Developments Around Insolvency And Restructuring In Iceland
Icelandic law has two distinct insolvency procedures
The first, composition, is primarily aimed at achieving a rescue of the business. Whilst Icelandic insolvency law is closely modelled on the Danish system, readers who are familiar with company voluntary arrangements or schemes of arrangement in the UK will also recognise some similarities with composition. It is a flexible procedure which enables the company to seek a compromise with its creditors, for example a debt for equity swap, so that it can emerge from its financial difficulties. Like an English law company voluntary arrangement a composition does not deal with secured debt unless a creditor determines that his security is unlikely to be sufficient to meet his secured debt, in which case he can chose to treat some or all of his debt as unsecured. And like an English law company voluntary arrangement it does not enable one class of creditor to cram down another; instead, it enables the majority to impose its will on the minority (notwithstanding that calculating the appropriate majority in any case can be a challenging process and that the rules for voting are complex and difficult to apply to a large estate).
The second procedure is bankruptcy. Bankruptcy is primarily intended to address the situation in which the company cannot be restructured but where the assets of the company need to be gathered in and distributed to its creditors. It is possible to implement a composition as an exit from bankruptcy.
Many of the failures around the world have raised new and interesting questions about the application of insolvency laws. The Lehman collapse has raised interesting questions about the ability of parties to terminate for insolvency on both sides of the Atlantic, bondholder litigation has thrown into question the test for balance sheet insolvency and its implications in the UK and the Nortel collapse has undermined previously held wisdom about the ranking of claims in an English administration. Similarly, the failure of a number of major Icelandic institutions has tested many areas of Icelandic insolvency law which, to date; have been applied only in the failures of small and medium-sized enterprises and even then on an infrequent basis. Our firm has been at the forefront of many of these recent cases and we believe that we are uniquely placed to understand and apply the new learning which has arisen from the crisis in Iceland.
Iceland’s principal banks conducted significant amounts of their business overseas before the collapse and both retail and institutional investors invested heavily in their debt issues. This means that the failed Icelandic banks have an international creditor profile and have assets in a number of jurisdictions. In handling the estates it is, therefore, necessary to have regard to the protection of assets overseas and to understand the needs of a diverse range of creditors who are not familiar with the Icelandic legal systems when determining a way forward.
Our firm has been extensively involved in the winding up of Glitnir bank hf handling directly applications in the US courts, the Canadian courts and courts in a number of European jurisdictions in order to protect assets and to gather them in. Similarly, an international creditors’ committee has been formed to provide a consultative body of representative creditors. We have gained a good understanding of how international creditors expect a committee of this type to operate and of the work which legal advisers can do to ensure that the consultation process is effective and helpful.
Our work has changed significantly in scale and complexity as a result of our involvement with Glitnir and other multi-creditor situations arising out of the collapse. Much of our current work relates to efforts to find a successful exit from winding up for Glitnir. At the same time, the wider Icelandic economy is beginning to strengthen and the focus in many other cases is similarly turning from stabilising the situation in order to prevent value erosion to seeking a suitable structure for returning value to creditors.
In common with other jurisdictions, Iceland’s insolvency & restructuring laws have been tested by the unprecedented scale and complexity of many of the recent collapse. The legislature has had to balance the need to make changes and clarifications so that creditor value can be preserved with the need to have a stable and predictable legislative environment. This has not been an easy task and some changes have taken the market by surprise. For example, until the changes introduced through amendments to the Bankruptcy Act during 2011 it was not clear that winding up of financial institutions could only act as a staging post and that, in order to make distributions to creditors, it was necessary to implement another restructuring or insolvency process. This is similar to the position in England before the changes to the administration regime introduced by the Enterprise Act in 2002. Whilst the trend in England and elsewhere is, perhaps, towards streamlining insolvency procedures as much as possible this can raise concerns about lack of transparency and independent review. In the Icelandic context it is perhaps not surprising, therefore, that the trend is towards ensuring that there are adequate checks and balances on office holders’ powers even if that occasionally makes resolution more time-consuming and costly.
Steinunn Holm Gudbjartsdottir, partner, Borgarlogmenn – Holm & Partners
Mrs. Steinunn Holm Gudbjartsdottir is an attorney of the Supreme Court of Iceland and she was appointed in 2008 by the Icelandic District Court to oversee the insolvency proceedings of Glitnir banki hf. as the “Moratorium Appointee.” She is currently the Chairman of the Winding-up Board of Glitnir, which is tasked by the Icelandic District Court with supervising the liquidation of Glitnir’s debts and assets.
Steinunn is an Icelandic citizen. She attended the University of Iceland and studied law. She graduated in 1988. She worked in the office of the Reykjavík County Commissioner from 1988 to 1992 as a lawyer. She was admitted as an Attorney to the District Court in 1992 and entered private practice. In 2005, she became an Attorney to the Supreme Court and since 2007 has been a Vice-Judge in the Labour Court. She lectures in law at the University of Reykjavík, predominantly in her specialist fields of bankruptcy law, litigation and inheritance law. She is a member of a number of Icelandic governmental committees. Mrs. Steinunn can be contacted firstname.lastname@example.org
Mr. Pall Eiriksson, partner, Borgarlogmenn – Holm & Partners
Páll is an attorney of the District Court of Iceland and was appointed in May 2009 by the Icelandic District Court to be a member of the Winding-up Board of Glitnir Banki hf
Páll is an Icelandic citizen. He attended the University of Iceland and studied law. He graduated in 1999. He attended the University of Exeter in the United Kingdom, studying international business law, and graduated with a master’s degree in that field in 2002. He was admitted as an Attorney to the District Court in 2000. He worked with Deloitte as a corporate and tax lawyer from 1999-2006. From 2006-2009 he worked at Glitnir as a lawyer. In October 2008 he was appointed the General Counsel for the Resolution Committee which took over control of Glitnir in that month and was subsequently appointed to Glitnir’s Winding-up Board as described above. Mr. Eiriksson can be contacted at email@example.com