When the new Companies Act 2006 came into force last year, several issues related to upstream loans and security (including financial assistance) that had been the subject of debate were clarified.
In relation to the general prohibition on loans and security to shareholders by a company (General Prohibition), the Act spells out in detail the scope and meaning of certain exceptions. Firstly, it provides that the group exception to the General Prohibition applies to all groups of companies where the ultimate parent company is domiciled in the European Economic Area. As such, the General Prohibition does not prevent upstream loans and security within such a group. Secondly, the Act stipulates that where a loan is made or security granted purely for reasons of commercial benefit (and, as such, is not be subject to the General Prohibition), such benefit shall accrue to the company making the loan or providing the security (and not to the borrowing or beneficiary company).
In terms of the financial assistance regime prescribed by the Act (implementing article 23 of the EC's Second Company Law Directive), the absolute prohibition on advances, loans or security for the purposes of assisting in the acquisition of shares in the company or a company in the same group (FA Prohibition), remains. There are no notable exceptions to the FA Prohibition and no whitewash procedures similar to those in, for example, England are available. The Act has been amended, though, to allow financial assistance in relation to the sale of a subsidiary – the FA Prohibition now only prohibits assistance in relation to acquisitions of shares in the company or a parent or sister company in the same group. It is thus formally possible to sell subsidiaries in exchange for deferred consideration (and otherwise to financially assist an acquirer of a subsidiary). It should also be noted that the term group in the FA Prohibition means a group where the ultimate parent company is Swedish. Hence, the FA Prohibition does not apply to acquisitions of overseas entities.
Lastly, the Act has clarified that a violation of the General Prohibition or the FA Prohibition entails the following sanctions:
- Criminal liability for the board of directors and the managing director;
- Invalidity and unenforceability of loans coupled with an obligation for the recipient to immediately repay the loan proceeds; and
- Unenforceability of security to the extent that the beneficiary realized or ought to have realized that the security was provided in violation of the General Prohibition or the FA Prohibition. However, a professional lender represented by counsel will probably never be able to claim ignorance on this point.
By Björn Sjöberg
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