Effective from 1 August 2022, a new Restructuring Act (Sw. lag om företagsrekonstruktion), which implements the EU Directive on restructuring and insolvency (the "Restructuring Directive"), comes into force in Sweden. As further explained below, the aim of the new Restructuring Act is to improve the Swedish restructuring regime by introducing a number of new features previously unknown to Swedish law.
The old Swedish financial restructuring framework has been perceived by many as inefficient and unable to provide the tools necessary to accomplish successful financial restructurings. This has also been statistically confirmed as the number of successful financial restructurings has been rather low. One of the major shortcomings of the old restructuring framework was that it basically only facilitated a restructuring (cram-down) of unsecured debt. The new regime will also apply to secured creditors. Furthermore, the old regime did not include any tools for facilitating debt-to-equity conversions, which resulted in the equity owners getting an unfair advantage by reaping most of the benefits of a successful restructuring. The implementation of the Restructuring Directive has therefore provided the Swedish legislator with an opportunity to carry out a very much needed reform of the Swedish financial restructuring regime.
Below is a description of the new Restructuring Act with a particular emphasis on changes compared to the old restructuring framework. Some of the parts of the new legislation are quite extensive and technical, but we will address the major features with as much brevity and clarity as the limited format of this client alert allows.
Starting a Restructuring Proceeding
A submission for restructuring can be made either by a debtor or a creditor. The submission shall be made to the local court that has jurisdiction over the debtor and is subject to a number of formal requirements, which differ depending on whether it is a debtor or a creditor submission. The court may approve the start of a restructuring proceeding if (i) the debtor is insolvent or there is a risk of the debtor becoming insolvent; and (ii) there is reason to believe that the restructuring will result in a viable enterprise that can continue operating.
The above is slightly different from the old regime. First of all, the new regime makes it clear that that anticipated insolvency, and not only actual insolvency, is relevant when applying for restructuring. Furthermore, the viability test is tougher than under the old regime.
Another new feature is that the restructuring proceeding may not commence if the debtor’s books and records are incomplete or deficient to a degree that makes it impossible to ascertain the business and financial situation of the debtor.
The court shall – as under the old regime – appoint one or more restructuring administrators. It is the court appointed administrators who will take lead on the restructuring. The new law gives such an administrator increased power and control, but at the same time, the eligibility test and scrutiny of the administrators are also increased.
The right to act on behalf of the debtor
The management and directors of the debtor remain in charge of the ordinary day-to-day business of the debtor. However, the administrator must approve of the following: (i) completion or securing of obligations that were incurred prior to the start of the restructuring; (ii) transactions outside of the ordinary day-to-day business; and (iii) disposals of or encumbrances over assets that are of significant importance for the business of the debtor.
A new feature compared to the old restructuring regime is that an administrator can declare an ultra vires transaction (i.e. a transaction that was completed without the administrator’s required consent), to be null and void with the consequence that the transaction shall be reversed.
Stay of enforcement actions
Debtors, shall, according to the Restructuring Directive, benefit from a stay of individual enforcement actions in order to support a successful restructuring. Such stay of enforcement action already existed under the old Swedish restructuring framework and has largely been transposed to the new Restructuring Act.
The former restructuring regime did however contain a rather generous right for secured parties to enforce their rights over possessory liens (i.e. security interests that are in the possession of the secured creditor) notwithstanding such statutory stay of enforcement. Similar exemptions are also allowed under the Restructuring Directive save that such exceptions to the stay of enforcement action only apply in well-defined circumstances, where such an exclusion is duly justified and where: (i) enforcement is not likely to jeopardise the restructuring of the business; or (ii) the stay would unfairly prejudice the creditors of those claims. In light of this the Swedish legislator has decided to limit the right of secured creditors to enforce such possessory liens to situations where the conditions set out in (i) and (ii) above have been fulfilled and subject to the prior approval of the administrator.
The above is of course important for secured creditors whose enforcement rights are somewhat curtailed. For example, a share pledge enforcement in respect of shares in the restructuring debtor’s subsidiaries could be denied based on the principles set out above.
Contracts entered into prior to the start of a restructuring
The Restructuring Directive requires that there must be rules preventing creditors to which the stay applies from withholding performance or terminating, accelerating or, in any other way, modifying essential executory contracts to the detriment of the debtor, for debts that came into existence prior to the stay, solely by virtue of the fact that they were not paid by the debtor. Essential executory contracts shall be understood to mean executory contracts that are necessary for the continuation of the day-to-day operations of the business, including contracts concerning supplies, the suspension of which would lead to the debtor’s activities coming to a standstill.
