The environment of elevated and enduring inflation, the increase in nominal interest rates and the impact of rising energy costs led to a slowdown in global economic growth, which also put pressure on the Swiss debt finance market.

Although Switzerland is home to a large number of companies and serves as an important hub for key subsidiaries of various major international corporations spanning diverse industries, the size of the loan market stagnated after a long phase of above-average growth. Due to higher borrowing cost and more difficult lending conditions, volumes were lower throughout 2023 compared to 2022 and 2021. The decline affected secured loans more than unsecured loans.

Switzerland’s debt capital markets, on the other hand, continued to perform strongly and grew further in 2023, with the volume raised by debt capital instruments on the main debt security exchange SIX Swiss Exchange (SIX) exceeding the CHF100 billion mark for the second consecutive year. Also, the number of green, sustainable, sustainability-linked and social bonds traded on the SIX increased from 108 in 2022 to 136 in 2023.

The lending market is mainly in the hands of banks, with locally-headquartered banks being predominantly involved in bilateral lending, and international banks more active in relation to syndicated loans. Although banks are overall the main players in the Swiss corporate lending market, alternative lenders such as pension funds and insurance companies are becoming increasingly prominent. In international leveraged finance transactions, particularly those arranged in the United States but with a Swiss component, specialised debt funds are participating more frequently as well.

The global uncertainty in the banking sector in March 2023 led to emergency measures by the Swiss authorities and, eventually, the merger of UBS Group and Credit Suisse, two global systemically important banks. Both banks were independently major players in the Swiss and international debt finance markets. While this merger meant the loss of one major player, particularly in the syndicated financing space, it could also prove to be an opportunity for new entrants.

A more recent trend in Switzerland is marketplace lending, where platforms seek to connect institutional investors and borrowers. This form of lending continued to grow in volume in both the small and medium-sized enterprises (SMEs) and large corporations segments, reaching a new high in 2023.

While European and North American issuers feature very prominently on the list of top-10 bond issuers on the SIX, local issuers account for more than two-thirds of the outstanding corporate bonds, led by UBS with a third of the market share. Banks are generally responsible for most of the SIX corporate bond issuances, followed by chemical and pharmaceutical companies and other service providers.

Despite increased volatility in the financial markets due to risks and uncertainties caused by events such as the COVID-19 pandemic and the subsequent unwinding of aid programmes, the war in Ukraine and the conflict in the Middle East, the Swiss credit market proved to be stable. Although the Swiss National Bank (SNB) raised interest rates several times in order to combat inflation, rates and their impact remained moderate compared to international developments. Nevertheless, higher borrowing costs and fears of recession did have an impact on investors, leading to a slowdown in their activities.

Also, rising interest rates have fuelled a trend towards the increased use of combined bank loan and bond structures in transactions, as opposed to senior term loans alone.

Another notable impact has been the full package of economic sanctions imposed by the EU on Russia in response to its aggression against Ukraine which has been endorsed by the Swiss government. These include financial sanctions and restrictions such as a ban on the sale of securities to Russian citizens and entities. These measures are accompanied by enhanced due diligence and reporting requirements in the context of the fight against money laundering.

The US presidential elections in November will potentially have a large impact on US economic policy, regulatory frameworks and investor sentiment. A transition of power from one administration to another can lead to important shifts in fiscal, healthcare and environmental policies, international trade and foreign relations, affecting global trade flows, supply chains and investment behaviour.

Globally, 2024 can be considered as the ultimate election year with national elections in a minimum of 64 countries (as well as on EU level) representing 49% of the world’s population. The outcomes of those elections will undoubtedly have significant macroeconomic and geopolitical implications.

In Switzerland, the main types of debt finance transactions include:

• secured syndicated loans;
• acquisition finance; and
• securitisations.

The Swiss bank loan market is well developed with some major players in the international cross-border financing market. The international regulatory framework for banks, such as Basel III, provides for strict capital requirements when giving out loans, making it harder for smaller players to participate. The securitisation market in Switzerland continues to evolve with an increasing number of transactions.

The acquisition finance market in 2023 was largely driven by Swiss companies acquiring foreign entities, which accounted for almost half of all transactions. However, challenging market conditions have led to a general slowdown in acquisition financings, resulting in 25% fewer transactions and a drop of almost 50% in deal volume as compared to the previous year. The slowdown was particularly pronounced for transactions involving private equity firms. While market conditions eased during the second half of the year, future challenges remain in relation to the increasing complexity of transactions in terms of technological developments and risks, as well as increased sustainability requirements.

In the securitisations market, environmental, social, and governance (ESG) securitisations are expected to gain in significance going forward. Up until now, trade receivables, in particular, have been the subject of securitisations, with auto-leasing and credit card receivables forming the two main types of underlying assets. Frequently, securitisations are structured through a Luxembourg issuing vehicle that purchases Swiss receivables, mainly in order to avoid Swiss withholding tax. While private placements are most common, the Swiss public securitisations market is also fairly active.

