sou · GNB31 · 2000-01-01 00:00:00 — These exceptions include, among other things, bank balances and cash, ne- gotiable promissory notes, shares and bonds, as well as property which can be pledged through registration, such as real estate and ships (see Chapter 2, section 1 of the Business Mortgage Act 1984). Thereafter, creditors have rights of priority in property on which execu- tion has been levied, provided that the execution can not be avoided as a preferred transaction on the grounds that it was carried out less than three months prior to the bankruptcy (section 8 of the of Priority Act). Thereafter, the remaining assets are applied to the payment of auditors fees (section 10a of the of Priority Act). Thereafter the remaining assets are applied to claims by the State for taxes and fees (section 11 of the of Priority Act). Thereafter, the remaining assets are applied to claims for wages which became due and payable not more than three months prior to the granting of the bankruptcy petition or which relate to wages following notice of dis- missal pursuant to the Employment Protection Act and claims for holiday compensation for the current and preceding year (section 12 of the of Priority Act). Wage claims, which have a right of priority in a bankruptcy, are guaranteed by the State up to a total amount of per em- ployee (Wage Guarantee Act, 1992:497). Where the State has paid com- pensation pursuant to the wage guarantee, the State is subrogated to the employeesrights in the bankruptcy. Finally, the remaining assets are divided among what are commonly re- ferred to as creditors without any right of priority, in proportion to their claims (section 18 of the of Priority Act). The claims of certain creditors may, however, be subordinated pursuant to agreements with the debtor, and such creditors receive payment only after all other creditors have received full satisfaction of their claims. In conjunction with bankruptcies, the largest amount of claims relates to creditors without rights of priority. The amount of their claims equal the amount of all other creditors. Claims by creditors (usually banks) whose claims are secured by business mortgage constitute an amount more than half the size of claims of creditors without rights of priority. Thereafter, the States tax claims constitute an amount half the size of claims secured by business mortgages. Wage claims, in their turn, constitute an amount ap- proximately half the size of tax claims. On average, floating charges provide a dividend of approximately of the amount of the claim. Tax and wage claims usually yield approximately , while on average creditors without right of priority receive only . It is, however, difficult to talk in terms of averages in this context. Thus, the median dividend on wage claims is , from which it is evident that, for the employees, wage guarantees are more important than rights of priority for wage claims. The tasks of the of The rules with respect to composition were previously set forth in an Act from 1970 (no. This entailed, primarily, that individual execution measures were prohibited during the period of time in which composition negotiations were pending and that, following a qualified majority vote, the claims of creditors without rights of priority could be reduced, normally to a minimum of . In 1992, a committee designated as presented a proposal (SOU 1992:113) for a Business which was intended to replace the Composition Act and, hopefully, increase the num- ber of compositions. In fact, has had only approximately 50 judicial compositions per year, while there are approximately 9,000 bankruptcies. Following prolonged consideration by the , the new Act was enacted in 1996 (no. The changes were not great. Where possible, company reorganisations should be brought forward and can now be initi- ated as soon as payment difficulties arise, even though there is not neces- sarily a situation of insolvency. During the attempted reorganisation, fi- nancing is facilitated by a new right of priority for loans to the debtor under reorganisation (section 10 of the of Priority Act). The debtor under reorganisation should also more easily be able to retain advantageous con- tracts. In Chapter 2, section 20 of the Business , a rule has been introduced whereby, following the initiation of a reorganisation, the opposite party to an agreement may not terminate the contract as a re- sult of any grounds of termination which arose prior thereto, if the debtor under reorganisation performs, or provides security for, that which relates to the period since the commencement of the reorganisation. The restriction on termination cannot be contractually excluded. Ipso facto are not covered by the rule other than where, possibly, by analogy. Certain other proposals including, inter alia, the abolition of the right of priority for tax claims and the redrafting of the right of priority for certain wage claims and business mortgage were not, however, carried out. In the Swedish Parliament, politicians from all political parties were un- happy with the fact that the Ministrys handling of the proposals of the In- solvency Committee took such a long time and that the proposals were only partially implemented. In various motions, it was stated that the new Act would not result in any appreciable reduction in bankruptcies or an increase in the number of business reorganisations. The of (JU 1996:02)1 was thus appointed in 1996 with the task, once again, of reviewing the right of priority rules which are relevant when choosing between business reorganisation without bank- ruptcy, and bankruptcy. The aim was, thus, to promote business reorgani- sations through compositions, without bankruptcy. However, the Committee was also naturally to take into consideration that the rules would not threaten the provision of loans to solvent companies. The subjects which were specifically mentioned in the terms of reference were business mort- gage (which, however, it was presupposed would essentially remain), rights of priority for tax claims, and rights of priority for wage claims. With re- gard to wage claims, the Committee was to provide employees, in the event of bankruptcy, with protection which would be as comprehensive as possi- ble but, at the same time, pursuant to supplementary terms of reference which were issued 1 1/2 years later, would save million, or ap- proximately of the States expenditures on wage guarantees. In addition, the Committee was charged with the task of investigating whether a debtor under reorganisation should be able to terminate contracts prema- turely. 