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13 October 2006
Since January 1 2004, the value of floating charges in a bankruptcy situation has been reduced pursuant to changes to the legislation. Before January 1 2004, floating charges provided a security over almost 100% of the debtor's assets. Following the amendment to the law, the security was reduced to cover only 55% of the debtor's assets. The change aimed to make creditors with floating charges more proactive in insolvency situations. The new legislation has been heavily criticized by various organizations (eg, the Bank Union).
In order to give creditors time to adjust their credit agreements to the new rules, the old legislation continued to apply to bankruptcies which occurred during 2005, as described in the applicable transitional provisions. The wording of the transitional provisions gave the impression that bankruptcies which occurred during 2005 also had to be closed before the end of that year for the old rules on floating charges to apply. This issue has now been clarified by the High Court in a recent decision.(1)
In the case at hand a company was declared bankrupt on April 22 2004. The question was whether the dividends owed to the bank with a floating charge as security should be interpreted under the new or the old rules; the question arose because the bankruptcy was not closed before the end of 2005.
The court found that the old rules on the value of floating charges should apply. The court further held that a different conclusion would contradict the insolvency principle that all creditors' rights must be frozen when the debtor is declared insolvent or on the date on which the application for bankruptcy is received by the court. It would also contradict the principle that new material rules cannot be applied once the proceedings have started.
The decision clarifies an issue which created a lot of practical problems for official receivers and courts last year.
For further information on this topic please contact Henrik Gallus or Margareta Andersson at Wistrand Advokatbyrå by telephone (+46 31 771 21 00) or by fax (+46 31 771 21 50) or by email (email@example.com or firstname.lastname@example.org).
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