Switzerland Update: What Do I Have to Consider as a Member of the Board of Directors of a Group Company?

The uncertain world situation, rising interest rates, inflation and supply chain problems are challenging many companies. In this blog series, VISCHER’s Restructuring & Insolvency team shows how companies can navigate through these challenges. Here you will find answers to the most important questions about the duties of the board of directors of a group company.

1. What is the group dilemma and what interests does the board of directors of a Swiss group subsidiary represent?

Many companies in Switzerland are part of a group or group. As subsidiaries, they are integrated into a larger, often international whole. In some cases, such companies are heavily dependent on other group companies and could hardly function without the support of parent or sister companies in this group constellation.

Unlike many foreign legal systems, Switzerland does not have any actual group law. Under Swiss law, each company is considered an independent entity. Accordingly, the Board of Directors of each Swiss Group company must act in the best interests of that Group company, in principle without regard to the interests of the Group or other Group companies. In principle, this cannot be changed contractually. That’s why a board of directors of a Swiss subsidiary is always latently in a dilemma. The dilemma is particularly great if such a board of directors also has a leading function at the parent company or in another group company, or if a centrally managed group sets strong targets.

Outside of a crisis, the Group dilemma is usually unproblematic for the Swiss Board of Directors because the interests of the Group and the Swiss Group company are similar and the Group finances the Group companies as needed.

2. How does the Board of Directors have to deal with the corporate dilemma in the crisis?

The board of directors of a Swiss company must always act in the best interests of the company of which it is a body. This also applies in group relationships and is of particular importance if the subsidiary is threatened with illiquidity or over-indebtedness. After all, according to new case law, the board of directors of the subsidiary may also take into account group interests under certain circumstances if this is advantageous for the subsidiary as a whole.

When balancing interests, the board of directors walks a tightrope. It is therefore advisable for the Board of Directors to seek careful advice in such a situation.

In the event of a tense financial situation, the granting of loans to parent or sister companies in the Group and participation in a cash pool (see below) is particularly tricky.

3. Under what conditions may a subsidiary grant loans to other group companies?

Loans to parent companies or sister companies in the Group (so-called upstream or crossstream loans) are permitted without further ado if they are granted on third-party terms (at arm’s length). In any case, if such a loan does not stand up to the third-party test, its size may not exceed the company’s free equity.

An upstream or crossstream loan stands up to the third-party test if a third party, such as a bank, would also provide the loan on these terms. In addition to the collateralization of the loan and the creditworthiness of the borrower, other criteria include the amount of the loan amount, the term of the loan and its terminability.

Based on a reference in an earlier decision of the Federal Supreme Court from the Swissair environment, it seemed questionable whether unsecured loans in the group relationship could be granted at all on third-party terms. According to a new Swissair decision, unsecured upstream or crossstream loans may also be able to withstand the third-party test if the borrower’s creditworthiness is good.

The situation must be closely monitored, especially in times of crisis. If the creditworthiness of borrowers in the group deteriorates, new loans should only be granted if they are backed or collateralized by free equity. In the case of existing unsecured loans, any measures such as adjustment or termination must be examined in accordance with the terms of the loan agreement.

4. What is a cash pool and what applies in crisis?

In a typical cash pool, all cash in the group is transferred daily to a group company, the cash pool manager. Each group company has an account with the cash pool manager (on which there is either a credit balance or a debt), which is netted daily like a current account. If a subsidiary has a credit balance with the cash pool leader in the group, this is nothing more than a loan that is regularly (usually daily) realigned. Therefore, the same due diligence and considerations apply to cash pools as to other loans. If the relevant conditions are met, participation in the cash pool is permitted without further ado.

Because the loan at the cash pool fluctuates constantly, the creditworthiness of the cash pool leader must also be continuously monitored (if there is no security), especially during a crisis. If the repayment appears to be at risk, measures must be taken, such as in particular the termination of the cash pool. After all, according to the Federal Supreme Court, an overall view is permissible in such a case. Due to the special circumstances of the individual case, it may be justified to waive a termination. This was the case with Swissair because, as a subsidiary, it was dependent on numerous services from other group companies that would also have ceased to exist if it had withdrawn from the cash pool.

5. Can the board of directors rely on the support of the parent company during crises?

Legally, a parent company in a group is a normal shareholder of its subsidiaries. Apart from the obligation to make the original capital contribution, the shareholder of a Swiss company has no obligations towards the company, in particular he has no obligations to make additional contributions to the company. Thus, even a group parent company has no obligation to finance its subsidiaries.
In practice, there is often an implicit “group guarantee” in favor of the subsidiaries. Legally, however, such a commitment is not enforceable. If the board of directors of a subsidiary wishes to rely on the group, it must require legally binding commitments, e.g. a subordination agreement or financing obligation. In addition, the guaranteeing group company should have sufficient creditworthiness. Only if the subsidiary has an enforceable claim can the board of directors avoid filing for bankruptcy, e.g. in the event of over-indebtedness.

6. Recommendation

Balancing the normally converging interests within a group, which often diverge in times of crisis, is a balancing act for the board of directors. It is therefore advisable for the Board of Directors to seek careful advice in such a situation.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.