1 Supreme Court was appointed as Chairman of the of . members were , , and (all Social ), Per (Left Party), (), (Centre Party), (Liberal Party), (Conservative Party) and (). The secretary was Judge . Summary of the proposals primarily proposes as follows: -that the right of priority for rental claims be abolished; -that the right of priority for business mortgage be converted into a right of priority in of all property; -that the right of priority for tax claims be abolished; -that the right of priority for wage claims be restricted to wages which accrued during a period of three months prior to the filing of the bank- ruptcy petition until one week after the granting of the petition, subject to a ceiling of ten times the statutory base amount (currently approxi- ,000, i.e. 360,000). These claims and claims for wages following notice of dismissal, which correspond to what is paid pursuant to the Employment Protection Act (1982:80), i.e. for a period not ex- ceeding six months, are protected through a State wage guarantee with a ceiling of four times the statutory base amount (currently approximately ,000). Where an employee whose employment has been termi- nated works for the estate in bankruptcy commencing one week after the granting of the petition, the wages shall be paid from the estate without the possibility of utilising the wage guarantee; -that the wage guarantee be extended to apply also to business reorgani- sations controlled by the court, without bankruptcy, to the same extent as compensation would have been paid in an bankruptcy. Prior to the annulment of a business reorganisation order by the court, the debtor must repay to the State any funds which has been paid from the wage guarantee, while the States claims with respect to wages following no- tice of dismissal to those who have not worked can be reduced through a composition. If the business reorganisation is converted directly into a bankruptcy, funds, which have been paid from the wage guarantee dur- ing the reorganisation, are deducted from what may be paid in wage guarantee under the bankruptcy. The overall aims of the proposals are as follows: -to focus decisions with respect to loans more on the borrowers repay- ment ability than on security; -to facilitate business reorganisations without bankruptcy through earlier reorganisations and through a reduction of special interests in composi- tion negotiations; -to abolish the possibility of competition on unequal terms that arises due to the fact that an estate in bankruptcy can continue to conduct the busi- ness as a result of fact that wages to dismissed employees who work for the estate are compensated from the wage guarantee. Through the abolition of the right of priority for rental claims, the limitation on the property which forms the basis for business mortgage, and the aboli- tion of the wage guarantee for those who work for the estate during the pe- riod following notice of dismissal, it is estimated that the States net costs in respect of the wage guarantee (payroll taxes on the wage guarantee and dividends on wage claims less payments) will be improved by at least million. also presented certain other proposals, which are passed over in this summary. forth below is a more detailed account of the Committees considera- tions with respect to tax claims, wage claims, and business mortgage. The right of priority for tax claims During the past few decades, the right of priority for tax claims has been abolished in many foreign countries. In , such a proposal was first presented in SOU 1970:75. Thus far, however, the Government has consis- tently opposed such abolition. The reasons cited through the years have been that the State cannot refrain from giving credit and cannot freely choose its debtors; that the State finances would be detrimentally affected; that the debt collection climate would become tougher; that, in certain cases, tax claims relate to funds which are held on behalf of the State; and that tax morals would be detrimentally affected. However, when consider- ing the proposals of , the Government was content to cite the difficult budgetary situation as a reason not to abolish the right of priority for tax claims. The Committee concluded that the State is not alone in providing credit involuntarily. Creditors who are owed damages, particularly creditors owed damages in tort, also provide their credit involuntarily but have no right of priority. do creditors who are owed damages possess the States possi- bility to make office holders personally liable for payment. According to information compiled by the Committee, the debt collection climate can become tougher. Already today, if security exists it is taken in conjunction with grants of respite. Approximately 2/3 of the States claims relate to withholding taxes and VAT. Nevertheless, where withholding taxes are involved, the person sub- ject to taxation cannot be said to hold the funds on behalf of the State to any greater degree than applies to other debt relationships, since payment takes place with funds which the person subject to taxation has acquired without any connection to the withholding tax liability. VAT funds, however, are collected precisely for the payment of VAT, but in this context it should be noted that other creditors holding