Global political crises, volatile interests, inflation and supply chain issues challenge many companies. In this blog series, VISCHER's restructuring & insolvency team will show how companies can navigate through these challenges. Here you will find answers to the most important questions regarding the duties of a director of a Swiss subsidiary.
1. 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.
Outside of a crisis, the group dilemma is usually negligible for the Swiss subsidiary's board of directors because the interests of the subsidiary and the group are aligned and, the group would typically support the subsidiary if financial difficulties arose.
2. How should the board of directors deal with the group dilemma in a crisis?
The board of directors of a Swiss company must always act in the best interests of the company. This applies equally to all the subsidiaries of a group and is of particular importance if the subsidiary or other group companies are on the brink of illiquidity or over-indebtedness. Furthermore, according to recent case law, the board of directors may, under certain circumstances, also take into account group interests if this is beneficial for 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.
In a tense financial situation, granting loans to parent or sister companies or participating in a cash pool are particularly sensitive.
3. Under what conditions may a subsidiary grant loans to other group companies?
There are generally no restrictions on loans from a 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.
Particularly in a crisis, the situation must be closely monitored. 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.
4. What is a cash pool and what applies in crises?
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, 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. If repayment appears to be at risk, the Swiss subsidiary must take measures, such as in particular the termination of the cash pool. Nevertheless, according to the Federal Supreme Court, an overall, group-wide assessment is permissible in such a case. Due to the special circumstances of the individual case, it may be justified to not terminate. This was the case with Swissair because, as a subsidiary, it was dependent on numerous services from other group companies, termination of which would have been even more detrimental to Swissair than remaining the cash pool.
5. Can the board of directors of a Swiss subsidiary rely on the support of the parent company during crises?
Strictly speaking, a parent company in a group is a normal shareholder of its subsidiaries. Therefore, apart from its obligation to make an initial capital contribution, the parent company of a subsidiary has no obligations towards that subsidiary; in particular the parent company has no obligation to make additional contributions to or finance the subsidiary.
In practice, there is often an implicit "group guarantee" in favour of the affiliates. However, such an implicit guarantee is not legally enforceable. If the board of directors of a subsidiary wants to rely on the support of the group, it must obtain legally binding commitments, e.g. a subordination agreement or financing commitment. Moreover, the guaranteeing group company should have sufficient credit. Only if the subsidiary has an enforceable claim, the board of directors can avoid filing for bankruptcy, e.g. in the event of over-indebtedness.
6. Recommendation
Weighing up in a crisis often increasingly diverging interests within a group is a balancing act for the board of directors. It is therefore advisable for the board of directors to seek expert advice in such a situation.
For questions or in-depth advice, please do not hesitate to reach out to your normal VISCHER contact person or the VISCHER Restructuring and Insolvency team.
Other articles in the series:
Authors: Benedict F. Christ, Dorothea Wirth, Alexander Rom, Flavio Langenegger
