Member Article

The Rights of Priority Act regulates the order in which different claims are to be paid in the event of levy of execution or bankruptcy. The starting point is that all claims shall be paid pro rata in the bankruptcy, but since certain claims have been given right of priority, deviations from this fundamental principle of equal treatment have been made. Right of priority to payment can be either specific or general. A specific right of priority applies in levy of execution and bankruptcy and applies to certain property. A general right of priority applies only in bankruptcies and applies to all property included in the debtor’s bankruptcy estate. A specific right of priority has priority over a general right of priority.

The Rights of Priority Act has been subject to a number of changes since the act entered into effect in 1972. The latest changes, prior to the ones which have now entered into effect, of importance in the formation of the Rights of Priority Act were made on 1 January 2004 when the act on floating charges (2003:528) entered into effect and replaced the prior act on floating charges. In conjunction with this, the value of the collateral security a company could provide when it wanted to borrow money was reduced. After the statutory change, only 55 per cent of a company’s personal property could be used as collateral security for credits. The purpose of this change was, inter alia, to provide better conditions for company reorganisation and to create incentives to consider the profitability more than the security when providing credit. It was concluded that the transition from the prior form of floating charges, which gave full specific right of priority in certain classes of assets, to this form of floating charges, which gave general rights of priority to 55 per cent of the debtor’s entire property, lead to worse credit opportunities for companies. In order to remedy this negative effect, inter alia, the Government proposed the reform which has now entered into effect in, which makes it possible to use personal property in the business as collateral security for loans.

The new security right, which is as earlier called a floating charge, confers a specific right of priority in bankruptcy and levy of execution, thus replaces the prior form of floating charge. The property which is covered by the new form of floating charge is the personal property of the business, to the extent it belongs to the business. However, the new form of floating charge does not comprise cash at hand and bank funds, shares and other financial instruments which are intended for general circulation, property which may be pledged in other ways such as aircraft and ships as well as property which can not be object for levy of execution or be part of a bankruptcy (for example the debtor’s minimum necessary personal property (Sw. beneficium).

Among the advantages the new regulation is expected to bring, the following are stated in the preparatory work: the business proprietor can fully use assets as collateral security for credit; the opportunities to obtain credit on advantageous terms are enhanced; that property which is covered by the security right may be used fully as security while, at the same time, real property and securities may be pledged separately and, for the creditor, that a specific right of priority does not only apply in bankruptcy but also in levy of execution (thus the covered property cannot be object for levy of execution for any other claim).

In the preparatory work, it is also emphasised that the reintroduction of the prior form of the floating charge with specific right of priority, inter alia, will result in that the creditors which are not entitled to any right of priority and prioritised wage claims will decrease. Because of this, the introduction of the new form of floating charge has been combined with the complete repeal of the State’s right of priority for claims regarding wages disbursed under the wage guarantee. As an effect of the repeal of this right of priority, the State will be a large non-privileged creditor which will mean that the State will get a large portion of the distribution which goes to creditors which are not entitled to any right of priority. Hence, the State will also have an interest in the future to monitor its claims in insolvency cases and to be an active creditor. However, it is likely that the State’s interest in filing bankruptcy petitions against debtors will decrease since the State’s distribution in bankruptcies will generally decrease. Therefore, the State will, in ways other than before, have to weigh pros and cons of various courses of action to monitor its interests. Since the State’s right of priority for recourse claims is abrogated, the number of bankruptcies with monitoring procedures is likely to increase. An abrogation means both that claims with a general right of priority will decrease, and that the claims will be for lower amounts. Therefore, it will become more common that creditors which are not entitled to any right of priority will be paid.

In the transition from the prior form of floating charges to the new form of floating charges, questions arise regarding how floating charges which have been approved and granted as security prior to the effective date of the new act shall be treated in various situations. Floating charges granted as security prior to the effective date will apply in accordance with the previous rules up to 1 January 2010. At this point they will be converted into the new form of floating charges. In bankruptcy, levy of execution and company reorganisation decided on the basis of petitions which have been filed prior to the effective date or during the transitional period, the rules which applied on the filing date will be applied throughout the procedure.