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Asset classes used as collateral for security
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
Security over real estate is granted by way of a mortgage and official registration with the Land Registration Authority. On application by the legal and registered owner, the registration authority issues mortgage certificates, which, when handed over to the secured creditor, represent a security right with a certain value and a certain priority.
A dematerialised mortgage certificate will be regarded as handed over to the creditor when it has been transferred to the creditor’s account in the mortgage register (or to the account of a third party representing the creditor) held by the Land Registration Authority. The dematerialised mortgage system is available to local banks only. The secured creditor must return the certificate or be deregistered as a holder, as applicable, when all secured obligations have been satisfied.
Certain assets (eg, machinery) may be regarded as industrial accessory equipment or fixtures, and would then be covered by a mortgage.
In essence, the security interest entitles a secured party to payment out of the proceeds from a sale of the relevant real property up to an amount equal to 115% of the amount of the mortgage certificates issued in that property and held by that secured party as security. If a real property is disposed of at a value that exceeds 115% of such amount, the difference will be allocated to the pledgor.
Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Unless the machinery and equipment is industrial accessory equipment or fixtures and thus covered by a real property mortgage, the only practical way to grant security over machinery and equipment is by way of a business mortgage. The reason is that security over movable property requires change in possession of the property and the pledgor must be excluded, both legally and practically, from dealing with the pledged assets. Consequently, it is difficult to obtain perfected security over machinery and equipment other than through a business mortgage.
A business mortgage covers all of the pledgor’s movable property (other than cash at hand and bank deposits, shares and other tradable financial instruments and securities) used in the pledgor’s business. Such security is perfected by the delivery of the business mortgage certificate to the pledgee and is registered with the Companies Registration Authority.
A business mortgage does not prevent the pledgor from disposing of its assets in a way that diminishes the value of the mortgage. A business mortgage is subordinate to other perfected pledges, even if such pledges are created after the business mortgage. A debtor may therefore pledge receivables that form part of a pre-existing business mortgage, and the pledge of the receivables will then rank ahead of the business mortgage.
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Security over accounts receivable and contractual rights is granted by way of a pledge. Such pledge is perfected through notification to the receivable debtor or contractual counterparty, as applicable. If the receivables are in the form of a bearer promissory note (or similar), the pledge is perfected by transfer of possession of the relevant promissory note to the pledgee. Proceeds are to be paid directly to the pledgee and the pledgor may not have control over any account to which payments are made.
Security over accounts receivable may be cumbersome for the pledgor as it must have no disposal rights in respect thereof. A pledge requires that the secured parties have total control over the payment of the accounts receivable, meaning that all debtors must be notified of the pledge and instructed to pay to an account which is not controlled by the pledgor.
Security over receivables can also be created by means of a business mortgage.
Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Security over shares and other financial instruments is granted by way of a pledge. A share pledge is perfected by transfer of possession of the relevant share certificates (if the relevant shares are in certificated form and share certificates have been issued) to the pledgee or, if no share certificates have been issued, through notification of the pledge to the company’s board of directors.
If the shares or other financial instruments are in a dematerialised registered form and held on a securities account, perfection is made by registration with Euroclear Sweden or, if held on a deposit account (as opposed to a securities account), through notification of the pledge to the account bank. Other financial instruments which are not in a dematerialised form require transfer of possession in order to be perfected.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security over cash deposits on bank accounts is granted by way of a pledge. Such pledge is perfected through notification of the pledge to the account bank. The pledgor must not be allowed to withdraw funds standing to the credit of the pledged account without the express consent of the secured party.
For practical reasons it may be undesirable to block the bank account and the parties may agree that a pledge over the bank account will not be perfected until the occurrence of an event of default (or similar triggering event). However, non-perfected security will be subject to a three-month hardening period from the date of perfection and could be clawed back in a following bankruptcy.
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes. Security over patents and trademarks may be created by registering a pledge with the Patent and Registration Office. No similar registration is available for copyrights and, provided that there is no counter party or official registry to give notice of pledge to, this form of security may not be created over copyrights or goodwill.
Security over patents and trademarks can also be created by means of a business mortgage. Copyrights and goodwill may also be secured by a business mortgage.
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