Kategori: Litigation

Taking out construction insurance – including considerations about optional cover – is a natural element in companies’ risk management. Holger Schöer and Pernille Svit Westphal Riis represented an international contractor consortium in a dispute against an insurance company and the insurance company’s customer regarding the execution of and damage to a major offshore construction (cofferdam). Among other things, the extensive case concerned questions about coverage under a LEG3/DE5 construction insurance, including what can be considered an “unforeseen event” and what effect the behavior of the parties up to and during the damage and repair period may have on the scope of coverage, as well as questions about unforeseen ground conditions. The handling of the case has also provided in-depth knowledge of the burden of proof issues, how insurance companies and insurance brokers cooperate regarding the underwriting of construction insurance policies, and the practical handling of claims reports, including the scope of documentation.

Judgment was entered in favour of a bank during avoidance proceedings. Holst, Advokater represented the bank during the proceedings

In December 2021, the Danish Supreme Court found that only in very special cases, avoidance may be made to a reduction of an overdraft facility, if the reduction is made by means of floating charge funds. Holst, represented the bank during the proceedings in December 2021.

In April 2023, the District Court in Herning decided in a similar case about avoiding the reduction made to an overdraft facility comprised by a floating charge.

The bankruptcy estate after a car dealer business, which had become subject to restructuring proceedings on 15 March 2021 and subsequently subject to bankruptcy proceedings on 9 April 2021 with reference date 11 March 2021, had initiated legal proceedings against the bank. The parties agreed that the overdraft facility of the business in the amount of DKK 2.4 million had been reduced by DKK 563,610.07 from 25 February 2021 until 11 March 2021. The parties also agreed that the bank only enforced its floating charge in the amount of DKK 2.4 million on 11 March 2021. During the proceedings, the bankruptcy estate claimed that the reduction should be avoided according to section 67 or section 74 of the Danish Bankruptcy Act, and that the bank should disclaim the enrichment and pay compensation.

The court began by stating that it was for the bankruptcy estate to prove that the bank had become enriched, or that the estate had sustained a loss. After the witness statements, the court then found that the business until 5 March 2021 had the right of disposal of the overdraft facility within the credit limit, and that the credit facility was shut down on this date for further withdrawals. During the period, payments had been made into the account of DKK 779.967,88 from various invoices, etc., DKK 75,944.20 from debit card payments and DKK 56,875.53 from insurances.

The court concluded that the bankruptcy estate had not proved that the payments made by means of invoices and debit cards did not to a reasonable extent constitute payments of outstanding debts comprised by the bank’s floating charge or payments in connection with the sale of goods that previously had been comprised by the charge. Nor had the bankruptcy estate substantiated that the payments from insurances were not covered by the floating charge. Therefore, the bankruptcy estate had not proved that the bank had become enriched by the reduction of the overdraft facility, including that the reduction was not secured under the floating charge, and hence judgment was entered in favour of the bank.

The judgment is in line with the principles of the judgment delivered by the Supreme Court in December 2021 that failing enforcement of a floating charge does not automatically entail avoidance of a reduction of an overdraft facility prior to bankruptcy proceedings.

Assistant attorney Marie Bayer Thode of Holst, Advokater represented the bank during the preparation of the case and during the final hearing.

The client imported used cars from abroad and resold them in Denmark. All invoices were affixed with a text by the client stating that the imported cars were sold under the VAT arrangements for second-hand goods. Meanwhile, the Danish Tax and Customs Administration had determined that the conditions for applying the second-hand VAT rules were not fulfilled, and therefore the reported VAT was declared too low.

The audit firm had assisted the client with the preparation of accounts, bookkeeping, etc., including the preparation of a VAT letter for the client’s VAT reporting.

The Public Prosecution Department requested that the audit firm, like the client, should be fined tens of millions of Danish kroner.

Claus Hedegaard Eriksen represented the audit firm in the criminal proceedings, in which the proceedings against the audit firm were dismissed.

