This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in Sweden.
This Q&A is part of the global guide to Restructuring & Insolvency (3rd edition). For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/restructuring-and-insolvency-3rd-edition/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
Security over immovable real estate, and over ships and aircraft is created by way of a mortgage. This security is perfected by possession of a mortgage deed and registration in public registers.
Security can also be created over practically all moveable assets either in the form of a pledge over specific property or a floating charge over the assets in a business (a floating charge will not include cash and shares).
A pledge over specific movable property is normally written (but may be an oral agreement) and will be perfected by way of taking possession over the pledged asset. There is no registration procedure available in Sweden for this purpose, at least not in respect of tangible assets. A pledge over intangible assets such as trademarks and patents, however, will created and perfected by a written agreement and registration with the Swedish Patent and Registration Office.
A floating charge over the assets of a business (Sw. företagshypotek) is created by way of a mortgage deed being pledged and transferred to the pledge holder. Registration is not required, unless it is a digital mortgage certificate.
Unless the different formalities described above are not complied with, the security in question will not be perfected and, if so, the security will not be protected against the debtor’s creditors and will thus not give any priority to the claim in insolvency proceedings.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
Secured creditors can exercise their rights and enforce a pledge over property even during bankruptcy or reorganization proceedings. A floating charge, however, being a general security may normally not be exercised once reorganization protection has been granted or if bankruptcy proceedings are commenced.
Enforcement of a real estate mortgage or a floating charge is done by application to the Swedish Enforcement Authority (Sw. Kronofogdemyndigheten) and requires a formal procedure which can be somewhat time consuming.
Enforcement of a pledge over specific property which is held by the pledge holder is more straight forward, and the procedure for this is normally regulated in the security agreement or rules otherwise provided for in the Swedish Commercial Act.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
Insolvency test under Swedish law is a prognosis. A debtor is deemed insolvent when it is unable to pay all its debts as they fall due, if this inability is not only temporary. The latter prerequisite means that a debtor may be illiquid while at the same time not necessarily insolvent. Future foreseeable financing may thus be considered in the insolvency test.
No, strictly speaking, a debtor or its directors are under no formal obligation to file for bankruptcy upon the debtor becoming distressed or insolvent. However, as further described in Question 14 below, if an insolvent debtor’s business is continued, its directors may be personally liable if they breach certain duties set forth in the Swedish Limited Liability Companies Act and in the Swedish Penal Code.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
Strictly speaking the Swedish insolvency regime only provides for one insolvency procedure, which is bankruptcy (insolvent liquidation) (Sw. konkurs). In-court company reorganization proceedings are often also referred to as an insolvency procedure which, in contrast to bankruptcy, assumes going-concern and having the purpose of rescuing the business and not liquidating it. As reorganization proceedings will be described separately in Questions 8-11 below, this section and Questions 4-7 will deal only with bankruptcy.
In bankruptcy proceedings the debtor is not in control. Upon the court declaring the company bankrupt, an official receiver (Sw. konkursförvaltare) is appointed, who will assume full and sole control over the business and all assets of the debtor. If the receiver decides to continue the business during the proceedings, he or she may let management or key personnel stay in place to run the business, but it will always be on instructions from and under the supervision of the receiver. The board of directors do remain registered as such, although are relieved of practically all powers to represent the company.
The official receiver is the sole representative of the bankruptcy estate and dismantling and divesting the business and all assets will be carried out in his or her sole discretion. Thus, all decisions throughout the bankruptcy proceedings will be taken by the receiver. Even so, the receiver has an obligation to inform and hear both any affected creditor(s) as well as the Supervisory Authority in Bankruptcies prior to any and all important decisions (e.g. sale of business or property, litigation etc). The bankruptcy court, together with the Supervisory Authority in Bankruptcies, has a supervising role and will rule on any disputes during the proceedings and will eventually be approving the costs of the proceedings (receiver’s fee) and how the surplus is distributed among the creditors.
