Restructuring and insolvency law in Sweden

Restructuring

Formal procedures

Swedish legislation offers two different formal procedures for insolvent companies:

• Company Restructuring: mainly regulated by the Act on Company Restructuring (SFS 2022:964) (“ACR”) which implements the Restructuring and Insolvency Directive (EU 2019/1023)
• Bankruptcy (addressed here under the heading Insolvency): mainly regulated by the Bankruptcy Act (1987:672) (“Bankruptcy Act”).

Both proceedings are also subject to international Conventions, The European Insolvency Regulation (2015/848) (“EIR”) and the Nordic Bankruptcy Convention of 1933 (“Nordic Bankruptcy Convention”).

Bankruptcy offers the possibility to save the business of a company, even if the entity will be liquidated as a result of the proceeding. It is therefore common in Sweden to use a bankruptcy proceeding to restructure the company’s operations by having the business, or viable parts thereof, transferred by the bankruptcy estate to a new company.

Alternatives

The alternative to a Company Restructuring under the ACR is a voluntary out-of-court arrangement. Such arrangements are not covered by the ACR and require agreements with each concerned creditor.

A petition to open a Company Restructuring shall be filed with the relevant District Court by the debtor or by a creditor. In practice it is the debtor who initiates this proceeding since an application by a creditor may be granted only with the debtor’s consent.

There is only one formal restructuring procedure under Swedish law, which is the one regulated by the ACR. The overall objective of a Company Restructuring is to restructure the business of an insolvent company without bankruptcy. A restructuring procedure under the ACR can only be used if the debtor cannot pay its debts, or if such inability will occur within a short time; or when the debtor is having financial difficulties in some other respect which entail a risk of insolvency. It must also be demonstrated to the court that there is a good chance that the viability of the business can be secured through a restructuring.

The Company Restructuring is a “debtor in command” proceeding, so the Board of Directors continues to represent the company and the debtor retains the right of disposition over its assets. However, at the opening of a Company Restructuring, the District Court will appoint an Administrator (an insolvency practitioner) to supervise the debtor’s business to ensure that e.g. the provisions of the ACR are followed and to negotiate with the creditors. For certain significant transactions, the Directors must obtain the Administrator’s approval.

During the proceeding, all enforcement actions against the company with the aid of the court or the Enforcement Authority are stayed (except for enforcement due to certain pledges), hence a decision by the court to open a Company Restructuring gives the debtor company – with a few exceptions – bankruptcy protection.

Furthermore, the debtor company is – with some exceptions – granted the right to prematurely terminate long-term agreements entered into before the Company Restructuring with the consent of the Administrator and subject to a 3-month notice period. The damages resulting from such a premature termination will be treated as a pre-restructuring debt and may thus be subject to write-down in a restructuring plan.

Debts incurred before the opening of the Company Restructuring cannot be settled during the proceeding, but must instead be handled in the restructuring plan which the company is required to draft in collaboration with the Administrator. The restructuring plan serves as the primary instrument during the course of the Company Restructuring.

A Company Restructuring procedure lasts for 3 months but may be extended by the court for further 3-month periods up to a maximum of 1 year. However, if the court has decided on a negotiation to adopt a restructuring plan, the procedure may be extended to a maximum of 15 months.

In a bankruptcy procedure (see below), creditors will receive dividends based on the priority of their claims in accordance with the Priority of Rights Act. This Act distinguishes between:

• creditors with a specific right of priority
• creditors with a general right of priority
• non-priority creditors.

However, unlike during bankruptcy proceedings, there is no established order of payment under the ACR. Rather such payment order shall be presented in the restructuring plan. In practice, however, to a large extent the same order will also apply in restructurings in order to get the plan approved and adopted by the creditors. 

When voting to approve the restructuring plan, the creditors are divided into groups. The classification of groups, according to the law, should be done as follows:

1. Creditors whose claims are associated with preferential rights, security rights (such as liens and pledges), or set-off rights
2. Creditors with public law claims (mainly the Tax Authority), if the claim is not of the type referred to in 1 or 3
3. Creditors with subordinated claims
4. Creditors with claims other than those referred to in 1–3 (unsecured claims)
5. Shareholders or others with an ownership interest in the debtor or the debtor’s operations.