As an alternative means to raise capital, Switzerland has seen an increase in marketplace lending in recent years. Crowdfunding or crowdlending activities in relation to SME loans have experienced significant growth. This is a popular way of funding projects, especially in the start-up sector. However, the biggest increase in marketplace lending in terms of volume has been in the segment of online loans to medium and large companies.

Revolving credit facilities and term loan facilities are the most common forms of bank loan facilities in Switzerland.

In acquisition financings, senior term loans are used to finance the purchase price of the acquisition itself, while high-yield notes are often used in addition to senior term loans in larger transactions. On the other hand, revolving credit facilities and term loans are the most common forms of bank loans to finance the working capital needs of the target company and bridge loans are often used in tight timeframes as syndication of bank loans can be time-consuming. Bank guarantees are frequently seen as well, whereas swingline facilities are less common. Debt packages consist of either senior debt only or of senior debt supplemented by one or more layers of junior debt in the form of mezzanine and high-yield debt.

The Swiss bank loan market allows for efficient and, if required, confidential (ie, “non-public”) financing. Borrowers often maintain long-standing, close relationships with their Hausbank (relationship bank). Bank loans are sometimes also used in transactions with volumes that may be too large for the debt securities market. In addition, unlike debt securities, bank loans are not subject to various regulatory requirements relating to prospectus compliance, filing and registration. This is particularly true for listed debt securities. However, syndicated bank loans are generally subject to more stringent covenants and may have a greater impact on the borrower’s operating flexibility.

The loan market is almost exclusively dominated by banks, while the investor base for debt securities transactions is much broader (insurance companies, pension funds, specialised debt funds). However, as banks have withdrawn to some degree from certain parts of the lending market amid the turmoil observed in the sector and the challenging lending environment, private lending has benefited, giving rise to non-bank lenders trying to fill the gap.

The documentation used for loan financing transactions in Switzerland depends on a number of factors. There are no legally required forms for secured finance transactions in Switzerland, but there are standard bank agreements or templates.

Large syndicated loans are often governed by either English law and based on Loan Market Association (LMA) standard documentation or New York law and based on the Loan Syndication and Tradition Association (LSTA) standard documentation, with Swiss law specific provisions incorporated into these templates.

Loan documentation under Swiss law also closely follows the LMA standard documentation to the extent permitted by local law. Security documentation for Swiss security interests is generally governed by Swiss law, taking into account Swiss law specifics (such as Swiss-specific forms of security, creation and perfection requirements). Intercreditor agreements also play an important role in debt financing transactions (see 6.1 Role of Intercreditor Arrangements).

Bond documentation usually consists of a prospectus or other offering document together with a subscription agreement (in the case of a public offering) or just a subscription agreement or note purchase agreement (in the case of a private offering) as well as a note trust deed (for English law transactions) or an indenture (for US law transactions). There may also be an intercreditor or subordination agreement.

In the Swiss market, it is common practice for lenders’ counsel to issue an enforceability opinion and for borrowers’ counsel to issue a capacity opinion in loan financing transactions, whereas two sets of bond opinions are usually being issued. While legal opinions were traditionally required only in international transactions, they are increasingly being issued in domestic transactions as well.

In terms of corporate authorisations, board and shareholder resolutions are usually required together with the customary director’s certificates.

For larger acquisition financings that may be suitable for international syndication, long-form letters of commitment are common, whereas for smaller, less complex transactions, especially those without cross-border involvement, banks may use only short-form letters of commitment, or even “highly confident letters”.

One reason why the loan market in Switzerland is predominantly in the hands of (Swiss) banks are the so-called Swiss “non-bank rules” which, in case breached, may lead to up to 35% Swiss withholding tax being imposed on interest payments made by Swiss borrowers or Swiss guarantors in respect of loan financings by non-banks. The Swiss “non-bank rules” basically limit the ability of lenders to sell their position in a particular facility to more than ten non-bank lenders (see also 9.1 Tax Considerations).

The general contraction in the credit market in 2023 was also accompanied by a sharp decline in private lending. With the exception of investment-grade deals, private lending has shifted to less traditional segments and become increasingly covenant lite in an attempt to capitalise on moderate bank lending activity. In particular, direct lenders have been increasingly seen to waive key financial covenants as they sought to participate in larger deals and take additional market share from traditional bank lenders.

Swiss law does not generally prohibit or restrict the granting of collateral or guarantees to foreign lenders. There are, however, certain jurisdiction-specific considerations that need to be taken into account in cross-border loan documentation.

As far as non-Swiss lenders are concerned, it is important to ensure that there is no permanent physical presence in Switzerland, as this may require authorisation from the Swiss Financial Markets Authority (FINMA).

