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21 October 2005
The wage guarantee is an important factor in Swedish bankruptcy proceedings. Employees are entitled to a maximum amount of Skr160,000 paid by the state to cover wage claims. In case of bankruptcy, the normal practice is to terminate all employment contracts immediately, which triggers wage claims during the term of notice. Employees may have additional claims such as holiday wages and other accrued unpaid payments. The state is obliged to pay claims under the Wage Guarantee Act and takes over employees' claims against the company. Wage claims have priority in bankruptcy cases.
Insolvency matters are administered by either the Company Reorganization Act or the Bankruptcy Act. The Company Reorganization Act was established in 1996 and has been applied in only around 170 cases per year over the past few years. As there are approximately 6,000 bankruptcies per year in Sweden, the general opinion is that the Company Reorganization Act has been a failure. Therefore, in order to increase the number of reconstruction proceedings and reduce the number of bankruptcy cases, several changes have been made to the legislation in recent years - for example, floating charges for creditors have been reduced to encourage the latter to take the necessary steps to avoid bankruptcy.
Moreover, as of July 1 2002 a wage guarantee has been included in reconstruction proceedings under the Company Reorganization Act.
There are several differences between the wage guarantee in bankruptcy proceedings and that in reconstruction proceedings. In reconstruction proceedings, the wage guarantee supports only insolvent companies with liquid funds. All money provided to the employees under the guarantee must be recorded as a debt to the state. As soon as the reconstruction proceedings are over (which usually result in a judicial settlement), the debt to the state must be repaid on request. The wage guarantee can be considered only as a temporary solution to the insolvent company's liquidity. The company might also be obliged to pay payroll taxes to the state based on the wage guarantee. However, this obligation has never been tested in practice.
Moreover, the wage guarantee gives employees the right to receive wages accrued during a period of three months before the court ordered the commencement of the reconstruction proceedings. The guarantee also includes certain holiday payments and, more importantly for the insolvent company, wage costs accrued in the first month following the court order. If the insolvent company terminates any employment contracts, the guarantee will also cover wages accrued during the term of notice. A maximum amount of approximately Skr160,000 can be paid. The receiver must administrate the wage guarantee, but the payment must be made by the state. The receiver's decision can be appealed. If a company goes into bankruptcy during reconstruction, employees will have a right to a new wage guarantee during the bankruptcy proceedings.
The purpose of introducing the wage guarantee in reconstruction proceedings was to (i) create neutrality between bankruptcy and reconstruction proceedings, and (ii) increase the number of reconstruction proceedings under the Company Reorganization Act, so that companies suffering only from temporary bad liquidity can avoid bankruptcy. Arguably, the wage guarantee can serve this purpose. How the state demands repayment will be an important factor in achieving this goal. The repayment obligation comes into force directly after settlement with the creditors and must therefore be taken into consideration. The terms of repayment have not yet been specified, but this change in legislation is likely to increase the number of reconstruction proceedings.
For further information on this topic please contact Margareta Andersson or Henrik Gallus 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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