Parties within a group may, in turn, be further divided into additional groups if justified based on having equivalent interests. Affected parties in the same group should be treated equally. Affected parties in different groups could receive different settlements. A creditor with security for only part of the claim can participate in and vote in more than one group.

Insolvency of a company does not trigger an obligation on the Board of Directors to file for insolvency proceedings or take other similar action. However, insolvency does trigger prohibitions against certain actions, the violation of which can impose liability on the Directors. There are also certain situations, often connected to insolvency, in which the Directors need to act (e.g. a set of rules in the Companies Act for the situation where a company has insufficient equity).

Personal liability can be incurred by Directors to the company (i.e. the bankruptcy estate) and/or to creditors in certain situations, including for example:

• for negligent actions, a breach of the Companies Act (including supporting unlawful distributions) or 
• for a criminal offence (liability to the company and/or creditors)
• for unpaid taxes due prior to the bankruptcy (liability to the state), or
• for debts arising when the equity of the company is insufficient and certain formalities in the Companies Act are not adhered to (liability to a creditor or creditors).

The Board of Directors continues to manage the company. The Directors must however obtain the Administrator’s approval for certain significant transactions. An additional responsibility of the Board of Directors during a Company Restructuring is to seek solutions for the company to regain solvency and for the business to remain viable, and to draft a restructuring plan that creditors can approve.

Shareholders do not have any specific responsibilities. Their right may however be affected by the restructuring plan, e.g. ownership could be diluted through a debt-to-equity swap if such a proposal is included in a restructuring plan which is subsequently approved.

There are also rules whereby shareholders may be jointly and severally liable for obligations incurred by the company, e.g. in certain situations where the equity is below 50 % of the registered share capital. These rules, however, apply regardless of whether a Company Restructuring is opened or not and are not specific to such proceeding. 

Insolvency

Insolvency proceedings are mainly regulated by the Bankruptcy Act or the ACR. Both are considered to be insolvency proceedings and are also subject to international Conventions, the EIR and the Nordic Bankruptcy Convention.

A petition for bankruptcy is filed with the district court by the debtor or by a creditor.

In the Bankruptcy Act “Insolvent” is defined as the debtor being unable duly to pay its debts, and that this inability is not merely temporary. Whether this inability is just temporary must be assessed based on the circumstances of each individual case, such as the industry in which the debtor operates. However, considering the interests of the creditors, prolonged inability to pay should not be accepted.

In practice, a statement of insolvency by the debtor is sufficient. The court will immediately declare a company bankrupt if the petition is filed by the company itself. If the petition is made by a creditor, the court will summon the debtor to a hearing to consider the petition. The creditor must prove that the debtor is insolvent. There are certain situations where the debtor is presumed to be insolvent. Accordingly, in these situations the debtor will have to break the assumption and prove itself solvent.

While there are different types of insolvency proceedings, bankruptcy is the only winding-up procedure aimed at liquidating and dissolving the legal entity. The objective of a bankruptcy is to close down the insolvent company, sell all its assets and distribute the proceeds in accordance with the Priority of Rights Act.

When a debtor has been declared bankrupt, all property owned by the debtor at the time of bankruptcy, or acquired during the process, and which is capable of being seized, is included in the bankruptcy estate.

The District Court appoints a Trustee. This appointment is valid for the whole liquidation process. The task of the Trustee is to realise the assets and distribute as much of the bankruptcy estate’s funds as possible to the creditors.

The Trustee will work independently and with few formal limitations. There is no creditor committee for them to report to (as in a Company Restructuring), and they do not need the approval of the court or anyone else before taking decisions on, for example, the sale of a business. The Trustee is, however, obliged to consult with secured creditors before taking decisions that may materially affect them.

