Vol 1 (2004) - Issue 5

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The Swedish Company Reorganization Act

Introduction

In Sweden, businesses facing financial difficulties can be reorganized in a number of ways. The main alternatives are:
- a composition by voluntary arrangement with the creditors;
- a company reorganization (Sw. företagsrekonstruktion), with or without a compulsory composition;
- bankruptcy; and
- liquidation.

Voluntary arrangements are not governed by any specific legislation and therefore do not include any element of compulsion vis-à -vis the creditors.
Bankruptcy proceedings are probably the most commonly used vehicle for reorganization of a business in Sweden. The bankruptcy proceedings are governed by the Bankruptcy Act 1987. In bankruptcy proceedings, the court appoints a receiver to wind up the company. The receiver controls the debtor’s estate fully and assumes all the powers of the board of the debtor. It is the receiver who decides whether the debtor’s assets shall be sold as a going concern or piecemeal.
Liquidation is a less frequently used vehicle for reorganizing a business. This is because it involves the payment of all known creditors of the company in full.
The fourth main alternative is company reorganization under the Company Reorganization Act 1996. This is the subject of this article.

The Company Reorganization Act

Rationale behind the Company Reorganization Act

In the early 1990s the number of corporate insolvencies in Sweden reached unprecedented levels. Political pressure led the Swedish Government to make a policy statement to the effect that more companies should be reorganized.1 In line with this ambition, the Swedish Parliament introduced the Company Reorganization Act in 1996. Its underlying purpose is to facilitate the reorganization of companies in financial difficulties without resorting to bankruptcy or liquidation. The intention was that companies that have a potentially viable business should primarily be reorganized, leaving bankruptcy proceedings to be used only to wind up companies with unviable businesses. The Government hoped that the new legislation would enable early reorganizations in order to avoid deterioration of asset values. Another objective was to provide statutory rules that were more flexible than the bankruptcy rules and the compulsory composition rules previously in force.

Eligible entities

Any legal entity conducting business that is domiciled in Sweden can be the subject of company reorganization under the Company Reorganization Act, except certain businesses in the financial and public sectors, e.g. banking companies, insurance companies and debtors controlled by the State.

Applicants

An application for company reorganization may be made either by the debtor itself or by a creditor (unsecured as well as secured). If a creditor is the applicant, the debtor has to consent to the reorganization.
The application is filed with a Swedish district court having jurisdiction over the debtor and must include a preliminary plan for the reorganization.

Substantive tests

The company reorganization will only start if the court makes a corresponding order. There are two basic substantive tests that need to be met for the district court to make such order, namely that:
(a) it can be assumed that the debtor is unable to pay its debts as they fall due or that such inability will arise shortly; and
(b) it is reasonable to assume that the purpose of the company reorganization can be achieved.