The beginning of 2019 saw a slight decrease in the number of bankruptcies in Sweden compared to 2018. The September 2019 numbers are, however, the highest for September in the last 15 years. The total number of companies that declared bankruptcy during 2018 was 6,178, an increase of 11% over 2017.
Although it cannot be described in numbers, the Swedish market seems to have adopted a more apprehensive approach. Official interest rates have been negative since February 2015, meaning that lending is still very cheap. According to the current forecast, the Swedish Central Bank has announced a planned increase of interest rates in spring 2020. It has been questioned whether the increase will happen in the current economic environment, however, given the awaited downturn.
The most affected industries so far are construction and retail. Also, several larger housing developers have struggled financially during 2018 and 2019. As for the retail industry, a number of large retail chains have been declared bankrupt or have entered into formal restructuring proceedings.
See 1.1 State of the Restructuring Market.
The principal laws relating to restructurings and insolvency in Sweden are the:
To wind up a company there are two main proceedings:
The main formal restructuring proceeding is formal restructuring under the Business Restructuring Act. It should be noted that the bankruptcy proceeding under the Bankruptcy Act may be utilised to restructure a business, in which case it may be considered a formal restructuring proceeding.
Swedish legislation does not impose an explicit requirement for a company to commence insolvency proceedings if it is in financial distress or even insolvent. Indirectly, however, Swedish law does impose a requirement that the directors file for, or take action towards, formal insolvency proceedings if it is clear that the company is financially distressed or insolvent. This is in accordance with the rules on directors’ personal liability for the company’s debts, which state that under certain circumstances, the directors of a company can be held personally liable for the company’s debts or taxes.
There are “capital maintenance” rules requiring a company to maintain at least 50% of its registered share capital. If the company’s assets are less than 50% of the share capital, and unless this is going to be addressed, the board of directors is required to take steps to liquidate the company. If they do not do so, they can be held personally liable for the company’s new debts.
If a company is insolvent or under financial distress, the company could choose several options to either conclude the business or take steps to reconstruct it in order to solve the financial situation. If the company wishes to close its business and it has the funds to pay all its debts, the most suitable option is voluntary liquidation – a solvent winding-up of the company. If the company is in financial distress but wishes to continue its business, there is a formal restructuring proceeding that is regulated by law, but the company could also opt for an informal restructuring proceeding (although if this does not pan out, the directors may become personally liable). If the company is insolvent the only option (unless the financial issues can be resolved) is bankruptcy – the equivalent to liquidation for an insolvent company.
A creditor can force a company into bankruptcy (assuming the company is insolvent) by filing a request with the district court. If the district court finds that the company is insolvent, the company will be declared bankrupt. This procedure can be long and cumbersome depending on the debtor’s defence strategy.
A formal restructuring can be initiated by a creditor. If the creditor applies for formal restructuring, the court may only rule upon the application if the debtor gives its consent to commencing the process.
Bankruptcy presupposes that the company is insolvent, which means that the company is unable to pay its debts as they fall due and such inability is not merely temporary.
The financial prerequisites for a debtor to pursue formal restructuring proceedings are that the debtor must be deemed to be unable to make payment of its debts as they become due, or that such inability will arise within a short time. A formal restructuring also presupposes that the business can be continued in some form after the restructure.
A voluntary, solvent liquidation does not presuppose insolvency.
The Banking and Financing Business Act (2004:297) and Insurance Business Act (2010:2043) contain specific provisions applicable to banks and insurance companies and other credit institutions commencing restructuring, insolvency or voluntary liquidation proceedings. Furthermore, EU directive 2014/59/EU has been implemented in Swedish law through the Resolution Act (2015:1016).
The INSOL Principles are not widely used among Swedish market participants. However, in cross-border restructuring involving Swedish companies, these principles may be used if the context so requires.
For larger lending structures, the market trend is for most restructurings to be dealt with in consensual processes. A formal restructuring or insolvency is normally a last resort used when a consensual solution is impossible, or where all or a majority of the creditors are affected, and all the unsecured debts are crammed down by way of a statutory composition.
There is no explicit legal requirement to hold consensual restructuring negotiations before commencement of a formal restructuring, even though in practice many formal proceedings are preceded by consensual negotiations.
The approach of banks and credit funds to companies experiencing financial difficulties varies from case to case but, for reasons of market environment and historically extremely low interest rates, the market trend is for financial institutions to be fairly tolerant and to have a supportive approach where there is a plan and a realistic chance of rescue and survival.
When it comes to restructurings, a formal proceeding lacks flexibility, which makes the informal option preferable. However, the pending implementation of the Pre-Insolvency Directive means that the flexibility of formal restructuring proceedings may expand in three years’ time.
The strongest argument to opt for a formal proceeding, as opposed to a consensual one, is the implication of personal liability for directors. Under certain circumstances, the directors of a company can be held personally liable for the company’s debts or taxes. Should an informal restructuring process fail, the directors could become personally liable under the Swedish Companies Act if they fail to prepare a balance sheet for liquidation purposes or if they continue the business without due care and act negligently. Under Swedish tax legislation, a director may also become personally liable for company taxes if, prior to not paying taxes when they become due, all creditor payments are not frozen and insolvency proceedings (bankruptcy or formal restructuring) initiated. If appropriate action is taken for the initiation of insolvency proceedings prior to any such critical tax debt or other debt becoming due, the directors can normally avoid becoming personally liable for the company’s debt and liabilities. It should be noted that commencing an informal procedure, for the negotiation of debt settlement or capital injection etc, will normally not be sufficient to avoid personal liability if such informal solution does not succeed and the company subsequently goes into bankruptcy.
