A Q&A guide to lending and taking security in Sweden. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
Swedish banks have, over the past year, remained fairly active and have generally continued to take on both corporate and real estate risks. Borrowers' refinancing demands are, however, expected to increase over the coming two to three years and this, in conjunction with the tightening of capital requirements and so on, due to the introduction of Basel III may well limit the bank's future appetite. As a consequence, lending costs are expected to further increase.
As an alternative to bank lending, more corporates are looking at issuing corporate bonds, whose issuing volume is growing and is continuing to grow this year.
Although lenders continuously increase pressure on borrowers (for example, the airline SAS was recently forced to agree to significant down-sizing by the bank syndicate), foreclosures and enforcements have remained low in number.
Real estate is legally defined as land, a physical area created through property registration, handled by the Swedish Mapping, Cadastral and Land Registration Authority (lantmäteriet) (Land Registry). Registered real estate (fastighet) may encompass horizontal and vertical areas.
Real estate also comprises buildings and any other permanent fixtures and fittings on buildings, fixtures or movables, under the Swedish Land Code (1970:994) (jordabalken), may be excluded from the real estate if they are registered as movable property with the Land Registry. This occurs in particular in relation to industrial fittings, where assets or production facilities are owned by someone other than the real estate owner.
Security over real estate is commonly created by pledging a mortgage certificate, for a specific amount in relation to a particular plot or plots. It is only the registered owner (formally, the most recent applicant for registration of ownership) of real estate that is entitled to apply for a mortgage (Swedish Land Code). The mortgage certificate is issued and registered by the Land Registry and is subject to a 2% stamp duty calculated on the face amount. Once issued, the mortgage certificate can be used as security by the current owner but also by any future purchaser of the relevant real estate, that is, the mortgage certificate is valid and may be used by any owner of the property for an unlimited number of times.
The priority between different mortgage certificates issued in relation to the same real estate is determined by the date of issuance of the individual mortgage certificate (see Question 24).
A mortgage certificate may be issued either in digital or physical form. Digital mortgages are registered in the Mortgage Certificates System (MCS), kept by the Land Registry. The majority of mortgages are in digital form. Most significant domestic lenders use the MCS for taking security over real estate. Under the MCS, a pledge (generally in the form of a pledge agreement) is issued by the pledgor and perfection is obtained when the lender has been registered as mortgagee. If the mortgage certificate is physical, the document must be handed over to the lender (or an appointed third party agent) in connection with the pledge.
Most property that is not classified as real estate is considered movable property (lös egendom). Tangible movable property (lösöre) includes machinery, trading stock (inventory), aircraft and ships, but excludes, for example, intellectual property rights, securities and money.
Security over tangible movable property can be created either by a pledge or by a floating charge/business mortgage (företagshypotek).
Pledge. A pledge over tangible movable property is generally created by the execution of a pledge agreement. Perfection is achieved by physically surrendering the pledged property or, in relation to aircrafts and ships, through a registration of the pledge in the relevant register. If the property to be pledged is in the possession of a third party, the pledge may be perfected through notification to that third party. A second ranking pledge is perfected by notification to the first ranking lender and the third party in possession.
Floating charge. A floating charge is registered with the Swedish Companies Registration Office (Bolagsverket). As evidence of the charge, the authority issues a floating charge certificate. The certificate may be either physical or digital and the security right is created and perfected by either (as applicable):
The handing over of the physical certificate to the lender as security for a debt.
The registration of the creditor in the floating charge certificates registry.
The floating charge comprises the movable assets of the relevant business, but does not affect the borrower's ability to dispose of the assets and continue to run the business subject to the charge. However, money, securities and assets that are already subject to a registered security right are not included under the security right created by the floating charge.
The stamp duty for the issuance of a floating charge is 1% of the face value.
Shares in Swedish limited liability companies (aktiebolag) are by far the most common type of financial instruments used as security. However, it is also possible to pledge debt instruments such as:
Security over shares is created by a pledge.
