Finance 2010 Switzerland Switzerland Daniel Haeberli, Eduard De Zordi, Luzius Staehelin, André Terlinden and Benno Hinni Homburger www.practicallaw.com/4-500-9989 THE SECURED LENDING MARKET 1. Please give a brief overview of the main trends and important developments in the secured lending market in your jurisdiction in the last 12 months. An important development this year concerns intermediated securities. The Swiss Federal Council has decided that the following will become effective on 1 January 2010: The Swiss Federal Act on Intermediated Securities (Federal Intermediated Securities Act). This governs, among other matters, the granting of a security interest in intermediated securities (see Question 4). The Hague Convention on Intermediated Securities 2006. This determines the applicable law relating to intermediated securities (see Question 25). REAL ESTATE purposes. Mortgage certificates must be issued either in bearer or in registered form. An outright transfer (see Question 3, Common forms of security) has certain advantages in the case of the security provider s bankruptcy and in multiparty transactions. Therefore, practitioners in cross-border banking transactions often prefer granting an outright transfer of a mortgage certificate instead of a pledge. In both forms of security, the secured party s claims can be backed by property belonging to the borrower or a third party (third party security), subject to the rules on financial assistance and similar limitations (see Question 9). TANGIBLE MOVABLE PROPERTY 3. Please briefly state what is considered tangible movable property in your jurisdiction, for example, machinery, trading stock (inventory), aircraft and ships? What are the most common forms of security granted over it? How are they created and perfected? 2. Please briefly state what is considered real estate in your jurisdiction. What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)? The definition of real estate under Swiss law includes: Edified and unedified land (that is, land with or without buildings). A flat or floor of a building. The right to build on a track of land for a limited period of time (Baurecht). The following forms of security are commonly granted over immovable property: Mortgage assignment (Grundpfandverschreibung). This is created by a security agreement in the form of a notarised deed and an entry of the security into the land register. The creditor of a secured claim can demand an extract from the land register. However, the extract only acts as evidence and does not constitute a negotiable security. Mortgage certificate (Schuldbrief). A mortgage certificate establishes a personal claim against the debtor, secured by a property lien. The lien is perfected by an entry in the land register. The mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security Tangible movable property comprises all property that is not classified as immovable, for example: Shares or other securities embodied in a negotiable instrument. Machines. Inventory. Valuables (for example, fine art and jewellery). The following forms of security are commonly granted over tangible movable property: Pledge. The pledge is the most widely used type of security in relation to shares and other securities, valuables, and intellectual property rights. A pledge entitles the lender to: liquidate the pledged property if the debtor defaults; apply the proceeds in repayment of the secured claims. Outright transfer. The transferee acquires full title in the transferred assets, but can, under the terms of the transfer agreement, only use its title to liquidate the assets on the debtor s default to apply the proceeds to the repayment of debt. Even though the transfer has certain advantages over a pledge on the bankruptcy of a Swiss security provider and in multi-party transactions, its use is restricted by increased liability concerns. CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook 161
Switzerland Finance 2010 The formalities for granting and perfecting a security interest depend on the type of security being given and the asset used as collateral. Perfection of a pledge or an outright transfer requires both: A valid security agreement. The secured party obtaining physical possession of the relevant assets. The security holder does not have a security interest over the collateral as long as the security provider retains possession and control over it (certain movable property, such as aircraft or ships, is not subject to this principle). Certain movable assets are subject to particular rules. The most important are aircraft, ships and railroads where the security is perfected by the entry of the security in the respective register. In addition, the Federal Intermediated Securities Act sets out specific provisions for the granting of a security over intermediated securities (see Question 4). Swiss law generally does not recognise the concept of a floating charge or floating lien. Therefore, taking a security over inventory, machinery or equipment (often used as collateral in other jurisdictions) is not practical under Swiss law, at least in relation to assets necessary for running the pledgor s business. The requirement of physical control over the relevant assets is generally too burdensome, costly and unmanageable. A security over intermediated securities can be granted in one of the following ways: By transfer of the intermediated securities to the securities account of the secured party. This requires: the security provider giving instructions to the bank to effect the transfer; and crediting the intermediated securities to the securities account of the secured party. By an irrevocable agreement (so-called control agreement) between a security provider and its intermediary that the intermediary will comply with any instructions from the secured party. The security provider can, through the control agreement, grant a security right in: specified intermediated securities; all intermediated securities in