funds in trust (e.g. wards in relation to guardians) do not have any right of priority where the funds held in trust are co-mingled with the debtors own assets. The assumption that higher tax morals might be promoted through a right of priority for tax claims is probably based on the notion that a right of pri- ority for tax claims is predicated on a general opinion that the States claims should be satisfied first. Against this, it can be objected that, thanks to the right of priority, the State can obtain payment without the person subject to taxation being required to pay the tax. A greater feeling of responsibility is created by the fact that office holders, through separate legislation, may incur a personal payment liability if the State does not obtain full payment of its tax claims. During the circulation for comments of the proposals of , one tax authority asserted that compositions would be made more difficult if the right of priority for tax claims was abolished. This opinion was presumably based on the fact that, in conjunction with compo- sition negotiations, if the right of priority for tax claims were to disappear, one would also need to persuade the State to vote in favour of the composi- tion. However, a composition becomes meaningless if only a small portion of the claims can be reduced; the requisite financial relief is not attained. In practice, a successful composition usually presupposes the voluntary par- ticipation of the State, even though the State need not do so since the State has rights of priority (compare Chapter 3, sections 3 and 8 of the Business ). The States interest in preventing spurious corporate activities does not require that the State should, in practice, possess a veto on compositions. Rather, this can be satisfied through other means, e.g. through voting rights in conjunction with composition negotiations and through prohibitions on trading. In , where the right of priority for tax claims was abolished as early as the 1960s, the highest tax authority informed the Committee that only a couple of cases have arisen in which compositions were adopted against the wishes of the State. The remaining nut to crack is thus the States interest in the State coffers being strengthened through dividends from bankruptcies. regards this argument as unconvincing, since all creditors can invoke the same reason, and the creditors in bankruptcies should not bear greater li- ability for the States finances than is borne by other taxpayers. In addition, the sums of money involved are small, in relation to the claims. If we disre- gard bankruptcies at the beginning of the 1990s, in which the States divi- dend at most reached million (1996), we note that the tax dividend in bankruptcies is normally million per year. The States revenues in 1997 amounted to billion. Thus, a normal dividend amounts to of tax revenues. Accordingly, the Committee proposes that the right of priority for tax claims and public fees be abolished. As already emphasised, the State will be fully compensated as a consequence of the Committees other proposals (primarily, a halving of the basis for business mortgage) whereby the State will obtain an increased dividend (approximately ) where the State, after payment of wage guarantees, presents proof of the employees wage claims with a partial right of priority and whereby the dividend to creditors without right of priority (including tax claims) will increase to approxi- . of priority for wages and wage guarantee has been obliged, if possible, to improve wage protection in conjunction with bankruptcies and, at the same time, to save mil- lion per year in wage guarantees. This corresponds to approximately of what was paid annually during the 1980s. In 1992, the maximum amount of billion was reached, after which payments have fallen to just over billion per year. At the same time, revenues amount to approxi- billion per year in payroll fees and dividends in bankrupt- cies, most of which (- 1.5 billion) relate to payroll fees. In addition, the Committee has been bound by an EC directive (80/987/EEC) which obliges to provide a wage guarantee for three months wages in the event of insolvency proceedings. has regarded it as important that the employees who are normally socially dependent on earned wages and who, in a weak labour market, cannot snub certain employers and, naturally, cannot save their workpower for later delivery, should enjoy wage protection in the event of the insolvency of the employer. However, the Committee has chosen to limit the wage protection for earned wages such that the employeesclaims con- tribute to the early initiation of insolvency treatment, before all liquid funds have been consumed, and in such a that abuse of the wage guaran- tee is counteracted. In addition, it has been regarded as important that the continuation of business during a suspension of payments or bankruptcy takes place subject to the same terms and conditions as apply to the debtor competitors, so that solvent enterprises are not driven out of business by insolvent ones. Finally, the Committee has chosen to counteract the prefer- ence by insolvent businesses for bankruptcy instead of business reorganisa- tion, in order thereby to more easily obtain financing for continued opera- tions (through the wage guarantee). The choice should, instead, be deter- mined by other factors, such as the need to retain ongoing contracts, to be quit of the current owners and the current management, and to avoid below- cost sales, etc. Concretely, the Committee proposes the following: Wage guarantees should be capable of being utilised in conjunction with reorganisations pursuant to the Business . In order that this not result in increased costs in the event of a subsequent bankruptcy, the debtor in the business reorganisation must repay any wage guarantee payments provided or must provide security for the repayment before a business reorganisation order can be