Litigation
High Court ruling: Severance pay was voidable
On 16 September 2020, bankruptcy proceedings were instigated against a farm personally owned and run by M.
On 15 December 2019, M had hired A to serve as manager of the business, but on 28 August 2020 A resigned on terms agreed in a severance agreement concluded between A and M and, on 31 August 2020, as part of said agreement, A received severance pay in the amount of DKK 204,556.69.
Arguing that the payment to A is voidable under section 74 of the Danish Bankruptcy Act, the trustee of M’s estate in bankruptcy demanded that A repay the severance pay to the estate.
It emerged during the proceedings that M’s bank had submitted, on 25 August 2020, a draft winding-up agreement, which M eventually chose not to sign. Instead, he filed for bankruptcy on 15 September 2020.
The Western High Court found that M’s farming business had been struggling financially the last few years up to 2020 and that there had been, for a prolonged period of time, attempts at securing long-term financial viability, yet to no avail. The business could not be made to be profitable, and the bank therefore urged M to try to sell it as best he could to avoid an otherwise imminent bankruptcy – which would likely increase the bank’s losses.
Nothing in the proposed agreement suggested that A would not be able to stay on during the sales period. M explained in court that he told A that the farm was going to be sold and that bankruptcy was also a possibility. On 27 August 2020, M and A signed the severance agreement, and A received a severance pay equal to 6 months’ salary.
The High Court found that with the draft winding-up agreement with the bank, the debt owed to the bank and the fact that the company’s equity was negative, the company was in effect insolvent. Given that the severance agreement had been drawn up by A a mere two days after the bank had sent M the winding-up agreement and shortly before the date of bankruptcy, A must have known that the company was insolvent. On this basis, the High Court found that A had received a fraudulent preference over other creditors, and that A did know of the circumstances making it so. The conditions for avoidance under section 74 of the Bankruptcy Act were therefore fulfilled, and the High Court allowed the bankruptcy estate’s claim for repayment.
The case was prepared and conducted by the litigation team of Holst, Advokater. If you have any questions about this case, please direct them to attorney Marie Bayer Thode of our firm.
