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27 April 2020

COVID-19 and Duties of a Swiss Subsidiary's Directors

The COVID-19 pandemic induced crisis is a challenge for every director of a Swiss company (see our blog post "What do I need to know as the member of a Swiss board of directors in times of the coronavirus?"). The situation for the members of the board of a Swiss subsidiary is even trickier as they must carefully navigate between Scylla and Charybdis if the interests of the Swiss subsidiary do not coincide with those of the group.

Here you will find answers to the six most important questions regarding the conflicts between the interests of a Swiss subsidiary and the group in times of COVID-19:

What is the group dilemma and what interests must a Swiss subsidiary's board safeguard?

Many companies in Switzerland are part of a group. As subsidiaries, they belong to a larger whole and sometimes heavily depend on other (often foreign) group companies. Often they could hardly function without support from the group.

Unlike other jurisdictions, Switzerland does not have specific rules governing groups of companies. Under Swiss law, each company is considered an independent stand-alone entity. Thus, in principle, a Swiss subsidiary's board of directors must exclusively act in the best interests of such Swiss subsidiary, without taking into account the interests of the group or other group companies. This cannot be changed by way of agreement. Therefore, board members of a Swiss subsidiary are often in a latent dilemma. The dilemma is particularly acute when a board member simultaneously holds a leadership position in the Swiss subsidiary and another group company, or if a Swiss subsidiary is subject to strict guidelines and instructions from the parent company.

In normal times (for instance, before the corona crisis), the group dilemma is usually negligible for the Swiss subsidiary's board because the interests of the subsidiary and the group are aligned and, the group would typically support the subsidiary if financial difficulties arose.

How should the board of directors deal with the group dilemma in the COVID-19 crisis?

The board of a Swiss company must always act in the best interests of the company. This applies equally to all the Swiss subsidiaries of a group and is of particular importance if the Swiss subsidiary or other group companies are on the brink of illiquidity or over-indebtedness. In this situation, the interests of the individual group companies may diverge. In particular, the grant of loans to the parent company or affiliates as well as participating in a cash pool becomes tricky for a Swiss subsidiary (see below). Nevertheless, according to a recent Swissair judgement of the Swiss Federal Supreme Court, a Swiss subsidiary’s board of directors may, under certain circumstances, also take into account the interests of the group if this is also beneficial to the Swiss subsidiary.

When weighing up the interests involved, the board of directors is walking a tightrope. It is therefore advisable for the board to seek professional advice.

Under what conditions can a subsidiary grant loans to other group companies and what applies in the corona crisis?

There are generally no restrictions on loans from a Swiss subsidiary to a parent company or the parent's affiliates (so-called up- or cross-stream loans) if they are granted at arm's length. Up- or cross-stream loans which are not at arm's length must be limited to the amount of the subsidiary's freely distributable equity reserves.

As a rule of thumb, an up- or cross-stream loan meets the arm's length test if a third party (e.g. a bank) would also grant the loan on the same terms. The main criteria for the at arm's length test are the borrower's credit rating and whether any securities are granted, but the loan amount, the loan's term and the termination rights are also of importance.

In a landmark decision in the context of the Swissair bankruptcy, the Federal Supreme Court indicated in an obiter dictum that it is questionable whether unsecured up- or cross-stream loans can ever actually be at arm's length. In a more recent Swissair decision, however, the Supreme Court revisited this point and stated that, depending on the circumstances, unsecured loans could be at arm's length if the borrower has a good credit rating.

In the current COVID-19 situation, the borrower's credit must be reviewed regularly. If the borrower's credit deteriorates, up- or cross-stream loans should only be granted if they are secured or if they are limited to the amount of the subsidiary's freely distributable equity reserves. With regard to existing unsecured up- or cross-stream loans, the subsidiary should consider whether to exercise any rights under the respective loan agreements, such as adjustments or early termination.

Can a Swiss subsidiary participate in a cash pool in the COVID-19 crisis?

In a typical cash pool arrangement, all group companies participate in an arrangement under which all cash will be transferred from the group companies on a regular (often daily) basis to a master account operated by one group company, the cash pool leader. Similar to a current account, each group company has a credit (or debit) balance with the cash pool leader which changes daily. Having a credit balance is basically the same for a group company as granting a loan to the cash pool leader, and therefore the same due diligence requirements and considerations apply to cash pools as to other loans. If the requirements for loans are met (see above), participation in the cash pool is permitted.

Because the amount lent under a cash pool arrangement fluctuates constantly, the solvency of the cash pool leader must be monitored on an ongoing basis, especially during a crisis such as currently with COVID-19. If repayment appears at risk, the Swiss subsidiary's board must act and, as a rule, refrain from granting further up- or cross-stream loans under the cash pool arrangement. However, the appropriate actions must be determined on a case-by-case basis. For instance, in the previously mentioned case, the Swiss Federal Supreme Court held that the Swissair board did not breach its duties when remaining in the cash pool despite the group's rapidly deteriorating creditworthiness. This because Swissair was highly dependent on services from other group companies, termination of which would have been even more detrimental to Swissair than remaining the cash pool.

Is it permissible to use COVID-19 credits for payments to group companies?

Swiss companies facing liquidity shortages due to the corona crisis can obtain a COVID-19 credit (see our blog post "Help is coming!" – The COVID-19 Bridging Assistance from the Government"). These COVID-19 credits are intended to infuse liquidity into the operational business in Switzerland.

Once a company has obtained a COVID-19 credit, any up- or cross-stream payments within the group are sensitive. With a few exceptions, the granting of intra-group loans is not permissible; intra-group loans to foreign companies are completely excluded. Accordingly, participating in a cash pool during the term of a COVID-19 credit is hardly possible and any other payments made by a Swiss subsidiary to other group companies, especially foreign ones, must be carefully examined.

Can the board of directors of a Swiss subsidiary rely on the support of the parent company in the corona crisis?

Under Swiss law, a parent company is nothing more than a normal shareholder of its subsidiaries. Therefore, apart from its obligation to make an initial capital contribution, the parent company of a Swiss subsidiary has no obligations towards that subsidiary; in particular the parent company has no obligation to make additional contributions to or finance the Swiss subsidiary.

In practice, there is often an implicit "group guarantee" in favour of the affiliates. However, such an implicit guarantee is not legally enforceable. For the Swiss subsidiary's board to rely on the group's support, it must obtain legally binding commitments (e.g. a financing commitment or a subordination agreement) from the group and such commitments should come from companies with sufficient credit. Only where such legally binding commitments are in place can a Swiss subsidiary's board avoid filing for bankruptcy in the event of over-indebtedness. Nevertheless, under the Swiss COVID-19 insolvency regulation, the Swiss subsidiary's board does not need to notify the court if the company was not over-indebted at the end of 2019 and there is a prospect that the over-indebtedness can be remedied by the end of 2020 (see our blog post "Help is on the way - The COVID-19 Regulation Insolvency Law").


When weighing up the interests within a group, a Swiss subsidiary's board walks a tightrope, particularly under the particular set of conditions created by the COVID-19 crisis. It is therefore advisable for the board of directors to seek expert advice.

For questions or in-depth advice, please do not hesitate to reach out to your normal VISCHER contact person or the VISCHER corporate and commercial or insolvency law teams.

Categories: Restructuring & Insolvency, Corporate and Commercial

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