sou · GPB380 · 2002-01-01 00:00:00 — The debtor's liability for defects As mentioned above, where the debtor has demanded performance he will be liable for ensuring that the other party to the contract receives the agreed consideration for performance of his outstanding obliga- tions, even where the debtor reaches a composition. Where the debtor is to perform in kind, he cannot circumvent his liability for delay by providing defective performance. To the extent the debtor has liability for delay which is outside the scope of a composition, he thus also has a liability for defects which is outside the scope of a composition. This liability will cover defects in performance in kind which the debtor, through a demand for performance, may be deemed to have promised to provide in exchange for receipt of new payment, notwithstanding the company reorganisation. In other cases the following principles ought to apply. Where the performance of the debtor's obligations is divisible such that he would have been able to demand outstanding payments against due consideration for such amounts without the need to provide any performance in kind in respect of a payment received prior to the com- pany reorganisation, the debtor's liability for defects should be covered by a composition to the extent the defect relates to a performance in kind which constitutes consideration for a payment received by the debtor prior to the company reorganisation, irrespective of whether the performance in kind was executed before or during the company reor- ganisation. Example: where, under an agreement for instalment deliver- ies prior to the company reorganisation, the debtor has received pay- ment for product A and delivers the same, following which he demands payment for product B (and delivers the same), he will thus not be li- able for defects in product A, irrespective of any composition. When the performance of the debtor's obligations is not divisible but, rather, the other partys contractual obligation to make (supple- mentary) payment is contingent on a defect not existing in an already delivered performance, it might be thought that a demand for out- standing payment should result in the other partys claim in the event of a defect being protected against a composition, irrespective of whether the defect relates to something that was delivered prior to or after the commencement of the company reorganisation. Thus, during a company reorganisation a contractor should be responsible for defects, independent of any composition, if he claimed any payment during the company reorganisation and it later transpired that the contracting work had been defective, irrespective of when such part of the contracting work was performed. However, such an extensive liability for defects independent of a composition might result in the debtor not daring to claim a small outstanding portion of the payment, and it might also appear to be unreasonable from the perspective of rights in rem that the other party to the contract, thanks to a small supplementary payment (against certain supplementary performance), should obtain a claim for full consideration which is protected in the composition also in respect of payments made prior to the commencement of the reorganisation. Taking into consideration the fact that the debtor's liability to refund the purchase price or to pay the other partys rectification costs or damages is divisible – while redelivery and rectification almost consti- tute sanctions for the protection of the party obligated to perform in kind, which in practice are never carried out through execution meas- ures – it would best accord with performance rules in general if the other party, when the defect relates to a performance in kind made prior to the commencement of the reorganisation, should have a claim outside the scope of a composition only up to the amount he paid dur- ing the reorganisation (cp. chapter 5, section 15 of the Bankruptcy Act), or alternatively in proportion to how much of the price he paid during the reorganisation. It is proposed that the scope of liability for defects not subject to a composition should not be restricted by the wording of legislation. Set-off of a composition claim against the debtor's claim for payment for performance in kind during the company reorganisation The basic concept that the other party to the contract, in the event of performance, should obtain full value for his new performance of obli- gations but only have a composition claim in respect of previously exe- cuted performance also forms the basis for a proposal that the other party to the contract should not be entitled to set off a composition claim against the debtor's claim for payment in respect of performance in kind which the debtor has chosen to execute during the reorganisa- tion. This entails a change in governing law (see NJA 1916, page 154 and 1996, page 368). Performance restricted to a specific time or quantity As mentioned above, it is proposed that the debtor be able to determine that performance of the outstanding obligations on both sides shall be limited to a specific time or specific quantity, but exceptions shall be made where such a division would result in significant prejudice for the other party to the contract or where the other party possesses a right to performance by the debtor which is protected against the debtor's creditors. The latter is the case, for example, where the other party leases an apartment in the debtor's property and has taken possession of the apartment or registered the tenancy. The other party may terminate the agreement insofar as the debtor has not demanded performance. Misleading allocation of consideration in the agreement As mentioned in several places above, in the event of performance the debtor must make payment of consideration in respect of the obliga- tions performed by the other party to the contract during the company reorganisation. Where the allocation