In a 2014 Supreme Court case(1) regarding loan prohibition under Chapter 21(1) of the Companies Act (SFS 2005:551), the court granted leave to appeal (for further details please see "At what point should money be deemed to be 'lent'?"). The relevant legal provision states that a company cannot lend money or grant security to a specific category of affiliated persons – including shareholders, directors and deputy directors.

The key issue was to determine when a borrower should be considered part of the restricted group – at the time of entering into a loan agreement or at the time of the actual payment to the borrower? The district court and the Court of Appeal held that the time of entering into the agreement was crucial. The Supreme Court upheld the Court of Appeal ruling, stating that it was most consistent with the wording of the Companies Act and existing Swedish contract law principles.

In another recent Court of Appeal case, the question was whether non-restricted shares should be included in property covered by business mortgages (for further details please see "Scope of property included in business mortgage"). A business mortgage (similar to floating charges) is a certain type of security in the borrower's property. Any property included in a business mortgage is subject to a right to priority in the event of bankruptcy of the debtor which granted security over business mortgages.

According to Chapter 2(1) of the Business Mortgage Act (SFS 2008:990), "shares and other non-restricted financial instruments" cannot be included in a business mortgage. Non-restricted shares are intended for general circulation. In other words, such shares may be traded on a regulated market, in contrast to restricted shares which are held on a long-term basis as part of the company's business activities. Due to the absence of the term 'non-restricted' before the word 'shares' in the act, it remains uncertain whether non-restricted shares can be part of a business mortgage.

Both the district court and the Court of Appeal held that non-restricted shares could not be included in business mortgages. The courts based the decision on preparatory works, which provided that the new legislation should contain no changes to the definition of what should be included in a business mortgage. According to the previous statute, both restricted and non-restricted shares were excluded from business mortgages.

The Supreme Court(2) granted leave of appeal and affirmed the lower courts' decisions. The Supreme Court upheld the same arguments as put forward by the lower courts. Accordingly, neither restricted nor non-restricted shares can be part of a business mortgage, which could ultimately reduce the business mortgage's importance as security on the loan market.

For further information on this topic please contact Jon Petterson or Petar Bojovic at Advokatfirman Törngren Magnell KB by telephone (+46 8 400 283 00) or email (jon.petterson@torngrenmagnell.com or petar.bojovic@torngrenmagnell.com). Törngren Magnell's website can be accessed at www.torngrenmagnell.com.

Endnotes

(1) Supreme Court T 3935-14.

(2) Supreme Court Ö 3625-14.

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