SWITZERLAND Law and Practice Contributed by: Daniel Haeberli and Simone Gloor, Homburger
stream security (see 6.2 Restrictions ), such a fee would limit the risk that the guarantee is not pro- vided at arm’s length. Consequently, if such an upstream or cross-stream guarantee is limited to the freely distributable equity of the guarantor, no guarantee fee is required. 7. Lender Liability 7.1 Equitable Subordination Rules The concept of lender liability is not specifically recognised in Switzerland. Therefore, lender lia- bility can only arise where a lender exercises its rights and obligations under the financing agree- ments in breach of their terms or of general rules and applicable Swiss law. For example, lender liability issues may arise if the lender: • improperly terminates a facility agreement; or • does not act in good faith in exercising its rights under a facility agreement. As a general rule, lenders must exercise their rights with due care and balance their own inter- ests with those of their borrowers. Swiss law does not provide an explicit statutory basis for equitable subordination. Historically, Swiss legal doctrine and some cantonal court decisions have supported the subordination or reclassification of shareholder loans – particu- larly where such loans were granted to a com- pany in financial distress or on non-arm’s length terms. These scenarios were considered risky that shareholder loans could be subordinated to all other creditors or even reclassified as equity, with repayment only after satisfaction of all other claims. However, a recent landmark decision by the Swiss Federal Supreme Court has clarified the
legal framework. The Swiss Federal Supreme Court confirmed that, as a rule, unsecured loans from shareholders and related parties are to be treated pari passu with other unsecured third-class claims in bankruptcy, unless there is an obvious abuse of rights. The Swiss Federal Supreme Court held that such abuse generally requires that the company was balance-sheet overindebted at the time the loan was granted. Mere financial distress, non-arm’s length terms, or the absence of simultaneous restructuring measures are not sufficient to justify subordina- tion. Furthermore, the Swiss Federal Supreme Court rejected the application of the so-called “third-party test” and other alternative criteria previously discussed in doctrine. The Federal Supreme Court also confirmed that subordination may arise if it is expressly, implic- itly, or impliedly agreed between the parties, but in the absence of such agreement, related-party loans are not presumed to be subordinated. 7.2 Claw-Back Risk Under Swiss insolvency law, a debt enforce- ment office has the power to avoid transac- tions under certain conditions. These trans- actions include the granting of, the payment under or the enforcement of any guarantee or security. If a payment has already been made under the relevant guarantee or the security has been enforced, the debt enforcement office may require the recipients to return the amount received to the bankrupt estate. In particular, a transaction may be avoided in the following cases if it results in damages to the creditors and has been made within the last year prior to the opening of formal insolvency proceedings or the confirmation of a composition agreement with the assignment or transfer of assets relating to the debtor.
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