DENMARK: An Introduction to Restructuring/Insolvency
Market Overview
Recently, the economic landscape in Denmark has - like other countries in Europe - been characterised by uncertainty due to the war in Ukraine, rising inflation and interest rates. As a natural implication of this economic uncertainty, many businesses have now faced financial challenges. The pressure is further exacerbated by the fact that a large number of Danish enterprises must repay the loans they raised during the COVID-19 pandemic in the form of support packages, which the government rolled out to the corporate sector in connection with the extensive lockdowns of the country.
Against the above background, the number of bankruptcy orders issued has increased, and thus, 2023 turned out to be the year in Denmark when most bankruptcy orders were issued since 2010. In 2023, bankruptcy orders were issued against a total of 3,078 active enterprises, and these enterprises had employees and/or a turnover exceeding DKK 1 million. The increase in the number of bankruptcy orders issued follows a period when the number of insolvency matters in 2020-2021 was at its lowest, partly as a result of the large number of government support packages for the business sector during the COVID-19 pandemic.
Much seems to indicate that the economic downturn is coming to an end. This is also reflected in the declining number of bankruptcy orders in 2024, and thus, the total number of bankruptcy orders issued in the period from January to April is about 20% lower than in the same period in 2023.
Although the number of bankruptcy orders is declining, the uncertain economy continues to entail that a high number of enterprises face financial difficulties. In general, the number of bankruptcy orders issued remains at a high level compared to previous years, with approximately 190-230 bankruptcy orders issued per month.
The Danish Government’s recent focus has been on stabilising inflation and thus the economy, and financial incentives seem to be targeted at individuals and not enterprises in financial difficulties.
In general, enterprises in the building and construction sector have been most affected by the economic situation in society, and thus this sector generally sees most of the issued bankruptcy orders. In 2023, 45% of all bankruptcies of active enterprises were in the building and construction sector as well as in the trade sector.
In addition, during the period from January to April in 2024, enterprises in the building and construction sector as well as in the trade sector represented the majority of the total number of bankruptcy orders issued.
In 2023, bankruptcy orders were also issued against a number of major Danish enterprises. These include (i) the auction house Lauritz.com A/S, (ii) Nordic Waste A/S, (iii) Dansk Boligbyg A/S, (iv) Skare Meat Packers K/S, (v) Altan.dk A/S and many more.
Some of the enterprises that have had an impact on the public debate in Denmark represent a small number of so-called "invoice factories" whose sole activity has been to issue fictitious invoices for the purpose of money laundering and for tax evasion purposes. Recently, we have seen increased media coverage of these types of bankruptcy estates, which are typically characterised by a high degree of complexity. The increased complexity of this type of fraud cases poses high demands on attorneys who act as trustees and requires co-operation with public authorities to uncover fraudulent matters, which should be investigated by the authorities.
In general, it is expected that weak economic growth will contribute to putting pressure on enterprises in financial distress, and this is why a large number of bankruptcy and restructuring matters are expected to continue, and there is also the possibility of initiating preventive restructuring proceedings prior to an insolvency situation.
The implementation of the EU Restructuring and Insolvency Directive
On 9 June 2022, the Danish Parliament adopted an act to implement a number of changes in the Danish Bankruptcy Act. One of the purposes of the Act was to implement the EU Restructuring and Insolvency Directive and it came into force on 17 July 2022.
One of the purposes of the new provisions was to implement preventative measures for enterprises to avoid bankruptcy. This is reflected in the provisions on preventive restructuring, a legal process that can be initiated prior to the onset of insolvency, subject to the possibility that the enterprise or debtor might become insolvent.
The scheme on preventive restructuring has entailed a number of changes to the Danish Bankruptcy Act, including, for example, that the initiation of a preventive restructuring will not necessarily appear in public registers and that there is no requirement as regards the appointment of a restructuring administrator, etc. Thus, the process may take place “under the table”.
Since the implementation of the provisions, the Bankruptcy Division of the Maritime and Commercial Court, which is Denmark's largest bankruptcy court, has concluded five cases of preventive restructuring in 2022, while, during the same period, two cases were pending. In 2023, the Bankruptcy Division of the Danish Maritime and Commercial High Court completed three cases of preventive restructuring, while zero cases were pending.
So far, it seems that the provisions on preventive restructuring may not have had a major impact in Denmark. In view of the fact that the provisions are new, it cannot be ruled out that preventive restructuring will increase in the future, especially with regard to the economic situation in Europe.
The Danish Bankruptcy Act
The Danish Bankruptcy Act is basically the most important legal regulation concerning insolvency in Denmark. The Act contains provisions on the procedural and substantive regulation of insolvency law, including on the initiation of insolvency proceedings, the appointment of a trustee or restructuring administrator, avoidance rules, creditor rights and rules on disqualification.
A trustee in a bankruptcy estate is appointed by the bankruptcy court and is responsible for winding up the estate in the best possible way. Thus, the trustee must manage the interests of the estate, safeguard its assets and take the measures necessary to prevent unauthorised transactions, and the trustee must also consider whether the former management, which is removed in connection with the issuing of a bankruptcy order, has carried out transactions of a nature that constitutes grossly negligent business conduct, which could justify disqualification or management-liability proceedings being initiated. To be subject to disqualification, the former management must have conducted in a way that makes it unfit to participate in the management of commercial activities. In this connection, the Danish Parliament adopted a bill that came into force on 1 July 2024, and which tightened the regulation on disqualification in a number of areas, including a clarification of what constitutes grossly irresponsible business conduct.
Likewise, avoidance investigations constitute a significant part of the trustee's work associated with the administration of a bankruptcy estate, and the avoidance rules also apply in the event of restructuring. Basically, avoidance is a legal remedy by which invalid transactions can be cancelled if such transactions have reduced the assets, increased the debts of the estate or resulted in a different distribution among the creditors than what follows from the ranking of claims.
Market overview going forward
The prospect of low economic growth, continued rising inflation and high interest rates - even if an economic crisis seems to have been prevented at this point - means that a high number of bankruptcy orders are still expected in the coming period. Naturally, this also requires a high degree of specialisation and preparedness among attorneys working in these areas, and the requirement for specialisation, particularly in relation to large bankruptcy estates such as those mentioned above, is a key factor, as the complexity of these types of cases has increased significantly, and they are increasingly controlled by significant creditor interests, both domestic and international.