A Q&A guide to lending and taking security in Switzerland. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
The amendment to the Civil Code concerning property law, which was adopted by the Swiss Parliament in December 2009, came into force on 1 January 2012. The most important change in this amendment is the introduction of a paperless mortgage certificate (see Questions 2 and 16). This certificate can be transferred by the existing creditor giving written notice to the land register, and the new creditor being registered in the land register. In the context of a secured lending transaction, this means that there is no need to keep physical mortgage certificates any longer and the risk of loss of the certificate is mitigated. However, the land register will need to be involved when transferring a paperless mortgage certificate.
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 to secure any kind of debt, whether actual, future, or contingent. The creditor of a claim secured by a mortgage assignment can demand an extract from the land register. However, the extract only acts as evidence and does not constitute a negotiable security (see Question 16).
Mortgage certificate (Schuldbrief). A mortgage certificate establishes a personal claim against the debtor, secured by a property lien. The mortgage certificate constitutes a negotiable security, which can be pledged or transferred for security purposes and is issued either in bearer or in registered form or, since January 2012, is available in a paperless version. An outright transfer (see Question 3, Common forms of security) has certain advantages in the case of the security provider's bankruptcy and in multi-party 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 13).
Mortgage assignments and mortgage certificates are created and perfected by:
The parties entering into an agreement regarding the creation of the security, made by a notarised deed.
An entry being made into the land register.
Tangible movable property comprises all property that is not classified as immovable, for example:
Shares or other securities embodied in a negotiable instrument.
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. Although 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 (see Question 20).
The formalities for creating 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, Formalities).
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.
Common types of financial instruments (both in certificated and dematerialised form) over which security is granted are:
Units in collective investment schemes.
Financial instruments can be:
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.
Since 1 January 2010, the Federal Intermediated Securities Act sets out rules in relation to intermediated securities (including the granting of security over intermediated securities). For the purposes of this Act, intermediated securities comprise:
Debt securities that are booked into a securities account.
Equity securities that are booked into a securities account.
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 (a 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.
Common types of claims and receivables over which security is granted are:
Rights under contracts in general (existing and future).
Trade accounts receivable (existing and future).
Positive balance in bank accounts.
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 be 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)).
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.
In Switzerland cash deposits can take the following forms:
Generally, the following forms of security are commonly granted over cash deposits:
The creation of security over cash deposits is based on the same principles that apply to security over movable property and, in the case of bank accounts, claims.
Intellectual property over which security is commonly granted includes:
The two available forms of security over intellectual property are:
Transfers and pledges are both created by written agreement and registration is not required to perfect the security. However, registration is recommended, so that the security holder can enforce its security interest against a third party who could otherwise rely, in good faith, on the information registered in the relevant public register.
As a general rule, 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. 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 3).
In addition, with respect to an assignment of future claims, it should be noted that any claims that come into existence only after opening of bankruptcy proceedings against the assignor will fall into the assignors' bankruptcy estate and will not pass over to the assignee.
See above, Future assets.
Security can, in principle, be granted over any asset, subject to generally applicable limitations and the specific requirements of certain types of security (see Questions 2 to 6).
The formalities required for the release of a security interest depend on the type of security interest in question. While certain types of security interest (for example, a pledge) will automatically cease to exist as soon as all secured obligations have been discharged in full, other types of security interest (for example, an assignment for security purposes) will not.
As a general rule, the release of a security interest is usually effected by a release agreement (or a clause in the original security agreement governing the release) and a corresponding release action such as:
For a pledge of movable property, the transfer of possession of the pledged assets to the pledgor.
For an assignment of claims, the reassignment of the relevant claims to the assignor.
For an outright transfer of movable properties or book-entry securities, the re-transfer of the relevant assets to the pledgor.
It is not common in Switzerland to set up an SPV holding certain of the debtor's assets for the purposes of a secured lending transaction with the debtor, except for covered bonds and similar structured transactions.
Sale and leaseback is used, in particular in relation to assets of significant value.
Factoring, including factoring of receivables (which is quite common), is used.
Hire purchase agreements and leasing arrangements are very common.
Retention of title (Eigentumsvorbehalt) is used. However, the effects of a retention of title are limited, and therefore it is only used rarely.
Conditional sale is also used. In addition, the parties have a legal right of set-off, if certain requirements are met and the right of set-off has not been contractually excluded.
Guarantees are widely used in secured lending transactions. According to Swiss law a guarantee is a promise to another person that a third party will perform, and that the guarantor will compensate for the damages caused as a result of the third party's failure to perform. There are no specific requirements as to the form of the contract. Once validly concluded, the existence of a guarantee is, in principle, independent from the existence of the obligation secured by the guarantee.
There are no particular company law rules on a Swiss company granting collateral to secure debt used to purchase its own shares or the shares of a parent company or of a subsidiary. The company itself 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 27). In addition, the restrictions under corporate benefit rules (see below, Corporate benefit) apply to the granting of:
Upstream security (for the benefit of a direct or indirect parent company).
Cross-stream security (for the benefit of another group company not fully owned by the party providing the security).
