Personal guarantees in Sweden and the development towards a Swedish doctrine of lender liability

United Kingdom
by Christer Brantheim/Harry Bergman, Tisell & Co Advokatfirma AB, Stockholm

According to regulations passed by the supervising authorities, Swedish financial institutions are authorised to lend money only if they have well-founded reasons to believe that the lender is capable of repaying the loan on its own. Financial institutions also have to secure loans given, by mortgages, other pledges, personal guarantees etc., unless this is considered unnecessary or if there are specific reasons for not demanding security. These regulations aim to protect the funds of the creditors of financial institutions.

In the late 1980s there was a financial boom in Sweden which lead to increased lending to various business enterprises. In this area, there was also a liberalisation of the banking and financial system, i.e. leading up to increased lending to rather speculative business operations. As a standard routine, the lender demanded personal guarantees from the owners and third parties for loans to small and medium-sized companies. These personal guarantees were often seen as a surplus security or as means of pressure on the management of such companies to take due care of the business operations.

The financial crisis that started with the Iraqi invasion of Kuwait in September 1990 struck Sweden harder than most other countries and resulted in a large number of companies going bankrupt. Due to the fact that the failing companies' substance and the securities given to the lenders often fell short and left large deficits, the focus on personal guarantees was increased and an enormous number of court cases were started by the lenders in order to try to receive payment from the guarantors. Starting in 1991 the Supreme Court of Sweden has ruled in several cases regarding personal guarantees, something which could be seen as a development towards a Swedish doctrine of lender liability.

In a judgement of 1991, a lender had returned a mortgage bond to a debtor considering that there would be no payment from the mortgage property related to the bond. A third party personal guarantor objected that he had the right to receive the mortgage bond as a security for his right to recourse against the debtor and that the returning of the mortgage bond to the debtor had caused him damages. The Supreme Court established that the guarantor was entitled to receive the mortgage bond as security and that the lender (a finance company) had to prove that the mortgage bond had no value as security for the guarantor's right of recourse.

In a judgement of 1992, the Supreme Court established that there was a contractual obligation for the lender to observe the guarantor's right of recourse and in this respect to keep the guarantor informed about circumstances which had effected the possibilities of enforcing his right. In this case, the lender (a Swedish bank) had failed to inform the guarantor about the debtor's failure to repay a loan on the due date and the bank had not taken any action against the debtor in order to receive repayment of the loan. Almost two years after the expiry of the loan the bank demanded payment under the guarantee. In the meantime the debtor (a limited company) had been declared bankrupt. The Supreme Court considered that the bank had acted negligently by failing to take proper action against the debtor and that the guarantee therefore should be free from his responsibility for payment under the guarantee, to the extent that this had caused him damage regarding his right of recourse. The Supreme Court established that the lender, in order to avoid this effect, had to prove that his negligence had not caused any damage.

In 1993 the Supreme Court further emphasised the obligation of the lender to keep the guarantor informed about the material changes in the financial conditions of the debtor. The court found that the lender (a Swedish bank) had failed to fulfil these obligations. However, the court considered that the gravity of the lender's negligence was not enough for the guarantors to be freed from their responsibility of payment. It is interesting to note that according to the Supreme Court, gross violations of the regulations from the supervising authorities, which are passed in the interest of the creditors of the financial institutions (i.e. the provisions regarding credit evaluation) also could affect the lender's relationship with the guarantor.

In a judgement of 1994, a guarantor had been the sole owner and manager of a limited company. The company had an open credit with a lender (credit card company). The guarantor then sold the company to another person who charged the account up to and above the credit limit. When the company failed to repay the loan, the lender turned against the guarantor. The guarantor objected that the lender had not been informed of the delay of payment and that the lender should have stopped further payment under the open account. The Supreme Court again established that the lender has contractual obligations towards the guarantor but noted that the guarantor had been the sole owner and manager of the company, that the lender had no information that the guarantor had sold the company and therefore had reasons to believe that the guarantor had knowledge of the activities on the open account. The Supreme Court did not consider that the lender had acted negligently towards the guarantor.

The conclusion that could be drawn from the Supreme Court cases is that there is a contractual obligation for the lender to protect the guarantor's interests. If the lender fails to do so, the guarantor could be released from his responsibility of payment. Based on the principles stated in the court cases, lenders on the Swedish credit market should act carefully in order to maintain the value of a personal guarantee. The following should be noted:

  • firstly, the lender has to make a proper evaluation of the debtor's capability to repay the loan and the value of the securities given. This is especially important when a guarantor is a third party and hence not the owner and manager of the debtor

  • the documentation regarding the loan decision (i.e. the credit evaluation) including the information to the guarantor regarding the purport of the guarantee, has to be clear and maintained in good order

  • in the case that the debtor fails to make payment in accordance with the terms of the loan, the lender immediately has to inform the guarantor so that he is given the opportunity to take action

  • in case of demand of the loan, the lender has to act rapidly and carefully in order to recover as much of the loan as possible from the debtor

  • in the case of enforcement, the lender has to act carefully and dispose of the pledges etc. in a way that is the most advantageous for the debtor and hence for the guarantor, i.e. the lender has to secure that the guarantor's right of recourse towards the debtor is maintained.