Reconstruction

In the past, bankruptcy has mainly been the practical alternative when a company faces financial challenges. The Temporary Reconstruction Act came into force on 11 May 2020. It has been extended several times and is now valid until 1 July 2026. A proposal for a new and permanent law is also being drafted, but it is unknown whether it will be ready in time. The temporary law is expected to be extended until the new law is in place. 

The law was intended to prevent the collapse into bankruptcy that was feared when the pandemic struck in 2020. However, there has been limited use of the law. There have been some annual cases of reconstruction from 2020 to 2025, but not nearly as many as expected.

Previously, an alternative to bankruptcy was to petition for debt negotiation. Debt negotiation could be opened where a debtor «cannot fulfil its obligations as they fall due», meaning that the company is illiquid. At a stage where the company is illiquid, it's often too late to get creditors to agree to a solution, because things are already going so badly that the creditors no longer believe that they will get any funds back after the debt settlement. Bankruptcy is often the next step.

For the Temporary Reconstruction Act, however, a lower threshold has been introduced for when opening can take place. The condition for opening reconstruction negotiations is that the company «has or in the foreseeable future will have serious financial problems»The fact that a company «will have» financial problems allows companies to address the financial situation while there is still financial and actual room for manoeuvre. By undergoing a reconstruction, the goal is for the company to be better rigged for the future. This is believed to help a company become financially sustainable in the long term.

The law stipulates that if the court finds that the condition of serious financial problems is met, a reorganiser will be appointed. The prerequisite is that an «appropriate advance» is paid to cover the assumed costs of the reorganisation hearing. Oslo City Bailiff's Office, for example, has routines whereby NOK 300,000 is assumed to be an appropriate advance in most cases. The administrator appointed must be a lawyer who is well versed in insolvency proceedings. Our trustees also have experience as reorganisers.

Opening of reconstruction

Upon appointment, the reorganiser is given the right to dispose of the company. The company must still be able to carry out its daily work, but not do anything that has financial consequences without the consent of the reorganiser. Similar to bankruptcy proceedings, the company cannot create or honour debts or agreements without the consent of the administrator. However, the aim is for the company to be profitable while everything is going on, so it is important that the reorganiser quickly establishes practical routines for how best to solve this. The administrator does not have the right to seize the company's assets as in a bankruptcy, but can make decisions together with an appointed creditors' committee.

If the company needs to take out a loan to finance the operation of the business, and to finance the reorganisation proceedings themselves, a lien can be created on business assets, inventory and outstanding receivables under the Mortgage Act, and then with «priority over existing pledgees» - i.e. a kind of super priority is given. This helps to ensure that the reorganisation process itself does not fail due to a lack of ongoing liquidity. Continued operation of the company is also a prerequisite for a successful reorganisation. 

There is also limited access to attachment and enforced seizure of the debtor's assets while the reorganisation is ongoing.

A solution to the reorganisation can be either a voluntary reorganisation or a reorganisation with compulsory composition. This can be a solution where, somewhat simplified, an agreement is reached with all creditors where it may be relevant to defer payment, percentage reduction of debt, full or partial conversion of debt to equity, transfer all or part of the debtor's business, or a combination of these. This can mean that a company can still make it through a demanding phase and avoid bankruptcy proceedings. If a solution cannot be reached during a reconstruction process, bankruptcy will in most cases be opened afterwards.