1 Overview
1.1 What are the main trends/significant developments in the lending markets in your jurisdiction?
Despite the challenging macro-environment marked by global conflicts and China's economic slowdown, Switzerland remains a desirable lending market due to its economic and political stability. The Swiss economy is robust, supported by high levels of consumption. Household spending is expected to keep growing, showing the country's economic resilience. However, as in other jurisdictions, the lending market may not be as vigorous as in the past years and legal practitioners have observed a slight shift towards recovery. Moreover, it is relevant to mention the collapse of Credit Suisse, a major player in the Swiss financial market, which has been acquired by UBS. The merger into UBS has ignited a trend to propose stricter regulations of regulatory capital requirements. On the positive side, the Swiss National Bank has recently cut its key policy rate by 25 basis points to 1.5%. This move makes Switzerland the first major western economy to loosen monetary policy in the current global economic situation.
1.2 What are some significant lending transactions that have taken place in your jurisdiction in recent years?
Many transactions and, in particular, deal values remain confidential. Transactions that made headlines in 2023 were the emergency liquidity assistance loans, in a total amount of several dozens of billions of Swiss francs, granted to Credit Suisse shortly before its merger with UBS in March 2023, with the support of the Swiss Confederation and based upon an ordinance adopted by the Swiss government specifically for that purpose.
2 Guarantees
2.1 Can a company guarantee borrowings of one or more other members of its corporate group (see below for questions relating to fraudulent transfer/financial assistance)?
A company can guarantee borrowings of one or more other members of its corporate group. In case such other member of its corporate group is a direct or indirect shareholder of the guarantor or a subsidiary of such shareholder (i.e. a sister company of the security provider), the financial assistance restrictions described under question 4.1 apply.
2.2 Are there enforceability or other concerns (such as director liability) if only a disproportionately small (or no) benefit to the guaranteeing/securing company can be shown?
If the guarantee/security is not at arm's length, the financial assistance restrictions described under question 4.1 apply unless the guarantee/security is granted to a fully owned (direct or indirect) subsidiary of the guarantor/security provider. If such restrictions are not incorporated into the guarantee/security agreement, directors are exposed to liability risks. The law is not settled and there is only a limited set of precedents in relation to the enforceability of such a guarantee/security.
2.3 Is lack of corporate power an issue?
Yes, the law is not settled and there is only a limited set of precedents in this regard (see questions 2.2 and 4.1).
2.4 Are any governmental or other consents or filings, or other formalities (such as shareholder approval), required?
No governmental or other consents or filings, or other formalities, are required except that, in practice, shareholder approval is sought in case of guarantees that require financial assistance restrictions because they are granted for the benefit of other members of the guarantor's corporate group that are either (direct or indirect) shareholders of the guarantor or subsidiaries of such shareholder.
2.5 Are net worth, solvency or similar limitations imposed on the amount of a guarantee?
Except for the financial assistance restrictions described under question 4.1, no such limitations are imposed on the amount of a guarantee. However, the directors of a Swiss company risk liability if a company prefers some creditors over others in case of a near insolvency or bankruptcy situation. This has the factual consequence that a company will not pay a guarantee if its directors determine that insolvency/bankruptcy cannot be avoided. In such scenario, guarantee claims will have to be filed with the bankruptcy or similar administration.
2.6 Are there any exchange control or similar obstacles to enforcement of a guarantee?
Currently, there are no exchange control or similar obstacles in Switzerland.
3 Collateral Security
3.1 What types of collateral are available to secure lending obligations?
Typical collateral to secure lending obligations are pledges or transfer of ownership (for security purposes) of certain assets such as shares, cash, intellectual property or real estate, as well as security assignments of certain receivables.
3.2 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
Certain types of security interests (e.g. pledges or security transfers) may only apply to a specific class of asset and, therefore, it is rarely possible under Swiss law to cover all the types of assets that an entity may hold under one single security agreement. In theory, this would be possible if a company only held assets over which a single security interest can be taken. However, even in this case the general security agreement must cover different perfection requirements that may apply to various types of assets, which would defeat the purpose of facilitating the procedure of taking security over multiple assets in a single agreement. Consequently, it is standard practice in Switzerland to use separate agreements for each type of asset.