A pledge is generally created by the execution of a pledge agreement. The perfection requirement depends on whether the shares or financial instruments are dematerialised and registered with a securities depository (presently only Euroclear is authorised for this purpose in Sweden):
A pledge over shares that are dematerialised and registered with a securities depository is perfected by registration of the pledge in the account in which the shares are held.
A pledge over shares that are not attached to a book-entry system is perfected by physical transfer of the share certificates to the lender. If no certificates have been issued, a pledge may be perfected by notifying the company's board of directors of the pledge and noting the pledge in the company's share ledger. A notification to the company and an entry in the share ledger should be made. This also applies to certificated shares.
Trade receivables are commonly used for security purposes in factoring arrangements. In M&A transactions banks often also obtain security in the rights under the share purchase agreement.
Security over monetary claims and receivables may be created by a pledge. Other rights under a contract can be transferred to a creditor by way of a security assignment (säkerhetsöverlåtelse).
Both a pledge and a security assignment are generally created by agreement. In both cases perfection is through notification of the relevant debtor (that is, a perfected security right may not remain silent).
Security over a bank account is created by a pledge.
Perfection is obtained by notifying the account bank to block the account, that is, the borrower must be effectively cut off from disposal of the deposited money.
Patents, as well as international and European applications (under certain circumstances), can be pledged. The same applies to trade marks and trade mark applications.
For other types of intellectual property, for example, designs, it is not established under Swedish law if they can be pledged and how perfection should be created.
Security over patents or trade marks is created by a pledge.
The rules on pledging patents are found in the Swedish Patent Act (1967:837) (patentlagen). According to the Act, a pledge of a patent or of a patent application is based on a registration system. Perfection is created by a registration of the pledge agreement with the Swedish Patent and Registration Office.
Perfection of a pledge of a trade mark or of a trade mark application is also made through registration with the Swedish Patent and Registration Office.
The creation of security over a future asset requires certainty as to the pledged asset. To be able to pledge or transfer, for example a future claim, it is necessary that it is possible to determine what the borrower has to fulfil. Accordingly, although future claims may be pledged, it is important that the pledge is concrete enough so that the relevant claim may be identified. At the outset the pledged asset may still be general or vague, under the condition that it will become defined and ascertained.
Fungible assets may be pledged, however, the assets must be defined well enough to be identified. Perfection can be obtained by cutting off the borrower's ability to dispose of the asset and it is normally sufficient to pass to the creditor the keys to where the relevant assets are stored. Joint possession of the assets is accepted although it is required that the borrower cannot control the assets on their own.
Other assets that cannot be pledged include, for example, property that is not transferrable due to legal prohibitions, such as an earnings-related retirement pension, or because of restrictions in, (for example) an agreement or a will.
The details and conditions for the release of a pledge are generally agreed in the pledge agreement. Pledged assets that are in the possession of the lender, such as movables, share certificates, mortgage certificates and so on, are released when returned to the borrower and the borrower regains the right to dispose of the asset.
It is common practice in Sweden to take security directly over the debtor's assets and security over the shares in an SPV. The latter may be of specific importance in structures where financial assistance limitations prevent certain assets from being used as security.
Sale and leaseback structures are used in connection with real estate financing. The real estate is sold to an investor and then leased back for a fixed term. The investor is registered as owner with the Land Registry so there is no risk of the transaction being recharacterised as a security interest. However, under the Swedish Land Code, the parties cannot validly agree on the seller having a redemption or repurchase right. A provision to this effect is not binding and, therefore, a sale and leaseback transaction must be carefully structured.
Sale and leaseback may also be used for chattels, for example, machines and vehicles. The assets are sold to an investor and leased back by the seller for a fixed term. Since Swedish law requires the assets to be physically transferred, an investor does not get protection against the seller's creditors if the assets remain in the seller's possession. In such a case, the investor must register its purchase in accordance with the Sale of Movables Act (1845:50) (lösöresköpslagen) to get protection.
Factoring is commonly used to obtain working capital. In a recourse structured factoring, invoices are pledged to the lender as collateral. To be perfected, the pledge must be notified to the invoiced debtors.
In a non-recourse factoring, the financial institution buys the company's trade receivables at a discount. The transfer of the receivables must be notified to the relevant debtors, who then make payment directly to the buyer of the receivables.
Hire purchases are common in Sweden and are regulated by the Swedish Act on Hire Purchase (1978:599). A hire purchase involves a sale of goods where the purchase price is paid in instalments and:
At least one instalment is due after the goods have been delivered to the buyer.
The seller retains the right to reclaim the goods if the buyer's obligations are not fulfilled.
If the buyer is a consumer, the Swedish Consumer Credit Act (2010:1846) is also applicable.
Retention of title is used when an asset is sold and the purchase price is payable later. To be valid it must:
Establish when the parties entered into the purchase agreement.
Be clear that it is a retention of title.
Contain a term that the buyer may not consume, resell or mix with or attach the object to other assets.
Guarantees are a common form of security in Sweden.
They can take the form of:
Secondary accessory surety (enkel borgen). For these, enforceability is subject to:
the validity of the underlying debt; and
that the original debtor is unable to fulfil its obligations.
Primary accessory surety (proprieborgen). For these, the guarantor is liable for the guaranteed obligation as if it was his own debt.
Demand guarantee. For these, their validity is independent of the validity of the underlying debt.
A guarantee is typically issued in written form, either as a unilateral declaration by the guarantor addressed to the beneficiary or in the form of an agreement between the two (or incorporated into a facility agreement).
According to the Swedish Companies Act (2005:551) (aktiebolagslagen) a company cannot provide loans or grant security for the acquisition of its own shares or shares in a parent company. These type of loans must be returned by the receiver and the security may be declared void (if the lender should have realised that the granting of security was violating the Companies Act). A violation may also cause criminal liability under chapter 30, section 1 of the Act.
A company's actions must always be in the best interest of the company, within the objectives set out in its articles of association. The general assumption is that a company's objective is to generate profits, and any different purpose needs to be specified in the articles.
Corporate benefit must be considered in relation to intra-group lending and provision of upstream security. Distributions that do not have a corporate benefit may be construed as unlawful and trigger personal liability for the persons involved.
A company cannot make or guarantee a loan to its managing director, or to one of its members of the board or to a shareholder (Companies Act). These rules also apply to certain related persons or affiliates. These loans are void, meaning that they must be repaid. A violation may also cause criminal liability under chapter 30, section 1 of the Act.
According to the Swedish Acts on Contracts (1915:218) (avtalslagen), usury is defined as taking advantage of someone's misfortune, lack of ability to judge or dependent position, for personal gains which are clearly disproportionate to the services rendered. Usurious loans could be declared void.
An entity or person causing contamination to land is also responsible for any resulting environmental damage. However, the environmental legislation also imposes a (secondary) liability, on the landowner.
If a lender enforces a mortgage and assumes title to land, the lender becomes liable to the same extent as any other landowner.
Contractual subordination of debt is possible and common. It may be achieved by:
A declaration by the party agreeing to subordinate its claims.
An inter-creditor agreement.
Structural subordination, for example, lending to the parent company of an operating entity, is also possible and common.
Inter-creditor arrangements are common. The terms of these agreements are often much influenced by English law precedents.
A debt that is governed by Swedish law can be transferred to a new lender. Any security or guarantee, granted to secure a debt, can be transferred with the debt, unless provided otherwise in the security agreement. Security may need to be perfected again to remain in force (for example, secured assets may need to be delivered to a new lender).
Syndicate lenders usually appoint a security agent to hold and administer the security on their behalf. Incoming lenders are therefore not required to take any additional steps to obtain the benefit of the associated security.
Swedish law recognises the agent concept, and a facility agent is frequently used in syndicated loans.
Swedish law does not recognise the concept of holding security through a common law trust. However, non-accessory security can be held, administered and realised by a security agent or security trustee on behalf of the secured parties (including future syndicate members) under a Swedish law contractual security agent concept. The security agent is also able to enforce the security.