a securities account; a certain quota of intermediated securities in a securities account, determined by value. CLAIMS AND RECEIVABLES 5. What are the most common forms of security granted over claims and receivables (such as debts or rights under contracts)? How are they created and perfected? SHARES AND FINANCIAL INSTRUMENTS 4. What are the most common forms of security granted over financial instruments, such as shares and other securities (both in certificated and dematerialised form)? How are they created and perfected? Financial instruments can be: Pledged. Transferred outright. Assigned for security purposes. Creation of a security is always based on a valid security agreement. Perfection of a security, however, differs according to the type of financial instrument: Certificated financial instruments require possession of the certificates to be transferred to the security holder. Additionally, registered certificates must be duly endorsed and transferred to the security holder. Uncertificated financial instruments must be pledged, transferred or assigned in writing. From 1 January 2010, the Federal Intermediated Securities Act will set out new rules in relation to intermediated securities (including the granting of security over intermediated securities). For the purposes of the Act, intermediated securities comprise: Fungible debt. Equity securities that are booked into a securities account. Claims and receivables can be pledged or assigned for security purposes. The granting of security is based on the same principles as for security over movable property (see Question 3) and, in particular, requires a valid agreement between the security provider and the security holder. The main differences are that: The security agreement must be in writing. There is no transfer of possession. In addition, an assignment of receivables or other claims requires that the assignor sign the assignment itself and not just the related undertaking in the assignment agreement. Perfection of a first-ranking security also requires that the claims or receivables are assignable under the governing law of those claims or receivables. If a Swiss bank account (that is, the balance of the account standing to the credit of the security provider) is used as collateral, the Swiss bank s business terms usually provide that the bank has a first-ranking security interest over its client s account. A third party therefore only gets a second-ranking security interest over a Swiss bank account, unless the bank waives its priority rights. To create and perfect a second-ranking security interest, the bank must be given notice. In the case of assignments, the third party debtors of the receivables are either: Immediately notified of the assignment (open assignment (offene Zession)). Notified only in case of default of the assignor or other events of default (equitable assignment (Stille Zession)). 162 CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook
Finance 2010 Switzerland On notification, the assignee, as the new creditor of the assigned claims, can directly collect the receivables from the third party debtors. Because Swiss law also allows the assignment of future receivables arising before a potential bankruptcy of the assignor, assignments are commonly used in practice. If all of the present and future trade receivables are taken as security, notice of the creation of the security interest is usually only given to the relevant debtor if there is a default. Until this notification, a bona fide debtor can validly discharge its obligation to the security provider. INTELLECTUAL PROPERTY COMMERCIAL SECURITY 8. What types of commercial or quasi-security (that is, legal structures used instead of taking security) are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest? Consider the following and give brief details: Sale and leaseback. Factoring. Hire purchase. Retention of title. 6. What are the most common forms of security granted over registered and unregistered intellectual property (such as patents, trade marks, copyright and designs)? How are they created and perfected? The two available forms of security over intellectual property (such as patents, trade marks, copyright, industrial designs and computer chip-designs) are: A transfer. A pledge. Both types of security are created by written agreement. Registration of a security transfer or pledge is not required to perfect the security. However, registration is strongly recommended, so that the security holder can enforce its security interest against a third party who relies, in good faith, on the information registered in the relevant public register. PROBLEM ASSETS 7. Are there types of assets over which security cannot be granted or is difficult to grant? Consider the following and give brief details of any additional requirements: Future assets. Fungible assets (a pool of assets indistinguishable from each other that may change over time). Other assets. Other structures. In Switzerland, the following types of commercial or quasisecurity can be used: Sale and leaseback, mainly of immovable property. Factoring, including factoring of receivables. Hire purchase agreements or leasing arrangements. Retention of title (Eigentumsvorbehalt) (a retention of title takes the form of a legal security if registered in the retention of title register). Conditional sale. Set-off. Lenders should ensure that their loan documents prohibit the borrower from subsequently creating a legal or a commercial security and, in particular, from setting-off any of the borrower s claims against those of the lenders. Negative pledge clauses have no effect on the assets and so cannot prevent third parties from taking effective legal security over the debtor s assets. RISK AREAS 9. Do company law rules affect taking security? In particular: Financial assistance rules. For example, if a company grants security to secure debt used to purchase its own shares (or the shares of its holding company), does this breach