Edited By: William Johnston, Thomas Werlen, Frederick Link
- Banks and cross-border issues — Guarantees and security — Close-out netting — Set-off
32.01 The right of set-off (kvittning) provides a way for a debtor under a claim (hereafter the ‘principal claim’) to fulfil its payment obligation under the principal claim by way of reducing the amount of the principal claim by the amount of a counterclaim against its counterparty (hereafter the ‘counterclaim’). For the creditor under the counterclaim, the right to set-off against the principal claim has the characteristics of a security for the counterclaim.
32.02 Swedish set-off law is to a large extent not codified. Instead, it has developed through case law and legal commentary. However, in certain areas, such as bankruptcy and situations with particular social concerns, legislation has been deemed necessary. For the purposes of this chapter, the legal landscape can be split into (i) principles applying outside bankruptcy and (ii) principles applying in bankruptcy.
(p. 508) Unless otherwise specifically mentioned, set-off is herein described on the assumption that set-off is conducted in a commercial context. Consequently, it is from this perspective that Swedish set-off law is described.
1. General considerations
32.03 When a creditor under a counterclaim exercises its right to set off its counterclaim against its debt under a principal claim, the debt under the principal claim will be settled as if actual payment had occurred. Set-off is effected by a declaration (kvittningsförklaring) by the party exercising its right to set-off.2 Generally, there are no formal requirements for such a declaration.3 As a general rule, set-off does not require registration or any other interaction with any authority or any contractual arrangement between the parties.
32.04 Unilateral set-off is subject to the fulfilment of the following requirements in respect of the counterclaim to be used for set-off:4
(1) The counterclaim must be legally valid. An important exception from this requirement is that a counterclaim that is barred by the expiry of a limitation period5 may be used for set-off, where (a) such set-off is otherwise permitted, ie the other requirements of set-off are fulfilled, and (b) the counterclaim was not barred by the expiry of the limitation period when acquired by the debtor or when the debtor became indebted to the creditor.6
(2) The counterclaim must be compatible with the principal claim, in the sense that the obligation undertaken to be performed under the counterclaim shall be of a type that would fulfil the requirements for a performance of the obligation under the principal claim. When a creditor under a counterclaim sets off its counterclaim against a principal claim, there is, however, no requirement that the obligation undertaken to be performed by it under the principal claim shall satisfy the requirements for a performance of its (p. 509) counterparty’s obligation under the counterclaim (in other words, the creditor under the counterclaim can choose by which means payment under the counterclaim can be made).7 The compatibility requirement rarely presents any problems when both parties’ claims are monetary claims. Generally, a counterclaim that is a monetary claim cannot be set off against a principal claim for the performance of services or the delivery of goods, due to lack of compatibility.8
(3) The counterclaim must have matured. A creditor cannot request payment before its claim has fallen due and should thus not be entitled to use such unmatured claim for set-off. There is no requirement that the principal claim shall have matured, but, for set-off to be possible prior to the maturity of the principal claim, the creditor under the counterclaim must have a contractual right to fulfil its contractual obligation under the principal claim prior to its maturity.9
(4) The two claims must, as a main rule, be mutual, ie the parties on either side of each debt or claim must be the same.10 This does not mean that set-off cannot take place only because a claim was acquired from a third party and such claim has not arisen from the same contractual relationship. Furthermore, as described below, the mutuality requirement will normally not prevent set-off by a creditor under a counterclaim against its obligations under a principal claim where the principal claim has been transferred by the initial creditor under the principal claim to a third party.
(5) In some cases, set-off is not possible due to the nature of the principal claim. Due to social-policy concerns, certain types of claims for payment, such as claims for social benefits, salary, and pensions, may not be set off against obligations of the party being a beneficiary under such claims.11 A person entitled to such payment generally has a legitimate expectation to receive actual payment and should thus not be deprived thereof by way of set-off.
32.05 Under Swedish law it is not required that the counterclaim is undisputed for set-off to be possible.12 However, if a debtor attempts to set off an amount owed by (p. 510) it against a questionable claim of its own, such debtor may be liable for interest accrued during the delay and possibly damages for breach of contract if a court at a later stage finds that the conditions for set-off were not satisfied. Thus, a debtor making a unilateral declaration of set-off is doing so at its own risk. On the other hand, a creditor under a principal claim refusing to acknowledge its counterparty’s fulfilment of its obligations by way of set-off on the ground that the required conditions for set-off are not satisfied will also do so at its own risk (ie that the creditor may incur liability in relation to its counterparty if a court at a later stage finds that the conditions for unilateral set-off were satisfied).13
32.06 It is possible that the fact that a creditor’s counterclaim is subordinated (contractually or by other means) in relation to the debtor’s other creditors may affect the right to set off such claim.14
2. Set-off after a transfer of the principal claim
32.07 Rules governing set-off rights of a debtor under a principal claim in the event of a transfer of the principal claim can be found in the Promissory Notes Act (SFS 1936:81) (‘Promissory Notes Act’).
