The limited room for management to rescue the company "quietly"

The Supreme Court established the fundamental starting points for a company's duty of disclosure towards its counterparties in cases of deteriorating finances in HR-2017-2375-A (Ulvesund). That decision has subsequently been followed up in case law including HR-2025-1171-A (Nordic Kingfish), and now most recently in the Supreme Court's decision in HR-2026-1181-A (Bjerke Snekkerisalg). In this last case, a company in the construction industry had ordered doors and windows for use in a housing project from Bjerke Snekkerisalg. When the order confirmation was transmitted, the supplier's CEO asked whether the financing was in order, which the company's chairman of the board and CEO confirmed by stating that the supplier did not need to worry about financing. The goods were subsequently delivered, but payment was not made and the company ceased operations approximately five months later. Insolvency proceedings were thereafter initiated. The bankruptcy trustee estimated that insolvency had occurred approximately six months before the doors and windows were ordered. The Supreme Court found that the chairman of the board and the CEO were personally liable for the loss suffered by the supplier, by acting negligently when providing wrongful and misguiding information to the supplier about the company's ability to finance the purchase.

The duty of disclosure towards contractual counterparties is not codified in Norwegian law but follows from the uncodified duty of loyalty between contracting parties. This is a fundamental principle on which both the Ulvesund judgment and the more recent Bjerke Snekkerisalg judgment are based, and which entails that the parties to an ongoing contractual relationship must not only act loyally at the time of contracting, but also throughout the entire duration of the contractual relationship. The duty is dynamic in nature, and its content and scope will largely depend on the type of contract and the specific circumstances.

The core of the duty of disclosure is that a debtor who knows or ought to know that it will not be able to fulfil its contractual obligations at maturity is obliged to inform the counterparty of this. In the Ulvesund case, the Supreme Court clarified that information about future payment difficulties lies at the heart of the duty of loyalty and that this requirement applies for as long as the contractual obligation subsists. This has been followed up in HR-2026-1181-A, paragraph 33.

Regarding the point at which the duty of disclosure arises, insolvency is the central starting point; an insolvent company that receives new deliveries on credit is expected to make the counterparty aware that it does not expect to be able to settle its debts at maturity. The assessment of insolvency is, however, forward-looking and broad. The decisive question is whether the company, considering future liquid assets it is expected to have access to, will be able to cover its obligations as they fall due. This was elaborated upon by the Supreme Court in the Ulvesund judgment, paragraph 30. The point of insolvency is therefore not a mechanical cut-off date. This is further qualified by the scope of action available to the company's management when it comes to working "quietly" to rescue the business.

The company's independent duty of disclosure and management's personal liability are not the same. This is in particular justified by the conflicting pressures to which management is exposed in a situation where the company encounters financial difficulties. In the Ulvesund judgment, this was expressed as follows in paragraph 37:

"The management of a limited liability company that encounters financial difficulties is easily placed under conflicting pressures: The interests of the creditors may indicate that management should fold in order to prevent further losses. For the shareholders, employees, business partners, the local community, and the wider economy, however, it may be important that management is able to continue working to get the business over the hurdle and secure continued operations. If this succeeds, it will also benefit the body of creditors."

On this basis, the Ulvesund judgment sets out three considerations which, taken together, afford management a scope for action. In paragraph 40, the Supreme Court stated that the standard of care should "give management a certain strategic room for action beyond what the contractual duty of loyalty in isolation may indicate, including to work to rescue the business 'quietly'". The Supreme Court further stated in paragraph 41 that the basis for liability in section 17-1 of the Norwegian Companies Act must "be applied in a manner that affords the company's management a reasonable degree of foreseeability" – if management proceeded on the basis that the company was solvent on a soundly clarified basis, personal liability will rarely be appropriate. Third, personal liability will not arise even if the company was insolvent, if there was "nonetheless a realistic hope of rescuing the company from insolvency, the company's management was working actively and loyally with this in mind, and folded within a reasonable time", cf. paragraph 42.

The three considerations set out above were also applied in the Bjerke Snekkerisalg judgment (HR-2026-1181-A).

