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As an alternative to bankruptcy, a Swedish business in financial trouble can enter into a composition (ackord) with its creditors. While seeking a composition, the debtor has nevertheless had no protection against its creditors. To solve this problem, new legislation (the Business Reconstruction Act, SFS 1996:764) has been enacted, effective from September 1 1996.

Under the Act, the debtor or a creditor can apply for business reconstruction of the debtor. If the court grants the application, a reconstructor is appointed to seek a solution to the debtor's problems. This could involve a series of measures to improve the profitability of the business and/or a composition with the creditors. If the business reconstruction is protracted (the normal time limit is three months, but the court may extend the time limit up to one year), the reconstructor will supervise the business of the debtor, whose freedom of action is curtailed so as to prevent a deterioration of its position.

One important aspect of a business reconstruction is that the debtor is protected from its creditors while the proceeding is in progress. This means that no enforcement measures can be taken against the debtor. It also means that a party to an agreement with the debtor is not entitled to terminate the agreement unilaterally on the basis of (anticipated) late payment on the part of the debtor once a business reconstruction has been instituted. The right to set off claims against one another is likewise restricted. These limitations should be taken into consideration when drafting international contracts with Swedish parties.

Critics of the new legislation maintain that it will not fulfil its purpose, because taxes will still have priority over the claims of unsecured creditors in general, which means taxes cannot be made the subject of a composition. Also, a bankruptcy may still be viewed as a 'profitable' alternative to a composition, because the state payroll guarantee, under which the state picks up the tab for claims for salaries and wages, is effective in bankruptcies.

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