32.08 In the Promissory Notes Act, a distinction is made between non-negotiable promissory notes (enkla skuldebrev) and negotiable promissory notes (löpande skuldebrev). A non-negotiable promissory note is a promissory note expressed to be payable to a specific person. The provisions of the Promissory Notes Act regarding non-negotiable promissory notes also apply to monetary claims based on means other than a promissory note, eg a claim under a guarantee or a contract.15 A negotiable promissory note is a promissory note that is expressed to be payable to (a) the bearer or (b) a specific person or order.16 This means that a negotiable promissory note is generally more suited to transfer to a third party than a non-negotiable promissory note.
32.09 A debtor (Party X) under a principal claim in the form of a non-negotiable promissory note is under certain circumstances entitled to use its counterclaim against the initial creditor for set-off against a third party to whom the principal claim (the claim under the non-negotiable promissory note) has been transferred. A condition for such set-off is that Party X did not acquire its counterclaim after it became aware of the transfer of the non-negotiable promissory note or had reasonable grounds for assuming that the transfer had taken place. Furthermore, it is (p. 511) a requirement that the counterclaim either (a) matured prior to Party X becoming aware, or having reasonable grounds for assuming, that the transfer had taken place or (b) matured before, or at the same time as, the principal claim.17 Thus, a set-off is limited to cases where Party X could have anticipated that its own counterclaim was ‘secured’ by a possibility of set-off.18
32.10 The situation is different with respect to negotiable promissory notes. Negotiable promissory notes are intended for trading, and the sale and purchase of these instruments would most likely be severely restricted if an extensive set-off right was permitted. According to the Promissory Notes Act, if a negotiable promissory note has been transferred by the initial creditor (the transferor) to a new creditor (the transferee), and the party being the debtor under such transferred claim (Party X) has a counterclaim against the transferor, Party X may not set off its counterclaim against the transferee unless the recoverability of the counterclaim would be prejudiced by termination of the right of set-off and the transferee was clearly aware of this at the time of the transfer.19
32.11 The provisions of the Promissory Notes Act with respect to transfer of promissory notes apply also with respect to the granting of a security interest in such instruments.20
3. Contractual arrangements
32.12 It is a general principle under Swedish law that parties to a contract are entitled to agree upon whatever rights and obligations they choose. This principle of freedom of contract is, however, not without exceptions. For example, Swedish courts will not uphold any provisions that are criminal or contrary to public order, or considered highly unreasonable against one party.
32.13 In accordance with the general principle of freedom of contract, parties may prevent set-off between them where set-off would otherwise have been possible. Thus, a creditor under a counterclaim may not set off the counterclaim against a principal claim which, according to its terms, may not be paid by way of set-off, unless any mandatory legal provisions provide such right to the creditor.21 The preparatory works to the Bankruptcy Act (SFS 1987:672) (‘Bankruptcy Act’) indicate that such contractual provision would not prohibit set-off in the debtor’s bankruptcy.22
(p. 512) 32.14 Parties may also create set-off rights where otherwise no set-off right would have existed. One example of how parties can structure set-off contractually is a three-party set-off (trepartskvittning) arrangement whereby a bank sets off its claim against a company, eg the company’s debit balance on an account held with the bank, against a debt owed by the bank to an affiliate of the company, eg the affiliate’s credit balance on an account held with the bank. Without any contractual agreement, a three-party set-off would not fulfil the requirements for set-off under Swedish law due to lack of mutuality between the parties.23 Hence, for a bank that wants to have such set-off right, some form of contractual set-off arrangement that creates mutuality between the three parties needs to be put in place. A clause stipulating that each of the two affiliates is jointly and severally liable, up to the amount of its own credit balance, for the other affiliate’s debit balances with the bank would create a legal structure where the bank has a direct claim against both parties. The structure would fulfil the set-off requirement of mutuality. Another way to create the required mutuality is to have each party guaranteeing the other party’s obligations.
32.15 When discussing joint and several liability provisions and guarantees, the legal restrictions for Swedish limited-liability companies regarding the furnishing of upstream or cross-stream guarantees/security represent an important issue which needs to be addressed. A joint and several liability provision is deemed equivalent to a guarantee for the purpose of said restrictions. Pursuant to the Swedish Companies Act (SFS 2005:551) (‘Companies Act’), certain restrictions exist on the furnishing of upstream or cross-stream guarantees/security to closely related persons.24 There are, however, certain exceptions to this rule. For example, the furnishing of cross-stream and upstream guarantees/security is permitted between companies in the same group, provided that the parent of the group is incorporated in a Member State of the European Economic Area or if the upstream or cross-stream guarantees/security are motivated by sound business reasons.25
32.16 In addition to the above, if a Swedish limited-liability company furnishes guarantees/security without receiving full consideration in return for its undertaking, ie without receiving sufficient corporate benefit, the guarantees/security will (in whole or in part) be considered as a distribution of value without consideration (värdeöverföring) and, as such, be lawful only to the extent it does not exceed the amount available for distribution of dividend to its shareholders at the time the guarantee is given or the security is provided. There is no given formula to establish whether corporate benefit exists. Instead, whether corporate benefit exist will have to be established based on the facts in each unique case.
(p. 513) 32.17 The above issues26 need to be addressed in detail when dealing with guarantees and joint and several liability provisions since a violation of the prohibitions and restrictions may lead to criminal or civil liability, inter alia for the board of directors of the company granting the guarantee/security.27 An external third party that receives an unlawful distribution of value, such as a bank which receives payment under an unlawful guarantee, is not likely to be required to repay any amounts received unless the third party was, or should reasonably be, aware of the circumstances making the guarantee unlawful.28 In upstream and cross-stream guarantees/security provided by Swedish limited-liability companies, limitation language is often inserted. By inserting limitation language limiting the validity of a guarantee/security, the guarantor/security provider can avoid a situation where the beneficiary is entitled to enforce the guarantee/security in cases where this would not be lawful for the company.
4. Security interests
32.18 A contractual agreement between parties regarding set-off rights will not typically be regarded as a security interest (such as a pledge or an assignment of a claim) under Swedish law, although the effects are often similar: a party’s own claim against another party is ‘secured’ by the debt owed to such other party. It should, however, be noted that it is possible under Swedish law for a debtor under a counterclaim to pledge its rights under a principal claim as security for its obligations under a counterclaim, so that the creditor under the counterclaim receives security over the claim in respect of which it is a debtor.29
32.19 Since a set-off right does not constitute a security interest, there are no perfection requirements (ie requirements that need to be fulfilled to make the set-off right valid and enforceable against third-party creditors). However, as set out above, the counterclaim itself needs to meet certain requirements for set-off to be possible. A contractual arrangement creating a set-off right is generally not likely to violate a negative-pledge clause in a standard Swedish law loan agreement, but this will depend on the wording of such negative-pledge clause. For example, there may be a risk that a negative-pledge clause prohibiting any ‘pledge, assignment, lien, etc or any other agreement or arrangement having a similar effect’ will catch set-off arrangements. The parties should also carefully to consider any set-off wordings in order to avoid any undesirable effects, which could potentially include the arrangement being classified as a security arrangement.
1. General considerations
32.20 In a bankruptcy context, set-off effectively acts as a quasi-security by elevating a creditor entitled to set-off over other unsecured creditors. Through set-off, the solvent creditor will, subject to certain exceptions, be able to obtain satisfaction of its counterclaim against the principal claim of the insolvent counterparty. Consequently, such creditor does not have to join the frequently long queue of unsecured creditors for the distribution of the assets of the insolvent counterparty.
32.21 The Bankruptcy Act contains provisions regarding set-off in bankruptcy.30 The right of set-off in bankruptcy is generally viewed as generous to the creditor seeking set-off.31 However, if the right of set-off was excluded outside bankruptcy by reason of the nature of the claim, eg if the principal claim was for social benefits, set-off will not be permitted in bankruptcy.32 Furthermore, due to lack of measurability and compatibility, it is generally not possible for a creditor to set off an amount owed to the bankrupt debtor against, for example, the bankrupt debtor’s obligation to deliver goods to such creditor.33
32.22 Under the Bankruptcy Act, a counterclaim against an insolvent counterparty that is recognized in the bankruptcy of the insolvent counterparty may be used by the creditor for set-off against the insolvent counterparty’s principal claim if the principal claim existed when the insolvent counterparty was put into bankruptcy.34
32.23 The first criterion is thus that the counterclaim shall be recognized in the bankruptcy of the counterparty. As a main rule, only counterclaims in relation to a bankrupt company arising before the court’s decision to put such company into bankruptcy may be recognized in the bankruptcy of such company.35 A claim under a contract is generally regarded as having arisen at the time such contract was entered into, if the counterparty at such time was legally bound to perform the obligation on which the claim is based.36 Swedish case law has also shown that (p. 515) a claim for damages due to breach of contract by the debtor following insolvency was regarded as having arisen at the time the contract was entered into.37 There is, however, no rule of general application to determine whether a claim has arisen. The purpose of the provision for which the question whether the claim has arisen is relevant is likely to be of relevance.38 If the counterclaim is deemed to have arisen prior to the court’s decision to put the debtor into bankruptcy, it may be recognized in bankruptcy irrespective of whether it is (a) conditioned upon the occurrence of certain events or (b) not due for payment.39 However, a creditor’s right to receive a dividend in the bankruptcy on the basis of a claim in respect of which payment is conditioned upon the occurrence of a certain event is contingent upon the later occurrence of such event.40 That a payment under a counterclaim is conditioned upon the occurrence of certain events will also have implications from a set-off perspective. No set-off may be made until the events upon which the payment under the counterclaim is conditioned have occurred.41 Consequently, if the principal claim matures before the counterclaim and payment under the counterclaim is conditioned upon the occurrence of certain events, the creditor under the counterclaim is required to fulfil its payment obligation under the principal claim. If the conditions for payment of the counterclaim occur after the payment of the principal claim, an amount equal to such payment (if this does not exceed the amount of the counterclaim) shall be repaid to the creditor.42 It should be noted that the fact that a claim that has not matured does not mean that payment under the claim is conditioned in the meaning set out above only because the maturity date has not yet occurred. This is because the occurrence of the maturity date of a claim is a certainty.43 Thus, there is no requirement that a counterclaim is matured for such claim to give the creditor under such claim a right to a dividend in respect of such claim, or a right to set off its debt against such claim, in the bankruptcy of its counterparty. Also, claims that have arisen but which may be affected (eg reduced) upon the occurrence of a certain future event may be set off in bankruptcy.44
32.24 The second criterion for set-off in bankruptcy is that the principal claim shall have existed when the counterparty (the creditor under the principal claim) was put into bankruptcy. That the principal claim is conditioned upon the occurrence (p. 516) of certain events does not affect the creditor’s (the creditor under the counterclaim) right to set off the counterclaim against the principal claim with immediate effect.45
32.25 As described above, set-off can, in bankruptcy be made using a counterclaim that has not yet matured.46 In this respect, the right of set-off is thus widened in bankruptcy compared to what applies outside bankruptcy. The Bankruptcy Act is silent on the issue of whether it is a requirement that the creditor under the counterclaim has right to repay the principal claim of the bankrupt debtor for set-off to be possible in bankruptcy.47 Although there are no precedents to this effect, the preparatory works of the Bankruptcy Act and legal practice indicate that a counterclaim that fulfils the criteria for set-off may be set off against a principal claim that is not payable according to its terms, which would mean that the right of set-off is widened in bankruptcy also in respect of the conditions for set-off applying to the principal claim.48
32.26 In the event that a creditor has two counterclaims in relation to the same bankrupt debtor—one counterclaim in respect of which it has a priority in the bankruptcy (by way of security or otherwise) and one counterclaim in respect of which it has no priority—the creditor is free to choose that the amount owed by it to the bankrupt debtor under a principal claim shall be set off against the non-prioritized counterclaim.49
2. Restrictions regarding the right of set-off in bankruptcy
32.27 As will be discussed below, it may be tempting for a party owing money to another party which is threatened with bankruptcy to acquire a claim against or become indebted towards such party solely for the purpose of creating a set-off right. In order to prevent an abuse of the Swedish bankruptcy law provisions providing a creditor a set-off right in the debtor’s bankruptcy, the Bankruptcy Act restricts the right of set-off in situations where a set-off mechanism has been created by the parties for improper purposes.50
32.28 Just before a debtor becomes insolvent, claims against the debtor can usually be acquired at cost that is lower than the cost would have been should the debtor (p. 517) have been solvent. For debtors of the entity threatened with bankruptcy, this represents an opportunity to acquire counterclaims at less than nominal value and thus set off their obligations to the bankrupt party. To prevent improper transfers of claims, the Bankruptcy Act stipulates two limitations to the right to set-off.51First, a counterclaim against the party threatened with bankruptcy (the insolvent party) acquired by a transfer52 by another party (the solvent party) from a third party up to three months before the ‘day of grace’53 may not be used to set off against a principal claim which the insolvent party had against the solvent party when the solvent party acquired its claim, unless the acquisition of such claim can be considered ordinary in regard to the circumstances.54Second, even if a counterclaim has been acquired by the solvent party (a) prior to the three-month period or (b) during the three-month period but has been considered ordinary, it may not be used for set-off if the solvent party then had reasonable grounds to assume that the insolvent party was insolvent.55
32.29 Another way to effectively create a set-off situation is for an unsecured creditor to incur a debt to the debtor. In a bankruptcy context, a set-off by a creditor of its counterclaim against the insolvent debtor’s principal claim is to be considered a payment by the insolvent debtor of its obligations in relation to its counterparty.56 According to the Bankruptcy Act, a creditor who has placed itself in debt to the insolvent debtor in circumstances where the debt has been incurred by the insolvent debtor through a transaction deemed equivalent to payment by non-customary means of payment may not set off to the extent that such payment could have been the subject of recovery.57 A payment by non-customary means of payment up to three months before the day of grace may be recovered, unless the payment can be considered to have been made in the ordinary course of business.58 From a set-off perspective, the relevant payment (the payment that could be characterized as customary or non-customary) is the ‘payment’ made by the insolvent creditor which has resulted in the incurrence of debt by its counterparty.59 An example of what could be considered to constitute non-customary (p. 518) means of payment by the debtor is that the debtor sells goods on credit to its counterparty for the purpose of giving the solvent creditor a set-off right in the bankruptcy of its counterparty.60
32.30 It is generally considered that it is doubtful whether a subordinated claim could be used for set-off in the bankruptcy of the creditor’s insolvent counterparty, but Swedish set-off law is unclear in this respect.61
3. Recovery of set-off effected before bankruptcy
32.31 In order to prevent a race among the creditors for a debtor’s assets when the debtor’s financial position becomes critical, the Bankruptcy Act contains a number of recovery provisions.62 These provisions entail that payment and other legal transactions within a critical period of time before the occurrence of bankruptcy may be recovered under certain circumstances. The recovery provisions, which are described below, are applicable where set-off is effected before the debtor is declared bankrupt.
32.32 As partly mentioned above, under the Bankruptcy Act, the payment, or set-off, of a debt during a period of three months before the day of grace which was made (i) other than by customary means of payment, (ii) prematurely, or (iii) in an amount that caused a considerable deterioration in the financial position of the debtor, may be recovered, unless it can be considered ordinary.63 If the payment (or set-off) was made to someone who is closely related to the debtor, the ‘look-back’ period is two years instead of three months, unless it can be shown that the debtor neither was nor became insolvent by virtue of the payment (or set-off).64
32.33 A set-off may not be subject to recovery if set-off would nonetheless be permitted in the forthcoming bankruptcy. The reason for this is that the recovery of a set-off effected before the start of bankruptcy would be meaningless if it were still permissible to set off in the subsequent bankruptcy.65
32.34 A set-off effected before the start of bankruptcy is in most cases unlikely to be recovered as constituting a premature payment or a payment in an amount that has caused a considerable deterioration in the financial position of the debtor.66 This is because set-off will be permitted in bankruptcy with respect to an (p. 519) unmatured counterclaim and irrespective of the size of such counterclaim. The provisions for recovery of actual payments are thus more far-reaching than the provisions regarding recovery of set-off.67
32.35 Furthermore, a set-off which has been effected prior to the three-month grace period may be recovered pursuant to the general provision in the Bankruptcy Act regarding recovery.68 According to this general recovery provision, a transaction (i) through which one creditor is unduly preferred to the detriment of other creditors, (ii) through which the debtor’s assets are dissipated, or (iii) through which the debtor’s debt is increased, may be recovered if the debtor was (or became by virtue of the transaction) insolvent, provided that the creditor was aware of or should have been aware of the debtor’s insolvency and the circumstances which made the transaction improper.
32.36 According to the Financial Instruments Trading Act (SFS 1991:980) (‘Netting Legislation’), a close-out netting provision agreed upon between two parties trading in financial instruments or with other similar rights or undertakings is binding in a bankruptcy situation.69 Close-out netting entitles a party to terminate all transactions with another party upon the occurrence of a specific event (eg the bankruptcy of the other party). Following such termination, all amounts outstanding between the parties are reduced to one net amount. In contrast to what applies in relation to set-off, the effects of netting will occur automatically, without any requirement for a netting declaration.70 The Netting Legislation effectively prevents a bankruptcy administrator from ‘cherry-picking’, ie choosing to perform the transactions that are favourable to the bankruptcy estate and repudiating less favourable transactions. The legislation also offers the possibility of netting claims which are not measurable or compatible, which allows netting in situations where set-off outside bankruptcy would not be possible due to the generally applicable requirements for set-off under Swedish law. For example, a monetary claim could be netted against a claim for physical delivery of a commodity.71
32.37 In Sweden, Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (‘Rome I’) applies to contractual obligations in civil and commercial matters (with the exceptions set out therein) in respect of agreements entered into on or after 17 December 2009.72 According to Rome I Article 17, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted, unless the right to set-off has been agreed by the parties. This means that, in Sweden, in the absence of an agreement between the parties, the law of the principal claim will govern the right to set-off. In accordance with Rome I Article 2, this applies irrespective of whether such law is the law of a State that is a Member of the European Union.