3.3 Can collateral security be taken over real property (land), plant, machinery and equipment? Briefly, what is the procedure?
Collateral over land is possible under Swiss law. For the purpose of securing lending obligations, the common forms used to create such collateral are either a security transfer of mortgage notes (Schuldbriefe) or a land charge (Grundpfandverschreibung).
Security transfer of mortgage notes
Mortgage notes are financial instruments representing a personal claim against the debtor that is secured by a pledge on real property. Mortgage notes exist in the form of bearer or registered certificates or in paperless forms.
Instead of a security transfer, it is also possible to pledge mortgage notes. However, practitioners generally prefer a security transfer of legal title over the creation of a pledge. The advantage of the former is the transfer of legal title of the mortgage notes will not become part of the debtor's bankruptcy estate.
In order to create a real estate security based on mortgage notes, such notes – if not already issued – must first be created, which requires a notarial deed. The parties then enter into a written security transfer or pledge agreement and transfer the legal title of the mortgage notes, either by transfer of possession in the case of paper mortgage notes, or registration of the transfer in the land register in the case of paperless (registered) notes.
Land charge
A land charge is a mortgage that is entered into the land register and secures any kind of claim, whether actual, future or contingent. Other than in the case of mortgage notes, the secured claim is not entered into the land register and neither the land charge nor the secured claim is evidenced in the form of a negotiable instrument. For certain reasons, the land charge is less commonly used than mortgage notes. To grant security in the form of a land charge, the parties must enter into an agreement regarding the creation of the land charge in the form of a notarial deed and file this deed with the land register. Once the land register has registered the land charge, the security is created.
Real property – plant
As a matter of principle under Swiss property law, structures become part of the land on which they are built. An exemption from this principle is an independent building right with a duration of at least 30 years, which can be established on land for the purpose of building a structure such as a plant. In this case, Swiss law recognises the building right as a real property in its own right. In either case, a mortgage security over a land or building right where the plant has or will be built is possible, and follows the same principles and procedures as laid out above (see "Real property – land" section above).
Machinery and equipment
It is possible to grant a pledge over movable assets such as machinery and equipment. However, since Swiss law does not recognise the concept of a floating charge, taking security over machinery or equipment is impractical and rarely pursued in a lending transaction.
A security over machinery or equipment can be created by a pledge or a security transfer of legal title in the machinery or equipment. These security interests entitle the pledgee or transferee to liquidate the machinery or equipment in case of enforcement. Unless specific rules apply in relation to certain types of movable assets, perfection of a pledge over movable assets requires the transfer of physical possession of such asset. The security is only established once the pledgor gives up its possession over the relevant assets and is no longer in the position to exercise independent possession rights. This makes it impossible to grant security over machinery and equipment while allowing the pledgor to make use of such assets.
An exception applies to certain types of movable assets, which are subject to specific laws. Most importantly, security over aircraft, ships and railroads is perfected by the entry of the security in the respective public register (such registration replaces the requirement to transfer possession).
3.4 Can collateral security be taken over receivables? Briefly, what is the procedure? Are debtors required to be notified of the security?
Security over receivables can generally be taken in the form of a pledge or assignment. However, in either case, the prerequisite for creating such security is the assignability of the receivables. This means that the assignability of the receivables must not be prohibited by applicable laws or excluded by contract or by the personal nature of the receivable (e.g. family law claims; however, according to Swiss case law there are also receivables where the personal nature is less evident). If the assignability is restricted in an underlying contract, it is common to request the assignor to seek a waiver of such restriction from the debtor.
The steps to perfect a pledge or assignment of receivables are as follows:
- The pledge or assignment of receivables requires a valid security agreement in written form, and in the case of assignment, a written declaration of assignment by the assignor (which in practice is part of the security agreement).
- Existing written acknowledgments of debts representing the pledged or assigned claim must be handed over to the pledgee or assignee.
The notification of debtors is generally not a requirement to perfect the pledge or assignment except where a waiver of a restriction of the assignability in an underlying contract must be obtained or where a second-ranking pledge over receivables is created. However, provided a notification to a debtor has not been made, a debtor may in good faith pay its debt to the assignor without becoming liable to the assignee. Therefore, it is market standard in Swiss security assignment agreements to include an obligation to notify debtors at the time of signing of the assignment agreement or as soon as possible thereafter. Debtors of trade receivables, however, are generally only notified after the occurrence of an event of default in order not to prejudice the legitimate business interests of the security provider.