A claim in itself is not enough for a creditor to enforce a loan, guarantee or security. Generally, an enforcement order (exekutionstitel) is needed for the seizure of the borrower's assets. Enforcement orders can be obtained, for example, through public courts or arbitration. A simplified proceeding is available for undisputed claims (betalningsföreläggande), which is obtained directly through the bailiff's office.
When the creditor has obtained the enforcement order, he or she can file for enforcement with the enforcement authority or bailiff's office, which then can seize the borrower's assets.
Real estate mortgages and floating charges can only be enforced in accordance with the stipulations of the Swedish Act on Enforcement (1981:774) (Utsökningsbalken), that is, through an application to the local bailiff's office. For other security interests enforcement is normally established in the security agreement, stipulating either a public or private sale of the security asset.
Rescue procedures are available through the Corporate Reorganisation Act (1996:764) (Lag om företagsrekonstruktion). The procedures are decided by the local court. The rules aim to facilitate restructuring of fundamentally sound businesses and avoid unnecessary insolvency proceedings.
An application to the court to start the proceedings can be filed by either the borrower or one of the creditors. The start of the proceedings gives the borrower protection from enforcement and insolvency. However, creditors have rights to be heard and to participate to a certain extent in the proceedings.
When an insolvency procedure is initiated, all of the debtor's assets are included in the insolvency estate (konkursboet), preventing the creditors from enforcing loans, guarantees or security. However, a lender's right to enforce a valid and perfected pledge in a specific asset of a borrower will remain.
Payments made less than three months before the application for bankruptcy may be declared void if made in any of the following ways:
With unusual means.
Before their due date.
Involving an amount that considerably impairs the financial position of the borrower (unless considered to be in the ordinary course of business, under the circumstances).
Security which was provided less than three months before the application for bankruptcy, may be reclaimed if:
It was not originally foreseen as security for a debt.
Not provided without delay.
The security under the circumstances could not be viewed as ordinary.
In the case of the borrower's insolvency, creditors have the following priority, (after the costs for the proceedings have been covered):
Claims of lenders have specific priority in relation to the proceeds from liquidation of the relevant security assets.
Claims of employees have a general priority (subordinate to the specific priority created by a security interest).
Trade creditors and other unsecured creditors.
Subordinated creditors (who have expressly agreed to have their claims subordinated to other debts).
Where more than one creditor holds the same security interest over the same asset, the order of priority depends on the type of security created:
Mortgages and floating charges. The order of priority is determined by chronology. Older mortgages or charges have priority over newer ones (the date of issuance of the mortgage or floating charge is relevant and not the date of the debt which it provides security for).
Pledges. The order of priority is determined by the date of the notice of the pledge.
If the same security interest has been granted in favour of more than one creditor, the order of priority is likely to be determined by the priority provisions of the finance documents such as in an inter-creditor agreement.
If a security is not perfected, a security interest is not created and the lender is treated as an unsecured creditor in the borrower's insolvency.
There are no restrictions on granting security to foreign lenders under Swedish law.
There are no exchange controls under Swedish law restricting payments to foreign lenders.
The issuance of real estate mortgages is subject to a stamp duty of 2%, calculated on the face amount of the mortgage. The issuance of a floating charge is subject to a stamp duty of 1%, calculated on the face amount. In relation to enforcement, only nominal amounts apply.
Only nominal amounts apply.
Only nominal amounts apply.
There are no general strategies that are applicable.
Currently there are no significant proposals for reform.
Description. The official website of the Swedish Parliament. Some documents may be translated into English but should only be used as guidance.
Professional qualifications. Attorney, Sweden, 2003
Areas of practice. Banking; finance; general corporate law; real estate and M&A.
Languages. Swedish, English and German.
Professional qualifications. Attorney, Sweden, 2009
Areas of practice. Banking; finance; M&A and general corporate law.
Languages. Swedish and English.