Corporate governance – to lend or not to lend, that is the question

In the second part of my blog about corporate governance ( the first one you find here ) I will discuss some aspects of loan prohibition according to the Swedish Companies Act ( 2005:551 ), chapter 21. It is simply a very complicated and actually a rather illogical regulation seen from the basic principles of the Companies Act. Nonetheless there are few questions within corporate law that, according to my experience, as often cause problems for lawyers, accountants, and owners.

To you who do not have the great honor to work with corporate law every day: the loan prohibition consists of two parts that, a bit simplified, mean that companies are not allowed to lend money to some related persons, nor lend, give advance or provide security for loans with the borrower’s intentions to acquire shares in the company or in the parent company of the group. As always there are exceptions.

The regulation was founded in the 80’s and it is probably not very harsh to claim that it originally was due to taxation, because it used to be very easy for owners to borrow money from their companies instead of getting salary or dividend and pay tax for these. Clever to try to stop, really, but it is doubtful according to the fundamental idea of corporate law that shareholders fully dispose their companies as long as it does not disfavor any creditors (these are protected by the value transfer rules in chapter 17).

Anyhow, my experience is that a regulation, that is difficult to reconcile with the fundamental principles of its legal area, almost always tend to become both complicated and cause tricky demarcation issues. E.g. regarding the loan prohibition there is an exception in order for companies to be able to give contributions to companies further up in the group, because it would be impossible to prohibit contributions inside the company group without causing serious problems in normal business life. Everyone might not know that the term “group” in this case means companies with residency in the European Union, i.e. one is not allowed to lend money to an American parent company, but it would be fully acceptable to lend to a British parent company. In my opinion, one can only wonder at the reason for this difference.

Another question that I have had to ponder on every once in a while is when the loan can be considered to be granted. The regulations in the 21 st chapter of the Companies Act are very clear about who are not allowed to receive a loan, but in fact the time can be equally decisive. Imagine the situation when the company signs a contract about lending money to a certain person who then, but before the loan is given, is elected to the Board of Directors of the company. Would it be considered a forbidden loan, or more specifically – should the time for signing the contract or the time for the actual payment be taken into account when deciding who is included in the prohibited circuit of people? From a contract law-point of view, the starting point is rather clear, but there are arguments both for and against both ways when it comes to the application of the loan prohibition. Luckily the Supreme Court made a decision regarding this question in case T-3935-14 and stated that signing the contract means that the loan obligation becomes legally binding, and therefore the time for the actual payment is not of interest. In other words; the loan in the example above would not be forbidden.

As usual, it is nice to know what one is not allowed to do… Next time you will be provided with some reflections of option programs in developing companies!