Bankruptcy proceedings will vary a lot in length, depending on the scope and the complexity of business operations and the estate assets. Normally, proceedings are on-going for at least six to twelve months, but often continues for more than a year, for example where the estate is or becomes involved in disputes or litigation which sometimes can go on for years. Where proceedings continue over a long time, advance distribution may in some situations be offered to preferred creditors.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
The order in which all claims rank is governed by the Swedish Rights of Priority Act. In short and in somewhat simplified terms, the proceeds from the realization of assets in bankruptcy shall be distributed in the following order.
i) claims from fixed charge holders;
ii) costs of proceedings (mainly official receiver’s fee and expenses);
iii) claims from certain preferred creditors; a) bankruptcy filing costs, b) company reorganization administrator’s fees or costs prior to bankruptcy, c) “super-priority” claims approved by company reorganization administrator prior to bankruptcy, and d) accounting services claims;
iv) claims from floating charge holders;
v) claims from employees and contributions to pension schemes;
vi) claims from unsecured trade and other creditors (pro rata dividend in proportion to their claims),
vii) post-petition interest on unsecured debts; and
viii) finally, if there is any surplus, to the shareholders.
As listed above, except for the creditors holding different types of security over specific or floating assets, and thereby being secured (thus having priority) in relation to the assets in question, there are also certain statutory general preferential rights for particular stakeholders such as administrators, accountants, employees etc.
No, there is no concept of equitable subordination for any class of creditor under Swedish bankruptcy law.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
As part of any bankruptcy proceedings, the official receiver will review the debtor’s trans-actions, in most cases payments, for a certain period prior to the proceedings being opened.
Generally speaking – under certain circumstances and with varying look back periods depending on type of transaction and who the parties are – any type of transaction may be challenged and set aside or reversed. Provisions to this effect are found in the Swedish Bankruptcy Act, which in short include;
- a general clause setting aside any type improper payment, transfer or other transaction within a five-year period (no limitation for closely related parties), where the debtor was insolvent at the time of the transaction or became insolvent as a result hereof, and where the other party favored by the transaction was in bad faith;
- payment of debt within a three-month period (two years in relation to closely related parties) prior the bankruptcy proceedings, if i) payment is made in advance, ii) is made in kind or iii) exceeds some 10% of the debtor’s total assets, and unless the payment is deemed normal and made in due course of business.
- creation of security for old debt within a three-month period prior to the bankruptcy proceedings; and
- gifts from the debtor, unreasonable salary or pension payments and matrimonial dispositions etc.
The official receiver has exclusive rights to pursue and bring a claim challenging a reviewable transaction. However, if the receiver will not exercise that right, any creditor will have a secondary right to do so on behalf of the bankruptcy estate.
A successful challenge will result in the transaction in question being unwound by a court order, and the receiving party being obligated to give up or return to the insolvent estate whatever money, asset or preference obtained through the voidable transaction. The creditor will then normally be entitled to lodge a corresponding claim in the bankruptcy proceedings and receive dividend in competition with all other creditors.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
Once bankruptcy proceedings are opened, no creditors may enforce their claims against the debtor. The only exception to this would be a creditor with security in the form of a pledge over specific property, which may be enforced even during bankruptcy proceedings as long as realization is co-ordinated with and accounted for to the bankruptcy receiver.
As for litigation proceedings, there is no stay that will apply in bankruptcy proceedings. Whether the debtor is the claimant or the defendant in such proceedings, they will continue even if the debtor enters into bankruptcy. What will happen is that the insolvent estate will have the right to assume the debtors standing as claimant or defendant and take over the proceedings. If so, the estate will assume all rights as well as all obligations of the debtor including litigation costs. If the estate does not enter into the proceedings and assumes the case, the debtor in bankruptcy (represented by its board of directors) will have the right to continue the litigation proceedings and ask the court to rule on the case.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?
Aside from informal and voluntary arrangements negotiated with all or certain creditors, Swedish law provides for only on in-court restructuring and rescue procedure, namely company reorganization (Sw. Företagsrekonstruktion).
In short, the two main pre-requisites in order to be granted reorganization protection by the court are that the debtor is illiquid and not able to settle all its debts (not necessarily insolvent, but often this is the case), while at the same time having a viable core business that following a restructuring plan can be expected to be profitable again.