Since loans made under Swedish law are normally made on a bilateral or club basis, the need for formal steering committees etc is limited compared to restructurings dealing with multi-layered syndicated debt structures. Informal restructuring in Sweden is normally dealt with bilaterally or involving the club of lenders on an ad hoc basis. If relevant due to syndication and/or multiple debt layers, the process and documentation are almost identical to the approach adopted for similar restructurings in the London market.
Standstills, as part of an initial informal and consensual process, will normally be agreed among the major participating lenders. It is not uncommon for the debtor company to be subject to certain restrictive covenants during such processes. The legal infrastructure of all negotiations in a consensual deal will respect contractual priority, security/liens priority and structural (entity) priority, and the relative positions of the creditor classes in liquidation proceedings.
Super priority can only be granted to claims which arise during formal restructuring proceedings and have been approved by the appointed administrator. When it comes to informal restructuringsno such super priority is created by way of law.
There are no principles of applicable law in Sweden that impose duties on creditors to each other, the company or third parties, or which otherwise regulate their conduct towards other creditors, the company or third parties. However, in extreme cases of negligence, damages may be sought.
Typically, credit agreements contain terms permitting a qualified majority (66% or two thirds) of lenders to bind dissenting lenders (who are parties to the agreement) to changed credit agreement terms. However, this presupposes the dissenting party is a party to the credit agreement. In addition, certain key terms require all lenders’ consent.
Unless the company enters into formal restructuring proceedings, there is no compulsory composition mechanism under Swedish law according to which a majority of creditors may force a composition or cram-down on a minority.
Thus, a consensual informal restructuring, where a cram-down is necessary, will require the full support of all the creditors and not just the majority.
Historically, there was a cram-down mechanism which did not require the commencement of a formal proceeding. As an EU pre-insolvency directive will be implemented in Sweden within the coming years, such a standalone cram-down mechanism might be reintroduced.
Real estate mortgages, aircraft mortgages, ship mortgages, shares, movable property, intellectual property, accounts and floating charges can all be pledged as security to a debt with a specific priority attached hereto, in accordance with the Rights of Priority Act (1970:979).
Creditors with pledge over assets in the creditors' possession can exercise their rights and enforce the security at any time during a formal restructuring process or bankruptcy, but security over a floating charge cannot be exercised after a formal reconstruction process or bankruptcy proceeding has been initiated. During a formal restructuring process all other enforcement actions are stayed (with some minor exceptions). During a bankruptcy proceeding, enforcement actions may be taken to retrieve third-party (segregated) assets and in relation to claims on the bankruptcy estate (ie, not normal unsecured claims in the bankruptcy).
Enforcement of real estate, ship and aircraft mortgages (and outside insolvency proceedings floating charges) is made by an application to the Swedish Enforcement Authority (Kronofogdemyndigheten) in accordance with the provisions in the Swedish Act on Enforcement (1981:774).
Pledge over assets in the possession of the creditor (shares, movable assets etc) can be sold on private auction as set forth in the Swedish Commercial Code (1736:0123) or in the applicable security agreement. No specific time limits apply unless agreed.
The timeline for any enforcement process varies depending on the nature of the underlying assets. Generally, the timeline for enforcement of security interests in the form of assets in possession of the creditor is considerably shorter than the timeline for enforcement of other security interests. The latter timeline is highly dependent on the turnaround at the Swedish Enforcement Authority, which is variable.
No special procedures apply to foreign secured creditors for lodging claims in a formal restructuring or in an insolvency proceeding. However, a foreign claim might be subject to recognition proceedings for any enforcement outside such proceedings, depending on the matter of the judgment and the country of its origin.
See 4.2 Rights and Remedies.
The order in which secured and unsecured creditors’ claims rank is governed by the Rights of Priority Act. It should be noted that the costs of insolvency proceedings (mainly the official receiver’s fee and expenses) will rank higher than all other claims, except for claims from fixed charge holders under certain circumstances.
Claims rank as follows:
All creditors are entitled to full payment for goods and services delivered to the debtor during a restructuring process. However, all creditors with unsecured claims as of the date when the application for restructuring proceedings is filed will be reduced by a public composition adopted by the creditors. A public composition which reduces the debts by some degree is almost always a part of the restructuring plan.
Unsecured creditors can disrupt a voluntary liquidation process (meaning the winding-up of a solvent company) by successfully filing for bankruptcy or by taking enforcement measures.
During a formal restructuring process, however, the debtor may not pay any old debts, and any petition for bankruptcy or other enforcement measures will be stayed except if a creditor’s right is seriously jeopardised.
A bankruptcy proceeding cannot be disrupted or stopped upon application from a creditor. A creditor may however petition the court to appoint a new receiver under certain circumstances.
Swedish law allows for applications for provisional attachment awaiting a final judgment. Provisional attachment requires the claimant to show probable cause for the claim, that it is reasonable to suspect that the opposing party will avoid payment of the debt, and to deposit security for the loss that the opposing party may suffer.
The enforcement process is initiated by the creditor by submitting a request for payment to the Swedish Enforcement Authority. If the claim is not disputed by the debtor, the enforcement authority will make attempts to secure payment by seizing assets from the debtor. If the claim is disputed by the debtor, the dispute is handed over to the district court as a case of litigation.
The timeline of the process varies depending on the turnaround at the Swedish Enforcement Authority. At present, the time from a submission to a final decision by the authority is 67 days.
A landlord has certain rights with regard to an insolvent tenant and the bankruptcy estate, such as eviction and a right to claim damages for unpaid rent.
See 4.4 Foreign Secured Creditors.
See 5.1 Differing Rights and Priorities.
Priority claims in restructuring and insolvency procedures include:
To the extent that secured claims are covered by a security over a specific asset, and the value of the asset is at least as high as the claim, the priority claims listed above do not have priority over secured creditor claims. However, such claims do have priority over creditors with general priority, such as salary claims, pension claims and floating charges in the business.
