amounts that significantly impair the debtor's ability to pay. The relative size of the amount is crucial, not its absolute size.

In assessing whether the payment has significantly impaired the ability to pay, one must look at the debtor's liquidity – his ability to meet obligations as they fall due. In legal theory, it has been suggested that an amount comprising 10-25% of the debtor's liquid assets could be considered significant.

Ordinary Reservation

Even if a payment meets one of the three alternative criteria, it cannot be reversed if it appeared ordinary. What is ordinary depends on an overall assessment. The preparatory works mention that "ordinary is payment in the usual course of routine of ongoing expenses in connection with the debtor's business: fees for delivered raw materials, rent, wages, taxes, etc."

For payments that have significantly impaired the debtor's ability to pay, the ordinary reservation will particularly matter for payments necessary for continued operations. The debtor's more specific payment habits may also be relevant in the assessment, cf. Rt. 1995 p. 222 (Direct Mail).

The reversal rules are central to ensuring equal treatment of creditors in bankruptcy, and trustees should therefore carefully evaluate all payments made in the time before bankruptcy.