Insolvency is a central concept in bankruptcy law and the primary reason why bankruptcies are opened. But what does insolvency actually entail, and when can a creditor petition for a debtor's bankruptcy? This article explains the central aspects of insolvency and bankruptcy conditions.
What is Insolvency?
The Bankruptcy Act § 61 defines insolvency as a situation where the debtor cannot fulfill their obligations as they fall due, unless the inability to pay is assumed to be temporary. This consists of two components:
Illiquidity: The debtor cannot pay obligations when due
Insufficiency: The debtor's assets and income combined are less than the debt
Both conditions must be met for insolvency to exist. A debtor who temporarily lacks liquidity, but has greater assets than debt, is not insolvent.
When Can Bankruptcy be Petitioned?
According to the Bankruptcy Act § 60, bankruptcy can be opened when:
The debtor is insolvent
Bankruptcy is petitioned by either the debtor themselves or a creditor
It is important to note that the burden of proof lies with the party petitioning for bankruptcy, and clear preponderance of evidence is required to prove insolvency. The Supreme Court has stated in Rt-2012-1310 that it will normally be "substantially more concerning with an incorrect bankruptcy opening than an erroneous refusal to open bankruptcy."
Illiquidity - Inability to Pay
That the debtor is illiquid means that they cannot pay their obligations as they fall due. This must have:
A certain stability
A certain duration
A comprehensive assessment must be made of the debtor's liquid assets and expected income, and whether these are sufficient to cover the obligations. It is not necessary that the debtor has actually defaulted on obligations - it is sufficient that it can be made probable that the debtor will become illiquid within a reasonable time.
Even if a debtor is illiquid, this is not sufficient to establish insolvency if the inability to pay is only temporary. The assessment must take into account the likelihood that the debtor will become liquid again. The longer the period is, the more certain one should be that it is temporary.
Insufficiency - Negative Financial Position
Insufficiency exists when the debtor's liabilities are greater than assets. The Bankruptcy Act § 61 specifies that insolvency does not exist when "the debtor's assets and income combined are assumed to be able to provide full coverage for the debtor's obligations," even if the fulfillment of obligations is delayed.
In the insufficiency assessment, one must:
Assess the debtor's total assets and income against debt and obligations
Take the situation at the time of assessment as a starting point
Include both due and undue debt
Assess the value of the assets upon realization
Who Can Petition for Bankruptcy?
The Bankruptcy Act § 60 gives both the debtor themselves and any creditor the right to petition for bankruptcy. For a creditor to be able to petition for bankruptcy, they must have a claim that is entitled to dividend in bankruptcy.
It does not matter:
What priority the claim will have
Whether the claim is due or legally binding
Whether the claim is disputed
Whether there is coverage for the claim
For disputed claims, the court must make a preliminary assessment of the claim's existence.
Conclusion
Insolvency is the central ground for bankruptcy in Norwegian law. To be insolvent, a debtor must be both illiquid and insufficient. The assessment is complex and requires a thorough analysis of the debtor's financial situation. The standard of proof is strict, requiring clear preponderance of evidence, which reflects that bankruptcy opening has serious consequences for the parties involved.
If you are facing questions about insolvency or considering petitioning a debtor for bankruptcy, it is recommended to seek legal assistance to ensure that the legal conditions are met.
Are you facing a bankruptcy situation or have questions about insolvency law? At Sterk Law Firm, 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.
