International rolling stock financing in Switzerland

As a rule, granting security over rolling stock under Swiss law is not possible, which is mainly due to Switzerland strictly applying the principle of possessory pledges (Faustpfandprinzip):

A pledge requires a pledge agreement, a valid secured obligation, the transfer of the possession of the pledged asset, as well as the power of disposition by the pledgor. The transfer of possession requirement makes a pledge generally unsuitable for rolling stock. In particular, simply marking the pledged rolling stock as pledged is insufficient to meet the transfer of possession requirement. Likewise, a security transfer without transfer of possession in lieu of the pledge does not create a valid security under Swiss law as it is regarded as an illegal circumvention of the possessory pledge principle (Article 717 para. 1 of the Swiss Civil Code, “CC”).

The Swiss Federal Supreme Court struck down sale-and-leaseback transactions as violating the principle of possessory pledges. More generally, any leasing structures involving the borrower remaining in possession of the asset will be deemed invalid.

This concept is only available in connection with sales contracts. RoTs must be registered (Article 715 para 1 CC). Hence, under Swiss law, RoTs would be available as security to the manufacturer in connection with a sales contract between the manufacturer and the borrower, but not as security for the lender. Sale-and-leaseback transactions involving a RoT are invalid (Article 717 para 1 CC).

The loan could be granted to a SPV/a third party, which owns the rolling stock and pledges the rolling stock to the lenders, while an operating company (OpCo) holds the rolling stock for the lenders (under a trust agreement or similar). However, the OpCo and SPV/third party must have a sufficient degree of independence from each other in order for the pledge to be valid. It must also be ensured that the requirements for a pledge are fulfilled at all times. In particular, there is a significant risk that such structures would be struck down in a Swiss court if the SPV/third party and the OpCo are part of the same railway enterprise.

Security over rolling stock in Switzerland can be created only in very exceptional circumstances. As set out above, for the vast majority of transaction structures, it is not possible to grant Swiss law security over rolling stock. Accordingly, these questions would have to be answered on a case-by-case basis.

Notably, the retention of title (Eigentumsvorbehalt) requires residency of the buyer in Switzerland.

• Security Assignment: leasing receivables may be assigned by way of security. Please note, however, that sale-and-leaseback structures are likely to be avoided. 
• Pledge (in practice, security assignments are much more common).

A security assignment requires a written agreement. Notice to the debtors is not a perfection requirement but is required to avoid them receiving a good discharge of the debt by making payment of the debt in good faith to the assignor. Written acknowledgements of debt (Schuldscheine, e.g. insurance policies), if any, must be physically transferred to the assignee in order to perfect security.

There are different options how to pledge receivables, the most common option being to enter into a written pledge agreement and to deliver acknowledgements of debt, if any, to the pledgee. Notice to the debtor of the receivable is not required to perfect security. However, until notified, the debtor will receive a good discharge of the debt by payment to the pledgor.

There are no specific taxes payable in connection with security over receivables.

Non-assignment clauses will render the assignment of, or a pledge over, the receivables void. The non-assignment clause itself may be void in some (exceptional) cases. Valid security however can still be created if the debtor of the assigned (or pledged) claims agrees to the assignment (or pledge).

Global assignment agreements are possible and common. However, the assigned claims must be ascertainable. It is therefore necessary that the assigned claims can be determined from the assignment agreement between the parties. 

• Share pledges
• Security transfer of shares (this is very rare in practice)

A share pledge requires a pledge agreement, a valid secured obligation, as well as the power of disposition.

If no share certificates have been issued, there are no further requirements. Usually, however, the lenders will insist on physical share certificates being issued. In this case, the share certificates are endorsed in blank and must be handed over to the pledgees.

There are no specific taxes payable in connection with security over shares.

Swiss law provides for official enforcement procedures by the debt collection office (Betreibungsamt). The parties may agree in advance that discretionary sale (Freihandverkauf) by the debt collection office is permissible. Official enforcement procedures require monetary claims to be converted into Swiss francs.

Swiss law also permits private enforcement (private Verwertung) including self-sale (Selbsteintritt) of security interests over shares/interests if so agreed between the security provider and the secured party, e.g. in the share pledge agreement.

