Disputes in connection with bankruptcy applications
A company experiencing difficulty in paying its debts as they fall due (the debtor) may apply for its own bankruptcy. Similarly, a creditor (claimant) seeking payment may apply for the debtor to be declared bankrupt. It is common for a dispute to arise between a creditor seeking bankruptcy and the debtor subject to the application. Typically, the parties disagree on whether the debtor is truly insolvent or if the creditor has a valid claim. The debtor's own application for bankruptcy can also give rise to disputes, such as disagreements within or between the board and ownership regarding the right course of action for the company.
Common disputes in bankruptcy
In a bankruptcy, a trustee takes control of the debtor's assets to pay the creditors' claims. When distributing the assets of the bankruptcy estate to the creditors, disputes can arise over who has a better right to certain property or whether certain property is subject to preferential rights. Disputes over unlawful asset transfers, asset recovery, and matters of personal liability are also common.
Preferential right
A dispute regarding preferential rights entails one or more parties claiming that property should be separated, so that it does not become part of the bankruptcy estate, but instead should be handed over to the party or parties asserting the claim. This could involve property claimed by someone else due to lease agreements, credit sales agreements with retention of title clauses, or consignment agreements. Disputes may also arise concerning property that has been sold before bankruptcy but remains in the possession of the debtor or a third party.
Unlawful transfers of value
Unlawful transfers of value refer to events that diminish a company's assets but lack a purely business-related character for the company. Typically, these are transactions where the consideration and counter-performance are not reasonably proportional to each other. For example, if the debtor has made a purchase at an inflated price before bankruptcy or has extended a loan to a related company that clearly lacks repayment capacity. It is also common for companies to distribute funds to shareholders without having sufficient retained earnings to make a legal transfer of value. The bankruptcy estate can claim reimbursement for the value that has left the company (reimbursement liability). In the absence of reimbursement capacity, the bankruptcy estate can assert a claim against individuals who have participated in an unlawful transfer of value and demand that they cover the deficiency that cannot be covered through reimbursement.
Disputes regarding personal liability
A limited liability company (aktiebolag) is generally operated without personal liability for the board of directors and shareholders. Shareholders' risk is limited to the subscribed share capital. To prevent abuse of the corporate form of a limited liability company, there are creditor protection rules in the Companies Act, including rules regarding personal liability in cases of critical capital deficiency.
The board of directors of a limited liability company has a duty to have a control balance sheet prepared in case of suspicion of critical capital deficiency. Disputes commonly arise concerning various issues related to the board's duty to act. Disputes may also arise regarding the valuation of the company's assets in a control balance sheet or whether the timing of the occurrence of a claim falls within the period of joint liability of the board members.
Damages
In Swedish law, there is no statutory provision that explicitly obliges the board of directors of an insolvent company to file for bankruptcy. However, it may be grounds for damages to continue operating an insolvent business because there is an imminent risk that ongoing operations will lead to a decrease in the company's assets, to the detriment of the company's creditors.
An insolvent company is largely operated at the risk of its creditors, and the board of directors must act to minimize the harm that creditors may suffer. This obligation is based on general principles of tort law. However, some level of risk-taking is acceptable in all business activities, and if it is justifiable to continue operating an insolvent business, the board of directors cannot be held liable.
Common disputes in corporate reconstruction
It is common for there to be disagreement between the debtor company and one or more creditors regarding whether it is appropriate to initiate a corporate reconstruction and, if a corporate reconstruction is initiated, how long it is appropriate to allow the reconstruction to continue. These issues can be adjudicated in court, and it is possible for a party to defend its own position and object to another's.
During a corporate reconstruction, disputes can also arise in several other matters. For example, whether the valuation of the debtor's assets is fair, whether the allocation of creditors into different voting groups in a debt settlement (plan negotiation) is reasonable, and disputes concerning the content or determination of a reconstruction plan.
How can we assist you
For us, achieving a solution that serves our clients' best interests and safeguards their rights and economic concerns is of paramount importance.
Every insolvency law dispute is unique. Working collaboratively with our clients, we initially develop a strategy to determine the most suitable and advantageous solution.
By retaining DER Legal’s services, you not only gain access to our experience and expertise but also benefit from our personalized and dedicated approach. Throughout the process, we will keep you informed, guide you, and provide advice based on well-researched legal analysis and strategic considerations. We offer diligence, energy, and results.
We look forward to securing your interests!