such rules? Security can be granted over future and fungible assets. However, the assets must be determined or at least determinable at any relevant point in time. Further, as Swiss law does not accept and recognise non-possessory security over tangible assets, a pledge over future or fungible assets is only effective once the: Asset has come into existence. Pledgee has taken actual possession over the asset. Until then, the security is not perfected and is only pending. For the same reason, Swiss law does not recognise the concept of a floating charge or floating lien (see Question 2). Corporate benefit rules. For example, if a subsidiary grants security relating to a loan to its parent, does this breach such rules? Other rules? The directors of a Swiss company are subject to a general obligation to act in the interest of that company in relation to all their actions on behalf of the company, including when granting security for the benefit of third parties. In addition to this general obligation, the following specific rules apply. CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook 163
Switzerland Finance 2010 Unlawful financial assistance The granting of security by a Swiss company to secure debt used to purchase its own shares or the shares of a parent company or of a subsidiary is not subject to any particular company law rules. However, the company must not purchase more than 10% of its own voting shares. The granting of security by a Swiss company to secure debt used to purchase its own shares can result in Swiss income tax being levied on the party selling the shares (see Question 26). Further, the restrictions under corporate benefit rules (see below, Corporate benefit rules) apply generally to the granting of upstream security (for the benefit of a direct or indirect parent company) or cross-stream security (for the benefit of another group company not fully owned by the party providing the security), irrespective of the purpose of the secured obligations. Corporate benefit rules The granting of security by a Swiss company in respect of a loan to its subsidiary is not subject to any specific company law rules. However, from a tax point of view, that downstream security may constitute a contribution to the subsidiary that is subject to tax at the rate of 1%. The granting of security by a Swiss company in favour of its shareholder(s), or related persons or entities of the shareholder(s), is restricted by numerous company law rules which may significantly affect the value of such security. It may also raise issues of directors liability (criminal or civil), bankruptcy law and tax law. These restrictions in theory do not apply, if the security is granted at arm s length conditions. However, in practice this approach can lead to difficulties: The shareholder(s) often do not wish to provide any consideration for the granting of the security. It is difficult to determine what consideration would be adequate. Due to these difficulties, it is advisable, and standard practice, to treat the granting of security in the same way as a distribution by the company to its shareholders. This means that the board of directors and a general meeting of shareholders must approve the granting of a security. By including appropriate limitation language, the enforcement of the security must be limited to the freely distributable reserves of the company at the time of the enforcement, the amount of which must be confirmed by the company s auditors. Certain aspects of upstream and cross-stream security are unsettled under Swiss law and will likely remain so until the Swiss Federal Court has the opportunity to review and decide a case dealing with these matters. the lender is not causing or permitting contamination, it may be held liable for the borrower s past acts or omissions and may have to bear the costs of cleaning up the contaminated land as the current owner or occupier of the land on enforcement of the security interest. STRUCTURING ISSUES 11. Is contractual subordination of debt possible and common? If so, how can it be achieved, for example by an inter-creditor agreement between senior, mezzanine and junior creditors? Is structural subordination possible? Subordination of debt is possible under Swiss law. It is achieved contractually through an agreement between the debtor and the subordinated creditor in which the creditor s claims are subordinated to certain other claims. It is also possible for more than two parties to agree on more complex ranking systems. This requires an agreement between the debtor and all the creditors involved. The debtor and the creditor cannot agree that the creditor will rank senior to any other creditor of the debtor, unless the other creditor agrees to be ranked junior. Without the approval of the other creditor(s), the senior ranking can only be achieved indirectly, by the debtor granting security to the senior-ranking creditors. If the liabilities of a company exceed its assets (that is, the company has negative equity and is overindebted) the board of directors must notify the relevant bankruptcy court, which, on notification, will start bankruptcy proceedings. The notification duty can be avoided if creditors subordinate their claims through a contractual agreement, similar to those above, which is subject to the requirements that the subordinated debt must not be payable other than: On the bankruptcy of the debtor. Where the debtor has managed to definitely overcome its overindebtedness. Further, subordination can be achieved structurally if the debt to be subordinated is incurred by a holding company while the debt that is to be senior is incurred by the operating subsidiary. 