Tax claims are generally unsecured.
The purpose of formal restructuring may vary depending on the business and the reasons for pursuing such procedures. However, at a general level, the purpose of any attempt to reconstruct is to secure the continuance of the business.
Formal restructuring proceedings are supervised by the court. An application for formal restructuring is submitted to the district court and the court appoints an administrator. The court also supervises the formal steps of the restructuring proceedings, such as the meeting of creditors to ensure that the administrator and the debtor comply with the obligations set forth in the Business Restructuring Act.
The financial prerequisite for a debtor to pursue formal restructuring proceedings is that the debtor is, or will soon be, unable to pay its debts as they become due. The debtor must also show that there is reasonable cause to assume that the purpose of a reconstruction proceeding can be achieved, ie, that the debtor will be able to continue its business in some form following a successful restructuring.
A creditor may challenge the court’s decision to allow a company to initiate restructuring proceedings and the court may terminate the proceedings if and whenever it is shown that the purpose of the restructuring will not, or is no longer likely to, be achieved.
At the creditors' meeting (which take place within three weeks from the court’s decision to open restructuring proceedings) the creditors may express their opinion on the restructuring plan and whether the proceedings should be allowed to continue.
Restructuring proceedings can continue for three months from the date of commencement. However, if the proceedings are not completed in three months, and if the debtor presents reasons for continuation, the court may extend the proceedings for another three-month period, and upon the debtor’s request, do so again for a maximum period of one year.
A (preliminary) restructuring plan should be filed with the court before the first creditors' meeting, which normally takes place within three weeks from the opening of the restructuring procedure.
A judicial composition is available as part of the restructuring proceedings, but this mechanism lacks the flexibility of the UK equivalent scheme of arrangements. The judicial composition offers a simple cram-down mechanism applicable to all unsecured claims accrued up to the date of filing for restructuring. Upon voting, a qualified majority among the unsecured and non-preferred creditors accepting a cram-down (minimum dividend needs to be 25%) will bind all such creditors. Under Swedish law, debt-for-equity swaps cannot be made within formal proceedings.
Prioritisation of Claims
As a rule, the right of priority among the creditors is established as of the date of the application and pursuant to the rank of claims set forth in the Rights of Priority Act.
The only reason for re-prioritisation of the different rights is if new claims have arisen based on agreements made by the debtor during the proceedings and with the administrator’s consent. A super priority will be attached to such claims that will rank higher than, for example, creditors secured by a floating charge. This super priority is however only relevant should the company later file for bankruptcy.
All claims in the composition are recognised for their full amount as per the day of the application for formal restructuring. A contingent claim existing at the time of the application for formal restructuring will be bound by the judicial composition even if the future event has not yet materialised at the time of the restructuring. The decisive moment is when the claim originated (for contractual claims, the general rule is when the parties entered into the contract in question). For certain types of contract, such as employment contracts and lease agreements with a long timespan, there is case law setting out specific principles for determining when a claim accrued.
Only unsecured creditors whose claims arose prior to the filing for restructuring may participate and have a vote in the judicial composition proceedings, and the judicial composition will bind all unsecured creditors (both known and unknown). Under certain circumstances, a creditor who is bound by the judicial composition can request that the court orders that the right to cram-down which has been granted to the debtor pursuant to the judicial composition is forfeited, eg, if the equal treatment of creditors principle has not been upheld or for other types of misconduct by the debtor.
Restructuring proceedings are public in Sweden and all documents filed with the court are publicly available (including commercial and economic information and statements etc that have been filed together with the restructuring plan).
When proceedings are opened, the court appoints an administrator (usually a lawyer specialised in insolvency and restructuring) whose role is to oversee the company during the proceedings and weigh in on the company’s decisions. However, even if there is a requirement that the administrator must sign off on certain important actions (selling key assets, assuming new debt etc), he does not replace the board. Management remains in place and the board continues to represent and sign on behalf of the company throughout the proceedings.
Upon opening the restructuring proceedings, the company may not pay any old debt that is included in the composition. The company therefore gets a period of grace for the payment of its old debts. However, all claims and liabilities accrued in the business during the ongoing proceedings must be paid in full, normally in cash or in advance.
The commencement of a formal proceeding will also trigger the state-financed salary guarantee for the benefit of the debtor’s employees which, depending on the workforce, may be a significant relief financially for the debtor for a limited period of one month following the opening of the formal proceeding (the salary guarantee will also cover certain old outstanding salary debt).
The idea of a restructuring is that the company can re-emerge after the proceedings and continue its business and become profitable again. Naturally the company will therefore continue to carry on with its business during the proceedings, albeit in some cases on a reduced basis in order to cut costs etc.
At the request of the creditors, a creditors’ committee may be formed for the purpose of representing the creditors’ interests during the restructuring. This committee will consist of no more than three creditors, though under certain circumstances there may also be an additional person representing the employees. The committee does not have any power but its members do have the right to be informed and to be heard by the debtor and the administrator in advance of important decisions during the reconstruction.
The creditors receive information about the restructuring proceedings from the court and from the administrator. In the initial phase (within a week from commencement) of the restructuring, the administrator will send information to all known creditors. Under the Business Restructuring Act this information should include a preliminary statement of the company’s assets and debts, information on the company’s financial situation and the reasons leading up to the restructuring etc, as well as information about the creditors' meeting to be held. In addition, a restructuring plan will be prepared.
The judicial composition will comprise and affect only unsecured and non-preferred creditors. Secured creditors’ claims will not be subject to the composition and are expected to be settled in full. However, if the amount of a secured claim exceeds the value of the security or relevant asset held by that creditor, the excess amount will be deemed unsecured and will as such be included in the composition and crammed down. As described above, a minority of dissenting unsecured creditors can be forced to accept a cram-down by a qualified majority. The majority required depends on the percentage of dividend in the composition.
