sou · GPB380 · 2002-01-01 00:00:00 — N Where the debtor demands that an agreement be performed during the company reorganisation, the claims of other party to the contract for payment in respect of performance of his outstanding obliga- tions may not be reduced through a composition; N Where the debtor consumes something provided in performance of an obligation without having decided that the agreement shall be performed, he shall pay full consideration for the obligation per- formed notwithstanding any composition; N Where, in performance of an agreement, the debtor has executed performance in kind, the other party to the contract may not set off his payment obligation against a composition claim; N Employment agreements shall be governed by the same rules as other agreements. Accordingly, employees shall not be entitled to withhold work on the grounds that wages earned prior to company reorganisation, to which a wage guarantee shall apply, have not been paid. Boycotts which are aimed at inducing the employer to pay wages earned prior to a company reorganisation will become impermissible; N In order that company reorganisations will not be exploited in order to circumvent the right of priority rules set forth in the Employment Protection Act, damages due to unfair dismissals during or other- wise in connection with the company reorganisation shall not be covered by a composition. proposes the following amendment to the of Pri- ority Act (Förmånsrättslagen): N Claims which, in accordance with the above points, cannot be re- duced through a composition shall enjoy rights of priority if a bank- ruptcy petition is granted not later than three months after the com- pany reorganisation. proposes the following amendment to the Bankruptcy Act (Konkurslagen): N Rules shall be incorporated into the Bankruptcy Act concerning the accession of the estate in to the debtor's agreements which corre- spond to the rules proposed regarding the debtor's rights to perform- ance in the event of a company reorganisation. In the event of hire purchase agreements and financial leasing, the debtor must, how- ever, immediately pay all due and payable amounts in order to pre- In addition, the estate in bankruptcy may lack a right of accession due to the nature of the legal relationship. The proposal relating to bankruptcy requires certain supplementary in- vestigation regarding consequential amendments before it can be implemented. In 1999, the Committee submitted its principal report, New of Priority Rules (SOU 1999:1). It was proposed therein, inter alia, that floating charges be converted into a general right of priority and that the security shall cover one half of the value of all of the debtor's prop- erty. It was further proposed that the right of priority in respect of taxes be abolished, that the right of priority in respect of wages be amended and that a wage guarantee be introduced in conjunction with company reorganisations. However, such wage guarantee shall be deducted from the wage guarantee payable in the event of an immediately subsequent bankruptcy . During the course of its work, the Committee was issued with sup- plementary terms of reference to investigate whether, during a com- pany reorganisation, the debtor should be entitled to terminate agree- ments prematurely. addressed this investigation work separately. In conjunction therewith, the Committee considered certain other issues concerning the debtor's agreements in conjunction with a company reorganisation. These were partially regulated through the enactment of the Company (hereinafter "CRA") which, however, has subsequently been deemed to be in need of certain clarification and amendments. Finally, the Committee has considered the need to incorporate into the Bankruptcy Act general rules regarding termination and performance of the debtor's agreements by means of the estate's accession thereto, corresponding to the rules which have been proposed to apply in the event of company reorganisations. Extraordinary right of termination The starting point in conjunction with company reorganisations is that the debtor's agreements remain in force. However, the debtor is not obliged to perform its obligations during the company reorganisation but, rather, enjoys a moratorium (Chapter 2, section 17 of the CRA). Normally, the claims of other party to the contract may be compulso- rily reduced through a judicial composition. Nevertheless, the possibility of a reorganisation may be rendered more difficult by the debtor being a party to onerous agreements, a fact which constitutes a serious encumbrance notwithstanding that the agreements are subject to a composition. In addition, at present the debtor may be forced to demand performance of an obligation for the entire outstanding term of the agreement in order to preclude the other party from terminating the agreement, notwithstanding that the debtor needs to utilise the agreement for only a limited period of time. The question thus becomes whether the debtor, through termination, can release himself from onerous agreements such that the other party to the contract does not even obtain a claim which is subject to a compo- sition or, in any event, cannot present a claim in contract for compensa- tory damages and whether the debtor may demand performance of an agreement in order to prevent termination but then, immediately there- after or following a certain period of time, terminate the agreement with the effect that, after the expiry of the termination period, the other party merely has a composition claim. Foreign law provides examples of both of these types of termination rules which are aimed at facilitating reorganisations in the event of both company reorganisations and bankruptcies. Total discharge from certain debts or from liability in contract for compensatory damages 's conclusion is that the principle of the equal rights of the creditors prevents the debtor from being accorded a possibility