Holst, represented the contractor in a case about the scope of some agreed unit prices; more specifically about whether the employer could instruct the contractor to use certain equipment and methods for performing additional works and make use of stipulated “miscellaneous items” from the tender list. The employer wanted to split up the individual stages of work. The umpire agreed with the contractor and found that it had not been proven that “miscellaneous items” could be used for settling the additional works.

Attorney Holger Schöer and Assistant attorney Emma Venø Bredtoft won the case on behalf of the contractor.

If you want to sell a business, you should provide the conditions to the counterparty in writing – and as a starting point incorporate them explicitly into the terms of the agreement.

This is made clear after the Western Division of the Danish High Court delivered its judgment in a case about a business transfer, in which the seller still owned the properties in which the sold business was based. Hence, the sold business (the target company) was to lease the premises from the seller.

In the seller’s view, these commercial leases had a fixed, non-adjustable rent. However, as this was neither stated in the agreement nor mentioned by the seller in the course of the negotiations, the buyer was not aware that, in the seller’s view, it was not possible to lower the rent.

Had the buyer known that the rent could not, for example, be adjusted to the market rent, it would of course have had a significant impact on the buyer’s assessment of both the value of the leases and of the deal. The dispute that followed between the buyer and the seller was first heard by the district court and later by the Western Division of the Danish High Court.

Clear victory in the High Court

Holst, was not involved in the conclusion of the agreement. However, associate partner Christian Skad-borg represented the buyer/target company through to a clear victory in the High Court.

The judgment entailed that the target company’s rent was significantly reduced, and that the target com-pany now has a repayment claim of more than DKK 2 million (including DKK 450,000 in legal costs).

In its decision, the Western Division of the Danish High Court particularly took into account the fact that the seller had not made the buyer aware of the seller’s essential condition about the rent for the leases.

Important contribution to case law
In recent years, there have been many business transfers in Denmark, and subsequent disputes about the terms are not unusual. Most often, however, the disputes are resolved directly between the parties, and if necessary through arbitration – which Holst, also has great experience with – and therefore the decision is of importance to case law.

The decision underlines the importance of both communicating conditions and being aware of any ap-pendices, and it also confirms previous practice regarding Section 13 of the Business Lease Act, accord-ing to which the rent for a commercial lease can be adjusted to the market rent. It is important for both the buyer and the seller to be aware of this during a business transfer, as it – depending on the circum-stances – should be included in the overall assessment of profitability.

Legal action was brought against a bank by a bankruptcy estate after a property company, which was declared bankrupt on 5 January 2017.

It was a case of a claim for avoidance with an aggregate value of DKK 28.6 million, and the main issues of the case were:

• whether repayment/reduction of an overdraft facility and a business loan, respectively, which the property company had taken out with the bank, could be avoided by the bankruptcy estate,
• whether the owners and guarantors of the property company towards the bank had orchestrated the reduction and were therefore liable for damages,
• whether the securities which the property company had provided towards the bank entailed that the repayments were non-voidable towards the bank.

The case was first brought before the District Court in Lyngby and subsequently before the Eastern Divi-sion of the High Court. Associate partner at Holst, Henrik Christian Strand, represented the bank before both courts.

Avoidance by the District Court in Lyngby

The bank was ordered by the District Court in Lyngby to pay DKK 16.5 million of the total amount of DKK 28.6 million, as the court found:

• that the reduction of DKK 7.5 million of the overdraft facility during the period from 6 October until 30 December 2016 was voidable, since the property company at the time of reducing the amount was in such serious, financial difficulties that bankruptcy was the only opportunity. The court ascribed importance to the fact that the property company during the period did not pay property tax, VAT nor mortgage payments, and that there was substantial uncertainty about the terms for refinancing the mortgage loan in the company’s property.
• that the reduction of the property company’s business loan in the bank of DKK 9 million, which had been made from 30 December 2015 until 30 June 2016, also was considered voidable. The court found that the bank must have been aware that the property company was insolvent in connection with an internal transfer made between two accounts on 9 May 2016. Although the payments made were assigned to the bank, the District Court in Lyngby declared these void as a similar new drawing right had been established for the property company simultaneously with making the payments.

The remaining amount claimed of DKK 12.1 million related to repayments of the business loan before 30 December 2015. This amount was not declared void as the court found that the property company was not insolvent at that time.

