Introduction
Difficulty in cancelling agreements
Security during reorganisation


Introduction

Companies with short-term financial difficulties but with good chances of survival in the long term may choose to go through a company reorganisation.

Once a company reorganisation has been decided on, a certain respite is created for the debtor (the company to be reorganised) to deal with its financial difficulties. When the reorganisation is initiated a number of parties are affected, especially those which have previously entered into agreements with the company. The debtor's agreements are usually one of the most important assets during the reorganisation. The starting point is that an agreement is not affected by company reorganisation. This means that both parties are bound by the agreement just as they were before the reorganisation was initiated.

Difficulty in cancelling agreements

The agreements that the debtor has entered into before the decision on reorganisation is made are protected from cancellation by the other contracting party by Chapter 2, Article 20 of the Company Reorganisation Act (SFS 1996:764). Even if a company that is to be reorganised is late with payments or deliveries, the other contracting party cannot cancel the agreement while company reorganisation is ongoing if the debtor requests, with the reorganiser's consent, that it shall be fulfilled in reasonable time. The debtor can request, for example, that rent, leasing or repair agreements are fulfilled, despite the fact that the other contracting party usually has the right to cancel the agreement on the basis of an actual or feared breach of contract. However, the other contracting party may cancel the agreement if the debtor's performance has failed.

In order for Chapter 2, Article 20 to apply, it is necessary that the agreement was entered into before company reorganisation was decided on. Further, it is necessary that the agreement is mutually unfulfilled, meaning that neither the debtor nor the other contracting party have performed according to the agreement. The date of the debtor's breach of contract must also be before the decision on company reorganisation. If the company that is being reorganised does not give notice on whether the agreements will be fulfilled, the other contracting party may cancel the agreement. It is only employment agreements and agreements on immediate settling – known as netting for trade with financial instruments – that are not included in the regulation.

Security during reorganisation

The other contracting party is not required to take new risks when a company undergoing reorganisation has requested that the contractual relationship continue. The other contracting party is therefore not obliged to continue performing according to the agreement if the debtor does not fulfil its corresponding obligations or provide a guarantee of their fulfillment. The guarantee should be acceptable and provided without unreasonable delay. If the company undergoing reorganisation is the buyer, the guarantee, as a rule, will refer to its future financial obligation. If the company undergoing reorganisation is, for example, a supplier of goods, the guarantee shall refer to the damage that may afflict the other contracting party if future deliveries are not made. The guarantee can be an advanced payment or a bank guarantee.

Without Chapter 2, Article 20 creditors which have made conditions that the debtor must first pay off old debts to receive delivery would receive an advantage over other creditors. Such an advantage conflicts with the principle of equal treatment, which is a basic principle regarding company reorganisation. It means that the loss will be carried proportionately by the creditors against the size of each creditor's claim. If the other contracting party was correct in cancelling the agreement, the company reorganisation would be complicated as business will continue and it is therefore reliant on not having several agreements cancelled.

For further information on this topic please contact Karolina Sarhagen at Wistrand Advokatbyrå by telephone (+46 8 50 72 00 00), fax (+46 8 50 73 00 00) or email ([email protected]).