Summary of the new rules on employee liabilities

The buyer of a business will only be liable for employee claims relating to the period after commencement of the restructuring proceedings

Under the old regime, the buyer of a business undergoing restructuring would be liable for all wages and salaries owed to the transferred employees etc. as at the date of the transfer whether the target was in the process of restructuring or not.

Where the seller of the business was being restructured, the buyer therefore had to pay all wage claims relating to the time before the restructuring for the employees who were transferred to the buyer, notwithstanding that the buyer had received no consideration for the payment (the employees’ services) in the pre-transfer period.

In a bankruptcy scenario, however, the buyer would be liable only for the wage claims etc. that related to the period after the issue of the bankruptcy order, as the Employees’ Guarantee Fund would pay the claims relating to the period before the bankruptcy order according to non-statutory practice.

Accordingly, the old rules provided a significant incentive for the parties to ensure that the seller was declared bankrupt before the transfer if wages and salaries were owed to the employees who were to be transferred with the business. As a result, a business transfer would often be completed only after a bankruptcy order had been issued for the purpose of reducing the buyer’s liability for wage claims.

If restructuring proceedings are commenced after 15 August 2021, the possibilities of completing a business transfer have now been improved. With the new rules, the transfer of a business in the process of restructuring will be treated in the same way as a transfer of a business in bankruptcy.

In a business transfer where the seller is being restructured, the buyer will now only be liable for wages owed to the transferred employees for the time after commencement of the restructuring proceedings.

The Employees’ Guarantee Fund will then cover wages owed for any work that performed before commencement of the restructuring process.

This constitutes a major improvement to both the failing business, the employees, and the potential buyers.

Increased scope of coverage by the Employees’ Guarantee Fund

The Employees’ Guarantee Fund has been established to ensure that employees receive the wages, pension payments and holiday funds to which they are entitled if the employer is adjudicated bankrupt. Employees are guaranteed up to DKK 160,000 of their net pay (2021 level) as well as holiday pay and other payments, including so-called “SH payment” and “fritvalgssaldo”.

However, the entry into force in 2011 of the current restructuring regime was detrimental to employees who were dismissed and released from work before or during restructuring proceedings, because they would generally have to wait for the proceedings to the completed, before they would either:

a) receive payment from the restructured business, or

b) receive payment from the Employees’ Guarantee Fund or, where the restructuring process ultimately led to bankruptcy, from the bankruptcy estate.

The coverage afforded by the Employees’ Guarantee Fund has now been extended in respect of restructuring proceedings commenced after 15 August 2021, but remains the same in respect of proceedings commenced after that date.

Employees who are dismissed and released from work before or during restructuring proceedings are entitled to payment from the Employees’ Guarantee Fund already when the employer files for restructuring and will no longer have to wait for the restructuring process to be completed.

For practical reasons, employees who have been dismissed or released from work before or during restructuring proceedings cannot file their claim with the Employees’ Guarantee Fund before 1 October 2021.

Employees who are still employed by the business undergoing restructuring will continue to receive pay from the business.

The new rules not only improve the rights of the employees who have been dismissed, but also increase the chances of the business being able to pay wages to those that continue.

A business which is being restructured can now borrow funds from the Employees’ Guarantee Fund for payment of wages that were due before commencement of the restructuring proceedings, subject to a maximum of one month’s pay and DKK 26,667 per employee. Thus, the business can obtain a loan to pay wages to those employees who are still employed in the business, thus reducing the risk of termination by these employees and keeping the value of the business intact.

The existing possibility of borrowing funds for payment of wages that are due after commencement of the restructuring proceedings, up to a maximum of 3 months’ pay and DKK 80,000, will continue as before.

Where the restructuring involves a business transfer, the Employees’ Guarantee Fund and the buyer will be liable for wage claims as described in the introduction above.

Our assessment of the new rules

The new rules put restructuring on a par with bankruptcy in relation to the buyer’s liability for wage claims and generally help support liquidity in the restructuring period.

With the changes, we expect an increasing number of business transfers involving viable businesses that have filed for restructuring.