12. Is secured debt traded in your jurisdiction? If so, what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security associated with the transferred debt? 10. Can a lender holding or enforcing security over land be liable under environmental laws, even if it did not cause any pollution of the land? There are a number of statutory laws imposing liability for environmental damage. Generally, the person causing environmental damage such as waste, or contamination of land or water, is liable for the damage. A lender is, generally, not held responsible for any such damage simply by holding and enforcing a security interest in certain assets. However, if the lender enforces its security interest in, for example, real property by itself taking over the land, and continues or permits to continue any polluting activities, the lender can incur liability for any environmental damage caused. Further, even if There are two types of security interests in immovable property which are common in Switzerland: A mortgage assignment. A mortgage certificate. (See Question 2.) Only the mortgage certificate is tradable and is, in contrast to the mortgage assignment, a negotiable security document certificate. The mortgage certificate can be transferred or pledged to a third party, who may, as transferee or pledgee, be registered in the land register. Registration permits the registered person to oppose claims from other persons. However, registration is not required to enforce the security interest represented by the mortgage certificate. 164 CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook
Finance 2010 Switzerland The issuance of covered bonds (Pfandbriefe) in Switzerland is governed by the Federal Act on Covered Bonds (Pfandbriefgesetz) (Covered Bonds Act) and the Covered Bond Ordinance. The main aim of this regulation is to offer mortgage lenders a possibility of long-term funding with low and stable interest rates. The Swiss covered bond regime has the following main features: Only two issuers. Covered bonds can only be issued by two issuers, one of which is the Pfandbriefbank Schweizerischer Hypothekarinstitute (Pfandbriefbank) (Covered Bonds Act). Repayment secured by a two-tier system of collateral. A twotier system of statutory liens ensures that, from an economic perspective, the claims of investors are ultimately secured by rights in rem in a covered pool of mortgages over Swiss real estate. The first tier is a register lien (Registerpfandrecht) over the claims of Pfandbriefbank under the loans it grants to its member banks. The second tier is a register lien of Pfandbriefbank over mortgages the relevant member bank specifies in its books as security for the loan granted by Pfandbriefbank. In the last few years, secured debt instruments have also been issued in the form of asset-backed securities. For tax reasons, Swiss securitisation transactions often use a double special purpose vehicle (SPV) structure, where a non-swiss SPV issues securities and loans the issuance proceeds on an unsecured basis to a Swiss SPV, which, in turn, acquires the relevant assets (for example, mortgage loans and mortgage certificates) from the non-swiss SPV. 13. Is the trust concept recognised in your jurisdiction? If not: The decision is recognised in the country where the trust has its seat, provided the defendant was not domiciled in Switzerland. Security trustee From a Swiss law perspective, a pledge and a security transfer or a security assignment of title must be distinguished in this context. In addition, specific regulations apply if the assets transferred to the security trustee are securities held by an intermediary. Pledge With respect to a pledge, Swiss law is based on the doctrine of accessory (Akzessorietätsprinzip), meaning that the secured party must be identical to the creditor of the secured claim. A pledge cannot be vested in a third party acting as a security holder in its own name and right; instead, the pledge must be granted to the lender or, in the case of syndicated loans, all of the lenders as a group. The lender(s) can, however, be represented by a third party acting in the name and on behalf of the lender(s). A pledge can therefore not be vested in a security trustee but a security trustee can act in the name and on behalf of the secured party. Security transfer or security assignment In relation to an assignment or transfer for security purposes, the doctrine of accessory (see above, Pledge) does not apply. For this type of security, therefore, a security trustee can enter into the security agreement and hold the security in its own name and on its own account for the lender(s). Is a trust created under the law of another country recognised in your jurisdiction? Can a security trustee enforce its rights in the courts in your jurisdiction? Trust concept A substantive Swiss trust law does not exist. Therefore, a trust cannot be set up under Swiss law. Recognition of foreign trusts Since July 2007, the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985 (Hague Trust Convention) is applicable in Switzerland. Certain provisions of the Swiss Private International Law Act (PILA) transpose the Hague Trust Convention into national law. These provisions essentially allow full and complete recognition of foreign trusts in Switzerland. The relevant PILA provisions grant a settlor unfettered freedom to choose the law applicable to the trust. The trust can also contain a choice of jurisdiction, which needs to be evidenced in writing or in any equivalent form. Intermediated securities In the case of security over intermediated securities, it is not clear yet whether the doctrine of accessory applies under the Federal Intermediated Securities Act. It should probably not apply where securities are transferred to the secured party s account, but may apply where a control agreement is entered into (see Question 4). 