1.1 Introduction

A creditor is a person with a claim against a third party, e.g. for the payment of money.  The party against whom the claim is directed and by whom the claim must be met is termed the debtor

The nature of the claim may be such that the debtor is required to pay a sum of money (typically in the case of a loan), to release an item (typically in the case of a purchase) or to perform a service (for example in the form of work) for the creditor.  The basis for the claim is frequently an agreement between the debtor and the creditor, although the claim may also be based on statute (for example a claim by the State against an employee for taxes) or the actions of the debtor (for example a claim for damages).

Introduction

1.2       The purpose of bankruptcy proceedings
1.3       Mutually burdening contracts
1.4       Non-monetary claims
1.5       Contingent claims not yet due

The procedure for registering claims

Review and approval of claims

3.1       Cases in which claims are not reviewed
3.2       The procedure for reviewing claims

The distribution of funds amongst creditors

4.1       General comments
4.2       Preferential claims
4.3       Preferred claims of Class 1
4.4       Preferred claims of Class 2
4.5       Unsecured claim
4.6       Claims ranking last by order of priority

Creditors with security interests (liens etc.)

5.1       General comments
5.2       Creditors with a lien on the assets of debtors
5.3       Creditors with a lien on the assets of third parties

Creditors with a right of set-off

The position of debt that cannot be covered by the assets of the estate

1.2 The purpose of bankruptcy proceedings

If a party with an obligation fails to fulfil this obligation voluntarily, the counterparty may enlist the aid of the legal system in ensuring that the claim is met.  This aid is provided under the rules on enforcement.

If the debtor is unable to fulfil his obligations as they come due and these obligations exceed the value of his assets, cf. Section 61 of the Debt Reorganisation and Bankruptcy Act, the debtor may be declared bankrupt.  If so, it will no longer be possible for individual creditors to enforce their claims.  Instead the assets of the debtor will be converted to monetary amounts by the bankruptcy estate, and these funds will then be distributed amongst the creditors in accordance with the provisions of the Creditors Recovery Act and the Debt Reorganisation and Bankruptcy Act.

1.3 Mutually burdening contracts

As a rule, agreements are mutually burdening.  In the case of a purchase, for example, the vendor supplies the goods and the purchaser must pay the purchase price.  In a bankruptcy the situation is frequently such that the solvent party has fulfilled his part of the agreement, but the debtor has failed to do so.  The supplier of goods, for example, may have provided the goods, but the debtor has failed to pay the purchase price.  This is a typical situation and is discussed below.

A situation may also arise where neither party performs the obligations provided for in the agreement:  The vendor/debtor has failed to supply the goods and the purchaser has failed to pay the purchase price.  For further information on situations of this type, readers are referred to the Norwegian Advisory Council on Bankruptcy’s information on the position of non-performed contracts in bankruptcies.

If the debtor has fulfilled his side of the agreement prior to bankruptcy but the other party has failed to do so, the bankruptcy estate will assume the debtor’s claim for performance of the agreement.

1.4 Non-monetary claims

As a general rule all claims against the debtor must be converted to monetary values, see Section 6-4 of the Creditors Recovery Act.  If, for example, the debtor was to have supplied goods that had been paid for in advance, the purchaser’s claim for the release of the goods will be converted to a monetary claim.  This means that the item must be valued in order to ascertain the correct monetary amount of the claim.

In some case, however, a creditor may claim the release of an object. This would be the case where a creditor has legal protection for his claim, i.e. the debt is secured by a fixed charge on assets, see The position of non-performed contracts in bankruptcy.  The claim for the release of an object etc. may also be a preferential claim, cf Section 9-2 of the Creditors Recovery Act.

1.5 Contingent claims not yet due

All claims against the debtor will be deemed to have come due for payment when bankruptcy proceedings commence, see Section 6-2 of the Creditors Recovery Act.  Contingent claims - i.e. claims that will be covered only if a particular condition is fulfilled, for example a guarantee that takes effect by the failure of a party to meet his commitments - are also recognized in a bankruptcy.  However, a dividend will be paid only if the condition in question occurs, see Section 133 of the Debt Reorganisation and Bankruptcy Act.

2. The procedure for registering claims

According to the provision of Section 78 of the Debt Reorganisation and Bankruptcy Act, an announcement that bankruptcy proceedings have commenced must be drafted.  This however is only a regulation.  The announcement must be published in "Norsk lysningsblad" (The Norwegian Gazette) and in a newspaper that is widely read in the place in question.  Moreover, the trustee must send the announcement to all known creditors of the estate. 

The announcement of the commencement of bankruptcy proceedings must contain a request to creditors to report their claims against the debtor to the interim trustee.  Claims must be reported within a specified time limit, normally four to six weeks after the commencement of bankruptcy proceedings.  This follows from Section 109 of the Debt Reorganisation and Bankruptcy Act.

