Avoidance rights in Sweden

Through the proposed EU Directive on the harmonisation of certain aspects of insolvency law (COM/2022/702), the Commission aims to harmonise member states’ abilities to take avoidance actions for certain types of transactions preceding a bankruptcy. The purpose is to address the deficiencies and differences existing in the insolvency procedures of EU member states. The proposed directive aims at enhancing investor and creditor security regarding cross-border investment activities. The proposal contains minimum standards, thus allowing member states to adopt stricter avoidance rules if such provisions offer stronger protection than those proposed for the collective body of creditors.

Below is an overview of Swedish avoidance rules along with some comments on how they compare to the proposed directive.

GENERAL OVERVIEW OF SWEDISH AVOIDANCE RULES

Laws governing avoidance are primarily found in the Swedish Bankruptcy Act and the Company Restructuring Act. A distinction is made between the general rule and specific avoidance rules. The general rule requires proof of insolvency by the bankruptcy estate, as well as subjective elements such as the counterparty's knowledge or deemed knowledge of the debtor’s insolvency and the facts that made the legal act improper. The specific rules, however, do not contain such subjective requirements and generally do not require insolvency at the time of the legal act. The burden of proof that the requirements for clawback have been fulfilled generally lies with the bankruptcy estate.

However, there is one condition that must be met for all legal acts to be considered for avoidance – the legal act must be to the detriment of one or more creditors. To fulfil the detriment requirement, it is sufficient that the legal act has worsened the distribution for at least one creditor. This can be compared to the Commission’s proposal, which requires that the transaction must be to the detriment of the collective body of creditors. This might lead to adjustments in the Swedish regulations.

Also, the limitation period is the same for all avoidance actions. A claim for avoidance must be brought by the bankruptcy estate no later than one year after the bankruptcy decision. Failure to do so will result in the bankruptcy estate forfeiting its right. However, there is a possibility of extending the deadline. An action may also be commenced within six months from the date the bankruptcy estate became aware of the reason. This extended timeframe is infrequently used in practice.

The Commission’s proposal includes a limitation period of three years from the date of the opening of insolvency proceedings. This period when a claim for avoidance must be brought, is significantly longer than the limitation period provided for in the Swedish Bankruptcy Act. Thus, from one perspective, the proposal offers stronger protection for the collective of creditors since the bankruptcy administrator gains additional time to scrutinise transactions for clawback purposes. Extending the limitation period, however, introduces prolonged uncertainty for creditors and other parties who have engaged in transactions with the debtor and may face clawback actions.

In general, the proposed consequences of avoidance actions in the Commission’s proposal are similar to those existing in the Swedish Bankruptcy Act. The property that the debtor has provided must be restored to the bankruptcy estate or, where return of certain property is associated with extraordinary inconvenience for the obligated party, the debtor may be allowed to pay compensation in lieu of the property. 

MORE ABOUT THE DIFFERENT AVOIDANCE RULES IN SWEDEN

Similar to the Commissions’ proposal, avoidance rules in Sweden are linked to a reference date that serves as the starting point for calculating the period within which a legal act must have occurred prior to bankruptcy in order to be subject to avoidance. Typically, the reference date is the day when the bankruptcy petition was submitted to the district court (i.e. the” filing date”), although another reference date may apply if, for example, the bankruptcy petition is preceded by a reconstruction.

As indicated below, the time limits vary depending on the applicable provision and the debtor’s counterparty in the transaction. Generally, a longer time limit can be invoked against parties closely related to the debtor.

The general clawback rule (Actio Pauliana)

The general clawback rule in the Swedish Bankruptcy Act applies to all types of legal acts that have been detrimental to a creditor, and through which a creditor has a) been unduly benefited at the expense of other creditors or, b) the debtor's property has been concealed from creditors or, c) the debtor's debts have increased. Furthermore, for the legal act to be subject to clawback under this rule the counterparty of the transaction must have known, or should have known (i) that the company was insolvent, and (ii) the circumstances that made the transaction improper. Whether a transaction is improper or not cannot be answered simply and is ultimately decided in case-law.

The general rule applies for legal acts that have occurred up to five years before the filing date or up to ten years prior to that time for parties that are closely related. A closely related party is presumed to have the knowledge of the financial status of the debtor and also of all other circumstances relevant for the decision on whether a legal act is improper. Thus, the burden of proof has been placed on that party.

The specific clawback rules

Regarding the specific grounds for avoidance in the Swedish Bankruptcy Act, no absolute subjective requirements are needed, such as the counterparty's awareness of the debtor's financial situation. The rules are mainly objective. It is sufficient that certain specified external circumstances exist.

Clawback of debt payments

The most frequently used specific clawback rule applies to debt payments made within three months before the filing date. Such a payment may be recoverable if the reason for the payment cannot be regarded as ordinary in the particular circumstances and one of the following circumstances applies: a) the payment has been made by non-customary means; b) the payment has been made prematurely; or c) the payment has significantly diminished the debtor’s financial position.

Payment made to a party closely related to the debtor earlier than three months but later than two years prior to the filing date will be subject to clawback unless it is shown that the debtor was not insolvent, or, by virtue the measure, did not become insolvent.

Clawback of beneficial transactions etc.

A gift refers to transactions without remuneration or where the remuneration is below market value, or in other cases where it is evident that the agreement is, in part, in the nature of a gift. A gift completed later than six months before the filing date could be subject to clawback. A gift perfected earlier but later than one year prior to the filing date could also be subject to clawback unless it is proven that following the gift the debtor retained executable property, which clearly corresponded to the debtor’s debts. The deadline is extended to three years for gifts made to a closely related party if the related party cannot prove that the debtor was clearly sufficient at that time.

It could be noted that the Swedish provision regarding gifts, unlike the proposal, requires that the debtor had a beneficial intention with the transaction. Determining a beneficial intention can be challenging, which is why the proposal may provide stronger protection for the creditor collective. Thus, there is a certain subjective element here in the otherwise more objective rules. The requirement for this” intention”, however, should not be seen as purely subjective. The assessment of this requirement in the context of clawback should be based on more objective criteria where the decisive factor is whether the transaction, upon an external assessment, appears to have been made with such intention.

There are additional specific clawback rules in the Swedish Bankruptcy Act, which involve, for example, security provided by the debtor later than three months before the filing date for a previously incurred debt without priority, unless the provision of security, considering the circumstances, can still be considered ordinary. Also, for this specific rule, the time limits for clawback are longer – up to two years before the filing date in relation to closely related parties if the related party cannot prove that the debtor was insolvent or became so as a result of the transaction. 

Summary

Generally, Swedish avoidance rules correspond to the articles of the proposal and in several respects, they even provide stronger protection for the creditor collective than the proposal. For instance, the Swedish provisions have a limited use of subjective requisites, a factor that may simplify the possibilities for clawback. The proposal, however, may in some cases offer stronger protection for the creditor collective. The most significant difference might be the limitation period by which avoidance actions can be brought, which, according to the proposal, is up to three years from the commencement of insolvency proceedings while Sweden has a limitation period of one year as a general rule.

Whether Sweden will need to adjust the avoidance rules of the Swedish Bankruptcy Act in response to the final proposal remains to be seen. Minor adjustments may be required, but major changes are not likely necessary.

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