14. Do the different types of security in your jurisdiction need to be documented separately or does your jurisdiction allow a single security document? Different types of security can theoretically be contained in a single global charging document. In practice, each type of security is usually documented in a separate agreement, particularly if a specific security must be documented in a public deed. ENFORCEMENT AND INSOLVENCY 15. Please briefly state the circumstances in which a secured creditor can enforce its security, for example, when an event of default occurs? What requirements must the creditor comply with? A decision by a foreign court on trust-related matters is recognised in Switzerland if it is made in any one of the following cases: By a validly selected court. In the jurisdiction in which the defendant has its domicile, habitual residence or establishment. In the jurisdiction where the trust has its seat. In the jurisdiction whose laws govern the trust. The conditions under which security can be enforced are determined by general principles of law as well as by the specific provisions of the security agreement. This applies both to pledged assets and to assets transferred by way of security. For a secured party to be permitted to enforce security, the secured party must have a secured claim, and this claim must be due. The relevant security agreement may set out additional CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook 165
Switzerland Finance 2010 conditions for the enforcement of the security. Usually security agreements refer to the occurrence of an event of default, as specified in the credit agreement governing the secured loan, as a condition for enforcing the security. (For example when a secured debt becomes due and is not paid, this typically constitutes an event of default under the credit agreement and the security for the loan generally becomes enforceable.) 16. How are the main types of security interest usually enforced? What requirements must a creditor comply with (for example, a mandatory public sale of the secured asset through the courts)? In the case of pledged assets, there are two main forms of enforcement. Private enforcement Private enforcement is only permitted where the parties have agreed to this in advance, for example in the security agreement. Private enforcement is possible in regard to all forms of assets, but in practice mainly occurs in connection with movable assets. Private enforcement can take place by: A private sale. A public auction. In relation to assets, the value of which can be objectively determined (for example, listed securities), the pledgee itself purchasing the pledged assets, and applying the proceeds to its claims (Selbsteintritt). For securities over intermediated securities, private enforcement is only permitted in respect of intermediated securities that are traded on a representative market. Pledges over intermediated securities can also be enforced privately on the bankruptcy of the security provider. This is in contrast with all other pledges. In all forms of private enforcement, the pledgee must protect the interests of the pledgor and in particular must: Obtain the best price possible in the sale of the pledged assets. Fully document the enforcement and provide the documentation to the pledgor. Return any surplus remaining after the application of the proceeds to the secured debt to the pledgor. Act on Debt Enforcement and Bankruptcy The enforcement of security follows the rules set out in the Act on Debt Enforcement and Bankruptcy (Debt Enforcement Act) when: There is a bankruptcy, provided that in the case of intermediated securities which are traded on a representative market, private enforcement remains possible despite the bankruptcy of the security provider. The parties have not agreed to private enforcement. The pledgee chooses not to enforce the security privately. The usual form of enforcement under the Debt Enforcement Act is the sale of pledged assets in a public auction. Assets can, however, also be sold without public auction (freihändige Verwertung) by the debt enforcement officials, in the following situations: The assets in question would deteriorate in the time required to prepare a public auction (for example, certain food products). The costs for the safe keeping of the assets are unreasonably high. The assets have a market price (for example, are traded on a stock exchange). All parties agree to the sale. In the case of real estate, the sale is subject to certain additional formalities similar to those required in preparation for a public auction. In the case of assets transferred by way of security, enforcement in a strict sense is not necessary, as the ownership has already been transferred to the secured party. Enforcement in this context means that the obligation to return the transferred assets under the security agreement expires. This follows similar rules to a private enforcement (see above, Private enforcement). In particular, the secured party must: Fairly value the transferred assets. Document the valuation. Apply the proceeds to the secured claims. Return any surplus remaining after the application of the proceeds of the secured debts to the party that granted the security. 17. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? If yes, please give brief details, including voting requirements to approve such procedures. How do they affect a secured creditor s rights to enforce its security? Swiss law provides for company rescue procedures (Nachlassverfahren) in the Debt Enforcement Act. The rescue proceedings can be started by: The company. A company s creditor, under certain circumstances. In such proceedings the competent court can grant a moratorium (Nachlassstundung). A moratorium may, if certain conditions are fulfilled, lead to a composition agreement (Nachlassvertrag) that is binding on all creditors and may affect creditors unsecured claims. For a composition agreement to be effective, it must be approved by both: At least a majority of the creditors holding two-thirds of all the debts, or a quarter of the creditors holding three-quarters of the debts. The competent bankruptcy court. If a moratorium is granted by the competent court, the security granted by the company is not directly affected. However, as a rule, enforcement proceedings for the security cannot be started or continued as long as the moratorium is in effect. Private enforcement (see Question 15) is still possible and is not affected by a moratorium. If the rescue proceedings result in a composition agreement, the security granted by the company will not be affected by this. 166 CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook
Finance 2010 Switzerland 18. How does the start of insolvency procedures affect a secured creditor s rights to enforce its security? In the case of bankruptcy, pledged assets form part of the bankrupt estate. As a result the private enforcement of pledged assets is no longer permitted and enforcement can only occur according to the Debt Enforcement Act (see Question 16, Private enforcement). Intermediated securities traded on a representative market are not subject to this restriction, and the private enforcement remains possible (see Question 16, Private enforcement). The pledgee s priority rights remain effective, and the proceeds from the sale of the pledged assets in the bankruptcy proceedings are first used to cover the claims secured by the pledge. If the proceeds from the sale of the pledged assets exceed those secured claims, the surplus is available for distribution to other creditors. 19. What transactions granting security can be made void if the entity that granted the security becomes insolvent? Please briefly state the time limits that apply and the conditions that must be met for the security to be made void. 20. Please list the order in which creditors are paid on the borrower s insolvency, assuming the security interests have been validly perfected. Consider: The secured creditors considered in Questions 2 to 6 (please set out any order of priority applying between the security interests). Statutory claims (such as tax or other government claims, expenses of the insolvency proceedings and employee claims). Unsecured creditors. Subordinated creditors. Pledged assets of a bankrupt company fall within the bankruptcy estate and are realised by the bankruptcy administrator. However, the secured creditor s claim is satisfied directly out of the proceeds from the realisation of the collateral. Therefore, the proceeds from realisation of these assets are first used to discharge the secured claims with any remainder used to satisfy unsecured creditors. If the realisation proceeds are not sufficient to fully discharge the secured claims, the secured creditor s claim for the outstanding amount ranks equally with all other unsecured and non-prioritised claims. The Act on Debt Enforcement and Bankruptcy provides, in connection with bankruptcy and composition of a security provider, that a transaction is voidable if any of the following apply: The security provider disposes of assets for free or for inadequate consideration in the year before the adjudication of bankruptcy or an equivalent event. The security provider repays debts before they become due, settles a debt by an unusual means of payment or grants collateral for previously unsecured liabilities in the year before the adjudication of bankruptcy or an equivalent event, provided that both: the security provider was overindebted at that time; the secured party was aware of the financial situation of the security provider. A bona fide secured party is therefore protected. However, the law presumes the secured party s knowledge of the security provider s overindebtedness, so that the secured party bears the burden of proof in relation to his good faith. The granting of security by the security provider occurred in the five years prior to the adjudication of bankruptcy proceedings or an equivalent event, provided that: the security provider intended to favour certain creditors over others; the security provider s intent was apparent to the other party. The collateral is granted for pre-existing liabilities, which the security provider was not bound to secure, provided the collateral was granted both: in the year before the adjudication of bankruptcy or an equivalent event; at a time when the grantor was already overindebted. Unsecured claims and the secured creditors outstanding claims are satisfied out of the proceeds of the remainder of the bankrupt estate in the following order, after the expenses of the bankruptcy proceedings have been satisfied: Claims prioritised by operation of law (for example, certain claims of employees and of pension funds, and certain claims derived from family law). Unsecured creditors. Subordinated creditors. 21. If more than one creditor holds the same security interest over the same asset, how is priority between them determined? Please briefly set out any specific ranking rules that apply. The rules governing the order of priority of creditors with security over the same asset depend on the type of asset: For security over real estate and other assets that must be entered in a register (for example aircrafts and ships), the ranking of the security is determined by its rank in the relevant register. This rank is agreed between the parties when the security is granted. However, the parties cannot agree on a ranking which would affect the security of a third party whose rights are already entered in the register, unless the third party gives its consent. To be effective, any agreed new ranking must again be entered in the register. For security over assets that does not need to be registered, the ranking of security is determined by the chronological order in which the security was granted. This means that the security granted earlier in time ranks senior to security granted over the same asset later. The parties can agree a different ranking. A senior-ranking security of a third party can, however, only be lowered in its ranking if the holder of that senior-ranking security agrees to the lower ranking. CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook 167