The implementation of the Pre-Insolvency Directive will likely lead to certain changes in the current partition of creditors, allowing for several and more distinctive classes of debt/creditors and may also make cross-class cram-downs possible.
Unless the original agreement states otherwise, the creditors may trade their claims even though there is an ongoing restructuring. If a claim is traded, notice of the trade and who the new creditor is should be given to the debtor.
As in other jurisdictions, Swedish law also has a concept of corporate groups, but there is no concept of “group benefit” in the Swedish corporate restructuring regime. Each company is viewed as a separate legal entity and thus a restructuring will not apply to a group of companies but to each company individually. However, to increase efficiency and for co-ordination purposes, one restructuring administrator is usually appointed for all or several group companies.
All the company’s business decisions or transactions should be approved by the restructuring administrator. A transaction made without the approval of the restructuring administrator will not, however, be void, since management and the board have signatory rights and remain in place during the proceedings.
If the restructuring is unsuccessful and the company ends up filing for bankruptcy, a transaction made without the approval of the restructuring administrator may be easier to set aside and recover. And unpaid claims under any such non-approved agreement will not have super priority.
There is no legal requirement to file any additional documentation in order for the company to use or sell any of its assets during the proceedings.
See 6.7 Restrictions on a Company's Use of or Sale of its Assets for information on who executes the sale of assets.
The creditors can credit-bid for the assets and act as a stalking horse in such sale. As long as all procedural rules are observed, such as the bid being subject to the judicial composition and payment being set off after the judicial composition has been approved, such credit bid can be accepted. It is important that all arrangements observe the principle of equal treatment of creditors.
Pre-pack sales can be conducted as part of restructuring proceedings, but such pre-pack sales do not have any formal approval or protection from the court.
Security and other claims can be released if secured claims are paid or resolved by other means. This is possible, as secured claims are not subject to or included in the judicial composition.
As new lending during ongoing proceedings will have super priority, if approved by the administrator, it is often an important part of a restructuring plan. New money can also be secured by the debtor’s assets, if there are any assets to be used as security, and if creating such security is approved by the administrator. As this may potentially be detrimental to and questioned by existing secured creditors for reasons of dilution, it is key that the administrator weighs up a decision to take up new debt with the existing secured creditors.
There are procedures within the restructuring proceedings to determine the value of individual claims, and ultimately the court will rule on such matters. But it is important to understand that the court will only rule on the value of a claim if the outcome of that dispute will or can potentially affect the outcome of the judicial composition vote. The court’s ruling will only affect the voting rights given to that creditor (and will not, therefore, determine with legally binding effect the value of a claim per se).
There is no such concept as a “fairness or equitable test” under Swedish restructuring law. Under current Swedish legislation, the restructuring plan is not a binding document as such, and (aside from voting on a judicial composition) there is no vote or formal and binding approval of the plan.
Existing contracts may be rejected as part of the restructuring proceedings and the judicial composition. To put it simply, this would be done by a premature termination or by provoking a breach and termination of a contract. This, in turn, would give rise to a counterclaim for damages etc, and this claim would be subject to the judicial composition as a non-preferred claim (since the agreement and any claim that stems from it was assumed prior to the proceedings). The total remaining liability/debt of that contract may thereby be reduced to 25%, assuming there is a majority in favour of the composition.
A non-debtor party will not be released from liability by the restructuring procedure. However, any payment received in the judicial composition procedure should be deducted from the non-debtor's liability.
A creditor with a claim against a debtor in restructuring can still exercise the right of set-off, provided that the claim and counterclaim meet the fundamental conditions of set-off and both the claim and the counterclaim originate prior to the opening of the restructuring (or, of course, if both claims originate during the restructuring).
Under Swedish law the restructuring plan is not subject to any vote or formal approval and thus cannot be breached.
Equity owners have very limited rights during restructuring proceedings, they are not viewed as creditors and have, for example, no voting rights in the judicial composition. Equity interests are in effect subordinated to all creditor claims (secured and unsecured).
To wind up a company there are two main proceedings – voluntary liquidation, which presupposes that the company is solvent, and bankruptcy, which presupposes that the company is insolvent.
The main purpose of bankruptcy is to secure the interests of creditors as far as possible. Put simply, bankruptcy is a procedure for winding up a business and its assets when it is no longer competitive. Bankruptcy presupposes insolvency, which means that the company’s inability to pay its debts as they fall due must not be merely temporary. If the company is deemed insolvent, the district court will declare it bankrupt. The district court will appoint a receiver in bankruptcy. The receiver's task is to administer the bankrupt company’s affairs and assets as a representative of the bankruptcy estate (which is considered a separate legal entity). The pros of a bankruptcy proceeding are that the business is discharged from all its debts, the business can be transferred, and the proceeding is independent of creditors' consent and co-operation. The cons of a bankruptcy proceeding are that there is often considerable destruction of value, the company loses control as all decisions are taken by the receiver, and the question of liability is investigated and highlighted.
As for a voluntary liquidation proceeding, this will only be available if the company is solvent and the shareholders have decided at a general meeting that the company shall enter into liquidation. All assets will be sold, the debts and commitments will be paid off and wrapped up and the company as a legal entity will cease to exist. As in the case of bankruptcy, the directors will have to give up control of the company, but instead of a board of directors, a liquidator will be appointed to wind up the company.
Commencing Statutory Proceedings
Both a voluntary liquidation and a bankruptcy proceeding are commenced by application. To commence a voluntary liquidation proceeding, the company applies to the Swedish Companies Registration Offices. To have a company declared bankrupt, the company or a creditor files an application with the district court.
