Under Swedish legislation (12:2 of the Companies Act), a Swedish company may not pay a dividend to its shareholders exceeding the free equity as shown in the most recent balance sheet adopted. Even within the free equity, a dividend may not be paid if it contravenes good business practice as dictated by the company's or group's capitalization, cash position or general financial situation.
A shareholder receiving an excessive dividend can be held liable for repaying the dividend to the company under Section 12:5 of the Companies Act. So can directors, auditors and shareholders participating in the decision or its execution or in the drawing up or adopting of an incorrect balance sheet forming the basis of the decision.
If a subsidiary grants a loan to its parent company or puts up a guarantee for the benefit of its parent and the measure is not founded on commercial considerations, the action may be considered an excessive dividend to the extent that it exceeds the subsidiary's free equity (see IFLRev July and November 1995). A loan would then give rise to a claim for repayment and a guarantee would be unenforceable.
The wording of Section 12:5 of the Companies Act does not provide for repayment of excessive dividends by anyone other than directors, auditors and shareholders. To what extent the provision can be applied to third parties has therefore been an open matter. However, the Supreme Court recently (June 24 1997, T2/95) ruled in a case in which a company had borrowed money and put up security to enable its parent to repay a bank loan. The measures were considered to constitute an excessive dividend.
The question then arose of to what extent the bank could be made to repay the amount on the basis that it had participated in the execution of the decision and had received the funds. The Court held that the provisions of Section 12:5 can be applied to third parties by analogy with its general principles.
However, applying the rules to third parties merely based on negligence or gross negligence would be too far-reaching because it would force third parties in a normal business relationship with a company or its owners to make extensive investigations. The Court therefore held that Section 12:5 could be applied to a third party only if it had acted in intentional breach of Section 12:2.
The case highlights the importance of Swedish rules on inter-company lending and their impact on third party lenders.