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The Swedish Supreme Court has recently had to pass judgment in an interesting case (NJA 1996 s52) regarding the perfection of pledges under Swedish law.

Following a merger within the construction industry, one of the participating companies (A) was sold off as a shell company with an outstanding publicly-traded subordinated loan and a back-to-back promissory note from its parent company (B). At the sale of A, A issued a deed of pledge which was placed in a bank deposit for the account of the noteholders, together with B's promissory note.

A pledged the promissory note in the deed as security for the due fulfilment of its obligations towards the noteholders, stating that the documents could not be withdrawn from the deposit without the approval of A and B. In a separate undertaking, B committed itself to pay under the promissory note to the bank holding the deposit for the account of the noteholders, and A signed its acceptance thereof. A later went bankrupt and the receiver claimed payment from B under the promissory note, but B instead paid to the bank for the account of the noteholders.

The court pointed out that the creation of a valid pledge of a promissory note of the kind in question presupposed that the note had entered the possession of the pledgee. This in its turn would only be the case if the pledgor was effectively cut off from possession of the pledged property. The court held that by retaining the right of access to the pledged property (jointly with B) A had not created a valid pledge. This was further stressed by the fact that an open deposit had been used in this particular case.

The practical implication of the case was that B had to pay the amount --Skr 253 million (US$38 million)-- twice. This highlights the importance of extreme caution when taking pledges under Swedish law.

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