of total discharge from certain onerous agreements, such that the other party to the contract does not even obtain a composition claim or an unsecured claim in the bankruptcy. In the Committee's opinion, such a discharge should take place only within the ambit of the avoidance of transactions rules pursuant to the provisions set forth in Chapter 4 of the Bankruptcy Act (particularly sections 5 and 6). The need for sim- plicity in the application of law militates strongly against the other party to a contract being precluded from presenting proof of its claim in contract for compensatory damages. Accordingly, the Committee does not make any such proposal. to performance with respect to a limited period of time or quantity With respect to the second issue, namely the introduction of an ex- traordinary right of termination following a demand for performance, the Committee notes that, in accordance with governing law, a demand for performance during a company reorganisation does not render the debtor's obligation to make payment of consideration independent of a composition. If, following a demand for performance, the debtor de- clares without warning that he is no longer willing to make payment in consideration of the other partys performance of the contract, the other party to the contract only has a composition claim for damages. Ac- cordingly, there is no need for an extraordinary right of termination on a prioritised plane in conjunction with company reorganisations. How- ever, the Committee is of the opinion that rules should be incorporated pursuant to which the other party against which a demand for per- formance has been made and which must, accordingly, be prepared to perform on pain of liability in damages should be entitled to consid- eration or damages which are independent of whether the debtor achieves a composition (see further below). If the agreement is divisi- ble in time or quantity without significant prejudice to the other party (for example, a lease agreement or regular or instalment deliveries), the debtor should not, however, be forced to demand performance of all outstanding matters in order for the other party to the contract to forfeit its right to terminate. In the event of such agreements, the debtor should be granted what in reality corresponds to an extraordinary right of termination following a demand for performance. However, instead of entitling the debtor, following a demand for performance, to be dis- charged from liability on the prioritised plane at any time, subject to a specific period of notice of termination, the Committee proposes that the debtor in his original demand for performance should be able to determine, at his discretion, the period of time or quantity in respect of which performance will take place. With respect to the period or quan- tity in excess thereof, the other party will obtain a composition claim (as if performance had never been demanded). One reason for the pro- posal is that the other party to a contract which is obliged to make do with a composition claim regarding a specific part of the performance of its outstanding obligations normally is in no worse position than if obligated to make do with a composition claim regarding performance of all of its outstanding obligations. Through the in which the rule is drafted, the other party to the contract will know immediately what is to apply in the future and it will not be necessary, in respect of the various relationships which may be involved, to state a fixed, gen- eral period of notice of termination or to fall back on a reasonable pe- riod of notice of termination. The debtor's entitlement to limited per- formance will encourage him to commence the company reorganisation before the insolvency becomes too deep. Thus, upon the commencement of a company reorganisation, the debtor should be able, for example, to decide that leased premises shall be retained for three months, during which period of time the other partys claim for payment is protected against a composition, following which the premises will be at the other partys disposal. Compensation for damage during any outstanding period of notice of termination will thereupon become only a composition claim, just as the claim for dam- ages would have been if the debtor had initially decided that the agreement would not be performed at all during the company reorgani- sation. Corresponding rules in conjunction with bankruptcy In proposals for corresponding rules concerning the debtor's agree- ments in the event of bankruptcy, the Committee presents no proposal that the estate in bankruptcy be granted a general right to make certain claims, in whole or in part, unenforceable as claims in the bankruptcy. On the contrary, it is stated that certain rules pursuant to which an em- ployee may not present proof of claim for wages for the entire con- tracted period of employment or the period of notice of termination, and may not present proof of claim for the entire agreed wages are, in principle, debatable insofar as the agreements cannot be subjected to general rules relating to avoidance of transactions. However, the Com- mittee presents no proposals regarding amendments on these points. On the other hand, the Committee proposes that a bankrupt's estate should be entitled, in respect of a limited period or quantity, to accede to an agreement which is divisible, and for which the estate assumes liability. In respect of the excess period or quantity, the other party to the contract shall only have a claim in the bankruptcy. Accordingly, here too the technique of a right of termination following a demand for performance (i.e. after accession and liability for the estate) will be applicable. It might appear to be the case that it represents a significant im- provement for the bankrupt's estate to be able to accede to agreements during a limited period of time or for a limited quantity since, under currently applicable law, the