This is irrespective of the purpose of the secured obligations.
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.
There are no specific company law rules on a Swiss company granting security in respect of a loan to its subsidiary. 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%.
A Swiss company's granting of security 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 that 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:
Shareholders 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 the security.
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. This can be done by including appropriate limitation language.
The purpose clause of the company may need to be amended to permit the granting of this security.
Certain aspects of upstream and cross-stream security are currently unclear and will probably remain so until the Swiss Federal Court has the opportunity to review and decide a case dealing with these matters.
There are no specific restrictions on granting loans to directors. However, under general principles, such loans should only be made at arm's length terms and where they are appropriate in view of the company's financial and liquidity situation (see above, Corporate benefit).
Except in the area of consumer credit, there are generally no specific limits on the amount of interest that can be charged on a loan. If the amount of interest charged is manifestly excessive, general restrictions may apply (under principles of law concerning abuse of rights, excessive commitments, and so on).
The validity of a loan, security or guarantee may be limited by:
Applicable bankruptcy, insolvency, re-organisation or similar laws affecting creditors and secured parties in general (including provisions relating to voidable preferences).
Laws or principles of general application (including the abuse of rights (Rechtsmissbrauch) and the principle of good faith (Grundsatz von Treu und Glauben)) and public policy.
There are a number of statutory laws imposing liability for environmental damage. Generally, the person causing environmental damage is liable. A lender is, generally, not held responsible for this damage simply by holding and enforcing a security interest over certain assets.
However, if the lender enforces its security interest in, for example, real property by 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 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.
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. Without the approval of other creditor(s), a senior ranking can only be achieved indirectly, by the debtor granting security to the more senior-ranking creditors.
If the liabilities of a company exceed its assets 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.
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.
Inter-creditor arrangements are often used in Switzerland in cases of a structured financing in order to regulate the positions of the different classes of creditors in particular in case of the occurrence of a credit event. Among other things, the inter-creditor agreement is used to establish priorities in payments and contains provisions regarding the rights and remedies of first priority and second priority lenders holding debt secured by identical collateral. It is not common for the inter-creditor agreement to include buy-out rights that give the second priority lender the option to acquire the first priority lenders' rights.
There are three main types of security interest in immovable property in Switzerland (see Question 2, Common forms of security):
The mortgage assignment.
The mortgage certificate.
Of these three types of security, only the mortgage certificate is a tradable and negotiable instrument. It is issued either in the form of a paperless mortgage certificate, or as physical title in bearer or registered form. It embodies the debtor's obligation to pay a nominal amount, plus (usually) interest on that amount. In relation to creation formalities, see Question 2, Formalities.
Once the appropriate entry is made in the land register, the physical mortgage certificate can be transferred or pledged to a third party, who can, as transferee or pledgee, be registered in the land register. However, registration is not required to enforce the security interest represented by the mortgage certificate. If issued in registered form, the transfer of a mortgage certificate requires an endorsement in favour of the creditor by the transferor.
In case of paperless mortgage certificates, perfection of a transfer or pledge requires inscription of the transferee/pledgee in the relevant land register.
The issuance of covered bonds (Pfandbriefe) in Switzerland is governed by the Federal Act on Covered Bonds (Pfandbriefgesetz) (Covered Bond 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:
Covered bonds can only be issued by two issuers, one of which is the Pfandbriefbank Schweizerischer Hypothekarinstitute (Pfandbriefbank).
A two-tier 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.
Such issuances are often listed and can be traded on an exchange.
In the last few years, secured debt instruments have also been issued in the form of asset-backed securities and similar securitisation structures. For tax reasons, Swiss securitisation transactions often use a double 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. Such issuances are often listed and can be traded on an exchange.
It is also possible to trade unsecured debt, for example, by way of assignment. However, there is no active market in this area.
In Switzerland, the agent concept is recognised and frequently used for syndicated facilities and agency arrangements governed by Swiss or foreign law.
A substantive trust law does not exist in Switzerland. Therefore, it is not possible to set up a trust under Swiss law.
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 recognition of foreign trusts (as defined in the Hague Trust Convention) 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 must be evidenced in writing or in any equivalent form. A Swiss court cannot decline jurisdiction if either:
A party, the trust or a trustee has their domicile, place of habitual residence or a place of business in the canton of that court.
A major part of the trust assets is located in Switzerland.
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 agreed 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 decision is recognised in the country where the trust has its seat, provided the defendant was not domiciled in Switzerland.
Generally, a security trustee can enforce its rights; however, this depends on the nature of the security:
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).
Security transfer or security assignment. The doctrine of accessory (see above) 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).
Intermediate securities. It is not clear yet whether the doctrine of accessory applies under the Federal Intermediated Securities Act. It is probable that it will not apply where securities are transferred to the secured party's account, but it may apply where a control agreement is entered into.
The conditions under which security (including guarantees) can be enforced are determined by general principles of law as well as by the specific provisions of the security agreement.
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 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.