Even though the notification of the debtor is in most cases not a requirement to perfect a security over receivables, a pledgee or assignee must be entitled to notify debtors at any time, i.e. even before an enforcement event. If such right is not granted to the assignee, the pledge or assignment for security purposes may be qualified as a conditional security interest that only arises once the secured party has notified the debtor.
3.5 Can collateral security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Security over cash accounts can be taken in the form of a pledge or a security assignment. Cash deposits held in bank accounts are treated as claims of the beneficiary against the bank. Therefore, the creation of security over cash deposits is based on the same principles and procedures that apply to security over claims and receivables. In case of a pledge over a cash account, the bank should always be notified. The Swiss bank's general business terms usually provide for a first-ranking security interest over the bank account. A third party therefore obtains a second-ranking security interest over a Swiss bank account only unless the bank waives its priority rights. To create and perfect such second-ranking security interest, the bank as first-ranking pledgee must be given notice.
3.6 Can collateral security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Can such security validly be granted under a New York or English law-governed document? Briefly, what is the procedure?
It is possible to create a security interest over shares of a Swiss company, the most common form to take such security being a pledge (even though a security transfer of title or security assignment may also be possible in certain cases). Swiss law does not mandatorily require a Swiss company to issue share certificates. Thus, shares of Swiss stock corporations may or may not be in certificated form, which may affect the procedure to perfect a share pledge:
- Irrespective of whether share certificates have been issued, creation of a valid security interest over shares requires a valid written security agreement.
- If shares are certificated, the share pledge must be perfected by transferring the original share certificates to the pledgor. In case of registered shares (Namenaktien), which have become the common form of shares in Swiss stock corporations, the share certificates must be endorsed in blank.
- Uncertificated shares must be pledged, transferred or assigned in writing.
A security over shares over a Swiss company governed by New York or English law is possible but not recommended. Such security would give rise to conflict of law issues and may not be valid vis-à-vis a third party, which may impede an effective enforcement in Switzerland.
The Federal Intermediated Security Act ("FISA") sets out rules on how intermediated securities are granted. Under the FISA, a security interest over intermediated security can be created by either transferring or crediting such securities to the securities account of the secured party. Alternatively, the security over intermediated security can be granted by an agreement between the security provider and the intermediary (a so-called control agreement) setting forth an irrevocable requirement for the intermediary to comply with instructions from the secured party only.
3.7 Can security be taken over inventory? Briefly, what is the procedure?
Security over inventory can be taken in the same manner as in the case for security over movable assets or machinery or equipment (please see question 3.3 above). In the absence of a floating charge concept in Switzerland, a security over inventory is possible but impractical.
3.8 Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility (see below for questions relating to the giving of guarantees and financial assistance)?
A company can grant a security interest to secure its own obligations under a credit facility as well as obligations of a third party, such as another borrower or guarantor. In case such third party is a direct or indirect shareholder of the security provider or a subsidiary of such shareholder (i.e. a sister company of the security provider), the financial assistance restrictions described under question 4.1 apply.
3.9 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets?
Most common forms of Swiss collateral, such as share or bank account pledges or security assignments, are not subject to notarisation or registration requirements. Therefore, no notarisation or registration fees apply to these types of collateral. If security is granted over real property, notaries' fees, registration fees (for the land register) as well as cantonal and communal stamp duties may be payable depending on the location of the real estate and the transaction value.
3.10 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
In the limited cases where a notification or registration is advisable, it is not time consuming and can be achieved within a couple of days. In case of a mortgage over real property, however, the notarisation and entry into the land register may take longer.
3.11 Are any regulatory or similar consents required with respect to the creation of security?
Except for security granted over certain assets of regulated entities, there are generally no regulatory consents required with respect to the creation of security.
3.12 If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?
There are no special priority or other concerns due to the fact that borrowings under a revolving credit facility are secured.
3.13 Are there particular documentary or execution requirements (notarisation, execution under power of attorney, counterparts, deeds)?
In case of a mortgage, the issuance of mortgage notes or the entry or establishment of a land charge must be notarised.
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Originally published by ICLG.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.