estate must accede to the entire out- standing agreement (see, e.g., Chapter 12, section 31 of the Land Code relating to rents for commercial premises). In fact, though, at least in certain cases, this proposal also entails a strengthening of the position of the other party to the contract. It is precisely with respect to rents for commercial premises that an estate which does not wish to accede and assume liability nevertheless is entitled, during a customary period of notice of termination (normally nine months) to use the premises in exchange for regular payment of the rent. In such case, the lessor ob- tains no claim against the estate for rent for all of the remaining term but, instead, only an entitlement to successive advance payments on its claim for payment in the bankruptcy. Accordingly, the estate has the possibility, for example after three months, to place the premises at the lessors disposal without notice and direct the lessor to present a proof of claim for damages in the bankruptcy in respect of unpaid rent during the remainder of the period of notice of termination. It is proposed that this possibility to retain the premises in exchange for successive pay- ment of rent be abolished by the lessor obtaining a right to terminate the agreement with immediate effect in the event the estate fails to claim performance for the entire term of the agreement or for a fixed part thereof (see below). Other proposals concerning company reorganisation It is proposed that the provisions of Chapter 2, section 15 of the CRA regarding the debtor's obligation to consult with the administrator be extended to cover not merely payment of debts incurred prior to the company reorganisation but also to the performance of other obliga- tions (performance in kind). The purpose is to strengthen the principle of the equality of rights of unsecured creditors and to promote the in- fluence of the administrator. It is proposed that the prohibition on execution set forth in Chapter 2, section 17 of the CRA be adjusted such that, primarily, execution lev- ied on property to which the other party to the contract holds title shall be possible where the debtor fails to demand performance of the agreement in question. Where the debtor fails to declare that he is pre- pared to make payment or to provide security in pace with the new per- formance of obligations by the other party to the contract, e.g. in the form of continued grant of use of property, the other party shall thus not merely obtain a right of termination (see below) but also a right to cause repossession to be executed. Extension of the prohibition on termination According to Chapter 2, section 20 of the CRA, following the granting of a company reorganisation order the other party to a contract may not terminate the contract due to the debtors delay constituting grounds for termination which existed prior to the company reorganisation. Not- withstanding such delay, subject to administrator's consent the debtor is entitled to decide that the agreement shall be performed. The Commit- tee proposes that the provision be extended such that a mere application for a company reorganisation order will constitute an im- pediment to termination. In addition, the provision which makes man- datory the debtors right to performance is clarified such that condi- tions pursuant to which an agreement automatically terminates in the event of company reorganisation (ipso facto ) are also invalid. On the other hand, a certain protection is introduced for the benefit of the other party to the contract which terminates an agreement following a good faith application for a company reorganisation order. The same performance rules irrespective of whether the debtor was in delay constituting grounds for termination prior to the company reorganisation According to Chapter 2, section 20 of the CRA, the other party to the contract is entitled to notification whether the agreement shall be per- formed – with the associated entitlement to security for payment in respect of future performance and the right to terminate the agreement in the event of no response or a negative response regarding perform- ance only where the debtor was in delay constituting grounds for termination prior to the company reorganisation. At the same time, the debtor has the right, specifically granted in the provision, to perform- ance without being required to make payment for obligations per- formed and received prior to the reorganisation – notwithstanding the rules governing the contractual relationship in question - only where the debtor provided the other party to the contract with grounds for termination prior to the reorganisation. is of the opin- ion that these rules should also be applicable when the debtor has not been in delay constituting grounds for termination prior to the reor- ganisation. The intention with the first proposal is to counteract uneven contractual obligations whereby the other party to the contract must be prepared to perform but cannot count on more than a composition claim. The intention with the second proposal is, inter alia, to encour- age the filing of early applications for company reorganisation orders. Demands for performance provide the other party to the contract with protection in the event of a composition According to Chapter 2, section 20 of the CRA, the debtor's demand for performance has the consequence that the other party to the con- tract is entitled to security when he is to perform his outstanding obli- gations in cases where the debtor is not contractually obligated to make immediate payment of consideration. Where the other partys out- standing obligations to be performed lie in the future, the other party is entitled to security for payment only where, for special reasons, such is necessitated in order to protect him against loss. This results in uneven obligations. Accordingly, it is proposed that the debtor's demand for performance should result