As a general rule, it is the responsibility of creditors to register their own claims.  Even if a creditor fails to comply with the time limit, the claim may still be reviewed, although the creditor may be required to pay any additional costs resulting from the failure to meet the time limit.  No claims may be registered after winding up of the estate has commenced, see Section 133 last sentence of the Debt Reorganisation and Bankruptcy Act.

Creditors with satisfactory security in the assets of the debtor or of third parties, or creditors with a full right of set-off are not required to register their claims.  Nevertheless, creditors of this type are also advised to register their claims and their security interests in respect of the estate, amongst other reasons to allow the trustee to decide questions of abandonment and whether the party in question has the right to register a residual claim, see Section 8-14 of the Creditors Recovery Act.

Furthermore, the creditors must document their claims, e.g. submit receipts, invoices or other evidence of an outstanding claim against the debtor.  Creditors must also document any security for their claims e.g. in the form of a mortgage certificate.  If a creditor fails to do so, there may be evidentiary consequences when the claim is reviewed.  Furthermore, the creditor should state what he views the priority/ranking of the claim against the estate to be.

3. Review and approval of claims

The trustee will draw up a list of claims filed against the estate.  Section 110 of the Debt Reorganisation and Bankruptcy Act provides that the debtor and creditors are entitled to familiarize themselves with the list. 

3.1 Cases in which claims are not reviewed

Where an estate does not have funds available for payments to creditors, the claims of creditors are not reviewed.  Claims are only recommended for payment to the extent that there are funds available to cover the class of creditors in question, see Section 110 third para and Section 130 second para of the Debt Reorganisation and Bankruptcy Act.  Claims for which only modest cover could be provided may be withdrawn from consideration.  In practice this means that unsecured claims and claims ranking last by order of priority will rarely be reviewed. 

3.2 The procedure for reviewing claims

The claims are reviewed by the trustee or by the board of trustees if a creditors committee has been appointed, see Section 111 of the Debt Reorganisation and Bankruptcy Act. Review may also take place at a general meeting of creditors.  The debtor, creditors whose claims have been recommended and the estate’s auditor may also give their views and attend when the claims are reviewed.

If the trustee recommends the approval of a claim and no objections have been received, the claim will be approved, see Section 113 of the Bankruptcy Act.

Section 114 of the Debt Reorganisation and Bankruptcy Act provides rules on situations in which a claim is disputed by the trustee, the debtor or other creditors.  Firstly, the creditor in question (the filer of the claim) must be given a time limit within which to provide further details in support of the registered claim.  If no such details are forthcoming within the expiry of the time limit, or if the trustee upholds his recommendation despite the grounds given, the trustee must report the matter to the bankruptcy court.  The bankruptcy court will then give the creditor a time limit of at least three weeks to bring a complaint.  The bankruptcy court must inform the creditor that the recommendation of the trustee will be adopted if no complaint is filed.  The procedure followed in reviewing claims is described in further detail in the Norwegian Advisory Council on Bankruptcy’s publication : The bankruptcy court’s processing of bankruptcy petitions and bankruptcy estates, section 10.

4. The distribution of funds amongst creditors

4.1 General comments

Some creditors have liens or other security interests.  Coverage of their claims from the values of the assets on which they hold the lien or security interest will have preference.  Other creditors may have rights relating to secured debts, see the Norwegian Advisory Council on Bankruptcy’s information on the position of non-performed contracts in bankruptcy.

Apart from this, the assets of the debtor will be sold and the funds will be distributed amongst the creditors.  Chapter 9 of the Creditors Recovery Act contains rules on how the funds are distributed. These rules are briefly discussed below.

4.2 Preferential claims

Claims against the estate arising after the commencement of bankruptcy proceedings are known as preferential claims.  Section 9.2 of the Creditors Recovery Act provides a full overview of the various types of preferential claims.  One example of such claims is costs incurred in processing the estate.  Other typical preferential claims are the charges of the bankruptcy court and the trustee’s fee.  If the estate continues the business of the debtor after the commencement of bankruptcy proceedings, operating expenses incurred after the commencement of these proceedings will constitute preferential claims.  Furthermore, preferential claims may also be non-monetary in nature, for example the claim for the delivery of an object that was sold by the bankruptcy estate.  Interest accruing on preferential claims has the status of a preferential claim.  Preferential claims must be met in full before the remaining funds of the estate are divided amongst the creditors.

4.3 Preferred claims of Class 1

After preferential claims have been met in full, claims for pay or other remuneration for services performed for the debtor will be covered.  See Section 9-3 of the Creditors Recovery Act.  If the estate does not have sufficient funds to cover pay claims, these will, with certain exceptions, be secured through the State run Wage Guarantee Fund.  The State assumes the claims for pay when payments are made through this scheme, see Section 6 of the Wage Guarantee Act.  For further information on the legal position of employees in the event of the bankruptcy of their employer, see the Advisory Council on Bankruptcy’s information on employees of bankrupt businesses and the Advisory Council on Bankruptcy’s recommendation: Processing pay claims in bankruptcies.

