The bankruptcy process and its actors – What happens when a bankruptcy is initiated?

When the district court has issued a ruling on the opening of bankruptcy, a number of legal mechanisms are initiated. The bankruptcy process is strictly regulated by the bankruptcy law, with clear rules on how the estate administration should be conducted. This article explains the procedure and the key players in a bankruptcy administration.

Appointment of the bankruptcy trustee

Bankruptcy Act § 77 requires that the district court "immediately" appoint a bankruptcy trustee when the bankruptcy is opened. This is usually a lawyer with experience in insolvency law. The trustee is tasked with managing the bankruptcy estate and safeguarding the interests of all involved parties.

The bankruptcy estate takes control

The most immediate consequence of the bankruptcy is that a bankruptcy estate is created, which takes control of the debtor's assets. The estate serves as a legal separation between the debtor as a person and their financial values.

The debtor loses the right to dispose of their assets, and all financial dispositions made after the opening of bankruptcy are without legal effect on the estate. However, this only applies to assets that belong to the debtor personally:

• Clothing and personal belongings of moderate value are kept out of the estate

• Assets that belong to the debtor's family (spouse, children) are not included in the estate

• Items with pledged rights are included in the estate, but lien holders have special rights

Registration of assets

One of the trustee's first tasks is to register all of the debtor's assets. This is an important process to get an overview of the estate's assets. The registration includes:

1. Real estate and personal property

2. Claims and other rights

3. Intellectual property rights

4. Cash and bank deposits

5. Shares and securities

While registration is ongoing, the debtor is not allowed to use or dispose of the assets. For companies, this means that the business must typically cease, and premises must be closed. The trustee is given keys and access to all assets.

Creditor committee and creditors' meetings

In larger bankruptcy estates, it is common for the district court or a creditors' meeting to appoint a creditor committee. This committee typically consists of 1-3 representatives for the creditors, and together with the trustee, they represent the estate council. In the bankruptcy of a business, the employees may also have the right to appoint a member to the estate council.

The main task of the creditor committee is to supervise the trustee's work and assist in important decisions. Appointment of the creditor committee can occur already at the opening of bankruptcy but is often decided at the first creditors' meeting.

The creditors' meeting is a meeting where all creditors can participate and vote on decisions related to the estate administration. Each creditor has voting rights according to the size of their claim. The creditors' meeting is led by a judge from the district court.

The debtor's obligations during the bankruptcy

Even though the debtor loses control over their assets, they still have obligations during the bankruptcy:

• Obligation to provide information about all financial matters

• Obligation to assist the trustee with necessary information

• Availability obligation - the debtor must be available for the estate council

• The duty to cooperate also applies to board members and the CEO in companies

Continued operation or winding up?

Even though a business goes bankrupt, it may in certain cases be relevant to continue operations for a period. This can be the case when:

• Continuation can secure better values through the sale of the business

• Ongoing projects can be completed with profit

• Operation can prevent depreciation of assets

The decision on continued operation is made by the trustee in consultation with the creditor committee. This only occurs when it is considered to be in the creditors' interest.

Realization of the estate's assets

A central part of the estate administration is the realization (sale) of the debtor's assets. The goal is to achieve the highest possible price to provide the best possible coverage for creditors. The trustee has several methods for realizing the assets:

• Sale of the business as a "going concern"

• Separate sales of assets and operating equipment

• Use of real estate agents or other professional brokers

• In rare cases, auctions are held

Auction was once the most common sales method but today, other methods are often chosen that yield better prices.

Claims and creditor claims

When the bankruptcy is announced in the Brønnøysundregistries and the Norwegian Official Gazette, creditors must submit their claims to the trustee within a specified deadline. The trustee reviews the claims, checks the documentation, and decides:

1. Whether the claim should be approved

2. What priority the claim has in the bankruptcy estate

Approved claims are entered into a list of claims, which forms the basis for distribution from the estate.

Priority order of claims

Not all creditors are equal in a bankruptcy. The Bankruptcy Act and the Norwegian Coverage Act establish the following priority order:

1. Mass claims - costs related to the estate administration, including the trustee's fee

2. Secured claims - within the value of the secured object

3. Priority claims - primarily wages and holiday pay for employees

4. Second-priority claims - mainly tax and duty claims

5. Unsecured claims - all other claims

6. Subordinated claims - interest incurred after the opening of bankruptcy, fines, etc.

Creditors in a higher priority class receive full coverage before creditors in the next class receive anything.

Conclusion of the estate administration

When all assets are realized and values distributed to the creditors, the estate administration is concluded. This occurs when the trustee prepares a final report and accounts that are sent to the district court. If there are no funds in the estate to cover mass claims, the estate administration can be terminated at an earlier stage.

Summary

The procedure in a bankruptcy follows a structured process where the goal is to ensure a fair distribution of the debtor's values among the creditors. The process is led by a trustee appointed by the district court, who has extensive authority to manage the estate. Creditors with different priorities receive their claims covered according to a statutory system, which ensures predictability regarding what they can expect to receive.

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