in the other partys payment claims and any claims in damages being outside a composition. The proposal may be compared with the accession of a bankrupt's estate resulting in a debt for the estate. In the event performance is demanded, the debtor need pay full consideration only in respect of the other partys outstanding obligations proposes no change in the rule set forth in Chapter 2, section 20 of the CRA whereby the debtor, following a demand for performance, in principle is not required to make payment in considera- tion of performance received prior to the company reorganisation. The rule probably has no independent significance in the event of regular and instalment deliveries to the debtor since, in such context, general contractual rules already prevent termination in relation to subsequent performance of obligations when a recurrence of the default in payment cannot be expected (see sections 43 and 44 of the of Goods Act). On the other hand, the provision is of great importance, for example, in conjunction with leases for commercial premises where, pursuant to the provisions of the Land Code, the debtor may terminate the agree- ment if all due and payable rents have not been paid (see Chapter 12, section 42 of the Land Code and NJA 1989, page 206). The equivalent must be assumed to apply to other rights of use agreements, e.g. pub- lishing agreements, licence agreements, and operational leasing, as well as the use of telecommunications services. The extraordinary right created by the CRA to performance in ex- change for payment only in respect of obligations performed which are received during the company reorganisation applies, however, only during the reorganisation procedure. When such ceases, the general contractual rules once again apply. The extent to which the debtor, in order to save a contract, must then pay all debts relating to the per- formance of obligations received prior to the reorganisation depends on the content of the general contractual rules and on whether the debts in question are reduced through a composition. Credit purchases with a right of repossession and financial leasing The purpose of the rule that the debtor is required to make full payment in consideration of performance received prior to the reorganisation is, naturally, that the other party to the contract, which merely has an un- secured claim for payment in respect of such performance, should not receive full payment for the same while other creditors with unsecured claims are subjected to a composition. The other party should only be absolved from taking new risks, i.e., he should receive full payment for future performance of obligations in respect of which he has a right to withhold delivery and a right of repossession. Where the other party has a right of repossession protected by rights in rem pursuant to which the property susceptible to repossession constitutes security for per- formance of all the debtor's obligations, as is the case with a purchase on credit which is subject to right of a repossession and in conjunction with financial leasing, rights in rem speak strongly in favour of the other party to the contract being able to demand immediate payment of all due and payable amounts in order not to terminate and repossess such partys property. The in which hire purchases and financial leasing shall be addressed according to governing law is unclear. Even if the other party to the contract has a civil law right of termination should not all due and payable debts be paid immediately, because of the prohibition against execution set forth in Chapter 2, section 17 of the CRA he can- not repossess goods without the debtor's voluntary co-operation. Tak- ing into consideration the fact that company reorganisations generally do not take place during a period in excess of three months, the Com- mittee proposes that a middle way be adopted. Through a demand for performance, the debtor should be able to prevent repossession during the reorganisation, provided that the debtor successively pays future due and payable amounts such that the goods need not serve as security for new debts. In order for the debtor to be able to become owner of the goods after the reorganisation, he must, however, pay the entire purchase price or leasing fee plus any option amount insofar as the goods were worth so much that they constituted security for the payment which was ne- glected prior to the reorganisation; in fact, in such case the other partys claim for such payment lapses without a composition (see Chapter 3, section 3 of the CRA). Performance in kind by the debtor The provisions relating to the content of performance are specified in the proposal in respect of those cases in which, under the agreement the debtor must perform in kind, e.g. deliver goods or perform contracting work. Also in such cases the debtor may, in principle, demand that the other party to the contract perform its outstanding obligations (to make payment) against full consideration only in respect of such payments, i.e. the debtor need not deliver goods which correspond to an advance payment received prior to the reorganisation. However, such a limita- tion on performance is conditional on the debtor's performance being divisible (cf. sections 43 and 44 of the of Goods Act). If a division of the performance of the debtor's obligations (delivery of the goods or the contracting work) would result in significant prejudice for the other party to the contract, the debtor shall be entitled to performance (i.e. the right to outstanding payment) provided he fulfils all of his perform- ance obligations under the contract. Example: where the other party to the contract has paid half of the contract sum for construction on two floors prior to the reorganisation but the debtor has not yet performed any of the contracting work, the debtor cannot demand to receive the outstanding portion of the contract sum against delivery of the second floor.