However, pay claims from company management do not have priority but will, if applicable, be covered as unsecured dividend claims.  Detailed rules on this can be found in Section 9.3 of the Creditors Recovery Act.

4.4 Preferred claims of Class 2

Under Section 9-4 of the Creditors Recovery Act, taxes to the State or municipality on assets or income and sums assessed together with taxes, Value Added Tax, taxes withheld (in accordance with the legislative provisions on liability for tax withholdings) and claims for refunds pursuant to Section 31 para 5 of the Tax Act as regards personal income must then be covered.  Interest on the claims is not a preferred claim.

For a claim to be preferred, the ordinary due date of the claim must not lie further back in time than six months before the filing date.  Older claims are not preferred. For further details on time restrictions relating to preferred claims, refer to Section 9-4 second para of the Creditors Recovery Act.

If the assets of the estate are not sufficient to cover all Class 2 claims in full, the claims will receive pro rata coverage with equal preference, see Section 9-4 third para of the Creditors Recovery Act.

4.5 Unsecured claims

The remainder of the estate’s funds must then be divided on an equal ranking basis between the unsecured creditors (ordinary dividend claims), see

Section 9-6 of the Creditors Recovery Act.  Typical examples include debt to suppliers, older tax claims and unsecured loans to the debtor.  Claims for interest which have been registered are unsecured up until the filing date, see Section 1.2 of the Creditors Recovery Act.  In practice there will rarely be sufficient funds to cover any of these claims. 

If other parties are jointly and severally liable with the debtor for the debtor’s debts, a creditor may still register and claim a dividend on the full amount.  Part payment by other co-debtors will not reduce an unconditional creditor’s dividend claim against the estate.  The rules on this can be found in Sections 8-7 et seq of the Creditors Recovery Act. These rules are fairly detailed.

If the estate’s funds are not sufficient to meet all unsecured claims in full, the claims will receive proportionate coverage on an equal ranking basis. 

4.6 Claims ranking last by order of priority

Section 9-7 of the Creditors Recovery Act distinguishes certain types of claim that are covered only after all other claims have been paid.  There are five major types, see Nos. 1) - 5), where the most significant in financial terms will normally be claims for interest after the filing date.  The provision applies an internal "order of priority" whereby there will for example not be coverage for No. 2) unless all claims in No. 1) have been paid in full.

All claims against the debtor are deemed to have come due for payment with the commencement of bankruptcy proceedings, see item 1.5.  If the claim was not interest bearing, the creditor would receive an arbitrary payment.  The law takes account of this in that ordinary dividends on non-interest bearing claims are based on nominal value less an estimated interim rate of interest, at present 10%.  The interim interest is calculated from the filing date and up until the original due date of the claim, and according to Section 9-7 No. 1 b of the Creditors Recovery Act, it will rank last by order of priority.

There will in practice normally not be sufficient funds to cover claims ranking last by order of priority.

5. Creditors with security interests (liens, etc.)

5.1 General comments

Creditors with rights of lien, rights of retention and the like are in a special position as regards bankruptcy.  The statutory rules are for the most part found in Sections 8-14 to 8-17 of the Creditors Recovery Act.  For the sake of simplicity this section confines itself to the position of lienholders in respect of the debtor’s bankruptcy.

5.2 Creditors with a lien on the assets of the debtor

If the creditor has a valid lien with legal protection (that cannot be reversed) for his claim, he will in theory not be affected by the bankruptcy.  It should be noted however that lienholders are advised to register their claim against the estate, see item 3 above.  If the estate is not required to respect the lien, for example because it lacks legal protection, the creditor may register the entire claim against the estate as an unsecured claim.

If the creditor’s claim lies within the value of the collateral, the creditor may receive full coverage of the entire claim with the addition of interest and expenses, if any.  Expenses and interest are encompassed by the lien within the terms of Section 1-5 a) and b) of the Liens Act.  If the collateral does not cover the creditor’s claim in full, the residual claim may be registered as a dividend claim, see Section 8-14 of the Creditors Recovery Act.  A pre-condition for this, however, is that the lienholder has a personal claim against the debtor in addition to the lien right, as will is normally be the case.  The lienholder is entitled for a dividend to be temporarily set aside on amounts that exceed the amount of the claim for which it is clear that the collateral will provide coverage.  Thus the lienholder will not suffer as a result of doubt about the value of the collateral. The lienholder is not entitled to payment of a dividend until it is clear how great a part of the claim can be covered by the collateral.