When a company has been declared bankrupt, if the assets of the bankruptcy estate are extensive enough to allow distribution to unsecured creditors, a lodging of claim proceeding will be commenced. This procedure is court-driven and all creditors must file their claim with the court. The receiver and all creditors who have filed a claim will then be able to challenge any claim they consider to be incorrect in any way. If a claim has been challenged this will be handled at a hearing in the court and the claim will finally be confirmed or rejected.
When a company has gone into liquidation, the liquidator shall determine the known creditors and issue a summons to unknown creditors to be published in the official gazette (Post- och Inrikes Tidningar). Any unknown creditors must contact the Swedish Companies Registration Office within six months of the summons for their claim to be recognised. Any claim brought forth by an unknown creditor after that period is precluded from the proceedings.
If at any point in voluntary liquidation the company is insolvent, the liquidator must apply for the company to be declared bankrupt.
There are no specific rules precluding contingent claims from being recognised in bankruptcy or liquidation.
A bankruptcy proceeding and a voluntary liquidation proceeding can be commenced at any point in time as soon as all formal requirements have been fulfilled.
Once a company is declared bankrupt the financial situation is “frozen”. Title to all assets passes automatically to the bankruptcy estate, which is administered by the receiver. All property belonging to the company and accrued during the bankruptcy is included in the estate. The receiver’s first task is therefore to take control and secure all assets belonging to the company on the day it was declared bankrupt. The court will schedule a meeting approximately one month from the day of the bankruptcy at which the directors of the company are to swear an oath to confirm the estate inventory. The estate inventory is prepared by the receiver and should be filed with the court one week prior to this meeting. Within six months of the company’s bankruptcy the receiver is to prepare and submit the receiver’s report which includes information about the company prior to the bankruptcy as well as an analysis of why the company became insolvent.
In solvent liquidation, the six-month period for unknown creditors to state their claims against the company must be observed, meaning that the liquidation cannot be completed before that period has expired. When the six months have expired and all known debts have been paid, the liquidator shall distribute the remaining assets.
There are no expedited proceedings.
Claims against the bankrupt company can be traded at any point during the ongoing proceedings. A transfer of a claim should be communicated to the bankrupt company. The same applies in a solvent liquidation.
Moratorium or "Stay" on Proceedings
If there are ongoing legal proceedings against the company at the time of bankruptcy these will continue. However, the receiver can decide that the estate should enter the proceedings in the company’s stead. In a solvent liquidation there is no stay of legal proceedings.
The purpose of a bankruptcy is to wind up the company and its business and the business is not therefore normally continued after the bankruptcy. If the receiver deems that it will be favourable, the business can be kept going in order to ensure that it can be sold as a going concern.
The purpose of liquidation is also to wind up the company. The business may nevertheless continue operating during the liquidation and the liquidator may decide to keep the management and directors on at that stage (but not members of the board, who will have been replaced by the liquidator). The liquidator may not take any measures which keep the business going for any longer than necessary for winding up.
Rejecting or Disclaiming Contracts
The bankruptcy estate has the right, but no obligation, to enter into any of the company’s former agreements. The deciding factor should always be whether it is in the best interest of the creditors to enter into an agreement. If the bankruptcy estate enters into an agreement, the bankruptcy estate is bound to respect the obligations under that agreement.
A company may not reject or disclaim a contract solely on the grounds that the company has entered into liquidation.
A creditor with a claim towards a company in bankruptcy can still exercise the right of set-off provided that the claim and counterclaim meet the fundamental conditions of set-off and that the counterclaim was not acquired for the purpose of putting the creditor in a better position than they were previously.
Creditors may exercise rights of set-off towards companies who have entered into liquidation under the same conditions as they may towards companies who have not entered into liquidation.
Information Made Available to Creditors
As many aspects of bankruptcy proceedings are court-driven much of the information available to creditors will be public documents such as the estate inventory, the receiver’s report and all claims made during the lodging-of-claim process.
In a solvent liquidation, certain information will be public, such as the company’s known creditors and the liquidator’s final report.
Conclusion of Statutory Proceedings
The Rights of Priority Act contains rules for the order in which different creditors will receive payment (see 5.1 Differing Rights and Priorities). If the estate has funds to make a distribution to unsecured creditors, this will be conducted by a lodging-of-claim proceeding. This is a court-driven proceeding where all creditors will be able to state their claim. Once the deadline (decided by the court) has passed, the receiver will review all claims. If any claim is disputed there will be a court hearing where the claim can finally be settled.
In a solvent liquidation, where all known debts have been paid and the six-month period of the summons to unknown creditors has expired, the remaining assets shall be distributed to the shareholders. The liquidator shall prepare a final report containing, inter alia, a management report and a description of the distribution of assets. The company’s auditor will present an auditor’s report and the reports will be presented to the shareholders at a general meeting.
In a voluntary solvent liquidation, the liquidator replaces the board of directors and is the sole person authorised to dispose over the assets. The liquidator can do this without any formal restrictions and has in principle the same mandate as the board of directors.
The official receiver normally executes sales of assets in a bankruptcy proceeding but must, when a sale is deemed to have a major impact on the creditors, consult with the regulator and major creditors affected. Furthermore, there are some exceptions set out in the Bankruptcy Act where the sale may, under certain conditions, be executed by a creditor, but these are limited to pledged collateral in the possession of a creditor or third party and the sale of mortgaged real estate. In addition, the Swedish Enforcement Authority may under some conditions handle sale of assets by public auction, but this seldom occurs and mainly when jointly owned real estates are sold involuntarily.
When an asset is sold by the Swedish Enforcement Authority at a public auction, the purchaser normally acquires good title in a sale, free and clear of claims. There are, however, exceptions such as encumbrances, which are usually known and of which the buyer is usually aware, and this is reflected in the price. When the purchase is made directly from the estate, the purchaser does not automatically gain protection from third parties that can prove a better claim.
