Bankruptcy

If a company is unable to pay its debts as they fall due, it is in default and is then normally liquidated by bankruptcy proceedings. This condition usually means that the board of directors voluntarily applies to have the company declare bankrupt. There are also instances where a creditor tries to have the company declared bankrupt by means of bankruptcy petition and then usually as a means of exerting pressure to obtain payment for an unpaid claim.

Other reasons for filing for bankruptcy may be that taxes are due in the tax account and that the board of directors and others thereby risk personal liability for the tax due. Other grounds for bankruptcy petition may be that the company has suffered a so-called critical shortage of capital, has prepared and presented a balance sheet to a general meeting, but has still not managed to restore its equity within eight months and is thus under an obligation to go into liquidation. In this case too, the petition is filed in order to protect the Board from personal liability.

Other common causes of bankruptcy in case of own petition for bankruptcy include sudden loss of customers or a lost dispute that all at once made it impossible to continue operations. Of course, there are also situations where the owner simply does not see that the business can be reversed and therefore chooses bankruptcy as a way out in order to achieve orderly closure.

How does bankruptcy begin?

A bankruptcy always starts with a decision by a district court. In the decision, a lawyer is usually appointed as bankruptcy receiver and his task, in short, is to convert the assets in the bankruptcy estate into a cash balance and then distribute these funds in accordance with the bankruptcy payment scheme and the Priority Rights Act. In order to achieve a maximum outcome, it is important to consider and analyse different solutions. In many cases, it could be a matter of continued operations. In other cases, it may be a matter of pursuing disputes or maybe even initiating a dispute yourself. The variations in each individual case are infinite. In most district courts it is possible to request the appointment of a certain bankruptcy receiver in particular. The choice of bankruptcy receiver often affects the outcome because bankruptcy receivers may have different specialities.

Approximately two months after the bankruptcy decision, the bankruptcy receiver draws up a bankruptcy estate inventory listing what is expected to be recovered to the bankruptcy estate and what the amount of debt is. The inventory and the accounts submitted shall be attached to an oath taken by the board of directors before the District Court. This brief meeting is usually the only time the board needs to visit a courtroom.

When the oath has been taken and the property has been wound up, in general only the so-called administrator’s report shall be drawn up before the bankruptcy is ready to be finalised. The management report contains mainly information for creditors and is usually submitted six months after the filing of the bankruptcy petition. The management’s report deals with the company’s history, how the accounts have been kept, if and when the company fell into critical capital shortages, when the insolvency occurred and what has caused it, as well as questions about possible liability etc.

How long does bankruptcy take?

It is difficult to specify any general times, but a useful rule of thumb can be that the smallest bankruptcies usually end within six months to 1 year, the slightly larger ones within 1.5 years and the largest and most extensive ones perhaps after two to three years.

There is no legal maximum limit on the duration of bankruptcy, but a receiver is obliged to act promptly. In case of personal bankruptcies, the urgency requirement is specifically expressed in the law.

Very few bankruptcies are closed after more than three years. If this happens anyway, in most cases, this is due to ongoing court proceedings or other non-bankruptcy related events. A peculiar case is that the bankruptcy estate awaits dividends in the bankruptcy of another company where bankruptcy has not been finalised by a bankruptcy receiver.

Liquidation bankruptcies

Bankruptcies can be divided into two main types according to the end result achieved. The first type is pure liquidation bankruptcies where the receiver sells the company’s property, dismisses the staff, returns the premises to the landlord and distributes the remaining funds to the creditors etc. Liquidation bankruptcies are often straightforward, and the smallest bankruptcies usually end up as liquidation bankruptcies.

Reorganisation bankruptcies

The second type of bankruptcy is the reorganisation bankruptcy in which the company resumes operation under a new corporate identity number. This can be done both with the previous owner remaining the owner of the business or with a new owner joining the business. If the old owner is interested in buying back the business, the receiver’s sale must normally be preceded by a public announcement. This rule exists to curb what used to be referred to as convenience bankruptcies. On the other hand, there are no legal impediments for an owner to buy back their business after bankruptcy.

Reorganisation bankruptcies usually provide the best solution for all of the company’s stakeholders. Creditors are normally assured of a higher dividend, customers are assured of continued deliveries, the company’s staff are usually allowed to keep their jobs and society is spared the costs of unemployment and other unfortunate social consequences.

Do you get a ban on trading activity after a bankruptcy?

It is a common misconception that after a bankruptcy a ban on trading activity is automatically imposed on the members of the board of directors. It is only in the event of personal bankruptcy that the debtor is prohibited from doing business. Only a court may order a ban on trading activity for the board of directors in a limited liability company, normally at the request of the prosecutor. However, a receiver is obliged to investigate whether an offence has been committed and whether there may be conditions for a ban on trading activity. Imposing a ban on trading activity is very unusual.

How much does a bankruptcy cost?

In the event of bankruptcy, the receiver of the bankruptcy is primarily paid from the pool of assets. If the assets in the bankruptcy estate are not sufficient for the receiver’s fee and the bankruptcy costs in general, these costs are covered by the State. The bankruptcy is then a depreciation bankruptcy and in such cases the board of directors or the owner is not liable to the State for the cost incurred by the State for the bankruptcy costs.

If, on the other hand, the assets in the estate are sufficient to cover the bankruptcy costs, we are talking about a distribution bankruptcy. The distribution bankruptcies end with the receiver’s submitting a distribution proposal to the district court, in which the court uses the payment scheme and the Priority Rights Act as basis to determine how much dividend the various creditors are to receive.

Both the receiver’s fee and the submitted dividend proposal are reviewed by the Swedish Supervisory Authority for Bankruptcies, by creditors holding floating charges or mortgages, by the representatives of the insolvency company and, finally, by the bankruptcy court, which also makes decisions. It is therefore a matter of 4-step review. 

Bankruptcy or company reorganisation?

The insolvency law framework is complex and often overlapping. If you are faced with the decision to declare a company bankrupt, it is a good idea to talk to a specialist. It is important to investigate whether bankruptcy should be initiated at all, as there may be other solutions, such as company reorganisation or amicable settlement. It is also important to set a date for initiating the chosen procedure. It is also good to ascertain in advance the existence of personal risks, such as liability in the event of critical shortage of capital, the existence of personal liability for taxes that have fallen due pursuant to the Tax Procedures Act, surety warrants and criminal risks of bankruptcy etc.

How do i find a receiver?

You will find an expert in bankruptcy management by talking to your accountant or bank liaison. Another way might be by browsing names on the Swedish Bar Association’s website provided that there is a search engine. A specialised lawyer should be able to answer most of bankruptcy-related questions from the first email or telephone contact and certainly also should have a preliminary idea of how the problems in the specific case can be solved and the risks associated with choosing different paths. Your industry is often important for the chances of success and an expert should therefore be able to disclose how similar cases have been handled in your industry in the past. Most specialists offer a free review of applicable law with respect to your particular company.

As in other contexts, it may be advisable to compare several different options and talk to more than one lawyer. You could have more trust in one of them or perhaps one of them could have better ideas about how to resolve your particular situation.

You can read more about the bankruptcies we have dealt with in ”experience”.