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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
Market practice in Sweden is that a lender becomes entitled to enforce security and claim under guarantees following an event of default or similar under the credit documentation. Such events of default include non-payment, financial covenant breaches and other non-compliance with the terms of the credit documentation. Usually, but not always, the security documents become enforceable only once the lenders (or the agent on behalf of the lenders) have accelerated the loan by declaring it immediately due and payable. In some cases, the relevant security document stipulates a notice period before enforcement action can be taken.
There are no specific requirements under Swedish law that a breach constituting an event of default must be of a certain nature in order for a secured creditor to be entitled to accelerate outstanding loans and enforce security, such as the requirement (in certain European jurisdictions) that a payment default must be outstanding.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
The process for enforcement depends on the type of security being enforced. Real property mortgages and business mortgages can be enforced only through certain public authorities and in essence require an execution order or the commencement of formal insolvency proceedings.
Other types of security can generally be enforced by public or private sale. The timing of and the precise procedure for enforcement will most likely be stipulated in the relevant pledge agreement.
The market standard enforcement provision in, for example, a Swedish law-governed share pledge agreement usually gives the pledgee the right to sell the security assets (eg, pledged shares) by private or public sale, auction or in any other way, and on such terms as the pledgee in its sole discretion deems fit (including the right for the pledgee to purchase the asset itself).
Under Swedish law, a secured creditor or pledgee is considered to have a duty of care in relation to the security, and therefore may not enforce or realise the pledge or sell the security assets in a way that is unduly adverse to the pledgor. Therefore, the secured creditor must, as a fiduciary duty, take into consideration and protect the interests of the relevant pledgor in connection with enforcement, including obtaining a fair sales price at market level for the security assets.
Further, if the sales price exceeds the indebtedness for which the security was granted, any surplus must be distributed to the pledgor following the sale of the assets.
There are special provisions in the case of bankruptcy. These provisions override any contractual provisions in Swedish law security documents.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In summary, priority between claims in a Swedish bankruptcy is dependent on the type of claim. There are three main types of claim:
- claims with special priority (eg, secured claims, claims secured by mortgage and claims secured by seizure);
- claims with general priority (eg, claims given priority because of public interest); and
- claims without priority.
If any assets remain after the claims with special priority have been discharged, claims with general priority will be discharged out of the remaining assets. Within the group of claims without priority, all claims rank equal in priority (pari passu) and will be discharged pro rata. Within the group of claims with special priority, the claims will be entitled to be paid out from the proceeds of the assets that are subject to the relevant security.
Costs for remuneration of the bankruptcy administrator, general costs and expenses for the management of the bankruptcy estate and costs accrued by the estate during the bankruptcy proceedings are considered to be claims with general priority in bankruptcy.
Claims from employees for salaries and pensions have general priority in bankruptcy.
Claims for unpaid taxes have no priority.
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