It should also be noted that when an entire business is sold, a charge in the business will under certain circumstances follow the assets even though these are transferred to a new owner.
When a sale is made, creditors can bid without any limitations; when selling assets to closely related parties, the regulator is normally heard as well as the major creditor.
Under certain circumstances, it is possible to conduct pre-pack sales (provided the rules under the Bankruptcy Act and the Rights of Priority Act are followed) but pre-pack sales cannot formally be authorised in advance by the court or the receiver. Pre-pack transactions are therefore at risk of being set aside.
There are no formal rescue plans drawn up in a voluntary liquidation or in a bankruptcy. In a restructuring, if the restructuring plan is not followed during the proceeding, this may affect how the creditors vote in a composition, but the plan itself is not binding. The court will, before reaching a decision to prolong the proceeding, ask the creditors how they stand on the question, and failure to comply with the restructuring plan may affect the position of the creditors and thus the court’s decision.
The investment or loan of new money to a bankrupt is rather rare. Any such loan will be considered a loan taken by the bankruptcy estate as opposed to the company. Before any dividend can be paid to the company’s creditors, all costs and loans taken by the estate must be settled.
In a solvent liquidation, the priority of new money will be determined in accordance with the same rules that apply outside of liquidation (see 5.1 Differing Rights and Priorities).
For information about how new money is treated in a formal restructuring, see 6.10 Priority New Money.
There are no insolvency proceedings that can be utilised to liquidate a corporate group on a combined basis. The normal procedure when liquidating a corporate group is to have the same administrator appointed in order to achieve administrative efficiency.
In voluntary and involuntary liquidations, there is no formal basis to appoint a creditors’ committee.
In formal restructuring, however, a creditors’ committee may, following a request from a creditor, be appointed by the court. The administrator must discuss material decisions with the committee, but the committee is only consultative. The members of the committee do not get paid for their work and their expenses are not covered.
In involuntary liquidations, the Bankruptcy Act stipulates restrictions or formal procedural rules for certain types of assets. A company under formal restructuring may not sell any assets without the consent of the administrator. There are no formal restrictions in voluntary liquidations. No court permissions are required in any of the proceedings.
Sweden recognises international insolvency proceedings under the EU Insolvency Regulation and the Nordic Insolvency Treaty. Involuntary liquidations and official receivers in jurisdictions other than the EU and the Nordic countries are not recognised in a way that such proceedings stay the possibility of opening proceedings in Sweden, nor are assets located in Sweden ring-fenced by such a proceeding, meaning Swedish parallel or competing proceedings may be opened.
As Sweden is a member of the EU, the Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings applies. The EU Insolvency Regulation contains specific co-ordination obligations.
The EU Insolvency Regulation and the Nordic Insolvency Treaty have sections on jurisdiction which rule when and in which state an insolvency proceeding may be commenced. The guiding principle of these rules is that the “centre of business” controls jurisdiction.
Foreign creditors are regarded as equal to Swedish creditors in relation to insolvency proceedings in Sweden.
In a voluntary liquidation, a liquidator is appointed.
In a bankruptcy proceeding, an official receiver is appointed. Should it be necessary, several official receivers may be appointed. This is often the case where there is a conflict of interest for the main official receiver in respect to a specific creditor in the bankruptcy.
In a formal restructuring, an administrator is appointed.
A liquidator is appointed to wind up a company in a voluntary (solvent) liquidation. The liquidator replaces the board of directors and any other managing director in place. The liquidator is the sole person authorised to dispose over the assets and can do this without any formal restrictions and has in principle the same mandate as the board of directors. The liquidator’s responsibilities are similar to those of the board of directors, the main difference being that the company shall be wound up. A liquidator may be held personally liable for the company’s debts or taxes, under the same conditions as the board of directors. Their duties include applying for a summons to unknown creditors to be published, preparing annual reports, liquidating assets, and submitting a final report on the liquidation process. They have a fiduciary duty towards the shareholders and the creditors of the company. If the company is insolvent, the liquidator must apply for the company to be declared bankrupt. The liquidator reports to the shareholders.
An official receiver is appointed to wind up a company that has been declared bankrupt. The receiver assumes full and sole control over the business and all assets of the debtor. If the receiver decides to continue the business during the proceedings, they may let management or key personnel stay in place to run the business, but this will always be on instructions from and under the supervision of the receiver. 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 their 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 regulator.
The district court, together with the regulator, has a supervisory role and will rule on any disputes during the proceedings and will eventually approve the costs of the proceedings (receiver’s fee) and how the surplus is distributed among the creditors.
An administrator in formal restructuring enjoys the confidence of the creditors and as a result, the administrator is not typically appointed as a board member or director. Also, the appointment of an administrator in a formal restructuring does not cause the board of directors or management to lose their legal capacity. This can be compared to a bankruptcy where the official receiver represents the estate.
In voluntary liquidation, the proposed liquidator is usually formally appointed by either a court or the Swedish Companies Registration Office. A liquidator can be proposed at the general shareholders’ meeting when the company decides to enter into liquidation.
A liquidator may resign or be dismissed if they are not deemed suitable for the assignment. The court or the Swedish Companies Registration Office will in that case dismiss the liquidator upon application of the office itself, the liquidator, a shareholder or any party affected by the liquidation. A decision to dismiss a liquidator must immediately be followed by a decision to appoint a new liquidator.
In bankruptcy, an official receiver is appointed by the district court in conjunction with the bankruptcy decision. A debtor or creditor may propose a receiver to the court in the application for bankruptcy. If there are competing proposals, the receiver favoured by the creditors will generally be appointed. If no receiver is proposed, the court will appoint a receiver known to the court.
