Sweden: New Swedish Legislation on Right of Priority in Bankruptcies

Last Updated: 9 February 2004
Article by Dag Di Meo

The current Swedish right of priority legislation, which is set forth in the Right of Priority Act (SFS 1970:979) was amended on 1 January 2004. The new legislation has been preceded by considerable disunion in the Swedish Parliament with several controversial questions being raised. So what are the reasons for changing the legislation? The overall aims of the new rules are 1) to facilitate business reorganisations without bankruptcy through earlier reorganisations, 2) to strengthen the employees wage protection and through a reduction of special interests in composition negotiations, 3) to abolish the possibility of competition on unequal terms due to the fact that an estate in bankruptcy can continue to conduct the business as a result of the fact that wages are compensated from the wage guarantee, and to 4) focus decisions with respect to loans more on the borrower’s repayment than on security interests.

Current rules

Under Swedish law, creditors possessing security interests in personal or real property are prioritised creditors in the bankruptcy. They possess a preferential right to payment from the security interests. Property subject to security interests cannot be encumbered with expenses of the bankruptcy, other than such as relates to the custody or sale of the property. Creditors with possessory liens, e.g. as a result of a contract for repair, are equated with security interest holders.

Before the other creditors can obtain dividends, the bankruptcy estate’s expenses and liabilities must be paid from those assets in the bankruptcy, which are not encumbered with security interests. Thereafter, the following applies, subject to certain simplifications. Firstly, the assets are applied to the payment of the creditors’ cost for placing the debtor in bankruptcy and the payments of loans, which have been granted during an attempt at business reorganisation prior to the bankruptcy.

Thereafter, certain assets are applied to the payment of not more than three months rent on real property, and after that to claims secured by floating charges. Rights of priority for rent and for floating charges applies to all property presently except, among other things bank balances and cash, negotiable promissory notes, shares and bonds as well as property which can be pledged through registration, such as real estate and ships.

Next, creditors having rights of priority in property on which execution has been levied will receive dividends, if the execution cannot be avoided as a preferred transaction on the grounds that it was carried out less than three months prior to the bankruptcy.

Thereafter, claims for wages which became due and payable not more than three months prior to the granting of the bankruptcy petition or which relate to wages following notice of dismissal pursuant to the Employment Protection Act and claims for holiday compensation for the current and preceding year become payable. Wage claims, which have a right of priority in a bankruptcy, are guaranteed by the State up to a total amount of SEK 100 000 per employee, and where the state has paid compensation pursuant to the wage guarantee, the State is subrogated to the employees’ rights in the bankruptcy.

Finally, the remaining assets are divided among what are commonly referred to as creditors without any right of priority, in proportion to their claims.

New legislation

The right of priority for rental claims is being abolished. This is of course a considerable deterioration for the landlords, since the landlords according to the old rules in most bankruptcies had the best right of priority. To compensate for this, a new provision is introduced in the Right of Priority Act. If a landlord requests that the estate places the premises at the landlord’s disposal, the estate must do so within one month, or else the estate is responsible for the rent until the premises is left. The intention with this rule is to accelerate the process of placing the premises at the landlord’s disposal.

The priority right for floating charges is being converted into a right of priority in 55 per cent of all property. With this alteration, it will not matter whether the accounts receivable of the business are converted into liquid funds immediately prior to a bankruptcy.

The right of priority for tax claims is being abolished. Such proposal has been presented many times, the first time in 1970. However, the Government has constantly opposed such abolition. The main reasons cited have been that the State cannot refrain from giving credit and cannot freely choose its debtors, that the State finances would be detrimentally affected, that the debt collection would become tougher and that tax morals would be affected. The proposal has now been realized, but the State will be compensated as a consequence of the other legislative changes, primarily the conversion of floating charges.

The right of priority for wage claims is restricted to wages which accrued during a period of three months prior to the filing of the bankruptcy petition until one month after granting the petition, subject to a ceiling of ten times the statutory base amount (currently approximately SEK 39 000, i.e. 390 000). These claims and claims for wages following notice of dismissal, which correspond to what is paid pursuant to the Employment Protection Act, i.e. for a period not exceeding eight months, are protected through a State wage guarantee with a ceiling of four times the statutory base amount. The rights of priority for the wage claims dealt with above seldom have significance for the employee. In most cases, all assets are used up for creditors with superior rights of priority and, therefore, the wage guarantee is of central importance. If an employee whose employment has been terminated works for the estate after one month after the granting of the bankruptcy petition, the wages will be paid from the estate without the possibility of utilising the wage guarantee.

The purposes with the new legislation

As stated in the preamble, the primary reasons for the new legislation in this area is to facilitate for certain companies, that have a solid business concept to carry through composition negotiations and avoid bankruptcy. The underlying thought is that the State will have revenues instead of costs by keeping the company alive and the employees as tax payers’. The owners and employees will also profit from this.

Another thought is to strengthen the employee’s wage protection in the bankruptcy by increasing the ceiling for right of priority for wage claims to ten times the statutory base amount together with increasing the ceiling for State wage guarantee to four times the statutory base amount.

The new legislation will also equalize competition between companies that are run by the estate in bankruptcy and other companies. Such competition is unsound, since bankruptcy estates, if they have the possibility to run the company without having to pay wages to the dismissed employees who are compensated from the wage guarantee during their period of notice, could drive ordinary companies out of competition.

Another expectation with the new legislation is that it will contribute to that decisions with respect to loans are focused more on the borrower’s repayment abilities than on security. Bankruptcies and business compositions involve costs for owners, employees, suppliers and the State, which should be avoided through investigation into credit rating based on the ability of reimbursement and on better credit follow-up.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions