Question

In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder (there is no reorganization through Chapter 11 bankruptcy). The current managers are often the high bidders for the company. Why? Is this a problem for Sweden and, if so, what, if anything, should be done about it?

Answer 1

In a world which is ever changing, the concept of debt management and restructuring of companies has become extremely important over the years. Across countries restructuring means changing the ownership of a company once it fails to meet its obligations towards those that have granted loans to it. This is usually done by setting up a board which looks after the company and transfers the same to an owner once the process of dissolving current ownership is over.

In the current case, Sweden adopts a bidding approach to sell of the firm. This however has an adverse effect. Any bidding activity usually happens when bidders have the same information available regarding factors such as quality of assets, vendor management, nature of the staff etc. The current managers currently have the maximum information on these factors and this is recognized by all the bidders. They resent from over bidding the current manager as they believe that the information with the current managers cannot be super seeded. As a result the current management wins back control as they have the highest bid which others do not want to outbid due to lack of information.

This indeed is a problem for the Swedish society as it promotes a culture wherein we can default and buy back assets of the company under a different name which would not relieve the debt but yet get back ownership of the firm respectively. In most cases partial payment of loans is only possible.

To solve this problem, setting up of boards explaining the assets of the firm in detail to all bidders and indepndent members which assess the quality are important. This will allow all participating members to have equal information and outbidding can then be made possible. Also conventional techniques of change of management can also be adopted if found worthy for the economy these include reorganization by setting up a board which has been described in the sections above.

Please feel free to ask your doubts in the comments section if any.