There is some uncertainty under Swiss law as to which law would be applied to the transfer of ownership of rolling stock or the creation of security over rolling stock, and the applicable law depends on the individual situation. The most important provisions are the following:

Article 100 para 1 Private International Law Statute (“PILS”) provides, as the general rule, for a lex rei sitae for transfer of property rights (dingliche Rechte) in movable property. Acquisition of movable property is governed by the laws of the country in which the movable property is situated at the time of the acquisition/loss of property rights.

Article 101 PILS provides for the application of the laws of the destination state for the transfer of property rights in movable property in transit.

Article 107 PILS provides that other statutes on property rights may be relevant in determining the relevant governing law. There are no special laws with respect to rolling stock in the sense of Article 107 PILS. However, some Swiss law commentators take the view that property rights in rolling stock are governed by the laws of the state where the rolling stock is commonly situated instead of where it is currently situated. Furthermore, there is a conflicting view that, as in Germany, deems the applicable  law to be the law of the state where the rolling stock is licensed for operation (similar to a lex registri). It is, however, not clear whether these views would be upheld by a Swiss court.

Again, Article 100 PILS provides generally for the application of the lex rei sitae for the acquisition and loss of property rights (dingliche Rechte). These are governed by the laws of the state in which the movable property is situated at the time of the acquisition/loss of property rights. Also, the subject matter of (Inhalt) and exercise of property rights are governed by the law of the state where the movable property is situated. 

Again, instead of the general rule, Article 101 and/or 107 PILS as set out above may apply.

Article 102 para 2 PILS states that if movable property is brought to Switzerland where there is a valid RoT under foreign law, but where such RoT does not comply with Swiss law, such title retention will remain valid in Switzerland for 3 months. However, in insolvency, such foreign title will only lead to a right to segregation of the asset (Aussonderungsrecht) if the security right was duly registered before insolvency. In addition, such registration is only possible if the debtor is resident in Switzerland.

In all other cases, once encumbered assets are moved into Switzerland, the validly created foreign law security must be transposed (“translated”) into Swiss law. Only if such “translation” is possible will foreign law security over rolling stock be recognised in Switzerland. 

Foreign law security, where the secured parties only acquire indirect possession of the asset, will not be recognised in Switzerland under the doctrine of possessory pledges (Faustpfandprinzip). Such foreign law security transfers cannot be transposed into Swiss law.

More generally, security interests infringing the doctrine of possessory pledges are unlikely to be enforceable in Switzerland, even if the security interests have been validly created under foreign law.

Under Swiss conflict of laws rules, an assignment is governed by the law chosen by the parties or, if this is not the case, by the laws which govern the assigned receivables (Article 145 PILS). However, choice of law may not be enforceable against the debtor of the receivable if he did not consent to the choice of law. Hence, it is recommended to include such consent in the relevant lease agreements.

Pursuant to Article 105 PILS, the pledge of claims is governed either by the law chosen between the parties (which will not bind third parties) (para 1) or by the law of the state of usual residence of the pledgee (para 2). Only the law governing the pledged claim is binding on the debtor (para 3).

Generally speaking, security assignments and pledges should be governed by Swiss law if the assigned/pledged claims are subject to Swiss law.

Foreign law security over receivables is generally enforceable in Switzerland.

We would expect an outright assignment, as the SPV shall be ultimately entitled to the receivables anyway. There may even be an assignment by law (cf. below).

Swiss law provides for the principle of substantiation (Bestimmtheitsgrundsatz). Thus, in case of the involvement of the fleet manager, issues can arise in this regard in particular if the lease agreements also relate to rolling stock of third parties.

On-assignments are permissible under Swiss law.

Under the Swiss law of agency (Auftrag), Article 401 para 1 of the Swiss Code of Obligations (“CO”), all claims against third parties which the agent acquired in his own name but for the account of the principal are transferred by law (Legalzession) to the principal (as soon as the principal has fulfilled all its obligations under the agency agreement). Under Article 401 para 2 CO, this expressly applies even if the agent is insolvent. Please note that under Swiss law, agency is the default contract for anything related to services and a number of other, more specialised types of contract are based on agency law and will apply this clause. Accordingly, it may well be that Article 401 CO also applies to the agreement between the fleet manager and the borrower, so that the cash flows are insolvency proof ex lege, and fleet management agreements should be structured accordingly.