In a complex legal context in which the focus is on employees’ obligations in the event of bankruptcy, the Göta Court of Appeal has recently issued a ruling that could have far-reaching consequences for how claims for salary and similar remuneration should be dealt with in the event of bankruptcy. The ruling, which was not appealed before the Supreme Court, has provoked both discussion and outrage in the legal community. This article carries out a more detailed examination of the controversial ruling, its impact on receivers in bankruptcy and employees and its implications for future bankruptcy proceedings.
EMPLOYEES’ SALARY GUARANTEE IN THE EVENT OF BANKRUPTCY
An employee who has claims for salary and similar remuneration in a bankruptcy is often entitled to payment through the State salary guarantee. The State then steps in and pays the employee’s claim and takes over the employee’s claim against the bankrupt company to an equivalent extent (so-called salary guarantee recourse). Nevertheless, the employee’s right to a salary guarantee is limited in terms of time and amount, which means that the employee sometimes fails to receive guarantee compensation for their entire claim. To enable the employee to be paid for the part of the claim not covered by a salary guarantee, the claim must instead be subject to distribution in the bankruptcy. The employee is then treated, in principle, as an ordinary creditor.
The general view among receivers in bankruptcy has been that the receiver is responsible for safeguarding claims for salary and similar remuneration on behalf of the employees in cases where the right to distribution is established through a safeguarding procedure (a safeguarding procedure takes place regularly in bankruptcies where distribution may be relevant for unsecured claims). Claims that are not safeguarded in the safeguarding procedure cannot be subject to distribution and the fact that the claims are safeguarded is therefore crucial for the employee’s ability to receive payment when remuneration cannot be received through the salary guarantee.
THE GÖTA COURT OF APPEAL’S DECISION AND THE BANKRUPTCIES
Nevertheless, on 3 March 2023, the Göta Court of Appeal issued a ruling (case no. Ö 182-23) in which the court established that a receiver in bankruptcy’s task does not include safeguarding the employees' salary claims in the safeguarding procedure unless the claim is covered by a salary guarantee. Since the ruling of the Court of Appeal in question was not appealed before the Supreme Court, the ruling will have a major impact on future safeguarding proceedings. The supervisory authority for bankruptcies, which is responsible for supervising the actions of receivers in bankruptcy, has (without considering the ruling as a problem) drawn the attention of the receivers in bankruptcy to the ruling and may be presumed to consider that the ruling now constitutes current law.
However, the weight of the Court of Appeal’s arguments can be questioned (more on this below). The outcome of the ruling is also unfortunate from a practical point of view. In bankruptcies involving large numbers of employees, the Court of Appeal’s ruling risks leading to higher bankruptcy costs and therefore a worse chance of distribution for the creditors. This is because it may be expected that the receivers in bankruptcy need to deal with a higher number of questions from employees regarding the safeguarding obligation. Furthermore, the number of cases of subsequent safeguarding (i.e. cases of safeguarding established only after the end of the ordinary safeguarding period and that need to be dealt with in a specific procedure) can be expected to rise. Because subsequent safeguarding may nevertheless be called for up to when the proposal for distribution is prepared (which normally takes place at the moment when the receiver issues final accounts), there is a risk that this will mean that bankruptcies will last longer which will mean, in addition to higher costs, that creditors will need to wait longer for their distributed funds.
SALARY GUARANTEE AND MONITORING: AN AUDIT
As noted, the Court of Appeal’s judgment may be questioned. The reason for this is somewhat knotty, but is explained here for those who are particularly interested.
At the centre of the assessment is section 15(1) of the Salary Guarantee Act, which states that:
The receiver must safeguard claims on the employees’ behalf that are clear in the receiver’s opinion.