Under Section 1-9 letter c) of the Liens Act, the claim will inter alia come due for payment if bankruptcy proceedings commence in respect of the debtor, even if the ordinary due date has not arrived and even if the debtor has paid interest and instalments on time.  If a claim is not paid, the lienholder may require the collateral to be realized (compulsorily sold) pursuant to the Enforcement Act.  There are however two limitations in this right of realization: firstly there is a time limit of six months, see Sections 117 and 17 of the Debt Reorganisation and Bankruptcy Act, second para in both cases.  Secondly, the estate may prevent a compulsory sale by paying off the lienholder who petitioned for the sale, see Section 8-16 of the Creditors Recovery Act.  When the collateral is subsequently sold, the estate will receive the amount that would otherwise accrue to this lien creditor. 

The estate may also sell a mortgaged asset even if the lienholder does not receive full coverage, see Section 117a of the Debt Reorganisation and Bankruptcy Act.  The estate may do so if it is convenient to sell the mortgaged asset together with other non-mortgaged assets with a view to achieving a higher sales price, or if the sale forms part of a transfer of all or parts of the business. 

The estate may also abandon the mortgaged asset to the debtor, i.e. the bankruptcy seizure will be reversed and the collateral will revert to the debtor, see Section 117b of the Debt Reorganisation and Bankruptcy Act.  In such a situation the lienholder may enforce the claim in respect of the collateral in accordance with the rules of the Enforcement Act or in some other way in agreement with the debtor.

The trustee may also transfer a mortgaged asset to the lienholder if the asset has no financial interest to the estate, see Section 117c of the Debt Reorganisation and Bankruptcy Act.  A transfer of this nature requires the consent of the lienholder.  In the event of a transfer, the asset must be valued by the trustee so that the size of the residual claim of the lienholder is known.  The lienholder must cover the costs involved in the transfer.  Furthermore, the estate may as a general rule at any time require the compulsory sale of mortgaged assets by the execution authorities, see Section 117 first para of the Debt Reorganisation and Bankruptcy Act and Section 8-15 of the Creditors Recovery Act.  This does not apply, however, if there will not be a surplus for the estate and the creditor for various reasons is not eligible for a dividend.

A creditor with a sales lien may in the event of the debtor’s payment default require the object of the sale to be released by the bankruptcy estate in accordance with the rules of Chapter 9 of the Enforcement Act.  In the event of such a return a financial settlement will take place between the estate and the creditor in that the creditor’s claim will be reduced in proportion to the value of the object.

5.3 Creditors with a lien on the assets of third parties

Creditors of this type may choose whether they wish to rely on the collateral security, register the claim (as a dividend claim) against the estate or do both.  However, irrespective of the approach chosen, the creditor must not receive more than full coverage of the claim.

Even if the creditor opts to pursue the third party collateral first, he may register the entire claim against the debtor’s bankruptcy estate, see Section 8-13 of the Creditors Receovery Act.

6. Creditors with a right of set-off

Like lien creditors, creditors who also owe the debtor money are in a strong position.  As a general rule such creditors may set off their entire claim (and not merely a dividend on the claim) against the debtor’s claim, as would have been the case had the bankruptcy not occurred.  A set-off means that the claims will as far as possible be eliminated against one another.

In order to prevent speculation (for example by a creditor incurring debt to the debtor or acquiring counterclaims from third parties if the creditor believes that bankruptcy is imminent) Sections 8-2 and 8-3 of the Creditors Recovery Act provide for certain restrictions in the right of sett-off.

7. The position of debt that cannot be covered by the assets of the estate

The debtor will continue to be liable for any parts of the debt that are not met by the estate, see Section 6-6 of the Creditors Recovery Act.  Debt restructuring (extinguishing) must take place in accordance with the rules on debt reorganization or compositon, or in accordance with the Debt Settlement Act.

However, if the debtor is a limited company or some other association with limited liability, the practical effect of bankruptcy will be that the remaining debt will be extinguished when the association ceases to exist (and is deleted from the Register of Business Enterprises, see Section 138 of the Debt Reorganisation and Bankruptcy Act, second para) with the conclusion of the bankruptcy proceedings.  The rule that a debtor remains liable for remaining debt therefore applies only in the case of personal bankruptcies. 

The time barring of a creditor’s claim is interrupted when the claim is registered against the estate, see Section 18 of the Statute of Limitations.  If so, no time barring will occur while the processing of the estate is underway, cf Section 21 No. 1 of the Statute of Limitations.  If the claim against the estate is approved, however, a new time limit of 10 years will commence with the completion of bankruptcy proceedings, cf Section 21 No. 2 of the Statute of Limitations.  If the registered claim is not approved, the effect of interruption pursuant to Section 18 of the Statute of Limitations will apply for one year after the decision not to approve or review the claim, see Section 21 No. 2 of the Statute of Limitations. 

The time limits will be interrupted in the usual way.