A similar regime existed already in the old Swedish restructuring regime and those rules have been transposed into the new Restructuring Act, albeit with some changes needed to align the Swedish regime with the framework set out in the Restructuring Directive.
The cornerstone of the new regime is that it is the debtor – sometimes subject to the approval of the administrator – that decides which contracts shall, fully or partially, continue to apply. The creditor is entitled to damages if the debtor opts out and terminates a contract. Such claim for damages is deemed to have occurred prior to the start of the restructuring proceeding and will be treated accordingly in the restructuring plan referred to below.
Ipso-facto clauses, financial collateral and close-out netting
There has been some uncertainty under Swedish law regarding the enforceability of insolvency ipso facto clauses (i.e. contract clauses entitling a creditor to terminate a contract solely on account of the insolvency, even if the debtor has duly met its obligations). The Restructuring Directive stipulates that ipso facto clauses are not allowed if they make reference to negotiations on a restructuring plan or a stay or any similar event connected to the stay. In light of this the Swedish legislator has included a regime explicitly stating that ipso-facto clauses are not enforceable against the debtor if they are triggered by the debtor applying for or becoming subject to a restructuring proceeding.
Notwithstanding the above, the stability of financial markets relies heavily on financial collateral arrangements, in particular, when collateral security is provided in connection with the participation in designated systems or in central bank operations and when margins are provided to central counterparties. As the value of financial instruments given as collateral security may be very volatile, it is crucial to realise their value quickly before it depreciates. Accordingly, the new Restructuring Act – as prescribed by the Restructuring Directive – contains a carve out from the stay of termination regime in respect of transactions covered by the Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement system and the Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements. There is also an exemption for netting arrangements, including close-out netting, as regards transactions involving financial instruments.
The biggest development in the Swedish restructuring regime is the adoption of the concept a restructuring plan as set out in the Restructuring Directive. The restructuring plan shall, among other things, contain information about the parties involved, the restructuring measures needed and the timeframe for executing the restructuring.
The old Swedish restructuring regime only contained a cram-down regime for unsecured creditors. The new Restructuring Act on the other hand implements the Restructuring Directive’s regime where stakeholders are divided into different classes (or groups as they are called in the Restructuring Act). The group formation reflects the rights and the seniority of their claims and interests of the different stakeholders.
One important feature of the new legislation is that it will be possible to execute cross-group cram-downs that will effect both secured and unsecured creditors. This is subject to certain conditions set out in the Restructuring Act and it is important to note that non-consenting groups cannot be made subject to an outcome that is less favorable than that which they could otherwise expect were the debtor to file for bankruptcy.
Another new feature is that debt-to-equity conversions can be included in the restructuring plan which addresses the unfair advantage that equity holders had over creditors under the old regime.
The restructuring plan will be confirmed by the local court that has started the restructuring proceeding. This confirmation by the court will make the plan binding upon the parties included in the restructuring plan.
Protection of new financing and interim financing
A requirement under the Restructuring Directive is that new financing as well as interim financing must be adequately protected. New financing consists of financing needed in order to execute the restructuring plan, whereas interim financing is aimed at funding the restructuring proceeding up until the adoption of the restructuring plan.
New financing will constitute a preferred claim as agreed in the restructuring plan. The parties can therefore agree on the ranking and preferential treatment when negotiating the restructuring plan.
Interim financing will – as was the case already under the old restructuring regime – constitute a preferred claim should the debtor file for bankruptcy. However, a difference compared to the old regime is that preferential ranking will cease to apply three months after the ending of the restructuring proceeding.
Finally, it should also be noted that the preferential ranking given to interim financing will also apply to the claims of trade creditors and other non-financial creditors who have entered into transactions approved by the administrator.
The new Restructuring Act will apply from and including 1 August 2022. However, any formal restructuring proceedings that have commenced prior to that date will remain subject to the rules set out under the old restructuring regime. During a period of time, two different restructuring regimes will therefore apply.
The new Restructuring Act is a welcome and long anticipated improvement of the Swedish restructuring regime. It will provide an opportunity to formally include all relevant stakeholders in a restructuring plan that will be given legal effect by being confirmed by the court. For secured creditors, it should be noted that some previously existing enforcement option will cease to apply under the new Restructuring Act. Furthermore, both secured creditors and equity holders must be prepared, as the new Restructuring Act will affect their legal and financial interests in a way that was not the case under the old restructuring regime.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2022 White & Case LLP