of the debtor's consideration for various obligations performed by the other party would obviously be misleading, the allocation should be adjustable. The aforesaid applies both when the other party to the contract has performed partially prior to the reorganisation and when the debtor demands partial performance of the remaining obligations. The debtor's liability for disposition when performance is not demanded With respect to the other partys right of repossession, in relation to property which, usually by mistake, has been given to the debtor fol- lowing an application for company reorganisation when performance is not to take place, the sole change proposed is that the right of reposses- sion shall be declared to be generally applicable, and thus also where the other party to the contract has paid money. If the debtor has dis- posed of the property delivered by the other party such that it cannot be returned essentially unchanged or undiminished, it is proposed that the other partys claim for consideration be independent of a composition, something which currently is not set forth in section 63 of the of Goods Act but which is perhaps implied. If, without having demanded performance, the debtor utilises the subject matter of a performance provided during the reorganisation such that it cannot be returned, for example retains possession of leased premises, in respect of which elapsed time cannot be reinstated, or accepts a service, the debtor shall make payment in consideration of that which has been used, independent of any composition. The pro- posal entails an amendment to governing law (see NJA 1999, page 617). Rights of priority in conjunction with bankruptcy Through the proposal that the claim of the other party to the contract for consideration in respect of its outstanding performance should lie outside a composition, after the debtor has demanded performance with the administrator's consent, it is natural that the claim for consideration and certain closely related claims should be accorded a general right of priority in accordance with section 10 of the of Priority Act in cases in which the company reorganisation is followed by an bank- ruptcy within three months. In such cases, the company reorganisation and the bankruptcy nearly constitute a single insolvency procedure and the performance has been demanded in approximately the interests of the creditors collectively, who are creditors in the bankruptcy. Trading in financial instruments The rules governing the debtor's agreements set forth in the CRA shall apply to all types of agreements, unless any other law expressly states that a different provision shall have precedence. The Financial Instru- ments Trading Act contains provisions pursuant to which agreements regarding final settlement in conjunction with company reorganisations shall be enforceable against the debtor and the debtors other creditors. has considered the extent to which employment agree- ments should be exempted from the general rules regarding the debtor's agreements in conjunction with company reorganisations. Such an ex- ception exists today. According to the exception, notwithstanding the commencement of a company reorganisation, an employee can termi- nate the agreement if the debtor (the employer) is in material default in payment of wages earned prior to the reorganisation. Employees are also entitled to withhold continued work until such time as all due and payable wages are paid, and their trade union can have recourse to a boycott. is of the opinion that these exceptions in the CRA lack objective justification. Even if the other partys claim regarding performance prior to the reorganisation enjoys a general right of prior- ity, in all other cases it is subject to the moratorium on performance and execution in conjunction with a company reorganisation. The debtor requires a moratorium and it is not always possible to determine whether the debtor's financial position is such that wage claims should receive a full dividend in an bankruptcy in the event the reorganisation attempt is unsuccessful. Provided that the Committee's proposals set forth in SOU 1999:1 are enacted i.e. that wage guarantees shall apply i.a. for wages earned prior to the reorganisation then the need for social protection is taken care of. The trade union right to have re- course to a boycott may reasonably be deemed to assume that the em- ployer does not have any legal grounds for its failure to pay due wages. In order to avoid any doubt regarding the meaning of the final para- graph of section 41 in the Co-determination in the Workplace Act, it is proposed, as a supplement to the provision, that boycotts for the pur- pose of debt collection may not be instituted in relation to wages earned prior to a company reorganisation. Where the debtor has demanded performance of an employment agreement, the employee shall be obligated to continue to work in ex- change for receipt of security for wages for future work and in ex- change for such a wage claim falling outside a composition and enjoy- ing a general right of priority in accordance with section 10 of the of Priority Act. As with other types of agreements, the demand for performance may relate to a shorter period than the remaining term of the employment. However, the debtor is not able to demand per- formance at a different level of employment. Where no performance, or performance limited in time, is demanded, the employee may terminate the agreement with immediate effect or with effect sometime thereaf- ter, irrespective of any other applicable period of notice of termination. Should the employer terminate the agreement, then pursuant to the proposal in SOU 1999:1 the employee shall be entitled to wage guaran- tee for a normal termination period of time but his claim shall have no priority in bankruptcy and thus be subjected to a composition. How- ever, if the employee is utilised during the termination period, then his wage