Daniel Hayek and Alexander Flink of Prager Dreifuss assess the options and framework for parties raising capital in Switzerland
Section 1 – Bank licences
1.1 What licences or approvals do lenders need to have if lending to a borrower in this jurisdiction if a) the lender is a bank or b) the lender is a not a bank?
No licences or approvals are required to make commercial loans.
1.2 Are any exemptions available and/or are any techniques typically used to structure around such requirements?
There are not.
Section 2 – Security interests
2.1 Can security be taken over the following asset classes and what documentation or formalities are required to create, perfect and maintain such security?
b) bank accounts
d) contractual rights
e) insurance policies
f) real property
g) plant and machinery
h) intellectual property
i) debt securities
j) future/after acquired property
k) floating charges over all assets
Security can be granted over the assets listed above under a security agreement for each type of asset at issue (subject to perfection requirements).
To perfect and maintain a pledge over shares (or other movable objects), the security trustee needs to be in possession of the pledged movable objects during the security period (Faustpfandprinzip). As a consequence of this requirement, security over plants, machinery, equipment or inventory is possible, but is usually not taken.
There are usually no securities over contractual rights per se, but the Swiss obligor's claims against the debtor based on a specific contractual relationship can be assigned or pledged.
An assignment of bank account balances and receivables is valid without a notification to the debtors. However, prior to such a notification bona fide payments by the debtors to the assignor will release the debtors from their payment obligations. A pledge of bank account balances and receivables is also possible but lenders usually prefer assignments, which are notified when the security is taken.
The assignment of an insurance policy requires the handing over of the policy to the security agent and a written notification to the insurer.
Security taken over real estate that serves primarily as living accommodation, and in certain cases of assignment or pledge of mortgage certificates, may be limited. There are formalities, which must be observed, but the quality of the security is usually worth the extra effort.
The assignment or pledge of IP rights may provide additional security. However, since a pledge or security assignment of trade marks or designs may only be invoked against a non-bona fide third party, registration is advised.
Perfection of Swiss security is usually subject to the transfer of title or possession. Therefore, subsequently-acquired property will generally require an amendment of the existing security document, with the exception of the assignment of future bank account balances and receivables.
Floating charges are not available in Switzerland.
It should be noted that there are several ways to create security interest over intermediated securities. So far, this type of security is of little importance in the Swiss market. However, it may become more common in the future to take security over intermediated securities in safe-keeping accounts by a control agreement.
2.2 Highlight any issues with securing obligations that may arise in the future.
Last year, the Swiss Federal Supreme Court held that payments of upstream or cross-stream loans made in connection with certain cash-pooling agreements must be backed by corresponding freely-distributable reserves, if these loans are not made at arm's length conditions. The reason for this is that such payments are considered constructive dividends and therefore limited to distributable capital. The question arises whether or not this decision also affects payments in relation to upstream and cross-stream security or guarantees. In the absence of further case law, it is not yet completely clear whether this decision is to be seen only in the context of the specific case or whether it is the basis for a general change in the way intercompany upstream and cross-stream security is to be treated.
2.3 Can a universal security agreement be used to grant security over all assets in this jurisdiction?
To obtain security over all assets of a Swiss company a combination of a share pledge agreement and of security agreements over the company's assets is advised.
2.4 Can security be granted for the benefit of different classes of creditors under the same security agreement and if so, are there any issues that creditors should be aware of in adopting this approach?
Generally this is possible. In case of a security assignment the facilities agreement or the intercreditor agreement can provide for a waterfall that mirrors the different classes of creditors. A pledge agreement can provide for a priority pledge for senior creditors and a lower ranking pledge for mezzanine creditors.
2.5 Can security trustee or security agent structures be used in this jurisdiction to secure obligations that are owed to fluctuating creditor classes?
Security trustee or security agent structures can be used to secure obligations that are owed to fluctuating creditor classes, provided that the security is taken by a security assignment.
Because of the principle of accession (Akzessorietätsprinzip), which is applicable to pledges and Swiss sureties, each of the secured parties would need to be a party to the relevant pledge agreement. To facilitate changes to the secured parties the underlying pledge agreements frequently provide for parallel debt structures. However, the validity of pledges granted under a parallel debt structure is not court tested. Therefore, Swiss pledge agreements provide additionally that the secured parties, represented by the security agent or the security trustee, are also parties to the agreement.
2.6 Briefly outline any issues that need to be considered when transferring loans and accompanying security interests between lenders.
No transfer tax applies to the transfer of loan shares. However, Swiss withholding tax at 35% on interests may become due, if the number of non-bank lenders exceeds 10 or 20 under the so called 10/20 non-bank rules due to the transfer.
2.7 Can security be granted by third parties? Are there any rights of contribution, subrogation or similar that might arise as a result of granting/enforcing third party security that ought to be/can be waived?
