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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The circumstances under which security or a guarantee can be enforced are determined by general principles of law, as well as by the specific provisions of the respective security agreement.
Generally, a secured party is permitted to enforce security if the secured obligations are not paid when due. In practice, customary Swiss security agreements usually make the occurrence of an ‘enforcement event’ (however defined) a condition for enforcing the respective security; such an enforcement event will typically be defined by reference to the events of default and respective acceleration provisions set out in the underlying finance document which iwill, in addition to non-payment, include further triggers.
Swiss law guarantees are independent of the existence and validity of the secured obligations. Hence, it is sufficient that the conditions for enforcement set out in the guarantee (if any) are fulfilled, which often consist merely in the secured party demanding payment and stating that a default has occurred. However, depending on the circumstances, the enforcement of a guarantee may constitute an abuse of rights, if the secured obligations do not exist or are not valid.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Private enforcement is generally favourable to secured parties as it can be effected more expediently and in a less cumbersome manner than enforcement by way of official debt enforcement or bankruptcy proceedings. If legal title to assets has been transferred for security purposes, enforcement can be effected only by way of a private enforcement. In the case of other types of security (eg, pledges), private enforcement is generally permitted only with the (advance) consent of the security provider and provided that no official enforcement proceedings have been initiated pursuant to the Act on Debt Enforcement and Bankruptcy.
Subject to the provision set out in the relevant security agreement, a private enforcement – including under certain circumstances a self-sale – may typically be effected in a manner and at a time that the secured parties deem fit (eg, via an auction process). However, assets may not be sold below fair market value and any surplus remaining after the application of the proceeds to the secured debt must be returned to the security provider.
Official enforcement proceedings The enforcement of security follows the rules set out in the Act on Debt Enforcement and Bankruptcy in case:
- bankruptcy proceedings have been initiated with regard to the security provider (except where private enforcement only is possible);
- a pledged asset has been attached or seized in the context of debt enforcement proceedings; or
- the security agreement does not provide for and the parties did not otherwise agree on a private enforcement or the secured parties prefer official enforcement proceedings over a private enforcement.
In general, official enforcement under the Act on Debt Enforcement and Bankruptcy is effected via a public auction. However, assets can also be sold via a private sale by the debt enforcement officials, among others, in the following scenarios:
- the assets in question would lose value during the time required to prepare a public auction;
- the costs for safekeeping the assets are unreasonably high;
- the assets have a market price (eg, are traded on a stock exchange); or
- all parties agree to the private sale.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In case of insolvency on the part of the borrower, pledged assets will form part of the bankruptcy estate (and will have to be handed over to the debt enforcement officials). However, any enforcement proceeds will first be used to satisfy the secured claims (upon deduction of the costs of the bankruptcy administrator) and only the remainder of any enforcement proceeds may be used to satisfy creditors.
To the extent that legal title to any assets has been transferred to a creditor for security purposes, the opening of bankruptcy proceedings will not affect the right of the secured creditors to a private enforcement (ie, the secured creditors will also rank ahead of all other creditors). Any overvalue resulting from the private enforcement by the secured party must be turned over to the bankruptcy estate.
Where more than one creditor is secured by the same security interest, the ranking of the creditors in principle depends on when the security was granted (earlier securities rank ahead of more recent ones). For security over real estate and other assets which must be registered (eg, aircraft and ships), the ranking of the security is determined by its rank in the relevant register. Generally, secured parties are free to enter into contractual arrangements governing the ranking of their claims.
Unsecured claims (which includes any claims in respect of which security has not been validly perfected) are ranked in the following order:
- claims of the bankruptcy administrator;
- claims prioritised by operation of Swiss bankruptcy laws (including, without limitation, claims of employees and pension funds, and certain claims derived from family law);
- all other unsecured claims; and
- subordinated claims.
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