Vol 5 (2008) - Issue 1

Article preview

Improving Contracts Through Insolvency Proceedings: A Swedish Case Study

The restructuring of the Swedish district heating group, Energisystem, in 2004-2006 was a good example of what can and cannot be accomplished in terms of restructuring using different Swedish insolvency proceedings. It also highlights the importance of creativity in the field of restructuring. The present article discusses some of the features in the restructuring, in particular how insolvency proceedings can be used to amend existing unfavourable long-term customer contracts.

Background
Landshypotek AB (publ) is a Swedish credit institution focused on providing mortgages to farms and forest businesses.

At the end of the 1990s Landshypotek’s subsidiary, Lantbrukskredit, started lending to a newly formed group specialising in producing and selling district heating based on renewable fuel. Following a rapid expansion, the financial situation of the borrowing group became extremely dire in the autumn of 2001 and Lantbrukskredit stopped further lending. As part of a restructuring of the group, the owners sold the business to a US and a Swiss company some months thereafter. The new owners injected new capital and the group was refinanced by Lantbrukskredit. The group then consisted of a number of holding companies controlling several local operating companies, each of which had one production facility supplying heating to one particular district. Its main customers were larger landlords owned by local municipalities. Lantbrukskredit then held security over virtually all of the assets of the borrowing group including mortgages over the production facilities (which constituted the predominant value in the group). It also held security over the businesses by way of floating charges and pledges over the shares.

The problematic customer contracts
One of the main reasons for the difficulties of the borrowers was the fact that the group had entered into long-term contracts with its major customers with insufficient indexation of the tariffs. Spiralling raw material costs meant that the yield from the contracts did not suffice to cover salaries, maintenance costs and interest costs. The new owners did try to renegotiate the existing contracts. Politically, however, it was difficult for the municipalities to voluntarily agree new tariffs. A certain lack of understanding of local politics on the part of the Swiss and US owners and a good deal of political posturing and economic irrationality on the part of local politicians aggravated the problem. Consequently, negotiations failed.

Attempted variation of the contracts through company reorganisation
The owners now sought to use formal company reorganisation proceedings to deal with the contract problem. They caused the operating companies to apply for company reorganisation under the Swedish Companies Reorganisation Act (the ‘Act’) proposing that the administrator would renegotiate the contracts, failing which the customers’ (and other creditors’) claims would be subject to composition.

An issue that arose almost immediately with respect to the composition element was that the claims of the customers were for the delivery of heating not for the payment of money. It was however argued by the operating companies that the proposed composition could and should affect not only monetary claims but also their customers’ claims for performance of the operating company obligation to deliver heating.