Acquittal: Funds were available for paying debts

The bank and the guarantors appealed against the judgment to the Eastern Division of the Danish High Court which acquitted both the bank and the guarantors.

Regarding the reduction in the amount of DKK 9 million of the business loan, the High Court concluded that the property company in May 2016 had funds available to pay any debts falling due in the nearest future.

In support of its decision, the High Court relied on:

• information in the company’s 2015 annual report and auditor’s report
• that there was a profit of about DKK 7.4 million in the ongoing operation
• that part of the poor annual result was due to a downward regulation by DKK 115 million of the property company’s property value as at 31 December 2015.

The Eastern Division of the Danish High Court also based its decision on the fact:

• that the property company during the autumn of 2016 negotiated with a creditor about a pur-chase-money mortgage of about DKK 31.2 million which fell due for payment on 31 December 2016; the negotiations were about the payment of an amount of DKK 1 million, and in December 2016 the parties agreed about an amount of DKK 2 million – which was also in the range esti-mated by the bank,
• that from the summer of 2016, there had been negotiations between the property company and its mortgage credit institute about refinancing the mortgage loan,
• that in the beginning of May 2016, it could not be regarded as unlikely that partially or wholly re-leasing could be made of an area, which a lessee pursuant to the lease agreement was to re-duce its lease with as at 1 January 2017.

Hence, the High Court was not satisfied that the property company on 9 May 2016 was insolvent, nor that the repayment of the business loan on that date had any coherence with the insolvency which 8 months later led to the bankruptcy of the company.

Furthermore, the High Court also found that because the property company did not pay VAT and taxes on 1 August nor on 1 September, the court could not decide otherwise, since the property company had funds available and could have paid if it had decided to do so.

Acquittal: The bank held a non-voidable security

Regarding the reduction of the overdraft facility from 6 October 2016 and through to 30 December 2016, the High Court concluded that the lessee’s rent payments on 7 and 10 October 2016 entailed that the related overdraft facility was reduced, thereby creating a positive balance of the overdraft facility on 10 October 2016. The balance remained positive through until the occurrence of the bankruptcy, where it amounted to about DKK 5.4 million.

It appeared from the case:

• that as security for the bank facility with the property company, the bank had on 15 June 2007 obtained an irrevocable primary assignment in rental payments made any time under the three lease agreements with the lessee, and that the lessee had been notified of such assignment,
• that the lease agreements regarding the same areas with effect from 1 January 2014 were com-bined in one lease agreement, simultaneously reducing the leased area as at 1 January 2017.

On the same day the latter agreement was signed, the lessee and the property company also signed a conditional substitution agreement from which it was set out:

• that the new lease agreement should replace the original lease agreements,
• that the expiry of such was conditional to the parties no later than on 1 March 2014 and with ef-fect from 1 January 2014 entered into a final, unconditional and binding lease agreement for the lease,
• that the lessee’s obligations in the event of vacation was maximised at DKK 7.5 million.

On those grounds – and since no new terms were agreed when the new lease was entered into about rent payments which constituted the security, and since there were no justified doubts about the rent payments – the Eastern Division of the High Court found that the bank held a non-voidable security in the rent payments that were paid into the overdraft facility of the operating account on 7 and 10 October 2016, respectively.

Hence, there could be no avoidance of the reduction and the repayment of the overdraft facility in rela-tion to the bank, as the security in the rent payments had not been made later than 3 months before the reference date.

Holst, represented a bank during proceedings about the avoidance of a reduction made to an overdraft facility – first before the Western Division of the Danish High Court and subsequently before the Danish Supreme Court. The bank succeeded before both courts.

Legal action was brought against the bank by a bankruptcy estate after a bakery, which was declared bankrupt on 22 February 2016.

Before the bankruptcy, the overdraft facility of the bakery had been reduced by approx. DKK 430,000 during the period from 30 December 2015 until 27 January 2016 at which date the bank enforced the floating charge.

