Restrictions in the financial freedom of action of the debtor

Bankruptcy entails that all the assets of the debtor are seized for the benefit of  creditors.  Once the Bankruptcy Court has adopted a ruling that bankruptcy proceedings should commence, the debtor will immediately lose the right of disposition over his/her assets, i.e. right to control the assets.  The right of control is transferred to the bankruptcy estate in the person of the trustee.  The term "assets" means all wealth including cash, bank deposits, real property, vehicles, operating assets, amounts receivable, inventory, registered trademarks and patent rights etc.  Moreover debt may not be paid and settlement may not be accepted from parties owing moneys to the debtor, and agreements may not be concluded on behalf of the estate, nor may debt be incurred for the estate.

If any of the assets of the company have been mortgaged for amounts in excess of their value, the bankruptcy estate will as a general rule waive seizure (abandon) of such assets or transfer them to the lien-holders.  For example, a piece of real property may have a value of NOK 800,000 whereas the bank has a lien on the property in the amount of NOK 1 million.  Abandoning generally entails that the seizure from these assets is lifted so that the right to control these assets will revert to the debtor.  The lien-holders may then apply for enforced coverage in the assets in question pursuant to the Enforcement Act. 

The rights of the debtor

The right of seizure of the bankruptcy estate encompasses only assets that belong to the debtor.  The property of the spouse of the debtor or members of the debtor's household cannot be seized.  Some of the assets of the debtor are also exempted from the right of seizure of the estate.  These are described in further detail in the Creditors Recovery Act of 8 June 1984, No. 59.  Some assets that are needed by the debtor and his family may be kept.  These assets include clothing, ordinary furnishings etc.  The debtor may continue to work or seek new employment.  Generally, the debtor may keep normal pay and pension income needed by the family to live.  However, the Bankruptcy Court may decide that pay etc. accruing to the debtor should be included in the assets of the estate.  The estate may not seize tools, vehicles and similar aids needed by the debtor or any member of the debtor's household in his/their work or education up to a total value of two thirds of the basic amount of the National Insurance Fund.  The basic amount, which is amended annually, stood at NOK 46,950 as at December 1999.

Inheritance on goods received by the debtor during the bankruptcy will also normally form part of the bankruptcy estate.  The same applies to other acquisitions by the debtor by bankruptcy proceedings.  The debtor may renounce inheritance that has not been settled and gifts.  The Insurance Agreements Act of 16 June 1989 No. 69 contains special rules on rights pursuant to insurance agreements in the case of personal insurance (for example life assurance and accident insurance).  The originator's rights to literary and artistic works are not seized by the estate. 

The debtor may petition the Bankruptcy Court for a ruling that the bankruptcy estate may only sell the dwelling of the debtor and his/her family if a replacement dwelling is found.  This will not apply if the debtor and family have failed to make every effort to acquire a replacement dwelling. 

The debtor may be assisted by an attorney at law.  Even if the services of an attorney at law are retained, the Bankruptcy Court and the trustee may approach the person in question directly.  The cost of legal assistance will not be borne by the bankruptcy estate.

The law gives the debtor certain rights during the bankruptcy proceedings.  As a general rule these rights are exercised by the directors of the company.  Some of the rights may also be exercised by the chief executive of the company.  For example, the debtor is entitled to be present when mail addressed to the company is opened, to comment on the proposal presented by the board of trustees and to dispute claims during the review of claims.  The directors may also present proposals for compulsory composition or the release of the estate.

The duties of the debtor

The debtor is required to provide the Bankruptcy Court, trustee and if applicable auditor of the estate with exhaustive information on his financial affairs and  business management before and during bankruptcy.  The debtor must cooperate with the trustee in his/her work on mapping the assets of the estate.  As soon as bankruptcy proceedings commence the debtor must contact the trustee and make all assets available to the trustee by handing over keys etc.  The debtor is required to participate in the immediate securing of accounting material.  Concealing funds from the bankruptcy estate is a criminal offence.  Furthermore correspondence, accounting vouchers, and other documents of significance to the bankruptcy proceedings must be surrendered. 

The debtor must attend all general meetings of creditors. The trustee may permit the debtor not to attend.  The debtor must not leave the country during bankruptcy proceedings without the consent of the Bankruptcy Court.  After the commencement of bankruptcy proceedings, proceedings will be held to register the assets of the debtor.  The  debtor must attend the registration proceedings if requested by the Bankruptcy Court or the trustee.  The debtor must provide information on all his assets during the registration proceedings.

If the debtor fails to fulfil his obligations, the Bankruptcy Court may decide that the person in question should be seized and held in prison or subject to other restrictions on his/her personal freedom.

Under the Accounting Act of 17 July 1998 No. 56, parties with an accounting obligation are required to store accounting records with vouchers for at least 10 years.  This applies even if the debtor is bankrupt.  Accordingly, after completion of the bankruptcy proceedings, the debtor is required to store accounting material.  This also applies to accounting material released to the trustee during the bankruptcy proceedings. 

Announcement and registration in the Register of Bankruptcies

The commencement and completion of bankruptcy proceedings is announced in the local press and in "Norsk Lysningsblad" (the Norwegian Gazette).  The bankruptcy is also registered in the Register of Bankruptcies.

The business of the debtor

The Bankruptcy Court or the trustee (the board of trustees if a creditors committee has been appointed) determines whether the business of the debtor should continue to trade for the account of the estate.  In most cases the business will not continue to trade and it will normally cease with the commencement of bankruptcy proceedings.  It is important to note here that a notice of deletion must be filed with the Register of Business Enterprises in Brønnøysund.  The commencement of bankruptcy proceedings will normally not represent an obstacle to the debtor engaging in a new business activity independently of the estate.  Nevertheless, the debtor may lose the right to engage in business activities while subject to bankruptcy proceedings, cf the Act concerning Commercial Activities of 6 June 1980.  If the business does continue, the debtor must surrender operating assets, goods, premises, rights etc. encompassed by the right of seizure of the estate.  Rights in accordance with agreement concluded prior to the commencement of bankruptcy proceedings pass to the bankruptcy estate. 

Tax issues

The losses sustained by the debtor in business activities and outside business activities occurring in the year of the bankruptcy may be deducted from the debtor's other income for the same year and from the income of a spouse and minors together with whom the debtor is assessed for tax purposes.  Guidance is available from the tax office in the home municipality of the debtor.

The duties of the board of trustees

When bankruptcy proceedings commence, the Bankruptcy Court appoints a trustee, usually an attorney at law.  The trustee takes over the management of the estate.  A creditors committee comprising representatives of the creditors may be appointed at the first general meeting of creditors.  The trustee and the creditors committee make up the board of trustees.  As a general rule the Bankruptcy Court must also appoint an auditor to the estate.  However, in practice, a lack of funds will often mean that no auditor is appointed. 

The trustee takes over control of the assets of the estate.  During the bankruptcy proceedings, the assets will be sold and the proceeds be distributed between the creditors in accordance with the rules of the Creditors Recovery Act.

The trustee will inter alia examine whether any of the transactions of the company prior to the commencement of bankruptcy proceedings can be voided. Matters to be considered will include gifts to close associates of the debtor and extraordinary payments to any creditors.

The trustee is entitled to examine the debtor's mail. It is customary for mail to be readdressed to the office of the trustee.  The debtor is entitled to be present when mail is opened. 

The trustee or, if applicable, the board of trustees, must submit a report to the Bankruptcy Court.  The same duty applies to the estate's auditor.  The debtor must submit a declaration stating that to the best of his knowledge the information contained in the report concerning the financial affairs of the debtor is correct and exhaustive.  If the report contains comments on this subject with which the debtor disagrees, this must be stated in the declaration.  The report must contain information on whether the debtor can be assumed to have concealed assets during the bankruptcy proceedings, committed criminal offences in connection with his financial affairs etc.  If so, the report must also be sent to the police.

