New Company Reorganisation Act proposed – with several major updates

4 Mar 2021

On March 3, 2021, the Reorganisation Inquiry presented its report with proposals for new rules regarding company reorganisation. The proposed changes are so significant and transformative that a completely new Company Reorganisation Act is being introduced, to take effect on July 1, 2022. The summary below highlights some of the most significant changes in the inquiry’s legislative proposal.

New “fast track” to reorganisation introduced

Targeted at smaller companies that find it difficult to bear the costs of a conventional reorganisation, an alternative to reorganisation is introduced: public debt settlement. This means that a company, under the supervision of a reorganiser, can under certain conditions be directly granted a settlement with its unsecured creditors for at least 25% payment, requiring a 2/3 majority.

Viability requirement increased for granting reorganisation

To initiate reorganisation, the requirement that the business’s viability must be reasonably ensured through the reorganisation is tightened. Furthermore, companies that do not have their bookkeeping in order are disqualified from initiating reorganisation (which is a welcome clarification).

Requirements for the reorganiser tightened

Stricter competence requirements will be placed on the reorganiser. As a general rule, they must work as a bankruptcy trustee or have such experience. Only in exceptional cases and on good grounds may someone else be appointed as a reorganiser. The inquiry refers here, among other things, to statistics showing that the proportion of failed reorganisations is many times higher for reorganisers who do not work as bankruptcy trustees.

Introduction of a reorganisation plan – instead of a public composition

A major fundamental change is the introduction of a binding reorganisation plan. This replaces and complements the current public composition. The reorganisation plan can contain measures other than just composition/debt write-down, such as the issuance of shares as payment, etc.

As in other countries, the proposal introduces so-called groups of creditors and other affected parties. The groups are not automatically equivalent to the various categories in the Rights of Priority Act. Instead, the groups are organised based on sufficiently uniform interests among the members of the group. As an example, one could imagine that unsecured creditors are divided into two groups where active suppliers form one group and other unsecured creditors (e.g., taxes and debts to historical suppliers) form another group.

Prioritised creditors, who are currently not part of a composition negotiation, will also participate in these groups. The same applies to shareholders and subordinated creditors. This means that the voting rules for passing a reorganisation plan will be significantly more complex compared to current legislation. Here is a somewhat simplified summary:

A reorganisation plan shall be adopted if a) 2/3 of those voting within each group vote in favour; and b) the claims voting in favour amount to 2/3 of all claims with voting rights.
Even if not all groups have approved the plan, it can still be confirmed if either:
- more than half of the groups have approved the plan and at least one of these groups consists of prioritised creditors; or
- at least three groups have approved the plan, consisting of creditors who can be expected to receive payment in a bankruptcy. This assumes, however, that the groups that voted against the plan a) are not treated less favourably than other groups that have the same priority in bankruptcy and b) receive full payment if a group with lower priority in bankruptcy is proposed to receive payment under the plan.
The court may refuse to confirm the reorganisation plan if a creditor objects and the plan is not deemed to be in the creditor’s “best interest” (in comparison with bankruptcy).
If the reorganisation plan prescribes new financing, this may only be confirmed if the financing is necessary and does not unduly harm the interests of existing creditors.
A reorganisation plan can, except in the case of smaller companies, also be confirmed without the debtor’s consent.

A confirmed reorganisation plan is binding on all affected parties (including shareholders and unknown creditors).

Partial performance of contracts

It is proposed that the company under reorganisation be given the opportunity, where practically possible, to demand partial performance of contracts. In this way, the company avoids having to choose “all or nothing”. One can imagine these rules becoming applicable when the company needs to rent premises or equipment for a limited time, or when, for example, it only wishes to continue using half of the company’s current leasing cars – even though these are grouped in a framework agreement (applies only to operating leases).

Increased opportunities for the company under reorganisation to exit contracts prematurely

Previously, companies under reorganisation have been able to use the public composition to exit long-term contractual obligations in a more cost-effective manner. Through the inquiry’s legislative proposal, these opportunities for the company are further increased, which may be significant for the reorganisation of businesses with long-term unprofitable contracts. As a general rule, the company under reorganisation can terminate contracts with three months’ notice, regardless of the contract term (the shortened notice period does not, however, reduce the counterparty’s right to damages).

Supervisory authority introduced

In combination with the tightening of requirements for reorganisers, a supervisory authority will also be introduced at the Swedish Enforcement Authority, in a similar manner to bankruptcies.

A form of “special courts” introduced

The inquiry proposes that the handling of reorganisation cases be concentrated for the time being to one district court within each county and opens up the possibility for even fewer courts to handle the proceedings. The reason for this is to maintain expertise within the courts that handle reorganisations.

More information

Please feel free to contact us and we will tell you more. Some of us who work with reorganisations can be found below.