As opposed to bankruptcy proceedings, the debtor and its management remain in control during reorganization proceedings. However, an administrator (normally an insolvency lawyer) is always appointed by the court to supervise the reorganization and the operations of the company during that time. Even if this is a debtor-in-control procedure, certain important powers are vested in the administrator which effectively limits the discretion of management; for example, the administrator must approve of any new debt/obligations, approve of any sale or pledge over property critical to the business, and approve of any payment of old debt etc. If the debtor and its management do not comply with the instructions of the administrator or with applicable law, the administrator can (and will be expected to) file for the immediate dis-continuation of the proceedings.
As part of the reorganization procedure, the debtor shall prepare a restructuring plan together with the administrator, describing all operational and financial measures to be taken for the debtor to restructure its business making it profitable. Whereas under Swedish law, the restructuring plan and its implementation is not a legally binding, nor something that the creditors will vote on, it nonetheless represents an important document for the purpose of explaining the rescue plan to the creditors and generally convincing them to approve of the reorganization and in particular to vote in favor of a public composition and write-down of all non-preferential old debt.
Creditors only get to vote on the write-down of old non-preferential debt by a public composition. All secured creditors are assumed to get full settlement once the reorganization proceedings are finalized and will therefore not be part of the vote. Aside from that, all creditors have the right at any time to oppose the reorganization and may ask the court to dis-continue the proceedings, if there is reason to believe that the purpose of the restructuring proceedings will not be achieved.
Company reorganization proceedings are bot opened and terminated by the court issuing an order to that effect based on the filings made by the debtor or a creditor. The court also appoints the administrator, normally a trusted insolvency lawyer proposed by the debtor. The court further rules on any disputes relating to and arising during the proceedings (e.g. voting rights, choice of administrator, extensions on proceedings etc).
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
Yes, in practice that is possible. However, there are no express provisions on financing in restructuring proceedings, nor any regime similar to the DIP financing under the US Bankruptcy Code. And, it should be noted (as indicated above in Question 8) that the appointed administrator must approve of any new debt being incurred during the on-going reorganization.
That said, any new obligation incurred during the reorganization proceeding, for example a new financing or loan agreement, which is approved by the administrator, will automatically get special priority, often referred to as “super-priority rights”. In a subsequent bankruptcy, such “super-priority” claims will rank ahead of all non-preferential debt, and even ahead of a floating charge secured claim if there are insufficient funds to settle both (refer to Question 5 above).
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
No, restructuring proceedings do not have the effect of releasing claims against non-debtor parties. As a general rule the duties of the debtor’s directors remain virtually the same even during restructuring proceedings.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
Yes, that is common, at least in larger restructurings where the number of creditors or the total debt is significant. Normally up to three of the largest creditors will be appointed by the court to form the committee.
Under Swedish restructuring law, however, creditors’ committees have no formal powers or influence other than the right to be kept informed and heard by the administrator in all important matters. If they retain advisers, they must do so at their own cost.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?
In company reorganization, the debtor’s contracts remain in force and both parties are obliged to perform their obligations. There is even statutory protection for contracts, which prohibits a creditor to terminate an agreement due to the debtor’s non-performance prior to the commencement of the reorganization proceedings. The creditor will, however, have the right to request security or cash payment for future deliveries or performance.
Retention of title and set-off provisions will normally survive and remain enforceable as such in restructuring proceedings. Premature termination will be regulated in the agreement, however, provisions automatically terminating contracts or allowing parties to terminate upon a counterparty’s insolvency, will be superseded by the statutory protection for contracts described above. It may be noted that, in order to effectively disclaim a contract at a cost, a debtor may always terminate the contract wrongfully, giving the other party a claim corresponding to the full contract and any contractual damages etc, all of which will later get crammed down in the following public composition (assuming the reorganization is successful and the composition is accepted by a majority of the creditors).
In bankruptcy, the general rule is that contracts remain in force. However, the debtor’s agreements will not be binding on the insolvent estate, and the agreements therefore are not enforceable against the estate. Contractual provisions automatically terminating a contract or allowing a party to terminate it upon the other party’s insolvency, will be upheld in principle, but the insolvent estate will have a superseding statutory right in most cases to assume the contract, including all rights and all obligations of that contract (partial assumption is not allowed).