Switzerland Finance 2010 If several security interests over the same asset rank equally, the amount realised in the enforcement of the security is applied proportionally to these secured claims. 22. If a security interest has not been validly perfected, where does the security holder rank on the borrower s insolvency? A failure to comply with the required formalities for creating and perfecting a security interest before the opening of bankruptcy proceedings means that there is no valid and enforceable security interest. Therefore, the lenders rank equally with all other unsecured and non-prioritised lenders or creditors (see Question 20). choice of law cannot be invoked against third parties who can rely on the lex rei sitae. In relation to the outright transfer of a claim and/or of uncertificated securities effected by way of security, the PILA states that these assignments are subject to the law: Chosen by the parties. Governing the claim, in the absence of a choice. However, that choice of law cannot be invoked against the debtor of the claim and the issuer of uncertificated securities without their prior consent. CROSS-BORDER ISSUES 23. Are there restrictions on granting security (over all forms of property) to foreign lenders? If yes, please give brief details, for example registration requirements. The Act on the Acquisition of Real Estate by Persons Abroad can, under limited circumstances, restrict the taking of security over Swiss real estate by foreign lenders. However, this Act does not apply to real estate used or reserved exclusively for commercial purposes. If real estate is used for residential purposes, a case-by-case analysis must be performed. The lender can generally either: Seek a decree confirming that a transaction is exempted from the application of the Act (Nichtunterstellungsverfügung). Structure the transaction to ensure compliance with the Act without obtaining such a decree. For security over assets other than real estate there are only a few limitations on granting security to foreign lenders, for example, restrictions applicable to security over shares in companies that must have a majority of Swiss shareholders. 24. Are there exchange controls that restrict payments to a foreign lender under a security document or loan agreement? There are no exchange controls in force that would prevent either: The repatriation of proceeds realised in Switzerland through the enforcement of security. Payments to a foreign lender under security agreements or a loan agreement. 25. Is a foreign choice of law clause in a security document recognised and applied by the courts in your jurisdiction? Does local law always apply in certain circumstances? For a pledge of securities and debts these general rules are partly modified as follows: If the parties have not chosen the applicable law, the pledge of securities and debts is not governed by the lex rei sitae but by the law of the pledgee s domicile. (However, if the parties make a choice of law, it cannot be invoked against third parties (see above).) Irrespective of the law applicable between the parties, the only law which can be invoked against the issuer of a security or the debtor of a claim is the law governing the pledged security or right. Therefore, the third-party issuer/debtor can always rely on the law governing the pledged instrument. Therefore, under Swiss Private International Law, up to four different laws may apply to the creation of a security interest: The law chosen by the parties. The lex rei sitae. The law of the domicile of the pledgee. The law of the third-party debtor. In an international context it may be prudent to create a security that complies with all potentially applicable laws, subject to a case-by-case analysis. Specific rules apply to intermediated securities. The law applicable to dispositions over intermediated securities, as well as further rights to such intermediated securities, is the law chosen by the parties to the relevant account agreement (Hague Convention on Intermediated Securities). However, this law can only apply if the relevant intermediary has an office (as described in the Convention) in that jurisdiction at the time the agreement is entered into. Otherwise, the applicable law is the law of the jurisdiction in which the intermediary s office, with which the relevant account agreement was entered into, is located. TAX AND FEES The rules relating to conflicts of law applicable in Swiss courts are set out in the PILA. As a general rule, an acquisition or loss of rights in rem in movable goods are governed by the lex rei sitae, that is, the law of the country of the asset s location at the time of the event giving rise to that acquisition or loss. However, the PILA allows the parties to subject the acquisition and loss of those rights to the law governing the underlying legal transaction. However, that 26. Are taxes or fees paid on the granting and enforcement of security? Consider the following and state the tax rates and fee amounts, if they are more than a nominal amount: Documentary taxes (for example, stamp duty). Registration fees. Notaries fees. 168 CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook
Finance 2010 Switzerland The granting or enforcement of securities does not in itself trigger any Swiss taxes. However, certain specific transactions may be subject to Swiss tax. Cantonal stamp taxes and notary fees If loans are secured over real estate, the following fees may be payable depending on the transaction: Notaries fees. Registration fees (land register). Cantonal and communal stamp duties. The rates depend on the: Security s face value. Location of the real estate. Income tax Generally, the granting or taking of security between related parties must be at arm s length. This may mean that a security commission or guarantee fee is payable to the security provider. This commission or fee can be subject to income tax for a Swiss security provider as part of his overall earnings. The transfer of ownership of an asset to secure a loan may trigger corporate income taxes on the net income as part of the overall earnings of a Swiss security provider. Income