What is insolvency and when can bankruptcy be filed? – Conditions of bankruptcy law

Insolvency is a central concept in bankruptcy law and the primary reason for opening bankruptcies. But what does insolvency really mean, and when can a creditor petition for a debtor to be declared bankrupt? This article explains the key aspects of insolvency and bankruptcy conditions.

What is insolvency?

The Bankruptcy Act § 61 defines insolvency as a situation where the debtor cannot meet their obligations as they become due, unless the inability to pay is assumed to be temporary. This consists of two components:

1. Illiquidity: The debtor cannot pay obligations when due

2. Insufficiency: The debtor's assets and income are collectively less than the debt

Both conditions must be met for insolvency to exist. A debtor who temporarily lacks liquidity but has greater assets than debt is not insolvent.

When can bankruptcy be petitioned?

According to the Bankruptcy Act § 60, bankruptcy can be opened when:

• The debtor is insolvent

• Bankruptcy is petitioned by either the debtor themselves or a creditor

It is important to note that the burden of proof lies with the one petitioning for bankruptcy, and there must be a clear probability balance to prove insolvency. The Supreme Court in Rt-2012-1310 stated that it is generally "considerably more concerning to open bankruptcy incorrectly than to erroneously deny opening bankruptcy."

Illiquidity – inability to pay

That the debtor is illiquid means that he or she cannot pay their obligations as they become due. This must have:

• A certain stability

• A certain duration

A comprehensive assessment of the debtor's liquid assets and expected income must be made to determine whether these are sufficient to cover obligations. It is not necessary for the debtor to actually have defaulted on obligations – it is sufficient that it can be demonstrated that the debtor will become illiquid within a reasonable time.

Even if a debtor is illiquid, this is not sufficient to establish insolvency if the inability to pay is only temporary. The assessment must consider the likelihood that the debtor will become liquid again. The longer the period, the more certain one should be that it is temporary.

Insufficiency – negative financial position

Insufficiency exists when the debtor's liabilities exceed assets. The Bankruptcy Act § 61 specifies that insolvency does not exist when "the debtor's assets and income together are assumed to fully cover the debtor's obligations," even though the fulfillment of obligations is delayed.

In the insufficiency assessment, one must:

• Evaluate the debtor's total assets and income against debt and obligations

• Base the assessment on the situation at the time of evaluation

• Include both matured and unmatured debt

• Assess the value of assets upon realization

Who can petition for bankruptcy?

The Bankruptcy Act § 60 gives both the debtor themselves and any creditor the right to petition for bankruptcy. For a creditor to petition for bankruptcy, they must have a claim that is eligible for dividend in bankruptcy.

It does not matter:

• What priority the claim will have

• Whether the claim is matured or legally decided

• Whether the claim is disputed

• Whether there is coverage for the claim

In disputed claims, the court must make a preliminary ruling on the existence of the claim.

Conclusion

Insolvency is the central reason for bankruptcy in Norwegian law. To be insolvent, a debtor must be both illiquid and insufficient. The assessment is complex and requires a thorough analysis of the debtor's financial situation. The burden of proof is strict, requiring a clear probability balance, reflecting that opening bankruptcy has serious consequences for the parties involved.

If you are facing questions about insolvency or considering petitioning for a debtor's bankruptcy, it is recommended to seek legal assistance to ensure that the legal requirements are met.

Are you facing a bankruptcy situation or have questions about insolvency law? At Sterk Law Firm, we have extensive experience with bankruptcy processes, both from the creditor and debtor side. Our specialized expertise can be crucial in securing your rights and interests in a challenging financial situation. Contact us for a non-binding initial conversation where we can assess your case and discuss how we can best assist you.