Klara Larsson Andreas Malmberg November 8 2022 Security and pre-agreed release under Swedish law Wigge & Partners | Banking & Financial Services - Sweden Klara Larsson, Andreas Malmberg Banking & Financial Services IntroductionRequirements for valid and enforceable security under Swedish lawPre-agreed releaseCommentIntroductionIt is generally a vital part of a loan transaction that a borrower, companies within the borrower's group or a parent of the borrower (collectively the pledgor) grants security in favour of a lender, for which one or more security agreements are entered into. Such security agreements outline the terms under which the loan is secured, and what will happen if the borrower defaults under the loan transaction. The security agreements themselves are, despite their purpose, not sufficient to protect the lender against third-party claims on the borrower – protection can only be accomplished through the security being duly perfected. Thus, fulfilment of the relevant perfection requirements is crucial, since failure to comply with them significantly increases the risk of the security interest not being enforceable in case the pledgor goes insolvent. Once the loan has been fully repaid, the security will be released, and the security assets will be returned to the pledgor. However, borrowers, lenders and other actors on the loan market may find pre-agreed release and/or partial release of the security (although full repayment has not occurred) to be useful for several reasons – for example, if the pledgor shall be able to sell or otherwise dispose of the security assets.The idea of a pre-agreed release is normally that the security is released (wholly or partially) upon the fulfilment of certain conditions, without the secured loan having been repaid in full. Whether pre-agreed release is acceptable under Swedish law without impairing the validity or enforceability of the security is somewhat unclear, and opinions on the matter vary. The uncertainty derives from the fact that the pre-agreed clauses may not sufficiently satisfy one essential perfection requirement, namely that the pledgor is effectively deprived of its rights to dispose over the security assets. Therefore, some security agreements establish that the security may only be released in the sole discretion of the lender. This is done for the benefit of the lender in order to avoid uncertainties in relation to validity and enforceability of the pledge.Requirements for valid and enforceable security under Swedish lawOne of the most common types of security under Swedish law is a pledge (pant), with the general rule being that almost any asset or property may be pledged. To create a valid and enforceable pledge against third parties according to Swedish law, the following requirements must be met:the security must be granted by the pledgor to the pledgee (which is typically stated in a pledge agreement);the security assets must be sufficiently identified; andthe security must be perfected to the effect that the pledgor is deprived of its rights and possibilities to dispose over the security assets.(1)The requirement of depriving the pledgor's possibilities to dispose over the security assets as described in the latter point above is, however, not absolute. Exceptions do exist, such as when the security assets have mistakenly been returned to the pledgor's sphere of control, or when the pledgor illegally retrieves the security assets.(2) Moreover, joint possession of the security is normally accepted, provided that the pledgor does not have access to or may dispose of the security assets on its own.Pre-agreed release As described above, uncertainty exists regarding the consequences of pre-agreed release clauses in Swedish security agreements. The Swedish rules regarding perfection are fragmented, and it has been left to the courts to adjudicate complicated problems within this area of law. The validity of a pre-agreed clause is to be analysed and assessed on the basis of case law often being over 40 years old, and many of the cases relate to specific situations that are difficult to apply to pre-agreed release clauses and situations. Therefore, the requirements for a valid and enforceable pledge have, in many cases, resulted in unpredictable results.Pre-agreed release clauses that can be found in security agreements and other finance documents include, among other things, the following:The pledgor may dispose of the security assets if the consideration is applied towards prepayment of the loan secured by such assets (clause (a)).The pledge shall be subject to partial release of the security assets due to a partial repayment of the secured debt (clause (b)).The pledge over the escrow account shall be released when the conditions precedent for disbursement have been fulfilled (clause (c)).Provided that a cash trap event is no longer continuing, any monies standing to the credit of the pledged deposit account shall be transferred to the unpledged general account (clause (d)).Whether or to what extent such clauses would be accepted varies among participants on the lending market in Sweden.Typically, a pre-agreed release clause implies that the actual release of the security requires some form of participation and/or assistance from the pledgee. Hence, the release is not automatic. Some scholars are of the opinion that these types of pre-agreed releases should not contradict the perfection requirement regarding the pledgee's control since the pledgee can hinder the release by remaining passive. As such, the pledgee has not lost its control of the security.Moreover, some pre-agreed release clauses can be argued as essentially being just an agreement regarding the duration of the pledge. It can happen that the pledge expires and is released upon fulfilment of certain conditions, even though the secured obligations are still outstanding. Thus, the fact that the pledge may expire prior to discharge of the secured obligations may not render the pledge invalid or unenforceable as such.CommentThere are arguments supporting the view that certain pre-agreed release clauses should not per se disqualify the security from being valid and enforceable against third parties. The pre-agreed release clause examples set out in clauses (a) and (b) above are typically acceptable since the secured obligations are discharged in connection with the release. The pre-agreed release clause example set out in clause (c) above could be considered as an agreement regarding the duration of the security (and not a right of the pledgor to dispose of the security assets) and may thus not be problematic from a validity or enforceability perspective. However, the pre-agreed release clause set out in clause (d) above is often considered to not fulfil the Swedish law requirements, as it requires the pledgee to release the security assets during the security period without the secured obligations being discharged. That said, it is uncertain what the outcome would be in a Swedish court, considering that there is limited relevant case law that can be applied in relation to pre-agreed release clauses. Nonetheless, without due perfection of the security, the pledgee cannot be confident that the security is protected from other creditors and, therefore, until a Swedish court has delivered guidance on the matter, certain lenders in the Swedish market prefer to be cautious by only accepting pre-agreed release clauses where the actual release, somewhat contradictory, in each case will be subject to consent from the lender in its sole discretion.For further information on this topic please contact Klara Larsson or Andreas Malmberg at Wigge & Partners by telephone (+46 (0)720 62 60 69) or email ([email protected] or [email protected]). The Wigge & Partners website can be accessed at www.wiggepartners.se.Endnotes(1) Cf Håstad, Torgny, "Sakrätt avseende lös egendom", 6th edition, page 288 ff and NJA 1911 page 104, 1921 page 364 and page 370, 1923 page 626, 1933 page 78 and 1996 page 52.(2) Cf Håstad, Torgny, "Sakrätt avseende lös egendom", 6th edition, page 289 ff. and NJA 1958 page 422.