32.38 In respect of agreements entered into on or after 1 July 1998 but before 17 June 2009, the provisions of the Convention on the law applicable to contractual obligations of 19 June 1980 (‘Rome Convention’) apply (with the exceptions set out therein).73 Also in the Rome Convention, the main rule is that the parties to a contract are free to choose by which laws a contract shall be governed.74 If no such choice has been made, the main rule is that the law of the country to which a contract is most closely connected will govern the contract.75 In Article 10.1(d), it is stated that the law governing the contract shall govern ‘the various ways of extinguishing obligations, and prescription and limitation of actions’. In a unilateral set-off where the principal claim and the counterclaim are derived from separate contracts and not governed by the laws of the same jurisdiction, this could be interpreted either as that it is the law by which the principal claim is governed that determines whether the set-off is possible, or as that the requirements under the laws of both claims must be met.76 It is possible that a Swedish court would seek guidance in the Rome I provisions, which would mean that the law governing the principal claim would govern a unilateral set-off.77 However, (p. 521) it cannot be ruled out that the laws applicable in relation to both claims will be applied.78
32.39 For agreements entered into prior to 1 July 1998, Sweden has no codified general choice-of-law rules for set-off. Generally, contractual rights and obligations will be determined by the substantial laws of the country to which the agreement is most closely connected.79 As when the Rome Convention applies, there is no clear rule to determine the applicable law on a unilateral set-off where the claims are not governed by the laws of the same jurisdiction.
32.40 In Sweden, Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (‘2000 Insolvency Regulation’) applies in relation to insolvency proceedings initiated in Member States of the European Union (except Denmark) on or after 31 May 2002 but before 26 June 2017, and Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (‘2015 Insolvency Regulation’) applies in relation to bankruptcy proceedings initiated in Member States of the European Union (except Denmark) on or after 26 June 2017.80 According to Article 4.2(d) of the 2000 Insolvency Regulation and Article 7.2(d) of the 2015 Insolvency Regulation, the law of the state of the opening of the proceedings shall determine the conditions under which set-offs may be invoked. However, according to Article 6.1 of the 2000 Insolvency Regulation and Article 9.1 of the 2015 Insolvency Regulation, the opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor’s claim. This means that a creditor seeking to set off its counterclaim against its obligations under its insolvent counterparty’s principal claim will be guaranteed the set-off rights under the laws governing the principal claim if the set-off right is restricted under the laws of the jurisdiction governing the bankruptcy proceedings. In Article 6.2 of the 2000 Insolvency Regulation and Article 9.2 of the 2015 Insolvency Regulation, (p. 522) an exception is, however, made for actions relating to the voidness, voidability, and unenforceability of legal acts detrimental to all the creditors.
32.41 The Nordic Bankruptcy Convention of 1933 (as amended) applies between Sweden, Denmark, Iceland, and Norway.81 According to the Nordic Bankruptcy Convention, the law of the jurisdiction of the bankruptcy proceedings shall apply in relation to, amongst other things, the effects of the bankruptcy on the insolvent company’s right to dispose of its assets, the scope of the bankruptcy estate, recovery to the bankruptcy estate, and the insolvent company’s rights and obligations in the bankruptcy.82 This suggests that in a unilateral set-off by a solvent creditor of its counterclaim against its insolvent counterparty’s principal claim, the laws of the jurisdiction of the bankruptcy proceedings will govern the set-off.
32.42 In Sweden, bankruptcy proceedings may be initiated where neither the 2000 Insolvency Regulation, the 2015 Insolvency Regulation, nor the Nordic Bankruptcy Convention applies. For example, a debtor can be subject to bankruptcy proceedings in Sweden even if the centre of the debtor’s main interest is outside the European Union, if the debt on which the filing for bankruptcy is based was incurred in Sweden, or if the debtor has assets in Sweden.83 In such bankruptcy proceedings, it is likely that set-off by a creditor against its bankrupt counterparty’s principal claim will as a main rule be determined in accordance with Swedish law, but there are no codified provisions to this effect.84
32.43 The conditions for set-off under Swedish law relate to the claims subject to set-off and not to the parties in the set-off relationship. Thus, it is typically the international characteristics of the claims subject to set-off that could give rise to cross-border issues under Swedish set-off law.