In order to ensure compliance with the Swiss “non-bank rules” and avoid Swiss withholding tax being levied on interest payments by a Swiss borrower or guarantor, a number of provisions are typically included in facility agreements with Swiss borrowers, guarantors or security providers. For example, depending on the structure, the ability of lenders to sell their position in the facility, sub-participate or otherwise enter into so-called damaging exposure transfers must be limited (to a total of ten non-banks under the specific facility) to avoid negative tax implications. Accordingly, assignment and transfer restrictions, as well as restrictions on damaging exposure transfers may need to be included in the facility agreements. An alternative, in the case where there is no Swiss borrower, would be to restrict the harmful use of proceeds from the facility in Switzerland. In either case, a recalculation of interest provision should be included from the lenders’ perspective.

In the case where a Swiss subsidiary guarantor and/or security provider provides guarantees or security or incurs any other financial obligation in respect of obligations of its parent or sister company or companies, any such agreements may only be entered into at arm’s length. Failure to comply with the arm’s length requirement may result in the fulfilment of such financial obligation being treated as a (disguised or hidden) profit distribution with possible negative tax implications or, if such payment exceeds the amount of freely distributable reserves of the relevant Swiss company, as a repayment of capital. It is, therefore, common practice to include restrictive covenants and limitation language in the loan documentation and, in particular, in the security and guarantee documents entered into by a Swiss company in order to prevent the company from incurring an obligation in breach of its protected equity.

Under Swiss law, due to the accessory nature of a pledge, a valid security interest can only be created in favour of those persons who are the actual creditors of the secured obligations. Where a security interest under Swiss law is held by a security agent also for the benefit of the other secured parties, such a security agent will have to be appointed to act as direct representative of the other secured parties. Such appointment is usually included in the intercreditor agreement, failing which, the facility agreement. In addition, parallel debt is often used as a “back-up”.  It should be noted that, as there is no legislation or case law on the parallel debt concept in Switzerland, there is no certainty that a security interest based on parallel debt obligations will be upheld by a Swiss court.

In corporate lending transactions, a security package will typically consist of a pledge over shares or quotas, a security assignment of (certain) claims and receivables, such as intercompany loan receivables, insurance receivables, and/or trade receivables and a pledge or security assignment over bank accounts. In addition, if the security provider has valuable IP, a pledge over intellectual property rights may also be entered into, and, in case of a real estate financing, a security transfer of mortgage certificates.

The Swiss security provider will usually also grant a guarantee. Such guarantee is, in most cases where the Swiss entity is a subsidiary guarantor, included in the facility agreement (in the case of English law transactions) or a separate guaranty agreement (in most US law transactions). If the guarantee is provided by a Swiss parent company (which may not otherwise be a party to the financing), a separate Swiss law guarantee may be entered into.

It should be noted that floating charges and blanket liens (also called all-monies debentures) are not recognised under Swiss law.

Types of Assets

• Financial instruments (such as shares).
• Bank accounts.
• Movable assets.
• Intellectual property.
• Claims and receivables.
• Real estate.

Types of Security

• Pledge.
• Security Assignment.
• Guarantees.

Formalities and Perfection Requirements

Pledge

For the creation of a right of pledge, a security document is highly recommended but in general not required by law. Requirements for perfection on the other hand vary depending on the type of assets.

Movable assets

• In general, the pledged assets must be physically transferred to the secured party or to a third-party pledge-holder for perfection.
• For publicly registered aircraft and ships, entry of the right of pledge in the relevant register is required for perfection.

Financial instruments (shares)

These are pledged by way of a written pledge agreement and, in addition:

• in the case of bearer shares, the share certificates are physically transferred to the secured party or the security agent; and
• in the case of registered certificated shares, the share certificates, duly endorsed in blank, are physically transferred to the secured party or the security agent (which has a similar function as a stock transfer form in the UK).

Bank accounts

Bank accounts are typically pledged, although security assignments are also common. Notification of the account bank is a perfection requirement in the case of a pledge, as such pledge is (technically) second ranking due to the prior ranking right of pledge usually contained in the account bank’s applicable general terms and conditions, and such notification has also become standard practice in the case of a security assignment. The parties will often also seek confirmation from the account bank that it waives any such priority rights in relation to the bank account.

Real estate

Real estate may be used as security in the form of mortgage certificates, which may be pledged and transferred for security purposes, or as a mortgage (land charge).

If the mortgage certificate has not been issued yet, its creation requires a written agreement in the form of a notarial deed and can take the form of a bearer mortgage certificate, registered mortgage certificate, or paperless mortgage certificate. Perfection requires the physical transfer of possession in the case of bearer and registered certificates, while in the case of paperless mortgage certificates, the transfer of legal title must be registered in the land register.

The land charge requires a written mortgage agreement in the form of a notarial deed which itself must be filed with the land register for perfection.