A receiver may be relieved of their duties by the court if deemed unsuitable, upon application of a creditor or the regulator. The receiver may be deemed unsuitable if subject to a conflict of interest or following deficiencies in the management of the bankruptcy estate.
In formal restructuring, the court appoints the administrator proposed in the company’s application to enter restructuring. The administrator should have the confidence of the creditors. The administrator may be relieved of their task by the court if deemed unsuitable, upon application by the administrator, a creditor or the company.
Interaction of Statutory Officers with Management and Directors
In voluntary liquidation, the liquidator replaces the board of directors and will thus interact with the company’s shareholders rather than company management. However, the former board of directors generally provides the liquidator with information during the liquidation, especially in the early phase.
In bankruptcy, the board of directors of the debtor is obliged to provide the official receiver with any information regarding the debtor required by the receiver. Should they not comply with this obligation, they may be detained by law enforcement.
In formal restructuring, the administrator acts as a qualified adviser to the company and advises the company during the ongoing restructuring. The administrator must consent to certain important decisions, such as the sale of assets crucial to the company’s operations.
Who Can Serve as a Statutory Officer?
A liquidator is suitable for the task of liquidator. If the company’s most recently submitted annual report has been audited, a member of the board or a shareholder can be appointed as liquidator. In those instances, there must be no obvious deficiencies in the company, nor can there be grounds for involuntary liquidation. The liquidator is subject to the same rules regarding conflicts of interest as a member of the board, meaning that it would be unlikely that a creditor would be considered suitable for the task.
An official receiver needs to have the special insight and experience required for the task and also be suitable in other respects. An employee of a court may not be an official receiver. Anyone who has such a relationship with the debtor, a creditor or someone else that it is likely to undermine confidence in their impartiality in the bankruptcy may not be appointed as an official receiver. This also applies if there are other circumstances in which confidence in the receiver's impartiality may be undermined. Before the court appoints a receiver, the regulator is to be heard. This requirement is met by the courts by listing approved receivers known to the court, from which a receiver is appointed in each bankruptcy where no proposal has been made. A creditor, creditor representative, owner, officer or director may not serve as an official receiver.
An administrator in a formal restructuring must have the special insight and experience required for the task, have the creditors’ trust and be suitable for the task in other respects. There is no equivalent to the listing of official receivers known to the court.
The statutory requirements for liquidators, official receivers and administrators in formal restructuring have reference to the capacity of the persons involved rather than their formal qualifications, such as education. In theory, a restructuring professional, attorney, accountant or other professional may serve as an officer in the different proceedings. In practice, however, only attorneys are eligible to act as official receivers, whereas the liquidators and administrators in formal restructuring may be chosen from a wider cohort of professionals.
The type of advisers employed depends on what type of insolvency proceeding is at hand.
For an informal restructuring, it is solely up to the company and the creditors to agree on what expertise is needed. Attorneys, accountants, investment bankers, financial advisers and management consultants are all commonly used in informal proceedings to negotiate, evaluate the company’s assets and reorganise the business structure. If an injection of new money is needed, investment bankers and/or private equity firms are often involved.
In formal insolvency proceedings, the court will appoint an administrator. The restructuring administrator and the official receiver have slightly different roles within the formal proceeding (see more under the preceding sections 9.2 Statutory Roles, Rights and Responsibilities of Officers and 9.3 Selection of Officers).
Official receivers are attorneys who are specially licensed to act as official receivers. It is not uncommon for the receiver to employ financial advisers or auditors to review the company’s books.
For restructuring administrators there are no formal requirements other than the person appointed having “the necessary knowledge and competence”. In most cases an attorney is chosen, as this grants legitimacy to the proceeding and is often demanded by creditors as a condition of their support for the proceeding. The company and the administrator can also engage other professionals, such as financial advisers or private equity firms, if this is deemed to be needed in order to reconstruct the business.
Any advisor employed by the company on a voluntary basis is reimbursed by the company in accordance with the agreement between the parties.
Restructuring administrators are also reimbursed by the company but their fee may be determined by the court if this is requested by the parties.
An official receiver is reimbursed from the estate. However, should the estate be unable to cover the receiver’s fees, the state will cover any additional fees. The fee is determined by the court.
No specific authorisation is required to employ an adviser that has not been appointed by the court.
A bankruptcy administrator’s main purpose is to realise any business assets and ensure all creditors are treated fairly during the proceedings.
A restructuring administrator also has a duty to ensure all creditors are treated fairly.
In the case of an involuntary or voluntary liquidation, or a formal restructuring proceeding, the proceedings will take place in the general courts of Sweden. In the case of an informal restructuring, there is no mandatory legislation and thus the parties may decide where and how to settle their dispute.
The courts do not have any tools to order mandatory arbitration. The court does, however, have a general duty to attempt to mediate between the parties before the case is heard.
The bankruptcy estate is considered as its own legal entity, which means that an agreement between a company which declares for bankruptcy and a third party is generally not binding for the estate in questions of real rights, recovery and non-contractual obligations. For contractual disputes, a pre-insolvency agreement to arbitrate should normally be upheld.
A restructuring proceeding does not affect the enforceability of a pre-insolvency agreement to arbitrate.
If the parties have not agreed otherwise, the Swedish Arbitration Act applies to arbitration proceedings. This law was revised in 2018 and the changes have been in force since March 2019. The parties may also agree that non-legislative rules, such as the SCC (Stockholm Chamber of Commerce) Arbitration Rules, should apply to their arbitration proceedings.
If the Swedish Arbitration Act applies, a dispute is heard by three arbitrators. Two of the arbitrators are appointed by the parties, with each party selecting one arbitrator for the panel. The two arbitrators chosen by the parties then appoint the third arbitrator.