tax rates depend, among other things, on the place of incorporation or residence of a person, entity or permanent establishment. Withholding tax on upstream or cross-stream securities The granting of security upstream or cross-stream on terms other than arm s length may trigger a 35% dividend withholding tax. This dividend withholding tax must be deducted from the gross payment made. Dividend withholding tax is fully recoverable by Swiss-resident entities. Non-resident companies with a permanent establishment in Switzerland can claim a full refund, if the relevant asset is attributable to the Swiss permanent establishment. Non-resident companies can claim a full or partial refund of the dividend withholding tax, based on an applicable double tax treaty between their country of residence and Switzerland. If no double tax treaty applies, the dividend withholding tax may become a final burden for the recipient (subject to any measures required in the country of residence of the recipient). Withholding tax on loans secured over Swiss real estate The Swiss Confederation and the cantons or communes levy an interest withholding tax on interest which is secured by a mortgage on Swiss real estate. This interest withholding tax is reduced to zero under many of the Swiss double tax treaties, including the ones with the UK, Luxembourg, Germany and France. Issuance stamp tax on downstream securities The granting of security downstream to a Swiss affiliate where the terms are not at arm s length may, in certain circumstances, lead to a 1% issuance stamp tax. Securities transfer stamp tax The transfer of ownership of a bond, note or other securities to secure a claim may be subject to a Swiss securities transfer stamp tax of up to 0.3%, calculated on the transaction value, if a Swiss bank or other securities dealer (as defined in the Swiss stamp tax law) is involved as a party or intermediary. The securities transfer stamp tax is paid by the securities dealer and may be charged to parties who are not securities dealers. If no securities dealer is involved, no transfer stamp tax will arise. In addition to this stamp tax, the sale of bonds or notes by, or through, a member of the SIX Swiss Exchange may be subject to a minor SIX Swiss Exchange levy on the sale proceeds (the levy also includes the Swiss Financial Market Supervisory Authority FINMA surcharges). Value added tax (VAT) The sale of goods against consideration in the course of a business is generally subject to VAT. The standard tax rate is currently 7.6% (8.0% from 2011). Most banking transactions, including interest payments and transactions regarding the granting of security, are exempt from VAT. However, corresponding input taxes on relating expenses are not recoverable. VAT on the sale of real estate is only chargeable if the seller opts for tax. The option is permissible for buildings (but not for land) unless the new owner uses the buildings only for private purposes. 27. If such taxes and fees make granting security too expensive, are there strategies to minimise costs? The granting or taking of security, other than over real estate, is generally not prohibitively expensive. Cost-minimising alternatives must be looked at on a case-by-case basis and are subject to anti-tax avoidance rules applied by the Swiss courts. REFORM 28. Please summarise any proposals for reform and state whether they are likely to come into force and, if so, when. In June 2007, the Swiss Federal Council produced a draft for a (partial) amendment of the Swiss Civil Code, according to which mortgage certificates (Schuldbriefe) can also be issued as non certificated (dematerialised) mortgage certificates. The parliamentary hearings started in June 2009 and it is likely that this amendment will be passed. CONTRIBUTOR DETAILS Daniel Haeberli, Eduard De Zordi, Luzius Staehelin, André Terlinden and Benno Hinni Homburger T +41 43 222 10 00 F +41 43 222 15 00 E lawyers@homburger.ch W www.homburger.ch CROSS-BORDER HANDBOOKS www.practicallaw.com/financehandbook 169
Homburger is one of Switzerland s premier business law firms. Since its establishment in 1957, Homburger advises and represents Swiss and international corporate clients and individual entrepreneurs on key aspects of business law. We offer our clients expert legal advice, support in business negotiations, representation in court, and protection of their interests in civil and administrative proceedings. Homburger AG Weinbergstrasse 56 58 CH - 8006 Zürich P.O. Box 194 CH -8042 Zürich Phone +41 43 222 10 00 Fax +41 43 222 15 00 lawyers@ homburger.ch www.homburger.ch Homburger is organized into six practice groups, integrating the skills and experience of more than 100 lawyers and tax experts focussing on specific areas. Our practice groups are Corporate M&A, Financial Services, Competition, IP IT, Litigation Arbitration and Tax. The Homburger Financial Services Practice Group is a leading advisor on banking and financing law serving major domestic and international banks and other financial institutions. The team offers a comprehensive range of legal services in the areas of Debt capital markets (straight and equity-linked bonds, eurobonds) Equity capital markets (IPOs, capital increases) and private equity Derivatives (listed products, OTC and structured derivatives) Collective investment schemes Syndicated, structured, collateralized and hybrid financings Securitizations (synthetic and true sale) Bank, securities dealer, stock exchange, insurance and investment fund licenses, regulation and compliance Bank contracts (asset management, custody, collateral, banking secrecy) Litigation and regulatory proceedings Contacts: René Bösch Email: rene.boesch@homburger.ch Benedikt Maurenbrecher Email: benedikt.maurenbrecher@homburger.ch Peter Widmer Email: peter.widmer@homburger.ch Daniel Daeniker Email: daniel.daeniker@homburger.ch Hansjürg Appenzeller Email: hansjuerg.appenzeller@homburger.ch Daniel Haeberli Email: daniel.haeberli@homburger.ch