Intellectual property

This is usually secured by way of pledge, which requires a written pledge agreement specifying the intellectual property. While, technically, registration is not required for perfection, a lack of registration would allow a third party to acquire the intellectual property in good faith.

Security assignment

The assignability of claims and receivables for security purposes is generally accepted under Swiss law and requires a written agreement for creation and perfection. However, it is important to ascertain that the relevant underlying agreements giving rise to the claim or receivable do not contain a prohibition on assignment as, in such case, the assignment for security purposes would be invalid.

Guarantees

There are generally no formal requirements for guarantees. However, it is advisable to obtain the approval of both the board of directors and the shareholders of the Swiss guarantor in order to grant an upstream or cross-stream guarantee.

In addition, it is important that guarantees are drafted in such a way as to avoid their requalification as a Swiss law suretyship. This is because such requalification would give the guarantor the same rights of objection and defence as the debtor and would impose formal requirements that may not have been met with respect to the intended guarantee.

Agent and Trust Concepts

Under Swiss law, security may be granted to and held by an authorised agent which, in syndicated financings or hybrid bond/loan transactions, would be the security agent or English law security trustee.

If the security interest is an assignment or transfer by way of security – ie, a non-accessory security interest, the security interest may be granted to and held by an authorised agent acting in its own name and on its own behalf as indirect representative of the other secured parties. However, as mentioned in 4.3 Jurisdiction-Specific Terms, a right of pledge, which constitutes an accessory security interest, can only be created in favour of those persons who are the actual creditors of the secured obligations. As Swiss law does not generally recognise a trust set up by contractual arrangement, the security agent will have to be expressly appointed by the other secured parties to act as their direct representative for the purposes of taking and holding (and releasing) the security.

Such appointment is usually included in the intercreditor agreement, failing which, the facility agreement.

Parallel Debt

Parallel debt is often used as a “back-up” to direct representation where an accessory security interest under Swiss law is held by a security agent for the benefit of the secured parties. As the parallel debt structures remain untested in Switzerland, it is unclear whether the concept would be upheld by a Swiss court, although practitioners tend to assume that it would.

Restrictions on Upstream Security

The granting of a security interest, guarantee or other financial obligation by a Swiss company for the obligations of its (direct or indirect) parent company (upstream liability) or its sister companies (cross-stream liability) is subject to certain restrictions. The relevant agreement needs to provide for arm’s length terms and the articles of association should expressly permit such up-stream/cross-stream liabilities. As, under Swiss law, payments made to or on behalf of a direct or indirect parent or sister company are considered akin to the distribution of a dividend, a shareholder resolution should also be obtained which expressly approves the distribution of the Swiss subsidiary’s assets in the case of enforcement.

In addition, upstream or cross-stream guarantees and security are – just like a dividend – limited to the amount of freely distributable equity and reserves of the security provider or guarantor, as any sums paid in excess of this amount may be considered an impermissible return of capital. Finally, Swiss dividend withholding tax (of currently 35%) may have to be deducted from any such guarantee payment or the proceeds from the enforcement of any such security.

Corporate Benefit

In addition to the specific requirements in respect of upstream and cross-stream liabilities, board resolutions should be obtained confirming that the proposed transaction is in the best interests of, and would materially benefit, the Swiss company.

The purpose clause in the articles of association of the Swiss company should ideally expressly permit the company to grant financings, cash-pooling, guarantees and security to or for the benefit of its group companies (be it its shareholders, sister companies or subsidiaries) as well as third parties, whether for consideration or not, and even if such transaction is to the exclusive benefit of such other person.

Nevertheless, for both corporate law and tax reasons, the granting of loans, guarantees or other security to or for the benefit of group companies should always be carried out on arm’s length terms – ie, on third-party conditions. The Swiss company should also carefully assess the creditworthiness of the intra-group obligor and the ability of such obligor to meet its primary obligations.

Financial Assistance

In Switzerland, there is no general prohibition of financial assistance – ie, the assistance by a company through the granting of a loan, security, guarantee or otherwise for the purpose of the acquisition of its own shares. However, the above-referenced limitations on upstream and cross-stream liabilities apply. In addition, for corporate and tax reasons, it is recommended that the Swiss company be compensated for providing the upstream security or guarantees by receiving a guarantee fee or a security commission.

Requirement for Guarantee Fees

As the granting or taking of guarantees and security between related parties must be carried out on arm’s length terms, a guarantee fee or security commission should be paid to the guarantor or security provider. The Swiss Federal Tax Administration has also generally required that Swiss companies providing guarantees to their parent companies receive appropriate remuneration for such guarantees.

Intercreditor agreements play an important role in financing transactions in Switzerland by allowing the parties to contractually (i) establish certain rights of the different classes of creditors, (ii) agree on the priority of claims, and (iii) select mechanisms in the event of an enforcement of the collateral. Such agreements are common in relation to multi-layered debt financings where a combination of senior loans, second-lien loans, mezzanine loans and high-yield bonds are used.