32.44 As described in section 32.04, it is a requirement for unilateral set-off that the counterclaim and the principal claim are compatible. If both the counterclaim and the principal claim are monetary claims, the general view is that this requirement is generally fulfilled even if the claims are denominated in different currencies.85 However, there exist no precedents to this effect and it is doubtful that the possibility to set off claims denominated in different currencies can be seen as a rule with general application. If the creditor under the principal claim has a specific interest in having the principal claim fulfilled in a certain currency, it may (p. 523) be deemed that the requirements for set-off are not fulfilled.86 In respect of set-off in bankruptcy, support for the position that the set-off may be made even if the claims are denominated in different currencies can be found in the preparatory works of the Bankruptcy Act.87
32.45 If payments under the principal claim and the counterclaim according to their terms shall be made in different jurisdictions, the question whether the compatibility requirement is fulfilled arises. Generally, set-off may be made irrespective of where payment shall be made according to the terms of the claims.88
32.46 As previously described, the fact that the parties are incorporated in different jurisdictions will not by itself have implications for the possibility for a creditor under a counterclaim to set off the counterclaim against its obligations under a principal claim. However, when structuring set-off arrangements involving a Swedish limited-liability company, attention must be given to the Swedish company law provisions regarding prohibited loans and guarantees/security, according to which a Swedish limited-liability company may not provide loans to or provide security for or guarantee the obligations of its direct and indirect parent companies that are incorporated outside the European Economic Area. Swedish company law may thus restrict the possibility to implement intra-group set-off or joint liability arrangements.
32.47 Under Swedish law, parties are free to negotiate and agree on set-off provisions. Without any contractual arrangements, set-off may be effected if certain requirements described above are met. In bankruptcy, a creditor’s right of set-off is widened compared to what applies outside bankruptcy. To prevent the creation of improper set-off arrangements, the Bankruptcy Act contains provisions restricting the right of set-off in bankruptcy. Claims that have been acquired shortly before the declaration of bankruptcy may not, under certain circumstances, be used for set-off in bankruptcy. Furthermore, a set-off effected shortly before the insolvency of the debtor may be subject to recovery. Swedish law recognizes the (p. 524) concept of close-out netting. Outside bankruptcy, the conflict-of-laws provisions of Rome I apply, and according to Rome I the parties are free to choose by which law a contract shall be governed. Unilateral set-off is governed by the laws by which the principal claim is governed. In respect of agreements entered into before 17 June 2009, the legal situation is not entirely clear. If set-off is made in bankruptcy, other provisions apply. In bankruptcy proceedings where the 2000 Insolvency Regulation or the 2015 Insolvency Regulation applies, set-off will be governed by the laws of the jurisdiction of the bankruptcy proceedings. However, the creditor under the counterclaim can rely on the set-off rights under the laws by which the principal claim is governed, if its set-off rights are restricted in the jurisdiction of the bankruptcy proceedings.
2 S Lindskog, Kvittning: Om avräkning av privaträttsliga fordringar (3rd edn, Stockholm 2014) 608. An important possible exception to this main rule is that when the principal claim is documented by a negotiable promissory note (löpande skuldebrev), the negotiable promissory note may (in addition to the declaration of set-off) be required to be transferred to the possession of the creditor. In the absence of relevant case law, the Swedish law on set-off remains unclear in these respects. If the negotiable promissory note is an electronic debt instrument, registration would replace the requirement for transfer of the physical document. See ibid., 122–3, 599, 603.
3 Lindskog (n 2 above) 609.
5 A claim may normally not be brought against another party after ten years of its origin, unless the limitation period has been interrupted prior thereto (The Limitations Act (Svensk författningssamling (‘SFS’) 1981:130) (‘Limitations Act’) s 2).
7 Lindskog (n 2 above) 144; K Rodhe, Obligationsrätt (Stockholm, 1956) 60.
8 According to case law, a creditor may not set off its monetary counterclaim against its obligations under a principal claim that is a monetary claim only as a consequence of a breach of contract by such creditor of the contract from which the principal claim derives, as the consequence thereof would be that the creditor would benefit from its breach of contract. See Nytt juridiskt arkiv (‘NJA’) 1995 p 356.
10 A right to set-off against a third person might, however, be created in case of cession or a commission relationship. Rodhe (n 7 above) 54–5.
11 Rodhe (n 7 above) 65–7; Mellqvist and Persson (n 4 above) 106; Lindskog (n 2 above) 270–82. An employer may, under certain circumstances, with the consent of the employee, set off amounts (salary) owed to the employee against the employer’s claims against the employee. See the Employer’s Right of Set-off Act (SFS 1970:215).
13 Rodhe (n 7 above) 63.
14 Prop. 1975:6 p 268; Statens Offentliga Utredningar (’SOU’) 1970:75 p 189. In relation to set-off in bankruptcy, see para 32.30 below.
18 Lindskog (n 2 above) 485–97.
21 Lindskog (n 2 above) 330.
22 Prop. 1975:6 p 268; SOU 1970:75 p 189. See also G Lennander, Återvinning i konkurs (4th edn, Stockholm 2013) 268. Lindskog argues that such contractual set-off prohibition should apply also in bankruptcy but notes that the legal position is unclear; see Lindskog (n 2 above) 334.