Guarantees under Swiss law are basically independent from the underlying claim. Therefore, it is not a requirement for the enforcement of a guarantee that an underlying claim must exist or be due (in contrast to pledges). It is sufficient that the conditions for enforcement set out in the guarantee are fulfilled. However, depending on the circumstances, the enforcement of a guarantee where there is no underlying claim may constitute an abuse of rights, which is not protected under Swiss law.
In the case of pledged assets, there are two main forms of enforcement.
Private enforcement is generally only permitted where the parties have agreed to this in advance, for example, in the security agreement. Private enforcement is possible in relation 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, as a matter of law, private enforcement does not need to have been agreed between the parties but is only permitted in respect of intermediated securities that are traded on a representative market. Pledges over intermediated securities can also be enforced privately in the bankruptcy of the security provider. This is in contrast with pledges over any other assets.
In all forms of private enforcement, the pledgee must protect the interests of the pledgor and in particular must:
Obtain the best price reasonably 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.
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.
For real estate, the sale is subject to certain additional formalities similar to those required in preparation for a public auction.
For 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 as private enforcement of a pledge, particularly in relation to intermediated securities (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.
Swiss law provides for company rescue procedures (Nachlassverfahren) in the Debt Enforcement Act. The rescue proceedings can be started by:
A company's creditor, under certain circumstances.
In those 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 affects the 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 20) should still be possible and not be 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.
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 20, Private enforcement). Intermediated securities traded on a representative market are not subject to this restriction, and private enforcement remains possible (see Question 20, 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.
All claims against the bankrupt company become due at the time the bankruptcy is declared and the enforcement of all claims occurs in accordance with the procedures prescribed by the Debt Enforcement Act.
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 or the guarantor disposes of assets for free or for inadequate consideration (not at arm's length) 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, which the security provider was not obliged to secure, in the year before the adjudication of bankruptcy or an equivalent event, provided that both:
the security provider was overindebted (its liabilities exceeded its assets) at that time;
the secured party was aware of the overindebtedness 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 the secured party bears the burden of proof in relation to his good faith.
The granting of security by the security provider (or the granting of the guarantee) occurred in the five years prior to the adjudication of bankruptcy proceedings or an equivalent event, provided that:
the security provider had the intention to disadvantage or favour certain of its creditors or should reasonably have foreseen that result; and
the security provider's intent was, or must have been, apparent to the secured party.
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.
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).
Where more than one creditor holds the same security interest over the same asset, the rules governing the order of priority depend on the type of asset:
For security over real estate and other assets that must be entered in a register (for example aircraft 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.
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.
Where a security interest has not been validly perfected, (that is, there was a failure to comply with the required formalities for creating and perfecting a security interest before the opening of bankruptcy proceedings), the lenders rank equally with all other unsecured and non-prioritised lenders or creditors.
Except in the area of consumer credit, there are no restrictions on the making of loans by foreign lenders.
The Act on the Acquisition of Real Estate by Persons Abroad to some extent restricts 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 as most restrictions apply to the enforcement of security rather than the granting of security. For example, security over shares in a company that must have a majority of Swiss shareholders would give limited enforcement options for the enforcement of the security because the shares could only be purchased by Swiss persons.
There are no exchange controls in force that would restrict payments to a foreign lender under security documents, guarantees, or loan agreements.
The granting or enforcement of a loan, guarantee or security does not in itself trigger any Swiss taxes. However, certain transactions may be subject to Swiss tax.
If loans are secured over real estate, the following fees may be payable depending on the transaction:
Registration fees (land register).
Cantonal and communal stamp duties.
The rates depend on the:
Security's face value.
Location of the real estate.
The rates for fees vary widely from canton to canton.
See above, Documentary taxes.
See above, Documentary taxes.
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.
The granting of security upstream or cross-stream on terms other than arm's length may trigger a 35% dividend withholding tax which must be deducted from the gross payment made.
Dividend withholding tax is fully recoverable if the recipient is a Swiss-resident entity. 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).
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. The combined rate of the tax varies between 13% and 33%, depending on which canton the real estate is located in. This interest withholding tax is reduced to zero under many double tax treaties, including the ones with the US, the UK, Luxembourg, Germany and France.
The transfer of ownership of a bond, note or other securities to secure a claim may be subject to 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 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 sale of goods for consideration in the course of a business is generally subject to VAT. The standard tax rate is currently 8%. Most banking transactions, including interest payments and transactions regarding the granting of security, are exempt from VAT. However, corresponding input taxes on related 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.
While interest payments by a Swiss resident borrower on loans are not subject to interest withholding tax, interest payments on bonds are subject to 35% interest withholding tax. A syndicated loan will be reclassified in a bond under Swiss withholding tax law if:
There are more than ten non-bank lenders under a syndicated loan agreement (so-called 10 Non-Bank Rule).
A Swiss borrower has more than 20 non-bank lenders under all its outstanding debt (so-called 20 Non-Bank Rule).
To ensure that a syndicated loan will not be classified as a bond, transfer restrictions and restrictions with respect to sub-participation should be inserted in the loan agreement. In addition, the Swiss borrower should make an undertaking to comply with the 20 Non-Bank Rule at all times.
There are no major proposals for reform within the next 12 months.