In the case of secured claims, priority is determined by the order of creation and perfection of the individual security interests (the so-called time priority concept). For unregistered assets, the parties may contractually alter the order by means of an intercreditor agreement. For registered assets, such as real estate, the priority of the security interest is determined by its entry/ranking in the relevant register.

Swiss law provides for the legal subordination of certain creditors in the event of the bankruptcy of a Swiss company. Secured creditors always have priority over unsecured creditors to the extent that their claims are fully covered by the security. Unsecured claims are divided into three different classes and are satisfied from the proceeds of the bankruptcy estate.

An intercreditor agreement, on the other hand, makes it possible to contractually agree on the priority of claims between certain creditors; whether such agreements are also binding on the liquidator during bankruptcy proceedings remains untested in Switzerland.

Another type of contractual subordination in Switzerland is based on statute (Article 725(b) of the Swiss Code of Obligations) and applies to creditors of over-indebted companies. Unless a statutory exception applies, the board of directors of the Swiss company must notify the court of the company’s over-indebtedness, with the latter then initiating bankruptcy proceedings. One such exception is where one of the company’s creditors subordinates its claims to those of all other creditors to the extent of the over-indebtedness. Such subordination is usually agreed by the shareholder of the over-indebted Swiss company in respect of its shareholder loans. The amount of the subordinated debt must cover both the principal and any interest due.

A security interest becomes enforceable when the secured obligations become due and payable and are not paid within the required timeframe or as otherwise contractually agreed between the parties (eg, upon the occurrence of an event of default). The specific circumstances under which a security interest may be enforced depend on the terms mutually agreed between the parties and are subject to certain minimum legal requirements designed to protect the interests of the security provider.

Security interests can be enforced through formal debt enforcement proceedings under the Federal Debt Enforcement and Bankruptcy Act (DEBA) or through private enforcement. In practice, parties often contractually provide for the secured party’s right to choose between private enforcement without court intervention and formal debt enforcement proceedings. Unless otherwise agreed, prior notice must be given to the security provider of a pending enforcement of the security. The parties are free to waive the requirement for prior notice.

In addition to the choice of the type of enforcement, the time of enforcement of the security is also at the secured party’s discretion, unless the security agreement contains a provision to the contrary. However, the secured party must act diligently and in good faith. It is usually expressly stated in the security agreement that the secured party has the right, but not the obligation, to enforce the security and realise the collateral.

Debt Enforcement Proceedings Under the DEBA

The DEBA is the primary source of legislation governing enforcement and insolvency proceedings in Switzerland. As Switzerland is not a member of the EU, any EU directives or regulations are not directly applicable to Swiss enforcement proceedings. Under the DEBA, the situation is slightly different to the EU position.

A security right in the form of a right of pledge may be enforced pursuant to the DEBA (i) via debt enforcement proceedings upon pledge realisation (Betreibung auf Pfandverwertung) or (ii) in the course of bankruptcy proceedings.

Debt enforcement proceedings upon pledge realisation (Betreibung auf Pfandverwertung)

Commencing debt enforcement proceedings

Debt enforcement proceedings upon pledge realisation (Betreibung auf Pfandverwertung) means realising a specific pledge without bankruptcy proceedings being opened against the company in question. In order to initiate this kind of proceeding, the secured party needs to file an application (Betreibungsbegehren) with the competent debt collection office in Switzerland. After the application has been filed, the debt collection office will issue a summons to pay (Zahlungsbefehl), giving the debtor a deadline of one month to pay the claimed amount.

The debtor has the possibility to raise an objection (Rechtsvorschlag) within ten days after receipt of the summons to pay, whereupon the debt enforcement proceedings will be suspended until the objection is set aside. It is then for the secured party to assert its claim in court proceedings in order to obtain a court judgement. This is an ordinary litigation in which the debtor is free to dispute the existence or the amount of the claim. Only after obtaining a court decision, can the objection be set aside and debt enforcement proceedings be continued. If the creditor has a written acknowledgment of the debt or if the debt arises clearly out of a contract (such as a loan agreement), the objection can also be set aside provisionally in summary proceedings. The debtor would then need to commence ordinary proceedings against the creditor and would have to prove that the claim does not exist or no longer exists.

If the debtor raises no objection or the objection has been set aside by a Swiss court, the creditor will be able to demand realisation of the pledge at the earliest after one month and at the latest one year after the summons to pay has been served. The debt collection office in charge then carries out the realisation.

Realisation of the pledge

(i) Public auction

The DEBA provides that the collateral to be realised will be realised by the debt collection office in a pre-announced public auction in which everyone interested is free to bid. The debt collection office is obliged to obtain the highest possible realisation proceeds under the circumstance and to safeguard the interests of the creditor to the best possible extent. The possibilities for the parties to exert influence are limited.

