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Asset classes used as collateral for security
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
Yes, security can be granted over real estate under Swiss law. Customary forms of security over real estate include the following.
Mortgage certificate security transfer or pledge Mortgage certificates are a financial instrument representing a personal claim against the debtor, which is secured by a lien on real property. Mortgage certificates may be issued in bearer, registered or paperless form. In either form the mortgage certificate constitutes a negotiable instrument, legal title to which can be transferred for security purposes and which can be pledged. Since there are certain practical advantages for a secured party to have full legal title to the mortgage certificate (eg, the mortgage certificate does not form part of the debtor’s bankruptcy estate), practitioners generally prefer a security transfer of legal title over the creation of a pledge. In order for security in the form of a mortgage certificate to be created, the mortgage certificate – if not already issued – must first be created by way of a notarised deed. The parties then enter into an agreement regarding the security transfer or pledge of the mortgage certificates (no notarisation or filing with the land register is required) and transfer legal title to the mortgage certificates in the appropriate form (including, in the case of registered and bearer mortgage certificates, the transfer of possession of the mortgage certificate and, in case of the paperless mortgage certificate, a registration of the transfer of legal title or pledge, as applicable, in the land register).
Land charge A land charge is a mortgage which is entered into the land register and secures any kind of claim, whether actual, future or contingent. Other than in the case of a mortgage certificate, the secured claim is not entered in the land register and neither the land charge nor the secured claim is evidenced in the form of a negotiable instrument. For certain reasons, the land charge is less commonly used than mortgage certificates. To grant security in the form of a land charge, the parties must enter into an agreement regarding the creation of the land charge in the form of a notarised deed and file this with the land register. Once the land register has registered the land charge, the security is created.
With both forms of mortgage security, the secured party's claims can be secured by property belonging to the borrower or a third party (third-party security).
Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over machinery and equipment. However, Swiss law does not generally recognise the concept of a floating charge or floating lien; therefore, taking security over inventory, machinery or equipment is often impractical.
Customary forms of security over tangible property include the following:
- A pledge (being a limited right in rem) entitles the secured party to liquidate such assets in case of a default (however defined) by the debtor.
- Security transfer of legal title, where the secured party acquires full legal title in the transferred assets and is entitled to liquidate these in case of a default (however defined) by the debtor and retain the proceeds up to the amount of its secured claim(s).
Unless specific rules apply in relation to a certain type of asset, perfection of a pledge or a security transfer of legal title requires a valid security agreement (in any form) and the transfer of physical possession of the relevant collateral to the secured party. No security is created as long as the security provider has possession over the relevant tangible movable assets, making it impossible to grant security over equipment and inventory while leaving the pledgor in a position to make use of such assets.
An exception applies to certain types of movable asset which are subject to specific laws. Most importantly, security over aircraft, ships and railroads is perfected by the entry of the security in the respective public register (such registration replaces the requirement to transfer possession).
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over receivables under Swiss law. Such security can be created in the form of a pledge or an assignment for security purposes:
- The perfection of a pledge over rights or receivables requires a valid security agreement in written form.
- Perfection of a security transfer of legal title to rights or receivables requires a valid security agreement in writing and a written assignment declaration. In practice, the assignment declaration is usually set out in the security agreement.
Where a pledged or assigned claim is represented by an acknowledgement of debt, such a document must be transferred to the secured party as a perfection requirement.
It is not a perfection requirement to notify third-party debtors of the pledge or the assignment for security purposes (except if a second-ranking pledge is created). However, as long as the debtors are not notified, they can still validly discharge their debt by making a payment to the assignor.
It is customary to request notification for the debtors of intra-group receivables, insurance receivables and bank account receivables at the time the security is created. Debtors of trade receivables are generally notified only upon the occurrence of an event of default in order not to prejudice the legitimate business interests of the security provider.
If receivables in respect of a Swiss bank account are pledged or assigned for security purposes, the Swiss bank's general business terms usually provide for a first-ranking security interest over the bank account. A third party therefore obtains a second-ranking security interest over a Swiss bank account only, unless the bank waives its priority rights. To create and perfect such second-ranking security interest, the bank must be given notice.
In order to make sure that a pledge or assignment for security purposes is not qualified as a conditional security interest (arising only once the secured party has notified the debtors), it is important to ensure that the secured party has the right to notify debtors at any time.
Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over financial instruments.
Common types of financial instruments (both in certificated and dematerialised form) over which security is granted include shares, debt securities and units in collective investment schemes. Security over financial instruments may be created in the form of a pledge, security transfer of legal title or an assignment for security purposes.
Creation of security over a financial instrument requires a valid security agreement in written form. However, perfection varies depending on the type of financial instrument:
- Certificated financial instruments require the certificates to be transferred into the possession of the security holder. Additionally, registered certificates must be duly endorsed (in blank).
- Uncertificated financial instruments must be pledged, transferred or assigned in writing.
The Federal Intermediated Securities Act sets out rules in relation to the granting of security over intermediated securities. Intermediated securities comprise both debt and equity securities which are booked into a securities account with an intermediary. A security interest over intermediated securities can be granted in one of the following ways:
- Transfer of the intermediated securities to the securities account of the secured party. This takes place when the security provider gives instructions to the bank to effect the transfer and the bank then credits the intermediated securities to the secured party’s securities account.
- The securities remain booked in the account of the security provider. However, under an irrevocable account control agreement with the security provider (and typically the security agent), the relevant intermediary irrevocably undertakes to comply with any instructions from the secured party.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over cash deposits. Cash deposits held in bank accounts are treated as claims of the beneficiary against the bank. Therefore, the creation of security over cash deposits is based on the same principles that apply to security over bank accounts, claims and receivables.
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Yes, security can be granted over intellectual property. Intellectual property over which security is commonly granted includes:
- domain names; and
- pending applications for the aforementioned IP rights.
The two available forms of security over intellectual property are pledges and security transfers of legal title. These are both created by a written security agreement.
Registration is not required to perfect the security with respect to intellectual property registered in Switzerland (a local law-based assessment is required with respect to intellectual property registered in other jurisdictions), although it is recommended, so that the security holder can enforce its security interest against a third party which could otherwise rely, in good faith, on the information registered in the relevant public register. It is customary to at least register the pledge or the security transfer of legal title with respect to the core IP rights or the security provider.
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