26 The prohibitions and restrictions under Swedish law with respect to upstream and cross-stream guarantees/security are only briefly discussed herein. Specific legal advice should always be sought on the issues.
31 Lennander (n 22 above) 269.
35 Bankruptcy Act ch 3 s 1. According to Bankruptcy Act ch 3 s 2, under certain circumstances claims which have arisen after the bankruptcy decision, but before or on the day after which the public notice of the bankruptcy decision was inserted in the Official Gazette (Post och Inrikes Tidning), may also be recognized in bankruptcy.
36 M Mellqvist and L Welamson, Konkurs (12th edn, Stockholm 2017) 193–7. L Welamson, Konkursrätt (Stockholm, 1961) 441–2. Lindskog states that a creditor who has entered into a contract regarding an exchange of benefits and sacrifices with its now bankrupt counterparty shall, at the time of the court’s decision to put the counterparty into bankruptcy, have made its (relevant) sacrifice(s) in accordance with the contract or otherwise put itself in such a position that the creditor cannot avoid making such sacrifice(s) without forgoing its legal rights for the counterclaim to be recognized in the bankruptcy of its counterparty. See Lindskog (n 2 above) 176, 181.
41 Lindskog (n 2 above) 184.
44 Prop. 1975:6 p 268; SOU 1970:75 p 188; Lindskog (n 2 above) 168–9.
45 Prop. 1975:6 s 268; SOU 1970:75 s 188; Lindskog (n 2 above) 186.
47 As set out in section 32.04 above, such requirement applies outside bankruptcy.
48 SOU 1970:75, p 188; prop. 1975:6 p 268; Palmér and Savin (n 33 above), commentary to Bankruptcy Act ch 5 s 15. Lindskog argues that the adequacy of such a rule can be called into question; see Lindskog (n 2 above) 325.
52 Actual transfers of claims are required. Claims acquired, eg, by inheritance or pursuant to a division of matrimonial property will not be caught by the relevant provision of the Bankruptcy Act. See Palmér and Savin (n 33 above), commentary to Bankruptcy Act ch 5 s 16; Lindskog (n 2 above) 107, 249–56.
54 According to the preparatory works to the relevant provision of the Bankruptcy Act, an acquisition of a claim made only as a part of a larger arrangement/transaction can in some cases be considered ordinary. See prop. 2004/05:30 p 68.
59 Lennander (n 22 above) 273.
61 Prop. 1975:6 p 268; Palmér and Savin (n 33 above), commentary to Bankruptcy Act ch 5 s 15–17.
68 Bankruptcy Act ch 4 s 5; Lennander (n 22 above) 277.
70 Lindskog (n 2 above) 80.
71 Following the implementation of Directive 1998/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems (‘Finality Directive’), multilateral netting is also recognized and enforceable under Swedish law in a notified settlement system provided that the settlement has taken place in accordance with the rules of the system.
76 U Magnus and P Mankowski, Joint response to the Green Paper on the conversion of the Rome Convention of 1980 on the law applicable to contractual obligations into a community instrument and its modernisation, available at http://ec.europa.eu/justice/news/consulting_public/rome_i/contributions/university_hamburg_en.pdf, p 40. Last visited on 2 June 2017.
77 M Hellner, Lagen (1998:167) om tillämplig lag för avtalsförpliktelser, commentary to Rome Convention art 10.1(d), Karnov, 1 July 2014. Available at http://karnovgroup.se. Last visited on 2 June 2017.
80 2000 Insolvency Regulation recital (33), art 43; 2015 Insolvency Regulation recital (88), art 84; Bogdan (n 72 above) 314. The 2000 Insolvency Regulation does not apply in relation to insolvency proceedings concerning, inter alia, insurance undertakings and credit institutions. See 2000 Insolvency Regulation art 1.2; and 2015 Insolvency Regulation art 1.2. In respect of insolvency proceedings for insurance undertakings and credit institutions in the European Economic Area, the Act (2005:1047) on International Conditions concerning Insolvency of Insurance Undertakings and Credit Institutions (implementing Directive 2001/17/EC of the European Parliament and of the Council of 19 March 2001 on the reorganization and winding up of insurance undertakings and Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganization and winding up of credit institutions) applies.
82 Bogdan (n 72 above) 316.
83 Bogdan (n 72 above) 308–11.
86 Lindskog (n 2 above) 149. According to Lindskog (ibid.), a counterclaim in one currency may not be set off against a principal claim in another currency if the principal claim is a claim under a currency contract where the purpose is to buy/sell currency. Rodhe argues that it should not be possible for a creditor under a counterclaim to set off the counterclaim against a principal claim denominated in another currency unless the creditor under the counterclaim has a contractual right to fulfil the principal claim in the currency in which the counterclaim is denominated; see Rodhe (n 7 above) 60.