However, since there is hardly any market for shares of companies that are not publicly traded, debt collection offices favour free sales (Freihandverkauf; ie, a private sale of the collateral by the debt collection office) over auctions, as experience has shown that they generate higher proceeds than public auctions. Whether a free sale is to be given preference over a public auction depends on the case at hand, whereby the debt collection office is granted considerable discretion.

(ii) Free sale

A free sale is in principle only possible if all parties expressly agree. In practice, however, the debt collection office will often decide itself if the pledge is to be realised by free sale and if so, the manner of execution. A free sale is usually considered (i) if a willing buyer has made itself known to the debt collection office and made a reasonable offer, (ii) if the bids at public auction are expected to be low, or (iii) if the circle of interested parties is limited from the outset. If an asset of a certain value is sold by way of a free sale, the debt collection office typically notifies interested parties of the terms of the offer it considers accepting and gives them an opportunity to place a higher bid.

The creditor is not entitled (even if the legal requirements are met) to demand that the realisation be carried out by free sale. This remains at the discretion of the debt collection office. If the debtor is of the opinion that the debt collection office violated its duty to obtain the highest possible amount of proceeds by the free sale, the order accepting the offer (Zuschlag mittels betreibungsrechtlicher Verfügung) can be challenged with an appeal pursuant to Article 17 of the DEBA.

Distribution of the proceeds

The costs of administration, realisation and distribution are paid in advance from the proceeds of the realisation of the pledged assets. The remaining proceeds would then be paid to the secured party/-ies up to the amount of their claim including interest and debt collection costs incurred. Any surplus is payable to the pledgor.

Private enforcement

Out-of-court private enforcement is usually quicker and less burdensome. However, the secured party is obliged to realise the collateral in a manner that ensures that the best possible price for the collateral is obtained, whether by private sale (including self-sale or the sale to another secured party or a third party) or auction.

There is generally no correct selling price that must be achieved. However, a low price may expose the secured party to a claim that the realisation was not conducted carefully and may result in potential liability. There are certain mechanisms that can limit the risk of such liability – eg, a fairness opinion or valuation by an independent third party or a contractual mechanism for valuing the collateral and determining the price. However, including such detail may not be in the interest of the secured party as it potentially limits its discretion when it comes to enforcement, and it might give the security provider the possibility to delay or disrupt security enforcement by claiming that the secured party has not complied with the specific requirements.

Once official debt enforcement proceedings have been commenced or the debtor has been declared bankrupt, private enforcement of certain security interests is no longer possible as co-operation with enforcement and bankruptcy officials is required.

Foreign judgments are principally recognised and enforced in Switzerland, subject to certain restrictions set forth in:

• the Convention on Jurisdiction and the Recognition and Enforcement of Judgements in Civil and Commercial Matters (the Lugano Convention);
• other international treaties to which Switzerland is a party; and
• the Swiss Federal Act on Private International Law (PILA). The procedure for the enforcement of foreign judgments in Switzerland, therefore, depends on whether there is a special regime applicable under an international treaty, such as the Lugano Convention, and is otherwise governed by the PILA.

The recognition of a foreign judgment is a prerequisite for its enforcement. In general, a foreign judgment will be recognised in Switzerland (subject to certain exceptions) if:

• the jurisdiction of the courts or authorities of the state in which the judgment was given was well founded;
• no ordinary legal remedy can be invoked against the decision or if it is final; and
• the recognition would not be manifestly incompatible with Swiss legal principles and public policy.

In the case of Lugano Convention judgments, the jurisdiction of the foreign court may generally not be reviewed and preliminary decisions are enforceable as well.

An arbitral award issued by a foreign arbitral tribunal must also be recognised in Switzerland before it can be enforced. According to the PILA, foreign arbitral awards are subject to recognition and enforcement in accordance with the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (Convention). This applies even if the award originates from a non-signatory state of the Convention.

In addition to insolvency proceedings, Swiss law provides for composition proceedings (Nachlassverfahren) in the DEBA, which allow for a more flexible and advantageous restructuring of the company than insolvency proceedings.

Composition proceedings offer debtors several restructuring options. It is possible to initiate the proceedings and to use such proceedings as a restructuring moratorium, subject to court approval. In this case, individual agreements between the debtor and its creditors must be reached, with the possibility of the court terminating the moratorium once the debtor has achieved financial recovery. If financial recovery cannot be achieved by the use of restructuring measures or individual agreements with creditors, a composition agreement may include a debt rescheduling (Stundungsvergleich) or dividend agreement (Prozent- oder Dividendenvergleich). The debtor retains control after the agreement is approved, thus avoiding liquidation. A composition agreement must be approved by a majority of creditors representing at least two-thirds of the total debt or by one-quarter of creditors representing three-quarters of the total debt (privileged and secured creditors excluded). The composition court confirms the agreement, making it enforceable against all creditors.

