How can Liquidation of Viable Corporations be Avoided?

Mar. 20, 2024

Increasing insolvency rates in Sweden, Europe, and globally underscore the need for effective corporate insolvency systems and processes. Recent EU reforms advocate for frameworks that prefer restructuring over liquidation for viable businesses.

Over the past few decades, Europe’s insolvency landscape has seen considerable transformation. At a recent seminar co-organized with SNS, Bo Becker (Swedish House of Finance), Lars-Henrik Andersson (Cirio), Erik Selander (DLA Piper), and Louise Sjödahl (Ackordscentralen) discussed the how well the current Swedish system prevents the liquidation of viable firms, and more generally, supports healthy business outcomes and credit markets.

They explored several recent cases – including restaurant chain Sushi Yama - and examined the current regulatory framework, focusing on both large corporates and small-medium enterprises (SMEs), to understand how best to support business continuity.

Swedish bankruptcies, past and present

Around 9,000 businesses filed for bankruptcy in 2023, a slight uptick from 2022. This is still far below all-time Swedish record for business bankruptcies, set in 1994, approximately 15,000 filings. Other countries have also seen an increase in the last six months. For example, Chapter 11 filings in the U.S. rose 44% in 2023.

The recent increase in insolvency volumes can be attributed to a high inflation, soaring interest rates, energy costs, component shortages, logistics challenges, and substantial unpaid tax deferrals, with about 50 billion Swedish kronor remaining unsettled, Sjödal said.

“These challenges underscore the volatile environment in which modern businesses operate, necessitating robust strategies for survival and growth,” she added.

In response to these conditions, new restructuring legislation was introduced in August 2022, aimed at providing businesses with expanded and improved opportunities to navigate financial distress.

This legislation bears similarities to Chapter 11 proceedings in the United States, offering similar provisions such as the ability to renegotiate or reject contracts, and access debtor-in-possession financing, enabling firms in bankruptcy to continue operations.

Swedish reconstruction also allows cramdowns, which limit creditor veto power, reducing the risk for hold-ups and delays.

“The legislation offers greater flexibility and better tools for restructuring,” Becker said.

Gaps in Swedish insolvency laws

The new legislation is just getting tested in cases. A possible limitation for small businesses is that the reconstruction process is complex and relatively costly.

Erik Selander raised opportunities to develop the legislation further:

“Some necessary regulations are missing due to the rush to meet EU directive deadlines, such as handling various clauses and transferring essential contracts. There's also a call for competent courts specialized in handling these matters,” he said.