claim shall be paid irrespective of a composition and with no wage guarantee. The same applies if the employer neither demands performance nor terminates the agreement. In order that the debtor, in the event of a company reorganisation, does not obtain greater possibilities to circumvent the order of priority in conjunction with termination of employment than are available to a bankrupt's estate or the party acquiring the business of the estate (see section 25 of the Employment Protection Act), it is proposed that dam- ages awarded for violations of the Employment Protection Act during or otherwise in connection with the company reorganisation shall be protected against a composition. Other proposals relating to bankruptcy The Bankruptcy Act contains no regulations regarding the estate's enti- tlement to demand performance of the debtor's agreements or, as it is usually called, the estate's right to accede to the debtor's agreements. However, individual acts contain provisions relating to the contractual relationships affected. See, for example, section 63 of the of Goods Act; Chapter 4, section 26, Chapter 8, section 17, Chapter 9, section 30, and Chapter 12, section 31 of the Land Code; section 47 of the Commercial Agents Act; section 27 of the Commercial Representa- tives Act; Chapter 2, section 27 and Chapter 4, section 7 of the Partner- ships and Non-registered Partnerships Act; and sections 26 and 28 of the Act. An explanation for this fragmented regu- lation is that the management of operations in the event of bankruptcy is transferred to a liquidator – a factor which, in certain but not other contractual relationships, may result in such an erosion in the other partys conditions for the agreement that it is not deemed reasonable that the estate accede to the agreement. The need for reform One disadvantage with the lack of a common regulation in the Bank- ruptcy Act is that uncertainty often prevails regarding the estate's right of accession in unregulated contractual relationships, and the provi- sions that do exist are sometimes contradictory without the contradic- tions being susceptible to any reasonable explanation. The lack of a common insolvency law perspective in the legislation has also resulted in the contractual interests of the other party to the contract having a strong impact on the development of case law (see NJA 1989, page 206). It should also be clear that reforms cannot be carried out without legislation (see NJA 1999, page 617). There exists a practical need to clarify the extent to which a bank- rupt's estate has a right of accession in unregulated contractual rela- tionships. According to the Committee, certain changes in the legal situation are also required (regarding partial accession, set-off, and liability for utilisation of rights of use when accession has not taken place). It should also be clarified whether the estate's right of accession is mandatory, where such occurs. In addition, it may be noted that bankruptcies currently constitute absolutely the most important instrument for the reorganisation of companies. While there are less than 50 company reorganisations a year pursuant to the CRA, there are 5,000–10,000 bankruptcies in a normal year. If it is desired that businesses affected by bankruptcy shall survive, albeit that they must be transferred to a new owner, it is impor- tant that the estate, through accession to the debtor's agreements, can keep the agreements alive until such time that all the assets in the busi- ness can be transferred. However, in order that even a piecemeal sale of the insolvent company's assets shall yield a satisfactory result for the creditors, it is necessary that certain agreements be retained, such as lease agreements, certain employment agreements, telephone and elec- tricity supply agreements, etc. In various countries, company reorganisations (in which the debtor continues to survive as a legal entity), and bankruptcies (which proce- dure normally concludes with a change in ownership of the assets), are now integrated. It may initially be difficult to know if the insolvency procedure should be concluded the one way or the other. However, in an unsuccessful company reorganisation cannot be smoothly transformed into a bankruptcy in which any party can purchase all as- sets without assuming liability for the debts. A liquidator must be ap- pointed instead of the administrator and a new estate inventory must be prepared based on the date of the granting of the bankruptcy petition. Even if the Committee's proposal contained in SOU 1999:1 is imple- mented, namely that wage guarantees shall be available also in con- junction with company reorganisations, the employees may, based on their own choice of either the date of the filing of the application for a company reorganisation order or the date of filing of the bankruptcy petition, influence what constitutes wages earned prior to the insol- vency procedure and what constitutes termination wages during the procedure. It would be beneficial if these procedures could be merged also in . General rules regarding the estate in bankruptcy 's rights of accession under the Bankruptcy Act As a step in the direction towards an integrated insolvency procedure, the Committee presents a proposal regarding general rules governing the bankrupt's estate's accession to the debtor's agreements. The rules are largely in accord with the rules proposed for company reorganisa- tions. As with the rules in the CRA, the provisions shall be subordi- nated to any other act. This exception may be of very great significance in conjunction with bankruptcies since several of the provisions exist- ing today, which deviate from those which it is proposed shall become general in the Bankruptcy Act, will remain in force. In general, the exceptions are where the debtor's person is significant for the due per- formance of the agreement. also proposes, in with the pattern in and , that the general