Entrepreneurs may be able to avoid bankruptcy by anticipating difficulties - if they keep a close eye on the financial situation of their business.
The Danish Bankruptcy Act is based on the following main principles:
- Divestment of the debtor
Control over the estate is taken from the debtor after the bankruptcy decree has been issued, and is transferred to the creditors/administrators.
- Ban against individual prosecution
Bankruptcy moves from individual prosecution in the county court to universal prosecution in the bankruptcy/insolvency court so as to be able to satisfy all creditors' demands equally.
Debts are shared equally among creditors. However, there are many exceptions from this in the "priority of bankruptcy claims".
- Priority of bankruptcy claims
The Danish Bankruptcy Act contains rules on the 'priority of bankruptcy claims', i.e. the sequence in which claims against the bankrupt estate are covered. The priority of bankruptcy claims means all claims in the same category are treated equally and those in a lower one only receive dividends to the extent that the claims in higher categories have been fully paid off.
The claims are prioritised in the following sequence:
- so-called "mass claims";
- other "privileged claims" (secondary pre-preferential claims);
- "employee privilege";
- "supplier privilege";
- "simple claims";
- "subordinated claims".
Bankruptcy means that certain dispositions and current creditor proceedings during the period prior to bankruptcy may be annulled under specific conditions.
- The aim of bankruptcy is to wind up a company or a personal debtor's assets, so that the values can be distributed among the creditors who have outstanding debts. The bankruptcy procedure is completed by distributing the resources in the estate to the creditors. A creditor retains his/her rights against the debtor in respect of the part of the debt that is not covered by distribution.
In addition to the bankruptcy rules, the bankruptcy legislation contains rules on notified reorganisation and composition agreements. Furthermore, the bankruptcy legislation also contains rules on any opportunities that a debtor might have for debt relief.
Reorganisation without notification to the bankruptcy court and voluntary agreements also exist and depend on agreements between the debtor and the creditors who are affected.
Cases of notified reorganisation, bankruptcy, composition agreements and debt relief are heard by the bankruptcy courts, which are connected to the municipal courts. In the Greater Copenhagen area, however, such cases are handled by the bankruptcy division of the Maritime and Commercial Court.
Coping with bankruptcy
It is possible to start a new company even after bankruptcy. If, however, it is established that the debtor has committed a criminal offence, they generally forfeit their right to found the company, be the managing director or sit on the board of directors.
Entrepreneurs having experienced bankruptcy should not lose confidence in their ability to embark on a new business.
Bankruptcy procedure: a step-by-step guide
Bankruptcy proceedings are initiated when either the creditor or the debtor submits a petition to the bankruptcy court.
If a creditor wants to file a claim, they should notify the trustee within 4 weeks. The invitation to register claims is announced in the Danish Official Gazette and sent to all known creditors.
Upon this, the trustee produces a list of registered claims (the bankruptcy schedule). They then assess the registered claims using a "claims test".
If the trustee does not agree with a creditor on the size of the creditor's claim, for instance, the creditor will be informed prior to the meeting. If agreement cannot be reached, the creditor may take the case to court.
These cases are handled by the bankruptcy/insolvency court.
A petition needs to be submitted to the bankruptcy/insolvency court no later than 4 weeks following the meeting during which the trustee's claim assessment is announced.
If the creditor does not file a petition within a fixed deadline, the trustee's decision will be final.
Immediately after the bankruptcy decree has been issued, the bankruptcy or insolvency court appoints one or more estate trustee(s). The trustee has to ascertain the worth of all assets and decide how the revenue will be distributed among the creditors.
Once bankruptcy has been established, the debtor loses all control of their assets, which now belong to the bankrupt estate administered by the trustee.
As mentioned above, the bankruptcy courts also hear cases on notified reorganisation, composition agreements and debt relief, in addition to bankruptcy cases.
Insolvency (suspension of payments)
A suspension of payments notified to the bankruptcy court will end automatically after 3 months. However, the bankruptcy court may extend the deadline by 3 months at a time, under very special circumstances. Payments may not be suspended for more than one year, however.
A composition agreement must be ratified by the bankruptcy court in order to be valid. A composition agreement may be based on reducing the debtor's debt by a certain percentage (but not less than 10%), distributing the company's assets among the creditors or by extending the deadline for paying the debt.
The bankruptcy court decides whether a debtor may be given debt relief.
Keeping the accounts
Once the estate's value has been established, outstanding credits have been collected and all disputes settled, the trustee draws up draft accounts and the draft of the final distribution either at the same time or once the accounts have been agreed upon.
If it transpires that there are only sufficient funds to cover estate costs, i.e. for the trustee's fee and actual costs, administration of the estate will be terminated using an §143-account, as it is known. Creditors get no dividends in this case.
Where there are surplus assets, the excess is distributed among the creditors following the rules of the 'priority of claims' once the estate costs have been paid off (see above for 'priority of claims').
Accounts with appendices and allocations are available at the bankruptcy / insolvency court for two weeks before the meeting.
The bankruptcy / insolvency court confirms the draft, unless it contains errors or omissions which need to be changed.
When the bankruptcy / insolvency court has confirmed the draft accounts and allocations and the appeals deadline (4 weeks) has expired with no claims being filed, the dividends are paid to the creditors.
Further information can be found on The Danish Business Authority's website.
The Maritime and Commercial Court bankruptcy division website contains general information about how the courts handle cases of bankruptcy, reorganisation, composition agreements, debt relief, etc.
The Virk.dk website is the companies' digital access point to the public sector. The portal provides access to reports and searches on business-related information from public bodies.