Security Interests in Switzerland

Security interests are a fundamental component of credit transactions, in Switzerland as in every other countries in the world. The Swiss legal system, based on civil law principles, recognizes various forms of security interests, including pledges, security assignments, and retention of title. Unlike common law jurisdictions, Switzerland does not recognize the concept of floating charges. Instead, lenders typically rely on specific, asset-based security arrangements, which must comply with strict formalities. Furthermore, Swiss law lacks of flexibility when it comes to  security interests over moveable assets remaining the possession of the borrower (such as a stock, equipment, vehicles, etc.).

The purpose of this article is to briefly describes the main security interests under Swiss law and to outlines possibilities of taking security over movable assets and claims (typically bank accounts) under Swiss law.

I. Pledges

All statutory forms of pledges under Swiss law have in common that the pledgor remains the legal owner of the pledged asset. The pledgee has a limited right in rem in the form of a priority right to enforce the pledge and to apply the proceeds of the realization of the pledge towards the secured obligations. The pledged asset has to be returned to the owner upon discharge of the secured obligations.

Generally, the creation and perfection of a pledge under Swiss law includes two separate steps: (i) the contractual undertaking of the parties to create a pledge (acte générateur d’obligation) and (ii) the act of perfecting the pledge with in rem-effect (acte de disposition). This legal distinction needs to be taken into account even if – as is often the case – the parties cover both steps in one agreement.

Pledges over movable assets are only effective towards third parties if the pledgor transfers possession of the collateral to the pledgee (dispossession requirement). Possession can be transferred by handing over to the pledgee or its agent the collateral itself or the means to dispose of the collateral, e.g., the key to a warehouse in which pledged inventory is stored.

Pledges over claims and other rights are perfected by an assignment of the relevant claims or rights, the dispossession of the security instrument (papier-valeur) or the debt certificate, if any.

A pledge is, pursuant to mandatory Swiss law, accessory to the secured obligations. This means that (i) the pledgee(s) must be identical with the creditor(s) of the secured obligations, (ii) the pledge is automatically transferred to a new creditor/pledgee if the secured obligations are transferred and (iii) the pledge automatically terminates if the secured obligations cease to exist. This rule limits creditors in their dealings with the secured obligations insofar as any novation of the relevant obligations (other than the novation arising from netting current accounts) would render a pledge securing such obligations to fall away by operation of law.

II. Security rights similar to pledges

A. Irregular pledge

One speaks of an “irregular pledge” (pignus irregulare) if the parties agree that cash or other fungible assets (e.g., listed securities and traded precious metals) be transferred to the secured party for security purposes and that the secured party shall, upon discharge of the secured obligations, hand over assets of the same kind and quality (but not a specific asset) to the security provider. Here, full ownership of the relevant asset is vested in the secured party and the secured party may freely dispose of the relevant assets.

B. Assignment for security purposes under Swiss law

The assignment for security purposes (or security assignment, cession à des fins de sûreté) operates similar like the transfer for security purposes with the main difference being the type of collateral and the perfection requirements. Claims may be the subject of an assignment for security purposes without consent of the third party debtor, unless the assignability is limited or excluded by virtue of law, by agreement or by the nature of the legal relationship. This is also true for (uncertified) securities and other rights (if they are realizable). As is the case with a transfer of assets for security purposes, the full legal entitlement is subject to a fiduciary duty of the transferee (secured party).

Claims which have not yet been created but which will arise in the future may be validly pledged or assigned if they can be defined with sufficient specificity. This means that the debtor, the nature of the claim and the size of such claims are at least determinable.

III. Available assets

1. Real estate

Taking security over real estate in Switzerland can be effected by different means, depending on the circumstances. A security interest over registered Swiss real estate property is, in practice, established in the form of either a mortgage certificate (cédule hypothécaire). The borrower can create a mortgage certificate – in registered or bearer form – by way of a public deed, which is then registered with the competent land register. The mortgage certificate is issued by the competent land registrar. This mortgage certificate can be the subject of a security transfer or assignment to the secured party. The security interest is established by entering into an transfer or assignment agreement (mortgage agreement) and handing over the mortgage certificate to the secured party. If certificates are issued in registered form, they need, in addition, to be endorsed to the secured party.

2. Movable assets

As mentioned above, the dispossession requirement applies to the perfection of a security interest over movable assets. A pledge or transfer for security purposes can only be validly created if the security provider surrenders physical possession thereof to the secured party or its agent. Swiss law does, in particular, not recognize the concept of the floating charge. It is, furthermore, not possible to perfect a security interest over movable assets by way of registration (with the exception of retention of title).

As a consequence of the dispossession requirement, movable assets located in Switzerland are hardly included into a security package (at least in the context of a credit transaction).

3. Claims – Bank accounts

A security interest over claims can be granted by a pledge or a security assignment. As per the above rule, the pledge of claims requires a valid pledge agreement (acte générateur d’obligation), and a written assignment (acte d’obligation). Both aspects can be covered in the same document. The notification of the debtor of the claim is not required, however, the debtor can, prior to the notification, validly discharge itself from its obligations with releasing effect by effecting payment to the security provider.

Under Swiss law, all assets held in a bank account are – as a rule – viewed as claims of the depositor vis-à-vis the bank (cash, un-certificated shares, un-certificates funds units, un-certificated bonds, etc.). These claims can either be pledged in favor of, or assigned to, the secured party (be it the bank itself or a third party). A security interest over all present and future assets in a bank account is admissible, provided that the secured assets as sufficiently determined.

IV. Enforcement

A. Ender the debt enforcement and bankruptcy act

A creditor who is secured by a pledge, e.g. over movable assets or claims, can seek enforcement by initiating enforcement proceedings with respect to the pledged assets or claims pursuant to the Swiss Debt Enforcement and Bankruptcy Act and apply the proceeds thereof to the discharge of the secured obligation. Pursuant to the applicable laws and contractual obligations, the creditor may be obliged to first pursue the realization of the collateral before it can pursue ordinary enforcement proceedings but typically, in Swiss security agreements, the security provider would waive this requirement.

Once bankruptcy proceedings against a Debtor are in force, the assets of the Debtor which are pledged to a third party belong to the bankruptcy estate like all other assets of the Debtor; the preferential rights of the secured creditor, however, remain reserved and in full existence. This means, in essence, that realization of the pledged assets and claims will be effected by the bankruptcy administrator but that the proceeds from realization serve exclusively to cover the claims of the secured party.

B. Private enforcement

Provided it is agreed in the Security Agreement, the secured party may, once the secured obligations become due and remain unpaid, enforce the pledged assets and claims (as well as assets and claims which have been transferred or assigned to the secured party for security purposes) either (i) by keeping and collecting the assigned assets or claims (appropriation) or (ii) by way of their private enforcement or sale (vente de gré à gré), in each case without having to initiate proceedings under, and without regard to the formalities provided in, the Swiss Debt Enforcement and Bankruptcy Act.

The secured party will have to account for the sums it obtained or which it could have, acting diligently, obtained, and deliver any surplus of the realization to the security provider or, if bankruptcy proceedings have been opened regarding the Debtor in the meantime, to the bankruptcy administrator.