Secured creditors are satisfied directly from the net proceeds generated by the realisation of the collateral. If these proceeds prove to be insufficient to fulfil a secured creditor’s claim, the remaining portion of the claim is then classified as an unsecured and non-privileged claim that is subject to the composition agreement, if any.

Lenders’ Rights to Enforce a Loan, Guarantee or Security in Insolvency

Financial claims generally

The opening of insolvency proceedings against a Swiss debtor results in the acceleration of all claims against such debtor, whether secured or unsecured (except for those secured by mortgage on the debtor’s real estate), and all such claims become due and payable. The creditor’s claim will consist of the principal amount of the debt, any accrued interest until the date of insolvency, and the costs of enforcement. It should be noted that, upon insolvency, interest on unsecured claims no longer accrues. In case of claims secured by a pledge, interest that would have accrued until the realisation of the collateral can be claimed.

All creditors wanting to assert a claim against the insolvent debtor need to participate in the Swiss insolvency proceedings. Insolvency proceedings constitute collective proceedings and creditors can generally no longer pursue individual claims separately but only in accordance with, and subject to the restrictions of, Swiss insolvency laws.

Assigned claims

Assets that have been legally transferred for security purposes (usually by way of a security assignment) – ie, legal title which has passed to the secured party, prior to the opening of the bankruptcy proceedings against the Swiss debtor do not form part of the bankruptcy estate of the security provider and, as such, can be realised by the secured party by way of private enforcement.

However, future claims and rights which have been assigned for security purposes, but which have only come into existence after the opening of bankruptcy proceedings against the assignor, will fall within the bankruptcy estate of the assignor and be treated in the same way as assets subject to a pledge (see below).

Pledged assets

The opening of bankruptcy proceedings deprives the debtor of the ability to dispose of its assets as they form part of the bankruptcy estate. This includes assets which are the subject of a pledge. From that moment on, private enforcement is, therefore, no longer permitted in respect of these assets. Instead, the enforcement of assets forming part of the bankruptcy estate may only be carried out in accordance with the DEBA, which requires co-operation with the bankruptcy administrator. However, the opening of bankruptcy proceedings does not affect the right of the secured creditor to be satisfied first from the sale of the pledged assets. Only if the proceeds from the sale of the pledged assets exceed the secured claims will the remainder be distributed among the unsecured creditors.

Claw-Back Risks

Claw-back actions aim to recover assets transferred or disposed of by an insolvent debtor and are intended to benefit the insolvency estate and ultimately its creditors as a whole. Transactions may be subject to claw-back actions if:

• within one year before the commencement of bankruptcy or insolvency proceedings, assets were given away for free or transferred without adequate consideration;
• within one year before the commencement of bankruptcy or insolvency proceedings, an over-indebted debtor (i) provided security for existing obligations without a prior-existing obligation to do so, (ii) settled a monetary debt by means other than cash or ordinary means of payment, or (iii) discharged a debt not yet due; and/or
• within five years before the commencement of bankruptcy or insolvency proceedings, a transaction was carried out by the debtor with the intention of harming its creditors or favouring a particular creditor, and the party benefiting from such a transaction knew or should have known of the debtor’s intention.

Equitable Subordination

While, in Switzerland, the concept of equitable subordination is not codified in law and there is no established case law, Swiss doctrine supports the concept of equitable subordination with respect to shareholder loans in insolvency situations. The general view is that shareholder loans granted to a Swiss company at a time when it is already in financial distress or over-indebted and no other third-party financing would be available risk being treated as equity and hence being subordinated to the claims of all other creditors and satisfied last. This is especially the case if such shareholder loan is not granted on arm’s length terms.

Order of Payment

In Swiss insolvency proceedings there are different classes of creditors that are satisfied according to their rank.

Secured creditors

Secured creditors always have priority over unsecured creditors to the extent that their claims are fully covered by the security.

Unsecured creditors

Unsecured creditors are divided into three classes:

• the first class of legally preferred claims consists, in particular, of claims of employees;
• the second class of legally preferred claims consists of claims relating to social insurances, contributions to the family compensation fund and privileged bank deposits up to a maximum amount of CHF100,000 per creditor; and
• the third class includes all other claims.

Creditors within the same class have equal rights. If the proceeds are not sufficient to satisfy all creditors within a particular class in full, they are distributed in proportion to the amount of each creditor’s claim, known as the bankruptcy dividend (Konkursdividende). Proceeds are not allocated to creditors in a subsequent class until the creditors in the preceding class have been fully satisfied.

If the secured claims cannot be fully satisfied from the proceeds of the relevant collateral, the secured creditor assumes the status of “ordinary” bankruptcy creditor. It is then assigned to one of the three bankruptcy classes mentioned above, depending on the nature of its claim, but most likely, the third class.