If there are funds available for distribution, creditors will receive dividend in accordance with the Priority of Rights Act. This Act distinguishes between:

• creditors with a specific right of priority: e.g. security holders with a security in specific assets, for example:
  • registered liens over real estate and certain other types of assets (e.g. ships and patents)
  • pledge over receivables and other claims (by notification to the debtor)
  • floating charge
  • levy of execution upon property affords a right of priority in such property
• creditors with a general right of priority, for example:
  • bankruptcy filing costs
  • claims with a first priority right due to a prior Company Restructuring, the administrator’s fees, auditors’ and accountants’ fees
  • salaries not covered by state guarantee (to some extent)
• non-priority creditors : all unsecured creditors including, for example,  
  • taxes and fees, suppliers, landlords (for rent) and shareholders for regular shareholder loans. Non-priority creditors receive dividends only after secured or prioritised creditors have been fully compensated for their claims. 

Yes, it is an option. Nonetheless, if a liquidation is initiated and it turns out that the company cannot settle its debts by payment or by an agreement with one or more creditors, the liquidator will need to file for bankruptcy. 

Financial restructuring from the creditors’ perspective

Lenders who do not own any shares in the company have to rely on the rights given to them in the loan agreement. If a lender’s requirements exceed what is stipulated in the loan agreement, the lender has to rely on negotiating with the borrower to increase their insight in the company’s financial situation, such as requiring the company to regularly provide more detailed financial information. If a borrower refuses to provide documents that they are obliged to provide according to the credit agreement, or if there are other events of default under the loan agreement which would lead to a litigation, there is a possibility to request attachment in court.

If the lender is also a shareholder (and holds 10% or more of the shares) in a Swedish limited company, the lender can use a rule intended to protect minority shareholders and require the appointment of a minority auditor or “general examiner”. A general examiner shall investigate whether the company’s operations have been conducted in an expedient and, from a financial perspective, satisfactory manner and whether the company’s internal controls are sufficient.

With respect to legal risks, under Swedish law there is no creditor’s liability. By lending money to an insolvent company, the creditor will incur no liability beyond the risk of losing the money lent.

However, a situation of recovery (clawback) may arise if the creditor has received new security for old debts. In order to avoid recovery, it is required that the security was agreed upon at the time of the debt’s origin and that the security is perfected when the loan is paid out. This rule does not apply when security is provided by a third party, and an exchange of security is normally not recoverable provided that the exchange has not caused any disadvantage to the creditors in the debtor company.

During a Company Restructuring the ACR differentiates between:

• New Funding: claims assignable to new funding are claims included in an adopted restructuring plan. New funding will have a “first priority right” in a subsequent bankruptcy to the extent and for the time specified in the plan. This first priority right has priority over unsecured claims and over claims with a floating charge security.
• Interim Funding: this is funding needed to be able to operate the business during the Company Restructuring and before a restructuring plan is adopted. Interim funding will have a first priority right if agreed with the Administrator. However, this first priority right is limited in time and ceases when the restructuring plan is adopted, or if the plan is not confirmed, 3 months from the decision that the Company Restructuring is to be terminated. Typically, these transactions are not seen as void in a subsequent bankruptcy.

New funding provided during a voluntary, out-of-court arrangement will not be granted a priority right and is treated as regular funding. 

Non performing loans

NPLs may be transferred through assignment. This involves a case-by-case transfer and normally no formal requirements are needed for an assignment to be valid. Although notification may not always be legally required, it is typically required to ensure that the assignment is legally protected against the assignor’s creditors as the debtor can still settle the debt by paying the assignor until they are notified.

If there is such a prohibition on assignment, it may be possible to arrange a sub-participation (unless the agreement also prohibits such an arrangement) where the lender transfers the risk to another financier without changing the contractual relationship with the borrower. In such a case, the original lender will still be the contractual party of the borrower while the risk lies with the new financier.

A one-off purchase of an NPL does not require a licence, but purchasing NPLs as part of a business may qualify as providing financial services under Swedish law. An entity incorporated in Sweden, or a branch office of a foreign company in Sweden regularly performing such business, may require registration with the Swedish Financial Supervisory Authority. Registration is not needed if the company is already authorised under a financial law.