According to the Court of Appeal, the scope of the Act must not be understood as an obligation for the receiver to safeguard all clear salary claims, but only claims that are covered by the State salary guarantee. However, such claims can only be safeguarded in a safeguarding procedure that is initiated before the receiver has had time to make a decision on the salary guarantee. Because salary guarantee decisions are normally made at an early stage of the bankruptcy proceedings, whereas a safeguarding procedure is called for only after the winding-up work has progressed to such an extent that it is clear that a question of distribution arises for unsecured claims, any such safeguarding obligation should, in view of the Court of Appeal’s ruling, rarely/never arise for the receivers in bankruptcy. In almost all practical cases, therefore, the employees themselves will need to safeguard their claims in the safeguarding procedure.
In the reasons for the ruling (page 5 of the ruling), the Court of Appeal traces the contents of Section 15 of the Salary Guarantee Act back to the first paragraph of Section 6 of the Act (1975:1261) amending the Act on the State Salary Guarantee in the event of bankruptcy.
The first and second sentences of the first paragraph of that law state that:
A receiver in a bankruptcy which is being dealt with in accordance with what is generally prescribed in a case of bankruptcy must, as soon as possible after the bankruptcy ruling, notify the authority referred to in section 5 of the claim for salary for a notice period if the claim is clear in the opinion of the receiver. Notice should also be given of other claims covered by the salary guarantee under the same conditions.
The third paragraph states as follows:
When notice is given in accordance with the first or second sentence of the first subparagraph, the receiver must at the same time safeguard the claim referred to in the notice on behalf of the employee.
The Court of Appeal draws the following conclusion from the above quotations:
The receiver’s obligation to safeguard therefore included, from the beginning, only the same claims that they had notified the paying authority of, i.e. claims covered by a salary guarantee. Since no substantive change has been intended by subsequent legislative amendments, the Court of Appeal considers that the receiver’s safeguarding obligation only includes claims covered by the salary guarantee and therefore not any other claims that employees may have.
However, the first sentence of the first paragraph of section 6 of the 1975 Act does not link the obligation to notify to the fact that the claim must be covered by a salary guarantee. It only states as follows:
A receiver in a bankruptcy which is being dealt with in accordance with what is generally prescribed in a case of bankruptcy must, as soon as possible after the bankruptcy ruling, notify the authority referred to in section 5 of the claim for salary for a notice period if the claim is clear in the opinion of the receiver.
The decisive factor is therefore whether the claim relates to
- a salary;
- for a notice period; and
- is clear in the receiver’s opinion.
Consequently, contrary to what the Court of Appeal appears to suggest, the receiver would also notify claims which, due to an amount block, for example, do not give rise to a right to a salary guarantee. Consequently, such claims would also be safeguarded in a safeguarding procedure.
This application is not contradicted by the second sentence of the statute, which states that:
Notice should also be given of other claims covered by the salary guarantee under the same conditions.
However, for such claims, i.e. claims that do not relate to a notice period, there is an obligation to notify (= safeguarding obligation) only if the claims are covered by the salary guarantee.
It can, of course, be argued that the wording [Notice should] “also be given of other claims covered by the salary guarantee” implies that the first sentence is also confined to claims covered by the salary guarantee, but if that were the case, one would not have needed both the first and second sentences, but could have confined oneself to stating that the receiver must notify the authority of all salary claims covered by the salary guarantee that the receiver considers to be clear. Reasons relating to the purpose also suggest that all clear salary claims – i.e. not only severance pay but also claims for holiday pay, for example – should be included in the receiver in bankruptcy’s safeguarding obligation.
To sum up, the Court of Appeal’s ruling does not appear entirely convincing. The Court of Appeal’s conclusions also deviate from the previously prevailing view that it is for the receiver to safeguard the employees’ claims for salary and other similar remuneration. The ruling also risks leading to undesirable consequences. Hopefully, the Supreme Court will soon have the opportunity to re-examine the Göta Court of Appeal’s conclusions. But at present, the legal situation must be described as uncertain, or unsatisfactory at any rate.