Generally yes – to both questions. However, the significance of security provided by third parties (that is companies, which are not members of the borrower's group) is very limited.
2.8 Briefly outline the registration requirements, if any, applicable to security interests created in this jurisdiction, including considerations such as timing, expense and the consequences of non-registration.
Except for certain types of real estate securities, there are no registration requirements. However, since the assignment or pledge of intellectual property rights may not be invoked against a bona fide third party, registration is advised. The registration can usually be obtained within three weeks (or even earlier).
2.9 Briefly outline any regulatory or similar consents that are required to create security (other than board/shareholder approvals).
In the course of enforcement against Swiss real estate held by the security grantor or against the shares in a Swiss company, a confirmation of non-application of the relevant rules by the relevant Swiss authorities may be required, to the extent that excessive reserves of undeveloped land exist or that the property at issue is partly used for residential purposes, if foreign secured lenders were to take possession or if the relevant assets were to be sold to other persons domiciled abroad.
Section 3 – Guarantees
3.1 Briefly explain the downstream, upstream and cross-stream guarantees available, with reference to any particular restrictions or limitations.
Under Swiss law, upstream and cross-stream guarantee payments are considered to be constructive dividends and, therefore, are limited to the profits and reserves freely available for distribution in the guarantor's balance sheet. Swiss guarantor limitation language usually contains the obligation of the guarantor to maximise the available assets for distribution. To enhance the proceeds from the guarantee, it is standard to combine a guarantee with a pledge over the shares in the Swiss guarantor. It should also be noted that upstream and cross-stream guarantee payments are subject to 35% withholding tax.
3.2 What regulatory or other consents are required for the granting of downstream, upstream and cross-stream guarantees (other than board/shareholder approvals)?
None. But in recent years, it has become general practice for the Swiss Federal Tax Authority to request that the Swiss company providing a guarantee to its parent company receive an appropriate remuneration for the guarantee (guarantee fee).
3.3 Briefly outline any enforceability concerns associated with the granting of downstream, upstream and cross-stream guarantees that lenders should be aware of, (eg any exchange controls or similar obstacles).
A Swiss guarantor's articles of association should allow the company to grant security within the group. If required, the necessary changes to the articles of association can usually be made within two weeks.
Since upstream and cross-stream payments are considered as a distribution of dividends, the rules in connection with the distribution of dividends must be observed. This includes the preparation of an up-to-date balance sheet by the guarantor and an approval of the resulting distribution by the shareholders' meeting.
Generally, the Swiss guarantor should, according to a new practice of the Swiss Federal Tax Administration, receive an at-arm's-length remuneration for upstream and cross-stream guarantees, and the guarantees should be approved by the board and the shareholders' meeting of the guarantor.
In addition, dividend payments are subject to 35% Swiss withholding tax. Therefore, it is necessary to address the issue in the finance documents.
Section 4 – Enforcement
4.1 Do the local courts generally recognise and enforce foreign-law governed contracts?
4.2 Will the local courts generally recognise and enforce a foreign judgment that is given against a domestic company in foreign courts (particularly the New York or English courts) without re-examining the merits of the decision?
Swiss courts will not re-examine the merits of a foreign decision provided that: (i) for New York decisions, the prerequisites for recognition and enforcement according to the Swiss Federal Code of Private International Law are met; or, (ii) for decisions by a Lugano Convention contracting state the prerequisites for recognition and enforcement according to the Lugano Convention (for English court decisions) are met.
4.3 Will the local courts recognise and enforce an arbitral award given against the company without re-examining the merits of the decision?
Yes, Swiss courts will recognise and enforce foreign arbitral awards under the New York Convention without re-examining the merits of the case.
4.4 When enforcing security, what factors significantly impact the time such enforcement takes and the value of the proceeds received from such enforcement? For example, are there any statutory requirements such as (a) holding a public auction; (b) court involvement; or (c) obtaining regulatory consents?
If the underlying security agreement is properly drafted, no public auction, court involvement or regulatory consents are required to enforce security. It may be agreed that the security is enforced by way of private sale or self-sale.
4.5 Are there any restrictions that apply specifically to foreign lenders when taking enforcement action?
Generally, no. However, the sale of Swiss real estate that is partly used for living accommodation is limited. This can result in additional enforcement costs, because a split of ownership may be required.
Before a foreign insolvent lender may seek to enforce its claim in Switzerland its insolvency decree must be recognised in Switzerland. In syndicated financing this hardly ever creates issues.
Section 5 – Bankruptcy and insolvency proceedings
5.1 Briefly outline the main bankruptcy/insolvency processes in this jurisdiction, including any control or influence that creditors can exert on the process, the timeframes usually involved and any mandatory filing requirements.
Swiss bankruptcy and reorganisation proceedings are generally governed by the Swiss Debt Enforcement and Bankruptcy Law.