Retention of title clauses will survive insolvency proceedings if they are properly drafted, and the creditor will have the right to request the insolvent estate to separate and release any such property. Setting off claims is normally allowed in bankruptcy proceedings, but statutory set-off regulations will apply.
What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
As the general rule, normal commercial terms and conditions will apply to a sale of assets or of an entire business where the seller is undergoing company reorganization. As mentioned in the above, any agreement entered into during restructuring and approved by the appointed administrator will automatically get so called “super-priority” rights, though often such priority rights will be agreed not to apply in this type of sale.
Security cannot be released without creditor consent. Credit bidding is allowed and will simply be a matter of commercial consideration for the debtor and the administrator.
In bankruptcy, the business as a whole or specific property are sold free and clear of any claims and liabilities (unless otherwise agreed with the buyer). Normally such sale will be on a as-is-basis without any warranties or representations for the buyer to rely on and with a wide disclaimer for the seller.
Credit bidding is permitted and there is also no specific legislation on this point. It will be up to the bankruptcy receiver to decide whether a credit sale is in the best interests of the creditors or not. In most cases, receivers in bankruptcy will tend to favor risk free cash deals over a different types of credit sales.
Pre-packaged sales are possible in practice and is not uncommon. However, a pre-pack and its commercial terms will always be reviewed by the receiver appointed in subsequent bankruptcy proceedings, thus with a risk of being set aside. Also, with little transparency and no creditor consultation pre-packs have been debated, and still are, especially where the business/assets are sold to someone connected to the debtor. When doing a pre-pack sale, it is recommended to do an external third-party valuation of the property sold, to avoid a sale at undervalue which can be criticized and potentially challenged.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Generally speaking, directors of a Swedish limited liability company owe fiduciary duties to the company and may thus, under certain conditions, be held liable by the company, its shareholders or its creditors for damages caused intentionally or negligently. As for other parties, also an accountant or a shareholder of a company may under certain circumstances incur liability for damages he or she causes to the company, its creditors or its creditors.
Under the Swedish Limited Liability Companies Act, a company’s directors also have a duty to ensure that the company’s equity is intact at all time. And, as soon as there is reason to believe that the company’s equity is eroded by more than half of its registered share capital, certain actions are required in order to either restore the capital reserves or to liquidate the business solvently. In this situation the directors must immediately prepare a balance sheet for liquidation purposes and call a shareholders’ meeting. At that shareholders’ meeting, the balance sheet is presented and the shareholders must decide either to enter into a solvent liquidation, or to continue the business and, in the latter case, the company’s share capital must be fully restored with in eight months. Within that time a second shareholders’ meeting must be called to confirm that the capital reserves are fully restored, otherwise the company must be immediately liquidated. Unless these specific rules of conduct are complied with, the directors may be held personally liable for any debt in the business accruing while this non-compliance is continuing. This liability typically applies to the directors of a company, but any other person acting on behalf of the company while being aware of the directors’ non-compliance, may also be held jointly liable.
Under Swedish law, directors of a company may also be held personally liable for unpaid taxes, if the company goes into bankruptcy with due and unpaid taxes, which will normally be considered the tax authorities as intentional or grossly negligent.
Moreover, directors of a distressed or insolvent company have certain duties under the Swedish Penal Code. For example, a director may face both personal liability for damages and criminal charges for fraudulent trading if he or she, while acting on behalf of the insolvent company, intentionally incurs debt or obligations which the debtor will not be able settle.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
No, generally speaking, there is no such automatic release for directors or other stakeholders when a company enters insolvency or restructuring proceedings.
However, it should be noted that such personal directors’ liability as described above in Question 14, relating to unpaid taxes or new debt accruing during capital inadequacy and non-compliance by the directors to take prescribed measures, may effectively be avoided if the debtor (i.e. its directors) either files for bankruptcy (insolvency proceedings) or files for company reorganization and presents a solution to its debt situation (often by way of a public composition), no later than on the day of the taxes becoming due or other debt being incurred.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?
