The legal basis for companies with financial difficulties is the Bankruptcy Act.
Stabilising a business
Under the Bankruptcy Act, a company in financial difficulties can declare itself insolvent (entailing a suspension of payments), or try to reach a composition agreement with its creditors. Outside the scope of the Bankruptcy Act, the company can try to reach a voluntary agreement with its creditors.
Insolvency (suspension of payments)
Debtors who do not feel able to fulfil their financial obligations can declare themselves insolvent to the bankruptcy and probate court.
Payments may be suspended for 3 months from the declaration date, but this may be extended by the bankruptcy and probate court by 3 months at a time in very special circumstances. Payments may not be suspended for more than one year.
The suspension period is used to investigate whether it is possible to come to an arrangement with the creditors.
As part of the insolvency process, the bankruptcy and probate court will appoint an administrator (usually a lawyer) to take care of the creditors' interests and assist the debtor. The administrator must approve the debtor's main transactions during the suspension period.
Insolvency cases are handled by the bankruptcy and probate courts. In the Greater Copenhagen area, however, such cases are handled by the Maritime and Commercial Court.
A composition agreement may be based on:
- a percentage reduction in the debt;
- a distribution of the debtor's property among the creditors so that the debtor is not released from the part of the debt that is not covered;
- postponement of payment. The debt may not normally be reduced to less than 10%.
It is a requirement for 2 representatives to be involved in a composition agreement, one of whom must have accountancy skills. The bankruptcy and probate court may permit the involvement of only one representative, who must then have accountancy skills.
The representative(s) must prepare a summary of the debtor's assets and liabilities and issue various statements for the creditors and the bankruptcy and probate court to use for making decisions on the case.
An application for a composition agreement by the debtor to the bankruptcy and probate court must contain:
- the debtor's proposal for settling the debt;
- a declaration of assent from at least 40% of the creditors, by agreement and depending on the size of the debts;
- a summary of the debtor's property and debts, prepared by the representatives;
- the representatives' account of the debtor's circumstances;
- declarations by the representatives, including whether the debtor's proposed agreement is reasonable;
- an affidavit by the debtor to the effect that he/she has supplied information about everything he/she owns and owes.
Once the bankruptcy and probate court has received the application, it will decide whether composition proceedings can be opened.
The bankruptcy and probate court will place an announcement concerning the opening of the composition proceedings in the Danish Official Gazette, in which the creditors will be invited to a meeting at the bankruptcy and probate court. The debtor and representatives must participate in this meeting.
The meeting will discuss and vote on the proposed agreement. At least 60% of the claimants participating in the vote must vote in favour of adopting the proposed composition agreement in order for it to be adopted.
Composition cases are handled by the bankruptcy and probate courts. In the Greater Copenhagen area, however, such cases are handled by the Maritime and Commercial Court.
A voluntary agreement is an agreement between the debtor and every single creditor. Voluntary agreements are not handled by the bankruptcy and probate court.
Access to different sources of finance can help overcome financial difficulties.
When filing for bankruptcy is the only option left for a business owner, it pays to cut your losses, initiate proceedings sooner rather than later, and move on to a new project.
You will find a special section on businesses in crisis at Startvaekst (Start-up Growth), a portal for entrepreneurs and expanding businesses run by the Danish Business Authority in cooperation with Børsen and business incubator organisations.