Usually, the board of a Swiss company in distress will request a debt restructuring moratorium (see question 5.3) before a lender starts enforcement proceedings and requests to declare the company bankrupt.
However, if a creditor initiates enforcement proceedings, and the debtor subject to debt collection under bankruptcy (companies) fails to pay the debt within 20 days, the creditor can request that the judge declares the debtor bankrupt. During the bankruptcy proceedings, an inventory of the debtor's assets is prepared and the creditors will be requested to file their claims. A schedule of claims is drawn up. Creditors whose claims were not included or who want to contest the admittance of other claims can file a claim within 20 days after the schedule of claims is published. Once the schedule of claims is final, the proceeds from the realisation of the company's assets are distributed among the creditors. It takes approximately one year until the schedule of claims is published (it may also take longer than this in the case of complex bankruptcy scenarios). The overall duration of bankruptcy proceedings is longer than, for example, in the UK or the US. However, interim payments may be made before the schedule of claim becomes final.
5.2 Are there any preference, fraudulent conveyance, clawback, hardening periods or similar issues or preferential creditor rights that lenders should be aware of?
Yes, the enforceability of any contract may be limited under the rules of the Swiss Debt Enforcement and Bankruptcy Act.
In particular, the following transactions may be fully or partially voidable: (i) transactions carried out during the year prior to the bankruptcy or insolvency decree, in which the Swiss security grantor accepted to receive no consideration at all or a consideration out of proportion to its own performance; (ii) certain financially inadequate transactions, if carried out during the year prior to the bankruptcy or insolvency decree and if the Swiss security grantor was at the time of the transaction already insolvent – however, the transaction is not voided if the recipient proves to have been unaware of the security grantor's insolvency; and, (iii) all transactions which the Swiss security grantor carried out during the five years prior to the bankruptcy or insolvency decree with the apparent intention of disadvantaging its creditors or of favouring certain of its creditors to the disadvantage of others.
Since January 1 2014, the burden of proof for preference claims according to (i) or (iii) above has been changed. Close third parties (for example, related companies) will need to substantiate that they have not received any undue advantages or did not know about the disadvantage.
5.3 Do bankruptcy/insolvency processes provide for any kind of stay/moratorium on enforcement of lender claims? If so, does the stay/moratorium apply to the enforcement of security interests?
Yes, the board of the debtor and creditors, who could request to declare the debtor bankrupt, may request a debt-restructuring moratorium. During a debt-restructuring moratorium, enforcement proceedings can be neither initiated nor continued. However, enforcement proceedings for the realisation of collateral for claims secured by a mortgage of real estate may continue, but the property may not be realised during the moratorium. In addition, with the granting of the moratorium, interest ceases to accrue against the debtor for all unsecured claims, unless the composition agreement stipulates otherwise.
Section 6 – Your jurisdiction
6.1 In no more than 200 words, outline any cross-border financing trends specific to your jurisdiction.
The Swiss market has well-established standards for cross-border financing and corresponding securities. The enforcement of properly drafted security agreements usually creates no major issues and can be done in a reasonable amount of time (this is somewhat slower than UK or New York enforcement proceedings, though). In the insolvency proceedings of the Swiss-based Petroplus group, lenders behind a major revolving credit facility agreement will be fully satisfied through enforcement of, among others, Swiss securities without direct court involvement. In this rather stable market there are very few decisions made in connection with cross-border financing and changes tend to be subtle. However, we expect that new variations of existing security instruments (such as electronically-registered mortgage certificates and intermediated securities) will have an increasing effect on the market.
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About the author
Daniel Hayek is a member of the management committee of Prager Dreifuss. As the head of Prager Dreifuss's corporate and M&A team, he specialises in mergers and acquisitions (mainly strategic buyers), corporate finance, banking, restructuring and bankruptcy proceedings as well as general corporate matters. Together with his team, he advises business clients in all types of domestic and cross-border transactions and represents creditors, some of which are banks, hedge funds or other financial institutions, in insolvency and restructuring proceedings. In these fields, Hayek also represents clients in post-closing disputes before courts and arbitrational tribunals. Lately, his practice has involved acquisitions of Swiss targets for major strategic buyers from a variety of industries, such as chemical, automotive, and transport, as well as complex insolvency litigation matters.
About the author
Alexander Flink is a senior associate in the Zurich office of Prager Dreifuss and member of the firms corporate and M&A team. Alexander focuses mainly on restructuring transactions and financing. He has significant experience in presenting lenders and borrowers in the negotiation of credit facilities regarding leveraged finance and project finance as well as in acquisition finance for private equity companies and providers of senior and mezzanine debt. His recent practice has involved the representation of major banks in domestic and cross-border transactions, including corporate finance and real estate and IP transactions.