When the company cannot pay its debts

What should I do if my company cannot pay its debts?

First of all, it is good that you have identified the risk that the company will not be able to pay its debts as they fall due. The earlier the problem is identified, the better the opportunities to analyse why the company is experiencing financial difficulties and to take measures.

The first question to ask is whether this is a temporary shortage of liquid funds or whether a lasting inability has arisen – or will arise – for the company to pay its debts as they fall due (i.e. that the company is insolvent).

Furthermore, for example together with a lawyer specialising in insolvency law, it is possible to analyse whether there are conditions for restoring the ability to pay by means of measures such as a new share issue, new credit facilities, payment deferrals or renegotiation of agreements.

It is important to emphasise that the issue of liquidity and insolvency should not be confused with the issue of whether the company’s equity is intact and the issue of the obligation to prepare a balance sheet for control purposes.

If, following a thorough analysis, it becomes clear that no customary means exist to restore the company’s solvency, two alternatives often remain: that the board applies for the initiation of corporate restructuring or for the company to be declared bankrupt. The board may propose a corporate restructuring administrator, or a bankruptcy trustee, respectively, in the application submitted to the district court.

Follow these links to see our summaries with information about corporate restructuring and bankruptcy.

What responsibilities and duties does the board have?

Under Chapter 8, Section 4 of the Swedish Companies Act, the board’s main duties are to be responsible for the company’s organisation and management, to continuously assess the company’s financial situation, and to ensure that the company’s organisation is structured so that the accounting, management of funds and the company’s financial affairs in general are controlled in a satisfactory manner.

This means, among other things, that the board must ensure that there are good processes around financial reporting and that the bookkeeping is prepared without significant delay so that the board has a good understanding of how the business is performing.

Board members also have a responsibility to ensure that insolvency proceedings, bankruptcy or corporate restructuring are initiated in time. The same responsibility may also rest with the CEO.

Persons other than board members may, if they exercise a decisive influence in the company, be considered de facto representatives. De facto representatives may, in certain respects, have corresponding responsibility to that of board members.

Can board members become liable to pay the company’s debts?

The main rule is that the board is not liable for the company’s debts, but there are a number of exceptions that may lead to personal payment liability.

First, under Chapter 25 of the Swedish Companies Act, the board must prepare a balance sheet for control purposes and have it reviewed by the company’s auditor, and take certain additional measures, when there is reason to assume that the company’s equity is less than half of the registered share capital, or when enforcement under Chapter 4 of the Enforcement Code has shown that the company lacks assets for full payment of the distraint claim. If the board does not do so, the members may become personally liable to pay debts that arise after the time when a balance sheet for control purposes should have been prepared.

Second, there is a risk of personal payment liability – so-called representative liability – for the company’s tax debts if these cannot be paid by the company. To avoid the risk of representative liability, the company’s representatives must ensure, no later than the day the tax debts fall due, that the company applies for bankruptcy or corporate restructuring. Board members, the CEO and so-called de facto representatives are covered by these rules.

Third, the board and the CEO, in addition to representative liability for taxes, have a responsibility to ensure that insolvency proceedings are initiated in time if the company is insolvent. If this is not done, there is a risk of liability in damages for the board for financial loss under Chapter 29 of the Swedish Companies Act or, in the case of serious misconduct, under the Penal Code.

In addition, mention may be made of agreements on private guarantees or other security that board members may have entered into. Normally, for example, it is banks and leasing companies that have requested personal guarantees in connection with the company entering into loan or leasing agreements.

Get help

Dare to seek help in time. For a company to end up in financial difficulties, due to temporary unforeseen events, changes in the market or various forms of irregularities, is not uncommon.

The possibility of saving a company or a business with financial problems is greater the earlier in the process the company seeks help.

We are happy to assist with all types of issues related to payment difficulties, whether it concerns a company that is having difficulty getting paid or is having difficulty paying.

Peter Eriksson
Lawyer and Partner
[email protected]