Member Article

Government bill 2007/08:161, Civil Committee report 2008/09:CU5

The priority rules in the Rights of Priority Act (1970:979) (Sw. Förmånsrättslagen) govern the allocation of a debtor’s assets between different creditors in bankruptcy and levy of execution. The rules differ between specific and general rights of priority.

Specific rights of priority only encumber certain property and apply both in levy of execution and in bankruptcy, whereas general rights of priority apply only in bankruptcy and include all property in the bankruptcy estate. As a general rule, specific rights of priority prevail over general rights of priority.

A floating charge is a collateral on personal property within a business such as goods, furniture or inventory. Up to 31 December 2008, floating charges have conferred a general right of priority to 55 per cent of the value of all the debtor’s property, i.e. even cash at hand and bank funds which remain after claims with a better right of priority have been paid.

As mentioned above, new rules on floating charges entered into force on 1 January 2009 by the Act of Floating Charges (2008:990). Thus, the floating charge which was introduced in 2004 is now replaced by a new form of floating charges (Sw. företagshypotek) which will include all personal property of the business to the extent it belongs to the business. The purpose of the change is to strengthen the collateral security, in order to make it easier for businesses to lend money on personal property as a security.

However, the new form of floating charges does not include:

- cash at hand;

- bank funds;

- financial instruments intended for general circulation;

- property which can be charged in another way (e.g. ships or aircraft) or;

- property which can neither be object for levy of execution nor can be included in a
bankruptcy.

The new form of floating charges will, as opposed to the now revoked form of floating charges, confer specific right of priority in the event of bankruptcy and levy of execution. This, together with other rules, essentially entails a reversion to the rules prevailing for floating charges prior to the 2004 changes. Since the rights of priority are strengthened, distributions to creditors which are not entitled to any right of priority will also decrease. In order to reduce the risk of the enhanced possibility of lending money on personal property as a security being consumed by greater credit losses for first and foremost smaller businesses, the State’s right of priority regarding guaranteed wages disbursed will be entirely abolished.

As a consequence of the change in the Rights of Priority Act, the earlier praxis e.g. NJA 1982 s 900 ("Minitube case" or the "Lambertz formula") will once again be applicable. The earlier praxis considers the calculation of earnings in the event of continued operations, the necessity to obtain consent to sell assets (regularly from the bank concerned) in the event of asset sales otherwise than by auction or continued operations, that the floating charges may cover any deficiency in the general estate and delimitation problems between different types of property to the extent that the property is covered by the floating charges or not.

Former provisions shall continue to apply throughout the entire proceedings in conjunction with a bankruptcy, a levy of execution, or a company reorganisation that was decided upon on the basis of a petition filed prior to the entry into force of the act, 1 January 2009, or during a transitional period.

In connection with the above changes in the Rights of Priority Act, the State’s right of priority for recovery of guaranteed wages disbursed is abolished. This means that creditors which are not entitled to any right of priority will receive an increased share of the distribution in a bankruptcy.

Transitional provisions entailing that floating charges granted as collateral security before the effective date of the act, 1 January 2009, will be valid up to 1 January 2010. Thereafter, such floating charges will be converted into the new form of floating charges. For a business proprietor who was granted a floating charge before the effective date of the act and who has not annulled the charge, the abrogated act shall apply during 2009 instead of the new act also in all other respects.

The transitional provisions give the creditors the possibility to review outstanding credits and to reassess such credits in view of the new situation which ensues from the changes in the Rights of Priority Act. Thus, the creditors are given the right, under certain circumstances, to demand additional security. If the debtor has not, within one month from the creditor’s demand of additional security, provided such additional security of which the creditor can be reasonably satisfied, the creditor may call in the claim during 2009 with a time of expiration of six months. This applies even if the parties have agreed upon a longer notice period or that the credit should not be possible to call in at all.

Electronic certificates for floating charges
Government bill 2008/09:17