Sweden is a party to the EU Insolvency Regulation which governs recognition of foreign insolvency regimes in Europe. As a result, insolvency proceedings opened in other member states will also be recognized in Sweden.
In relation to the Nordic countries, Sweden has also acceded the Nordic Insolvency Treaty together with Norway, Denmark, Finland and Iceland, and thus recognize insolvency proceedings opened in those jurisdictions.
European and Nordic insolvencies are recognized without any specific formal procedure.
The UNCITRAL Model Law on Cross Border Insolvency has not been adopted by Sweden.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Debtors incorporated in other jurisdictions than Sweden may be subject to local Swedish bankruptcy proceedings if the debtor has branch and a business place in Sweden. Such local proceedings will be territorial and thus comprise only assets in Sweden.
How are groups of companies treated on the restructuring or insolvency of one or more members of that group? Is there scope for cooperation between office holders?
Swedish insolvency or reorganization law do not recognise the corporate group concept, and legal entities are treated as single entities with their own respective creditors. Directors representing more than on company in the same group must always consider the interests of creditors in relation to that individual company.
Both in restructurings and in bankruptcy proceedings, one and the same administrator or official receiver will often be appointed for all group entities involved, for the purpose of co-ordination and efficiency.
Is it a debtor or creditor friendly jurisdiction?
Could be said that Swedish insolvency laws are fairly well-balanced between debtor and creditor interests. On the one hand management is allowed to remain in place and in control in restructurings, and no dilution or debt for equity can be imposed involuntarily on a debtor’s shareholders. At the same time, creditors’ rights are also protected, in particular claims which are secured and creditors with preferential rights such as accountants, employees etc, none of which claims are included and crammed down in statutory compositions.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
State support for insolvent companies, strictly speaking, is not allowed. Still, both in restructurings and in bankruptcies, the state funded Salary Guarantee Fund will be available to cover all salaries within certain limitations in time and amount etc. And even if the state will have a recourse claim for any all sums paid out, the recourse claim will not have priority (unlike employees’ claims which are preferential) nor will social fees on such guaranteed salaries be claimed. That in effect constitutes a type state support for the purpose of protecting employees, while at the same time facilitating restructurings.
Further, employment protection has a strong tradition in Sweden and is also allowed to influence insolvency proceedings to some extent. Aside from the state securing salaries to employees in insolvent companies and insolvency laws providing preferential treatment for salary claims, insolvency office holders are allowed by law to consider not only commercial interest but also to safeguard the continuity of employment. Also, unions have a certain advanced position and are allowed to be represented in creditors’ committees, and are given the right to negotiate employment rights and terminations etc when insolvent businesses are wound up.
The state through the Tax Authorities also often play a key role as one of the main creditors in in insolvency proceedings. Even if tax claims, and salary guarantee recourse claims, have no priority, these claims are still often substantial enough for the state to have certain leverage as creditor, for example in voting on a public composition in restructurings which will require a certain majority.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
Costs and time are often a concern in corporate restructurings, not least in smaller and mid-sized distressed businesses. One thing that would allow for swift and less costly restructurings would be to introduce a separate procedure for composition and a cram-down of old debt. What distressed companies need is sometimes just a way of dealing with its trade debts and other unsecured non-preferred debt (with an otherwise healthy and profitable business). Within the current legal framework such businesses need to enter into and go through full-blown in-court reorganization proceedings.
As mentioned in the above, under Swedish law there are no mechanisms for squeeze out of shareholders or forced dilution of their equity stake, which some believe is an important toolkit for successful restructurings. Also, there are no mechanisms to replace dysfunctional or non-performing debtor management, which sometimes can obstruct or at least make a successful restructuring more difficult.
Another recurring challenge in restructurings is that of financing and liquidity. Under Swedish law there is no structured and formal DIP financing arrangement similar to the DIP financing regime under the US Bankruptcy Code. There are techniques to be used where certain priority is granted to restructuring financing, but there are often competing interests, for example potential erosion of the floating charge security, to be considered, which can make it difficult to raise the necessary cashflow funding during the proceedings.
There are currently no concrete pending or imminent proposals to reform the above aspects of Swedish insolvency law.