SWEDEN: An Introduction to Restructuring/Insolvency

Sweden: Restructuring/Insolvency  

It should be noted that over a period of some years preceding the COVID-19 pandemic, insolvency work and the number of cases have continuously been slowing down, with a low and even decreasing number of bankruptcies and formal court led restructurings. This is the result of a long and generally stable economy in Sweden together with very low interest rates.

As was the case in other jurisdictions globally, Sweden and its companies were hit hard by the COVID-19 pandemic, and in the immediate wake thereof a large number of businesses and several industries have suffered from significant financial losses, which in turn has resulted in an upturn in the number of bankruptcies and restructurings during the spring of 2020. However, governmental aid has proven effective from the summer of 2020, resulting in a below average number of bankruptcies and restructuring cases. During the spring of 2021 the number of formal insolvency cases has increased to normal levels. Depending on how and when the governmental aid is phased out, we expect a high increase in both formal bankruptcy cases as well as company restructurings.

Considering the turbulent year, the overall relatively low increase in bankruptcies has been related to the low interest rates and the various government-funded COVID-19 rescue packages. Whether the measures taken will be sufficient to ensure the survival of the sectors which have been hit the hardest remains to be seen.

In Sweden, the number of companies filing for bankruptcy during 2021 decreased by 10% compared to 2020. This is a decrease from approximately 7,000 bankruptcies in 2020 to 6,900 bankruptcies in 2021. The number of employees affected by bankruptcies was 10,600 in 2021, which represented a 50% decrease decrease from 2020.

The number of granted restructurings between January and October 2021 was 117, which is a decrease compared to the number of granted restructurings between January and October 2020. The number for this period was 265. It is noted that the number of restructurings is lower for 2021 than the pre-pandemic levels of 2019.

The Swedish economy begins to see significant inflation signs. In February 2022 the inflation rate was 4.5%, which was an increase from 3.9% in January. It is still debated whether this is transitory due to temporary increase of energy prices or whether it represents the beginning of an inflation spiral. Due to higher prices on fuel, gas, oil and food products the forecast has changed and many economists now foresee an earlier increase of the repo rate than the former expected increase during the second half of 2024.

The invasion of Ukraine is also expected to further impact the economic climate adversely. There are already signs of decreased risk appetite on the Swedish equity markets.

The deferred tax payments for companies during the pandemic totals up to SEK 50 billion, the repayment of which may create severe problems for many companies in the near future.

From the 1st of July 2021 alterations in the Bankruptcy Act (1987:672) entered into force. The changes are exclusively related to procedural matters in how the proceedings are run. The most significant change concerns the oath administration meeting. The official receiver is from now on responsible for and is also hosting such meetings, which previously took place at the district court. The purpose of the changes is to make the bankruptcy administration more efficient.

In March 2021 a Government Official Report for the implementation of the EU Directive on Pre-insolvency restructuring proceedings was published, which presents a proposal reforming the Swedish Business Restructuring Act (SOU 2021:12) (the “Government Official Report”).

A NEW RESTRUCTURING PLAN – THE MOST CRITICAL CHANGE

• All concerned parties will vote on the adoption of all the legal implications in the entire restructuring plan (as opposed to the current order where the creditors only vote in a judicial composition to reduce unsecured cash claims down to 25 per cent). The restructuring plan will also be binding and have an impact on:

- Shareholders, who can lose their ownership in a debt-to-equity swap or be diluted by actions set out in the restructuring plan (directly enforceable under the Companies Act).

- Secured creditors, who can have the terms and conditions of their agreements and claims on the debtor altered by the restructuring plan.

- The debtor, who will be bound to follow the actions set out in the restructuring plan.

• All concerned parties will be placed in voting classes determined by the criteria “similar interest” (for example secured creditors, suppliers, state creditors, subordinated creditors and shareholders). The restructuring plan will be approved if a majority of 2/3 within each group votes in favour of the plan (both capital/interests (in absolute numbers) and in number of creditors/parties (only counting active votes)).

• The plan may also be approved by way of a cross class cram down even if one or more groups have voted against the plan, provided that:

- A majority of the groups support the plan and

- At least one of such groups holds secured debt, or

- At least two concerned groups that would receive payment in a bankruptcy have voted in favour of the restructuring plan, and

- The class/classes with higher ranking debt always, with some exceptions for extraordinary reasons, receives full payment before a group with lower ranking debt receives any payment at all (the absolute priority rule).

• The concerned parties must end up in a better position compared to an insolvent liquidation of the assets and this shall be ensured by “the best-interest-of-creditors test” which will be tested by court if the restructuring plan is challenged by a creditor.

• From a formal point of view, the debtor determines what actions should be included in the plan. If the plan is turned down the administrator is entitled to present an alternative plan for voting (where effective changes on the shareholder level is more likely). However, if the debtor has less than 250 employees and a turnover below 50 million euros, or a balance sheet total not exceeding 43 million euros, the debtor must always approve the plan before the court can confirm it.

OTHER MAJOR CHANGES

• Pledges over shares in subsidiaries and other pledges cannot be enforced during the proceeding without the consent of the administrator (today the creditor is normally entitled to enforce).

• Restructuring cases will be concentrated to fewer courts.

• Only lawyers who are on a regular basis appointed official receivers in bankruptcy matters may be appointed as restructuring administrators. The Swedish Enforcement Agency will supervise the proceedings and the administrators.

• An extraordinary termination right for long-term agreements is introduced.

• The super-priority right (which ranks above the business mortgage) for temporary restructuring loans will be changed. Also, new financing following the reconstruction proceeding can be granted security in super-preferential rights on terms set out in a reconstruction plan (and will not cease on in the way set out above regarding temporary restructuring loans).

• The act is proposed to enter into force 1 July 2022.