Practice Overview - Restructuring / Insolvency
Contributed by Cirio Advokatbyrå
In 2019, the market showed clear indications of a slowdown. Thus, going in to 2020 many financial institutions adopted a more cautious approach.
In March 2020 the spread of the COVID-19 virus in Sweden abruptly escalated the downward trend. Government restrictions and a great change in consumer behaviour greatly affected and are still greatly affecting the Swedish market and many business sectors. Even though Sweden adopted a more cautious and more situation-based lock-down strategy than many other countries, recommendations and regulations from the government have made the public more hesitant to visit retail stores, restaurants and public events.
Although the number of bankruptcies increased during the first half of 2020, the second half of 2020 saw a steep decrease of bankruptcies, resulting in an overall slight decrease of bankruptcies during 2020 compared to 2019. The main reasons for this are a combination of governmental support, low interest rates and individual actions taken by the companies affected.
In March and April, the quick spread of COVID-19 led to dramatic and fast changes in consumer behaviour, which resulted in a number of retail chains seeking bankruptcy. Among these were MQ, Joy, Flash and Dea Axelsson, all brands which date back many decades and had stores and customers all over Sweden. The bankruptcy of MQ was the largest bankruptcy in Sweden during 2020, both in terms of turnover and number of affected employees. Notable for this bankruptcy is not only the size of the business but also that the official receiver successfully sold the business within a month of the bankruptcy, thereby saving a number of jobs.
Even though the businesses' hardships are not reflected in the bankruptcy statistics, the number of formal court lead restructurings more than doubled in 2020, compared with 2019. Also notable is that the number of restructurings opened in 2020 was an all-time high. The previous “record year” was 2009 during the financial crisis.
One notable restructuring case in the travel and leisure industry during 2020 was the restructuring of BIG Travel Sweden group, one of Sweden’s largest business travel agencies. Cirio led the restructuring as court appointed administrator, and the case was recently successfully completed following a broadly accepted debt composition.
As in most countries (and as the examples above show), industries like the retail, travel, event, hotel and restaurant sectors have taken the hardest hit during the COVID-19 pandemic. As of January 2021, the restrictions on restaurants and bars to serve alcohol past 8 pm, which the government introduced in late 2020, are still in place, which means the restaurant sector is still struggling and most of the individual cases are a matter of financial endurance.
To soften the impact for businesses and employees due to COVID-19 the government has presented crisis packages of loans and subsidies. However, going into 2021, there is a worry amongst businesses that the funding will be "too little, too late."
The pandemic has also had an impact on unemployment, with the preliminary unemployment rate for 2020 expected to be 8.5% compared to 6.8% during 2019 even with the governmental support for temporary part- or full-time layoffs. The numbers are expected to increase during 2021 when the governmental support ceases, and some sources have estimated an increase to approximately 9%.
The current Swedish legal framework for informal and formal insolvency procedures is stipulated primarily in the following regulations:
• Bankruptcy Act (1987:672) (which regulates formal bankruptcy proceedings);
• Business Restructuring Act (1996:764) (which regulates formal restructuring proceedings);
• Rights of Priority Act (1970:979) (which regulates the creditors’ rights); and
• Companies Act (2005:551) (which regulates solvent winding-up proceedings).
In brief, the Swedish bankruptcy proceeding is a winding-up/liquidation proceeding of an insolvent company, whereas a formal restructuring is focused on facilitating the debtor’s survival and continuance of its business. It should be noted though that part of the bankruptcy procedure is to evaluate whether the business is sound and if so, the receiver will strive to sell the business assets to be acquired debt-free by a new company.
The EU directive on pre-insolvency proceedings is likely to be implemented in Swedish law before June 2022, whereby new legislation is expected to take place in the area.
This change is welcomed by the market, as there have been few material legislative changes in the last decades within the area of insolvency and restructuring. The Swedish government has initiated a preparatory committee to draft the necessary changes in Swedish statutory law in order to implement the EU directive. Their findings and suggestions are to be presented during spring 2021.
The current framework for formal restructuring procedures is considered inflexible and, as such, does not include the proper tools to handle more complex restructurings with more than one tier of debt. For larger companies with more complex financing structures, it is therefore uncommon to initiate a restructuring process. In this regard, the EU pre-insolvency directive and the review of the existing restructuring framework is welcomed. The opportunity to introduce a cross-class cram-down regime and to open for debt/equity swaps will most certainly change the dynamics for how workouts and formal restructurings are made in Sweden.