Debtors who need financial support

If the debtor lacks sufficient funds to support himself, he may apply to the Social Security Office in his home municipality.  If the debtor is entitled to unemployment benefit, an application must be made to the local employment office. The debtor may also, in certain cases, apply to the Bankruptcy Court for a maintenance grant to be paid from the assets of the estate.  

The reviewing of claims

Claims that are likely to be paid in full or in part must be reviewed during the bankruptcy proceedings.  The debtor may give his views before the claims are approved.  If the debtor objects to a claim, the Bankruptcy Court will decide whether it should be approved.

Disqualification period

In the report to the Bankruptcy Court the trustee must provide information on whether there are circumstances that suggest that a disqualification period should be imposed.  A period of disqualification may be imposed on the debtor if there are reasonable grounds for suspecting that the person in question has committed a criminal offence in connection with the bankruptcy or the business that led to the bankruptcy.  A period of disqualification may also be imposed if there are reasons for concluding that improper business conduct makes the person in question unfit to establish a new company or to serve as a director or the chief executive officer of such a company.  The Bankruptcy Court decides whether the debtor should be subject to a period of disqualification. 

A person who is subject to a period of disqualification may not form a limited company, or undertake the office of or de facto exercise the powers of a member or deputy member of a board of directors or the chief executive officer of such a company.  The person in question may also be removed from any such offices that he/she already holds.  A period of disqualification normally lasts for two years from the commencement of bankruptcy proceedings or from the time of imposition and will be registered in the Register of Bankruptcies.  It is a criminal offence to breach the rules governing a period of disqualification.  A period of disqualification will not entail a prohibition against conducting new business activities in the form of a one-man business or general partnership.

Further information on disqualification periods can be found in the leaflet on disqualification periods. 

The effect of bankruptcy proceedings on the obligations of the debtor

The debtor remains liable after completion of bankruptcy proceedings for any part of a debt that is not covered during the bankruptcy proceedings. 

After completion of bankruptcy proceedings, the debtor may apply for debt settlement pursuant to the provisions of the Debt Settlement Act of 17 July 1992, No. 99.  Debt settlement under these rules while bankruptcy proceedings are underway is not possible.  Further details of the Debt Settlement Act are available from the local execution and enforcement commissioner.

The debtor may present a proposal to the board of trustees for a debt settlement scheme in the form of compulsory composition.  Compulsory composition must involve the payment of at least 25% of the amounts owed to ordinary creditors.  Today debtors rarely have sufficient funds to pay such a high dividend.  However, the dividend may be paid in instalments if the creditors so agree.  The composition proposal must be accepted by a qualified majority of the creditors counted in terms of amounts and the number of creditors who participated in the vote.

Conclusion of the bankruptcy proceedings

A proposal for fees for the trustee, the creditors committee and the auditor to the estate must be submitted to the debtor for comment before fees are adopted by the Bankruptcy Court.  If there are insufficient funds to continue the bankruptcy proceedings, the Bankruptcy Court will discontinue the proceedings.  If not, the bankruptcy proceedings will be concluded in the form of the distribution of the assets of the estate amongst the creditors in such a way that the creditors receive proportionate coverage of their claims.  Nevertheless, preferential claims such as pay, claims for VAT etc. will receive full coverage before a dividend is paid to ordinary creditors.

Appeals against decisions

The main decisions adopted by the Bankruptcy Court during the bankruptcy proceedings may be appealed to the Court of Appeal.  This applies inter alia to the Bankruptcy Court's decisions to institute bankruptcy proceedings.  The time allowed for an appeal is generally one month.  A fee is payable for the processing of appeals.  The Bankruptcy Court will provide further details on the right of appeal.  The creditors may appeal the trustees' distribution to the Bankruptcy Court.  The time for appeal is one month after the announcement of the trustee's decision.  

If a decision adopted by the trustee, board of trustees or general meeting of creditors conflicts with the rights of the debtor or a third party or is clearly unreasonable, the debtor may apply to the Bankruptcy Court for the decision to be overturned or changed.