revoked. However, a composition may decrease the States claim for repayment of wages paid during the period following notice of dismissal. Where the business reorganisation is con- verted into a bankruptcy without any interruption, the business reorganisa- tion and the bankruptcy should be viewed as a single unit and the wage guarantee payments provided in the business reorganisation are deducted from that which can be received in the bankruptcy. Wages for a maximum period of three months prior to the petition for bankruptcy or business reorganisation will enjoy both rights of priority as well as wage guarantees. In terms of time, this means a certain limitation, since currently it is sufficient that the wage claim became due and payable not later than three months prior to the filing of the petition for bankruptcy (which means that the employees can wait up to four months before filing a petition to place the employer in bankruptcy but nonetheless benefit from the wage guarantees for all wages earned). However, certain provisions should be made for cases where the employer could not be served with process or where the wage claim was the subject of a dispute. Should an attempt at business reorganisation have preceded a bankruptcy, then the employee may choose, as today, to enjoy priority for wages during three months prior to the petition for business reorganisation if that is more ad- vantageous than wages during three months prior to the petition for bank- ruptcy. Thereafter, the right of priority and wage guarantee for wages exist up until an order commencing the business reorganisation or bankruptcy plus an additional week. It should not matter whether the employee worked for the debtor in reorganisation or the bankruptcy estate during this brief tran- sitional period. The rights of priority for the wage claims dealt with above seldom have significance for the employee. In most cases, all assets are used up for creditors with superior rights of priority and, therefore, the wage guarantee is of central significance. However, the employee may have a level of wages which results in the ceiling of the wage guarantee being surpassed. cases, he can exercise his right of priority, where funds exist in the estate, however subject to a new limit of ten times the statutory base amount (approximately ,000). Otherwise, the right of priority serves the purpose of increasing the dividend to the State when it has paid out wage guarantees and is exercising its right of recourse. Among other things, the Committees financial restrictions have necessitated that the right of priority be maintained in this respect. In the event work is performed on behalf of the debtor in reorganisation or the estate in bankruptcy later than one week after the commencement of the insolvency proceedings, the wage claim will not enjoy either a right of priority or a wage guarantee. Instead, the wage claim is paid in full by the business, which means that it is not affected by a composition and does not constitute a debt for the estate in bankruptcy. An analysis must be made of each employees efforts. Corresponding liability for the estate is proposed regarding rent for premises which are used by the estate, regardless of whether the estate has become a party to the agreement or not. This princi- ple can probably be applied to other types of contracts. Currently, the right of priority regulations in conjunction with re- employment pursuant to the Employment Protection Act need not be ob- served when an estate uses certain employees during the period following notice of dismissal. Since the proposed responsibility for the assets of the estate counteracts the unjust enrichment which would otherwise arise and its only purpose is to prevent an estate in bankruptcy from being able continue operations under conditions other than those of its competitors by utilising the wage guarantee, following the notice of dismissal, for employees with whom the estate has thus not entered into employment agreements, this new responsibility with the estate's assets should not lead to any new opinion regarding the applicability of the regulations governing the right of priority to re-employment. Claims for wages following notice of dismissal are, from a right of prior- ity perspective, not as important as the above-stated wage claims since for this period, the employee generally enjoys unemployment benefits in an amount of of his salary, subject to a five day qualification period and a ceiling of approximately per month. Therefore, it is proposed that the right of priority for wages following notice of dismissal be abol- ished, whether termination takes place during a business reorganisation or bankruptcy. also discussed eliminating the wage guarantee for wages following notice of dismissal. However, such a solution would not be in accord with the terms of reference to improve wage protection, where possible, in conjunction with bankruptcies. It is, therefore, proposed that wages following notice of dismissal corresponding to those referred to in the Employment Protection Act should enjoy wage guarantees, where- upon the State would be permitted, however, to pursue a right of recourse without enjoying the right of priority and would thereby be subject to a composition with respect to the wages following notice of dismissal. estimates that this solution can be realised within the restrictions of State finances. The right of priority for holiday wages remains unchanged. Severance compensation should enjoy rights of priority and wage guar- antees to the extent such rights would have existed had the employee instead received ordinary wages following notice of dismissal. It is uncertain whether this rule satisfies the requirements which are set forth in the Inter- national 1992 convention, no. 173 regarding protec- tion for employees claims in conjunction with the insolvency of the em- ployer. should not, therefore, ratify the Convention now either.