There are no specific requirements that an arbitrator needs to fulfil. The only limitations are that the person must be over 18 years old and have full legal capacity.
Under certain circumstances a director is liable for the company’s debts, eg, any shortage in connection to a value transfer executed in breach of law, or unpaid taxes and damages caused in the course of their work as director. Under Swedish law, the board of directors is to draw up a balance sheet for liquidation purposes if they believe the equity of the company may fall below 50% of the registered share capital. The balance sheet should be reviewed by the company’s auditor. If such a balance sheet shows that the equity is less than 50%, the company should convene a shareholders' meeting. Such a meeting may open a voluntary liquidation or continue the business for another eight months. If the board fails to comply with this process in any respect, the directors become liable for any new debt accrued. In this respect, they may be personally liable for the company’s pre-insolvency obligations and, furthermore, for deepening the insolvency of the company.
How Financial Distress/Insolvency is Determined
The measure applied to determine financial distress in the context of personal liability for the company’s new debt is that the equity of the company has fallen below 50% of the share capital.
The measure of determining insolvency in the context of liability for damages following crimes against creditors is the same as the statutory requirement for commencing bankruptcy proceedings, ie, insolvency is the inability of the debtor to pay its debts as they fall due and such inability is not merely temporary.
Duties in Relation to Creditors
A director is elected at the general meeting of the shareholders but owes duties to the company and shall act in the best interests of the company and prevent it from suffering loss, harm or damage.
A director has a duty and responsibility to treat all creditors (of the same level of priority) equally and not to favour a particular creditor if the company is insolvent or in danger of becoming insolvent.
Duties to Owners/Shareholders/Subsidiaries etc
A director may be held liable for damages caused, intentionally or negligently, in the performance of their duties, to a shareholder or others because of a violation of the Swedish Companies Act, applicable annual reports legislation or the articles of association of the company in question.
There are, furthermore, specific rules protecting minority shareholders, inter alia, the right to convene shareholders’ meetings, which must be observed by a director. There are no specific duties owed to affiliates or subsidiaries.
Pursuant to the Swedish Penal Code (1962:700), a director can be liable for crimes against creditors. A director who has committed a crime against creditors under the Penal Code may be disqualified from carrying on business.
In a bankruptcy proceeding, a claim for damages against a former director can be pursued either by a creditor or the official receiver as a representative of the insolvent entity. The restrictions on creditors to claim damages are set out above in 12.1 Duties of Directors.
Chief restructuring officers (CROs) are rarely appointed in Sweden, although companies sometimes choose to make board changes in preparation for, or as part of, a restructuring. The administrators in formal business reorganisation often act as advisers to the board, which is why few companies see the need to include a CRO as well. In most cases, the closest equivalent to a CRO is therefore the administrator.
The concept of shadow directorship does exist under Swedish law. Creditors can potentially become shadow directors, but it is more likely that a shareholder would be considered a shadow director. In order to be considered a shadow director, a person must have provided instructions to the elected directors which have been followed by the elected directors in such a way that a pattern has been established. Shadow directors are subject to the same duties as elected directors, and the potential liabilities are the same as for elected directors.
A shareholder is liable for damages caused to a creditor if the shareholder has participated, intentionally or through gross negligence, in any violation of the Companies Act, the applicable annual reports legislation or the company's articles of association. The scope of the shareholder’s potential liability is therefore much narrower than that of a director.
Examples of historical transactions that may be set aside include:
See 13.1 Historical Transactions.
In almost all cases, it is the receiver that pursues claims of recovery. If the receiver is not willing to do this, a creditor may do this on behalf of the estate, but this rarely happens. However, depending on the financial status of the estate, it is quite common that creditors grant the estate a guarantee for litigation costs.
Recovery claims can be brought in both restructuring and insolvency proceedings, but not in voluntary liquidations.
Valuations are used in many situations (eg, for identifying insolvency, for identifying the so-called “fulcrum creditor” having the economic interest or “value-break”, for validating sales by insolvency office holders, for validating release provisions in intercreditor agreements, for comparing returns of creditors to those in an insolvency, and for validating pre-packs).
Valuations for the purpose of identifying insolvency are often done when a creditor files for bankruptcy and this is being contested by the debtor. In formal or informal restructurings, valuations can be used for the purpose of deciding fulcrum creditors and for deciding voting rights. Valuations are often used for the benefit of proving duty of care in an enforcement of pledge. Valuations can also be used to legitimise a sale of assets or another transaction made prior to the commencement of a formal proceeding in order to protect the transaction from being set aside by an administrator or official receiver.
As mentioned in 14.1 Role of Valuations, a valuation can be initiated for various reasons and the situation would decide which party has the onus or the most interest in having the valuation done. For eg, in a pre-pack, a valuation would be initiated by the debtor, whereas in a pledge enforcement situation, it would be initiated by a creditor. Which party initiates the valuation when determining a fulcrum creditor, would depend on whether the debtor is questioning the alleged value of a secured asset, or the creditor is questioning the value set by the debtor and the administrator.
The jurisprudence on valuation is fairly developed in respect of insolvency proceedings, as valuation is relevant on several occasions during the proceedings.
All methods of valuations can be used. Whether liquidation analysis or going-concern analysis is used would depend on whether valuing the asset as a going concern is permitted. If the relevant company is considered insolvent, a going-concern valuation is not allowed. Other valuations would normally be an overall balanced value of several methods (for eg, a peer group analysis, discounted cash-flow valuations and LBO valuations).
It would be prudent in certain situations for officeholders to undertake their own valuation process.
If the valuation in question is sensitive and it is obvious that it will be challenged, a full-scale M&A process testing the market will constitute obvious proof of the market value and thus be difficult to challenge.
There are no requirements as to how forward-looking a valuation should be.