Interest Withholding Tax

Interest paid by a Swiss borrower on a loan is generally not subject to Swiss withholding tax. However, interest on bonds is subject to Swiss withholding tax at a rate of currently 35%. In order to avoid a loan granted to a Swiss borrower being requalified as a bond, the so-called Swiss “non-bank rules” must be complied with. The following circumstances may trigger a requalification:

• if more than ten non-bank lenders participate (either as lenders of record or sub-participants) in the same loan agreement (the so-called “ten non-bank rule”);
• if a Swiss borrower has more than 20 non-bank creditors on aggregate  (ie, all of its creditors and not just the lenders under the particular loan agreement) (the so-called “20 non-bank rule”); and
• if a Swiss obligor has, on aggregate, more than 100 non-bank creditors under financings that qualify as deposits within the guidelines issued by the Swiss federal tax administration, it is subject to (the so-called “100 non-bank rule”).

Similarly, such interest withholding tax may also apply to financings with a non-Swiss borrower which are guaranteed and/or secured by a Swiss parent or subsidiary guarantor. In the case of a harmful use of proceeds in Switzerland, interest payments under the relevant loan may also be subject to 35% Swiss withholding tax. It is possible to obtain an advance tax ruling from the Swiss federal tax administration to confirm (i) in the case of a Swiss subsidiary guarantor, that such upstream or cross-stream guarantee or security which is limited to the amount of distributable reserves of the Swiss subsidiary is not harmful for Swiss withholding tax purposes or (ii) in the case of a Swiss parent guarantor, the amount of proceeds from the financing which may be used in Switzerland without negative interest withholding tax consequences.

In addition, interest payments to non-Swiss lenders may also be subject to Swiss withholding tax if the payments are secured by Swiss real estate.

Swiss withholding tax may be partially or fully refundable depending on any applicable double taxation treaties.

Thin Capitalisation Rules and Dividend Withholding Tax

Swiss thin capitalisation rules generally only apply to related parties, in which case, the related party debt may be treated as taxable equity. The relevant circular letter issued by the Swiss federal tax administration provides for debt-to-equity ratios as safe harbours. Interest paid on loans in excess of the relevant ratios is generally not tax deductible, but is treated as a dividend distribution subject to Swiss dividend withholding tax of 35%. There are no limitations on the financings of Swiss companies by independent third parties such as banks.

As mentioned above, payments made under upstream or cross-stream guarantees or security are generally also subject to Swiss dividend withholding tax (generally at 35%).

Stamp Duties

In Switzerland, no stamp duty or documentary taxes are levied on the execution or delivery of loan or security documents. However, notary fees and registration fees may be payable for documents that are drawn up as public deeds or need to be filed with a registry.

In addition, the issuance or transfer of certain securities such as notes, bonds or shares evidencing or securing a loan, may be subject to Swiss stamp duty if a Swiss bank or securities dealer is involved as a principal or intermediary.

In Switzerland, lending activities are generally unregulated as long as the lender does not accept deposits from the public or refinances itself through a number of banks.

As a general rule, foreign regulated entities operating on a strict cross-border basis do not require FINMA authorisation. This does not apply if these activities involve a physical presence (such as personnel or physical infrastructure) in Switzerland on a permanent basis, as the cross-border exemption would generally not apply. FINMA may also assume a Swiss presence based on the volume of business in Switzerland or the use of teams specifically dedicated to the Swiss market.

The Swiss Federal Act on Financial Services (FinSA) and the Swiss Federal Act on Financial Institutions (FinIA) were introduced in response to the “third-country rules” of MiFID II (the EU’s Markets in Financial Instruments Directive 2014) and require foreign financial services providers that would be subject to authorisation in Switzerland to register in Switzerland before providing financial services to Swiss-based investors. Certain exemptions are available for regulated financial institutions that exclusively target institutional and professional clients in Switzerland.

It is important to note that lending to individuals for purposes other than business or commercial activities may qualify as consumer credit, which is regulated by the Swiss Federal Act on Consumer Credit.

Certain restrictions may affect the enforcement of a security interest by a foreign secured creditor, depending on the type of collateral, the nature of the security interest and the industry.

One notable example is real estate financing transactions involving residential real estate located in Switzerland. The Swiss Federal Act on the Acquisition of Real Estate by Persons Aboard, also known as Lex Koller, imposes restrictions on the direct acquisition of residential real estate by foreign nationals or entities as well as on the acquisition of pledged shares in real estate companies.

In addition, the creation of certain security interests (such as over real property, aircraft, and ships) may require registration with a public register and certain restrictions may apply in relation to security interests granted by companies active in regulated industries.

The consent of the works council is not required for financing transactions unless employees are affected in certain ways (eg, labour safety, mass dismissals, transfer of a business or of pension plans).