The parties agreed that the bank held a security by means of a non-voidable floating charge in the amount of DKK 1 million. Nevertheless, the bankruptcy estate was of the opinion that the reduction of the overdraft facility – through to the enforcement of the charge – should be avoided pursuant to Sections 67 and 74 of the Danish Bankruptcy Act, otherwise the bank would obtain double coverage. The bank-ruptcy estate was of the opinion that the value of the floating charge did not provide the bank with a fully satisfactory security.

The case gave rise to a number of questions, including:

• Does a security that is yet to be enforced not constitute a security?
• Will the bank receive double coverage if avoidance is not made for the period before enforcing the charge?
• What is the value of the floating charge before enforcement?
• Are cash and debit card payments into the overdraft facility comprised by the charge when the payments made come from the sale of pledged goods?

Associate partner Henrik Christian Strand and Assistant attorney Marie Bayer Thode from Holst, Advoka-ter first satisfied the Western Division of the High Court and subsequently the Supreme Court that the reduction of the overdraft facility was non-voidable.

The Supreme Court did not ascribe any importance to its decision that the bank had not yet enforced the floating charge during the period at issue. On the contrary, the Supreme Court expressed that the pay-ments made into the overdraft facility during the period at issue (approx. DKK 720,000) to a large extent constituted payments of claims comprised by the charge, or payments made in connection with selling goods and other assets, which had been comprised by the floating charge beforehand.

Since the estate in no other way had substantiated any enrichment on the part of the bank nor a loss to the estate, the bank won the case – both before the Western Division of the High Court and before the Supreme Court.

When cleaning up a roadside ditch, the Municipality of Hedensted accidentally destroyed a telephone cable. Hence, the telephone company claimed damages as the company was of the opinion that the municipality should have inquired with the national register about the loca-tion of the cables before commencing any cleaning up.

One of the decisive questions was therefore, whether ditch-cleaning carried out with machines should be determined as excavation works. If the answer was Yes, then the municipal-ity should have inquired with the register before commencing the work. This would change the practice for all Danish municipalities which then would have to use time and resources for obtaining information about the locations of cables along the approx 40,000 km of roadside ditches in Denmark.

Jacob Fenger, partner at Holst, represented the Municipality of Hedensted in the legal pro-ceedings against the telephone company – both before the High Court and subsequently before the Supreme Court. The municipality succeeded before both courts who decided that it was not a case of excavation works, and therefore both the Municipality of Hedensted and all other Danish municipalities could breathe a sigh of relief and continue their current practice.

Before a contractor began site works, he obtained information – which he is required to do – from the register in which all Danish cable owners register the location of lines and cables. The information showed that a fibre cable was located right where the contractor was to carry out excavation, however, when the contractor began the digging, there was no fibre cable.

The contractor carefully continued digging in the area in which the cable had been registered to be, and eventually the machines commenced the actual excavation. Meanwhile, it showed out that the cable had been placed about 2 meters away from the location that had been provided in the register, and it resulted in the contractor destroying the cable.

The phone company claimed damages and the decisive question was of course how far away from the location registered, did the fibre cable actually lay?

Jacob Fenger, partner at Holst, represented the contractor, and his services comprised, among others, a survey report of the digging location at which the situation was re-created, and the distances were mapped out very precisely. This entailed that both the district court and the High Court acquitted the general contractor, and the judgment now constitutes a benchmark on how similar cases shall be decided – and where the contractor must expect a deviation of 0.5-1 meter compared to what has been registered, whereas 2 meters is too much.

The only thing left to do after a contractor had completed a harbour extension, was the final tidying-up, and this was left for an employee to handle. The employee had to wait for a truck which was to help carry out a heavy lift; however, the truck kept the employee waiting so he decided to approach a local trader with an excavator and asked for help, and when making the lift, the employee became injured.

Hence, the employee claimed damages from the contractor, and first time around the employee succeeded in the district court. The contractor then approached Holst, and partner Jacob Fenger carefully began investigating the matter.

Jacob went through a large number of phone calls between several of the parties involved, and this survey made clear that what the employee had explained in the district court did not correspond with what – according to the phone calls – had actually taken place.

The thorough clarification of all details meant that the Danish High Court ruled in favour of the contractor who was thereby acquitted for a substantial claim for damages.