provisions regarding accession by the bankrupt's estate, shall not apply where the nature of the legal relationship otherwise requires. Naturally, this ex- ception leads to uncertainty regarding the legal situation in certain con- tractual relationships or individual agreements, but the uncertainty will in no way be greater than at present. The advantage with a general main rule is that clear justification is required in order for a type of agreement or an individual agreement to fall outside the scope of the common pattern. Deviations from the rules set forth in the Company On two points, deviations are proposed from the rules relating to com- pany reorganisations. The first point relates to the bankrupt's estate's liability for the utili- sation of the other partys premises or labour force. In SOU 1999:1, the Committee stated that the estate should be liable for resources used by the estate during the bankruptcy. However, the Committee proposes that there should be a transition period of one week before the estate becomes liable for a commercial lease agreement or an employment agreement. The reason is that a certain period of time is often required before the estate can assess whether it has use for the premises and the employees, and that the work might still not be conducted in an entirely efficient during the initial period of the bankruptcy. The Com- mittee finds no reason to amend this proposal. However, no transition period should apply in conjunction with company reorganisations, where the focus is that the operations shall continue and where the debtor, which retains the management, often has planned the company reorganisation before it commenced. The second point relates to the estate's accession to the debtor's pur- chases on credit subject to a right of repossession, and financial leasing agreements. In the event of company reorganisations, a deviation is made in this context from the fundamental rights in rem approach through the proposal that the debtor may retain the property during the reorganisation if he demands performance and pays amounts which become due and payable during the reorganisation. The aim is that the debtor will obtain a moratorium at the same time as the risks of other party to the contract do not increase. In addition, it can be assumed that most company reorganisations are concluded within a few months. By contrast, a bankruptcy is often significantly more protracted. reason, the other party to the contract should be able to terminate the agreement and repossess the goods unless the debtor, in conjunction with a demand for performance, also pays all amounts which became due and payable prior to the bankruptcy. The existence of the agreement after the conclusion of the bankruptcy Finally, it may be pointed out that the intention of rescuing an agree- ment in the long-term in the event of bankruptcy differs in a couple of respects from the situation with company reorganisation. One difference is that, upon conclusion of the bankruptcy, the agreement must normally be transferred to a third party, something which generally requires the consent of the other party to the contract. In such circumstances, the third party then has the possibility to re- negotiate the agreement. Another difference is that the other partys claims for payment for obligations performed prior to the bankruptcy remain insofar as such have not been covered by a dividend in the bankruptcy. Therefore, the issue arises whether the other party after the bankruptcy shall be enti- tled to terminate an agreement when bankruptcy claims remain unsatis- fied. Such a right is of course not in question when pursuant to appli- cable contractual rules the debtor himself could have retained the part of the contract that the estate has acceded to, in spite of a breach re- lated to another part (see e.g. sections 43, 44 and 56 of Goods Act). In some contractual relations, especially lease, the debtor must fulfil all his duties to prevent termination (see e.g. chapter 12 section 42 of the Land Code). Here it would be surprising if the debtor after the bankruptcy – when the debtor is a physical person or a company which may be allowed to survive pursuant to proposals in SOU 1999:36 and 2001:1 provided its share capital has been restored – would be able to retain the lease without paying all remaining debt for which the debtor is still liable. Consequently, neither a third party, which has acquired the right from the estate, should escape liability for such debts. The counter argument, that a party succession has taken place and that both the debtor and a third party should be able to exer- cise the same right as the estate had, seems conceptual. The estate could as well be regarded to administer the debtors rights, albeit with an extra protection against termination in order to prevent the estate from being forced to pay debts arisen before the bankruptcy when the estate wants to retain an agreement during the bankruptcy (cf. With this approach the result will in practise be the same as today fol- lows from chapter 12 sections 31 and 38 of the Land Code, since pur- suant to said rules an assignee is liable for lease debts related to the time prior to the bankruptcy, no matter whether the estate has acceded to the contract or not. finds it inappropriate that the estate by an assignment could exploit an extra value of a contract and assumes therefore that the relevant contractual rules will come into force when the bankruptcy has ceased. Lag om ändring i lagen (1996:764) om företagsrekonstruktion Härigenom föreskrivs i fråga om lagen (1996:764) om företagsrekon- struktion dels att 2 kap. 15, 17 och 20 §§ skall ha följande lydelse, dels att nuvarande 2 kap. 21 § skall betecknas 2 kap. 27 §, dels att nya 2 kap. 27 § skall ha följande lydelse, dels att det skall införas fyra nya rubriker av följande lydelse, dels att det i lagen skall införas sju nya paragrafer, 2 kap. 21-26 och 28 §§, av följande lydelse.