LIECHTENSTEIN Law and Practice Contributed by: Bernhard Rankl, Nicolai Binkert and Alexander Appel, Schurti Partners Attorneys at Law Ltd
limited by shares ( Aktiengesellschaft ) and the estab- lishment ( Anstalt )) are subject to capital-maintenance rules which, generally speaking, prohibit a company from disbursing its assets to or for the benefit of its direct or indirect shareholder(s)/holder(s) of founder’s rights other than by way of dividend payments, share- capital reductions or liquidation proceeds. In the context of financings, this means that forwarding funds drawn under a loan to, and securing liabilities of, direct or indirect shareholder(s) (up-stream) and/or affiliated entities other than subsidiaries (cross-stream) could be a breach of applicable capital-maintenance rules. There are exceptions to this general rule, such as transactions carried out on an arm’s-length basis or where a subsidiary secures a loan granted to its shareholder which is then passed on to the subsidi- ary. The arm’s-length criterion must be assessed on a case-by-case basis, and is not easy to determine as companies do not usually provide financing or secu- rity to unrelated third parties. The legal literature is still unclear as to the conse- quences of a breach – ie, whether the underlying con- tract is only partially void or void in its entirety. How- ever, certain examples of case law favour the latter. In addition, the members of the board of directors are personally liable for any damages that may occur in connection with such transactions. Given the far-reaching implications of upstream and cross-stream transactions, it is advisable to have the transaction approved in advance by the general meet- ing of shareholder(s)/the holder(s) of the founder’s rights and the board of directors, and to ensure that the statutes of the relevant company (in particular, the purpose clause) permit and cover upstream and cross-stream transactions. In addition, it is standard market practice in Liechtenstein to limit the poten- tial benefit of a security by means of specific limita- tion language that reduces the security interest to an amount that is in line with Liechtenstein capital-main- tenance rules. This can even reduce the commercial value of a security to zero in cases where no funds are available to distribute to the shareholder(s)/holder(s) of the founder’s rights of a company.
Financing and/or collateral granted on a downstream basis are not capital-maintenance sensitive from the shareholder’s perspective and are therefore possible without the above-mentioned limitations. 5.4 Restrictions on the Target The same limitations and formalities outlined in 5.3 Downstream, Upstream and Cross-Stream Guaran- ties apply. 5.5 Other Restrictions The two main limiting factors to be taken into account when granting collateral or guarantees are (depending on the type of security) the accessory nature of certain collateral (and the required structural steps to properly pool those security interests – see 3.5 Agent and Trust Concepts ) and ensuring compliance with Liechten- stein capital-maintenance rules (see 5.3 Downstream, Upstream and Cross-Stream Guaranties ). In distressed scenarios, insolvency law and in particu- lar claw-back and avoidance rights of the insolvency administrator must be taken into account. Generally speaking, an insolvency administrator can challenge legal acts (eg, the granting of security) which were performed prior to the opening of insolvency proceed- ings to the disadvantage of the debtor’s creditors. For the creation and the enforcement of mortgages in Liechtenstein real estate, the restrictions of the Liech- tenstein Real Estate Transfer Act ( Grundverkehrsge- setz ) must be complied with (see 6.4 A Foreign Lend- er’s Ability to Enforce Its Rights below). 5.6 Release of Typical Forms of Security Collateral of an accessory nature will automatically cease to exist when the secured obligation is fully dis- charged (see 3.5 Agent and Trust Concepts ). It is nev- ertheless customary for security agreements to fore- see a certain release procedure to properly document the release. The release by operation of law does not apply to non-accessory collateral (eg, security assign- ment and guarantees), meaning that additional steps have to be taken to accomplish the release. The release procedures depend on the asset and the actions undertaken to perfect the security. The secu- rity interests are typically released by setting the actus
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