Hamilton Perspectives Newsletter

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.

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