The room for discreet rescue operations has, however, an absolute limitation: it applies only to the justified withholding of information. It does not permit the providing of incorrect or misleading information. In such cases, the path to personal liability for management is short. In the Bjerke Snekkerisalg judgment, precisely this boundary was crossed when the chairman of the board and the CEO confirmed that the financing was in order despite the company being insolvent. The Supreme Court characterised the statement as clearly misleading and held that "the reality was that there was every reason to be concerned about" the company's ability to pay.

In the Bjerke Snekkerisalg case, the CEO was long aware of the insolvency, and the limit for continued operations without notification was therefore approaching fast. The Supreme Court emphasised that "A thus failed, during a period of up to six months before the order was placed with Bjerke on 10 June 2022, to ensure that the company filed for insolvency, despite the fact that it was insolvent, and he also failed to give notice of [company1]'s financial difficulties when [company1] took delivery of the goods from Bjerke on 26 July 2022. This weighs heavily in favour of the conclusion that he exceeded the scope of action available to him to attempt to rescue the company", cf. paragraph 43.

It can be derived from the Ulvesund and the Bjerke Snekkerisalg judgments is that "a realistic hope of rescuing the company" must be present in order to avoid personal liability when withholding information from trade creditors to rescue the business from bankruptcy. However, in neither the Ulvesund judgment nor the subsequent Bjerke Snekkerisalg judgment did the Supreme Court see reason to define positively what constitutes a defensible rescue plan. The judgments do, however, provide negative clarifications – they demonstrate what is not sufficient.

In the Bjerke Snekkerisalg case, the Supreme Court pointed to three cumulative factors indicating that the strategic room for action had been exceeded: the chairman of the board and CEO failed, during a period of up to six months before the order was placed, to ensure that the company filed for insolvency, and he also failed to give notice of the company's financial difficulties when the goods were ordered and received. Furthermore, weight was placed on the fact that he had arranged the bookkeeping in such a way that he could be criticised for not having a sufficiently clear overview. And although capital contributions from personal funds and from subsidiaries were invoked as part of a rescue plan, these efforts were in those circumstances held to be insufficient by the Supreme Court.

It can be derived from the Supreme Court's practice that a justified rescue attempt requires at least three elements: First, there must be ongoing and up-to-date oversight of the company's actual financial position. Inadequate accounting oversight is not an excuse – it is rather an independent failing that undermines any claim of a realistic rescue plan, something which was established already in the Ulvesund case. This is because the condition of "a realistic hope of rescuing the business" presupposes that management knows what the situation actually is. Second, capital contributions or other measures must be forward-looking. Capital contributions that are immediately absorbed by existing debt do not create the necessary basis for future payment capacity and therefore cannot support an argument for realistic continued operations. Third, a specific time horizon is required. Personal liability should not arise if there was a realistic hope of rescue and management "folded" within a reasonable time. This conversely presupposes, however, that there is in fact a point at which management recognises that hope is unrealistic and acts accordingly. Protracted inaction combined with an absence of concrete measures is incompatible with the condition of "active and loyal" efforts to rescue the company.

What the standard of care, taken as a whole, appears to require is not a formal restructuring plan in a corporate finance sense, but a factual and objectively verifiable basis for concluding that the company may reasonably become economically viable again combined with management actively and demonstrably working towards this objective, and being prepared to acknowledge the situation should the hope prove to be unfounded.

One may naturally ask: How wide is this room for rescue action in practice? Management is obliged to remain informed of the company's financial position and is simultaneously obliged to answer questions about the company's financial situation in a truthful manner. Management may therefore find itself in a potentially difficult position depending on how actively the counterparty behaves. If a counterparty actively asks questions about the company's finances, management can no longer work "quietly" to rescue the business. Management is then expected to provide true and accurate information, even if this results in the failure of the potential rescue of the business. Only where the counterparty does not actively raise questions will management's right to "work quietly" persist. In this regard, it would be prudent for any counterparty extending deliveries on credit to actively inquire into the company's finances, or alternatively to request to be kept informed should circumstances arise indicating a deterioration in the company's future payment capacity. 

Based on the recent case law development, management still has the right to "work quietly" to rescue the company without incurring liability, but this presupposes that no one breaks the silence.