Subjective annulment in bankruptcy – Conditions and practice in the Norwegian Coverage Act § 5-9

While the objective annulment rules in the Norwegian Bankruptcy Act §§ 5-2 to 5-8 give the bankruptcy estate the opportunity to annul certain transactions made within relatively short deadlines, the subjective annulment rule in § 5-9 provides a much wider scope for annulment. This provision acts as a general clause and has been called "the long arm" in bankruptcy law.

Conditions for subjective annulment

For a transaction to be annulled under § 5-9 of the Norwegian Bankruptcy Act, the following conditions must be met:

1. There must be a "transaction" that in an "undue manner" either:

   • Favors one creditor at the expense of others

   • Removes the debtor's assets from serving as coverage for the creditors

   • Increases the debtor's debt to their detriment

2. The debtor's financial situation was weak or became significantly weakened by the transaction

3. The other party knew or should have known about:

   • The debtor's difficult financial situation and

   • The circumstances that made the transaction undue

4. The transaction must have been made no later than ten years before the cut-off date

Differences from the objective annulment rules

The subjective annulment rule differs from the objective rules on several key points:

• Longer deadline: While the objective rules have deadlines of three months to two years, subjective annulment can occur for transactions made up to ten years before the cut-off date.

• Wider scope of application: The subjective rule is not limited to specific types of transactions but can affect all transactions considered undue after a concrete assessment.

• Stricter effect: In objective annulment, the estate can only demand the return of the other party's enrichment (cf. § 5-11), while in subjective annulment, the estate can claim compensation for its full loss (cf. § 5-12).

Assessment of undue transactions

A central part of the subjective annulment rule is the assessment of whether the transaction has unduly favored a creditor or removed assets from the estate. This assessment is objective, but subjective factors can still have significance.

In practice, transactions that by their nature fall under the objective rules will normally also be considered undue under § 5-9. This is evident from both the preparatory works and case law. The Supreme Court, for example, in Rt. 2001 p. 1136 (Kjells Markiser) established that the repayment of a loan which would have been affected by § 5-5 was also undue under § 5-9.

Other factors that may be significant for the assessment include:

• Whether the transaction benefits someone related

• Whether any of the parties can be penalized for conducting the transaction

• The timing of the transaction and the debtor's financial position at the time

• Whether the creditor had particular insight into the debtor's finances or the ability to influence payments

Practical significance

In practice, the subjective annulment rule is particularly significant in two types of cases:

1. Where the transaction was made outside the time limits for objective annulment

2. Where the estate's loss exceeds the other party's enrichment

Due to the stricter burden of proof and more comprehensive processes, the estate will often prefer to invoke the objective rules when possible. Thus, the subjective rule serves as an important supplement to ensure that particularly blameworthy transactions can be annulled even when the objective rules do not suffice.

Are you facing a bankruptcy situation or do you have questions about annulment? Do not hesitate to contact us. We offer practical guidance and strategic advice for both creditors looking to secure their interests and trustees considering annulment claims.