When the district court has issued a ruling on bankruptcy opening, a series of legal mechanisms are set in motion. The bankruptcy process is strictly regulated in the Bankruptcy Act, with clear rules for how the estate proceedings should be conducted. This article explains the procedure and the central actors in bankruptcy proceedings.
Appointment of Bankruptcy Administrator
The Bankruptcy Act § 77 requires that the district court "immediately" appoint a bankruptcy administrator when the bankruptcy is opened. This is usually a lawyer with experience in insolvency law. The bankruptcy administrator is tasked with managing the bankruptcy estate and safeguarding the interests of all parties involved.
The Bankruptcy Estate Takes Control
The most immediate consequence of the bankruptcy is that a bankruptcy estate is established which takes over control of the debtor's assets. The bankruptcy estate functions as a legal separation between the debtor as a person and their economic values.
The debtor loses the right to dispose of their assets, and all economic dispositions made after the bankruptcy opening have no legal effect against the estate. However, this only applies to assets that belong to the debtor personally:
Clothes and personal items of moderate value are kept outside the estate
Assets belonging to the debtor's family (spouse, children) are not included in the estate
Items with encumbrances are included in the estate, but lien holders have special rights
Registration of Assets
One of the bankruptcy administrator's first tasks is to register all the debtor's assets. This is an important process to get an overview of the estate's assets. The registration includes:
Real estate and movable property
Claims and other rights
Intellectual property
Cash and bank deposits
Shares and securities
While the registration is ongoing, the debtor does not have the opportunity to use or dispose of the assets. For businesses, this means that operations normally must cease, and premises must be closed. The bankruptcy administrator is given keys and access to all assets.
Creditors' Committee and Creditors' Meetings
In larger bankruptcy estates, it is common for the district court or a creditors' meeting to appoint a creditors' committee. This committee typically consists of 1-3 representatives for the creditors, and together with the bankruptcy administrator, they form the estate board. In the case of bankruptcy in a business, the employees may also have the right to appoint a member of the estate board.
The main task of the creditors' committee is to supervise the bankruptcy administrator's work and assist in important decisions. Appointment of a creditors' committee can happen already at the bankruptcy opening, 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 proceedings. Each creditor has voting rights in proportion to the size of their claim. The creditors' meeting is led by a judge from the district court.
The Debtor's Obligations During Bankruptcy
Although the debtor loses control over the assets, they still have obligations during the bankruptcy:
Duty to disclose all financial matters
Obligation to assist the bankruptcy administrator with necessary information
Availability duty - the debtor must be available to the estate board
The obligation to cooperate also applies to board members and the managing director in companies
Continued Operation or Liquidation?
Even though a business goes bankrupt, in certain cases it may be relevant to continue operations for a period. This may be the case when:
Continued operation can secure better values when selling the business
Ongoing projects can be completed with profit
Operation can prevent depreciation of assets
Decisions about continued operation are made by the bankruptcy administrator in consultation with the creditors' committee. This only happens when it is assumed to be in the creditors' interest.
Realization of the Estate's Assets
A central part of the estate proceedings is the realization (sale) of the debtor's assets. The goal is to achieve the highest possible price to give creditors the best possible coverage. The bankruptcy administrator has several ways to realize 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
Previously, auction was the most common form of sale, but today other methods that give better prices are often chosen.
Claims and Creditor Demands
When the bankruptcy is announced in the Brønnøysund Register Centre and the Norwegian Official Gazette, creditors must submit their claims to the bankruptcy administrator within a set deadline. The bankruptcy administrator reviews the claims, checks the documentation and decides:
Whether the claim should be approved
What priority the claim has in the bankruptcy estate
Approved claims are entered into a claims list that forms the basis for distribution from the estate.
Priority Order for Claims
Not all creditors are equal in a bankruptcy. The Bankruptcy Act and the Satisfaction of Claims Act establish the following priority order:
Estate claims - expenses for the estate proceedings themselves, including the bankruptcy administrator's fee
Secured claims - within the value of the pledged object
First priority claims - primarily wages and holiday pay to employees
Second priority claims - mainly tax and duty claims
Unsecured claims - all other claims
Subordinated claims - interest accrued after bankruptcy opening, fines, etc.
Creditors in a higher priority class receive full coverage before creditors in the next class receive anything.
Conclusion of the Estate Proceedings
When all assets have been realized and the values distributed to the creditors, the estate proceedings are concluded. This happens when the bankruptcy administrator prepares a final report and an account that is sent to the district court. If there are no funds in the estate to cover the estate claims, the estate proceedings may be suspended at an earlier point.
Summary
The procedure in a bankruptcy follows a structured process where the goal is to ensure a fair distribution of the debtor's assets among the creditors. The process is led by a bankruptcy administrator who is appointed by the district court, and who has extensive powers to manage the estate. Creditors with different priorities have their claims covered according to a statutory system, which ensures predictability in what they can expect to receive back.
Are you facing a bankruptcy situation or have questions about insolvency law? At Advokatfirmaet Sterk AS, we have extensive experience with bankruptcy processes, both from the creditor and debtor side. Our specialist expertise can be crucial to secure your rights and interests in a demanding economic situation. Contact us for a non-binding initial conversation where we can assess your case and discuss how we can best assist you.
