Hamilton Perspectives Nyhetsbrev

The Swedish Supreme Court clarifies the scope of the transaction avoidance rule in Ch. 4 Sec 10 of the Bankruptcy Act

On 5 June 2019, the Swedish Supreme Court decla­red that cer­tain pay­ments ma­de by a bank­rupt com­pa­ny could not be avo­i­ded pur­su­ant to the trans­ac­tion avo­i­dan­ce ru­le in Ch. 4 Sec 10 first sup-pa­ragraph of the Bankruptcy.

Ch. 4 Sec 10 of the Bankruptcy Act pro­vi­de as follows (un­derli­ning ad­ded):

Payment of a debt that was ma­de up to th­ree mont­hs be­fo­re the day of gra­ce [no­te: nor­mal­ly the day the pe­ti­tion for bank­rupt­cy was fi­led] and which was ma­de with so­met­hing ot­her than custo­ma­ry me­ans of pay­ment, pre­ma­tu­rely or in an amount hat has con­si­de­rably cau­sed the de­te­rio­ra­tion of the fi­nan­ci­al po­si­tion of the deb­tor, is avo­i­ded un­less it can ne­vert­he­less be con­si­de­red or­di­na­ry ha­ving re­gard to the cir­cumstan­ces. […]

The co­re is­sue in the dis­pu­te is the me­a­ning of the pre-requi­si­te that a pay­ment of a “debt” has be­en ma­de.

MS was ac­ti­ve both as a so­le tra­der un­der the na­me “Östermalms Teknisk Bilservice” and as re­pre­sen­ta­ti­ve of a com­pa­ny li­mi­ted by sha­res with the al­most iden­ti­cal na­me “Östermalms Teknisk Bilservice AB” (he­re­in af­ter re­fer­red to as the “Company”).

MS in his ro­le as so­le tra­der had a le­a­sing agre­e­ment with the land­lords H & K (he­re­inaf­ter re­fer­red to as the “Landlords”). MS in his ro­le as re­pre­sen­ta­ti­ve of the Company ma­de fi­ve pay­ments to the Landlords amounting to a to­tal of SEK100,000 short­ly be­fo­re the Company was decla­red bank­rupt.

The bank­rupt­cy esta­te of the Company com­menced a trans­ac­tion avo­i­dan­ce ca­se against the Landlords ba­sed on Ch. 4 Sec. 10 of the Bankruptcy Act. The Landlords ma­de se­ve­ral ob­jec­tions against the claim.

The District Court and the Court of Appeal re­jec­ted the Bankruptcy Estate’s claim for avo­i­dan­ce of the pay­ment becau­se ac­cor­ding to the court “debt” me­ans the bank­rupt deb­tor’s own debt, but in this ca­se the  Company had not pay its own debt sin­ce it was MS as so­le tra­der who was par­ty to the le­a­se contract with the Landlords and who had a debt to the Landlords.

The Supreme Court al­so con­clu­ded that Chapter 4 Sec. 10 is not ap­pli­cab­le when the deb­tor has paid anot­her par­ty’s debt.

Comment

The Supreme Court re­fer­red to the di­scus­sion in the le­gal li­te­ra­tu­re re­gar­ding the ap­pli­ca­bi­li­ty of Ch. Sec 10 of the Bankruptcy Act and agreed that the ru­le should be in­ter­pre­ted strict­ly and in ac­cor­dan­ce with the Supreme Court ca­se NJA 1985 s. 117 whe­re the Supreme Court sta­ted that a  secu­ri­ty for anot­her par­ty’s debt can­not be avo­i­ded pur­su­ant to the trans­ac­tion avo­i­dan­ce ru­le in Ch. 4 Sec. 12 of the Bankruptcy Act.

As aut­hor of one[1] of the two books on trans­ac­tion avo­i­dan­ce the Supreme Court re­fer­red to I can on­ly agree with the Supreme Court cla­ri­fi­ca­tion of the sco­pe of the ap­pli­ca­bi­li­ty of the trans­ac­tion avo­i­dan­ce ru­le in Ch. 4 Sec. 10 of the Bankruptcy Act. As the Supreme Court poin­ted out this do­es not me­an that pay­ments of anot­her par­ty’s debt are al­ways pro­tec­ted against trans­ac­tion avo­i­dan­ce ac­tions. Such pay­ments can, if all pre-requi­si­tes are met, be avo­i­ded pur­su­ant to Ch. 4 Sec 5 and Ch. Sec. 6 of the Bankruptcy Act.

4 Ch. 5 § first sub-sec­tion of the Bankruptcy Act pro­vi­des as follows:

A le­gal act, whe­re­by a par­ticu­lar cre­di­tor has in an un­fair man­ner be­en fa­vou­red in pre­fe­rence to ot­hers or whe­re­by the pro­per­ty of the deb­tor has be­en con­ce­a­led from the cre­di­tors or his deb­ts ha­ve be­en incre­a­sed is avo­i­ded if the deb­tor was or by the pro­ce­du­re, so­lely or in com­bi­na­tions with anot­her factor , beca­me in­sol­vent and the ot­her per­son knew or ought to ha­ve known of the in­sol­ven­cy of the deb­tor and the cir­cumstan­ces ma­king the le­gal act im­pro­per.

4 Ch. 6 § of the Bankruptcy Act pro­vi­des as follows:

A gift is avo­i­ded if it has be­en com­pe­ted up to sex mont­hs be­fo­re the day of gra­ce. A gift com­ple­ted up to six mont­hs be­fo­re then but up to one ye­ar or, when it has be­en ma­de to so­me­o­ne who is clo­se re­la­ti­ve of the deb­tor, up to th­ree ye­ars be­fo­re the day of gra­ce, is avo­i­ded un­less it can be shown that the deb­tor af­ter the gift re­tai­ned pro­per­ty that could be the sub­ject of execu­tion and which clear­ly met his debt.


[1] Hans Renman, Återvinning en­ligt 4 kap. kon­kursla­gen, 2 ed. 2013, s. 170 f. The ot­her book is Återvinning i kon­kurs, 4 ed. 2013 by Gertrud Lennander, pro­fes­sor and for­mer justice the Swedish Supreme Court.