Pledging of Claims

Clients’ liquid assets deposited in bank accounts are claims against the bank. Such claims are in general not incorporated in securities. Under Swiss law claims not incorporated in securities are pledged by means of a written pledge agreement and by handing over the acknowledgment of debt (Art. 900 Civil Code). The general business terms and conditions of Swiss banks regularly provide for a general right of set-off and of pledge covering all assets on deposit with the bank. Swiss law allows the right of pledge relating to an account with a bank in favor of this particular bank. The collateral to be pledged is an obligation of the bank itself: a right of lien on the bank’s own debt is admissible.⁶

Value rights, i.e., uncertified financial claims, exist in the form of bookentry securities for government securities.⁷ Pledging of such value rights is effected according to the provisions governing the pledging of claims. Further, the right of lien must also be recorded in the register.

Pledging of Securities

Securities may be pledged in the same way as ordinary claims. In addition, a special form of pledging for securities is possible (Art. 901 Civil Code). In the case of bearer securities a written pledge agreement is not required. A verbal agreement, followed by transfer of the security to the pledgee, is sufficient (Art. 901 para. 1 Civil Code). In the case of securities made out to order, a pledging endorsement is also required (Art. 901 para. 2 Civil Code).

Securities are the main type of asset pledged as collateral in the Swiss banking business, though account balances, fiduciary investments, and precious metals may also be used. Ready marketability is the key criterion determining whether an asset is acceptable as security.⁸

Pledging in Practice

In principle, no register exists for chattels.⁹ Physical control (possession) is deemed to express the existence of a ius in rem. Therefore, the pledge must be outwardly evidenced by transfer of possession (publicity rule). Under Swiss law constructive possession in the pledging of chattels and claims is impossible: the pledgor may not retain power over the chattel on the basis of any legal relationship (Arts. 717 and 884 Civil Code). However, in place of actual transfer, two substitutes for transfer are permissible:¹⁰

• Actual transfer of possession is not necessary if the pledgee is already in possession of the securities prior to pledging (brevi manu traditio).

• If the security is owned by a third party, it is sufficient for pledging purposes to assign the claim for restitution against the third party to the pledgee (notice of transfer of possession, Art. 924 Civil Code).

In accordance with the principle that the pledge must be outwardly evidenced by transfer of possession (publicity rule), the pledging of securities becomes effective as soon as possession is transferred. If possession is not transferred in accordance with the law, the pledge is not effective vis-à-vis third parties (Art. 717 and Art. 888 para. 2 Civil Code).

The pledging of assets in favor of a bank is straightforward. Based on the contractual relationship that a customer enters into with the bank on opening an account (or custody account), the assets serving as security are already in the bank’s possession.¹¹ In practice, the vast majority of securities accepted by banks as collateral (medium- and longer-term bonds and notes as well as shares) are held in collective custody by the Swiss central securities depository SEGA. Thus transfer already takes place with delivery into collective custody. Securities held by SEGA¹² are therefore pledged by means of a pledge agreement not requiring any specific form and by notification to SEGA of the transfer of possession.¹³

Banks either conclude special pledge agreements with their clients or refer to the relevant clauses in their general terms and conditions. These clauses contain a right of lien agreed in advance for future utilization, but may only be enforced once an actual claim by the bank against the customer has materialized. Any claims originating from the business relationship between the bank and customer as it stands at present or as it can reasonably be expected to develop in future are covered.¹⁴ Clauses imposing an encumbrance on the pledgee whose effect is of indefinite duration and whose scope cannot be grasped by the pledgee are in contravention to the law. They create an excessive degree of dependence.¹⁵

Expiration of Pledge

The pledge expires if the claim is extinguished or if the pledged chattel is destroyed (Art. 889 in conjunction with Art. 899 para. 2 Civil Code). The loss of possession of the pledged chattel by the creditor also entails the expiry of the lien if the creditor is legally unable to recover the pledged chattel (Art. 888 para. 1 in conjunction with Art. 899 para. 2 Civil Code).

Subsequent Pledge

By way of exception to the principle that the pledge must be outwardly evidenced by transfer of possession (publicity rule), the law permits the subsequent pledging of securities or claims: an already pledged security is to be delivered to the second pledgee once the first has received satisfaction. For the subsequent pledge to be effective, the prior pledgee must be notified in writing (Art. 886 and 903 Civil Code). With the consent of the pledgor, even the creditor can pledge the chattel in his possession. Banks are required by law to obtain the consent of the pledgor in writing and in a special document that deals exclusively with the pledging of the security.¹⁶

Ranking of Pledges

The principle of prior constitution applies when the ranking among different pledges is to be determined (Art. 893 para. 2 in conjunction with Art. 899 para. 2 Civil Code). However, the bona fide purchaser of a pledge takes priority over any earlier constitution of a pledge (Art. 884 para. 2 Civil Code).

Pledging Under Swiss International Private Law

In a cross-border relationship, the legal situation in regard of pledging of chattels is complex and involves quite a lot of risks for the creditor. The pledging of claims and securities is not subject to the rules of one jurisdiction:

• The pledging of claims and securities is subject to the law chosen by the parties, i.e., the pledgor and the pledgee.¹⁷ Such a choice of jurisdiction covers not only the pledge agreement but also the transfer of the possession of the chattel to the pledgee.¹⁸

• The choice of law is only valid between the parties. For third parties, the pledging is subject to the law at the ordinary residence of the creditor for whom security in the form of claims or securities is pledged.¹⁹

• Only the law to which the pledged rights are subject can be invoked against the debtor of the pledged claim or securities.²⁰

Enforcement of a Claim Through Official Realization of the Pledged Chattels

In Switzerland a separate procedure exists for execution in the case of claims secured by collateral, i.e., debt collection through the realization of a pledge.²¹ This special execution procedure does not take into account the interests of other creditors but focuses on the liquidation of assets set aside for the creditor by the pledging of the chattel.²² This ensures that the pledgee has priority over the other creditors.

The enforcement office is in charge of the realization of a chattel. Realization is in principle effected by public auction, or by private sale for securities and items with a market or stock exchange price, as long as the price offered is equivalent to that day’s market price.²³

Enforcement of a Claim Through Private Realization of the Pledged Chattels

Private realization is effected by the sale of the pledged item to a third party or, in the case of claims, either by sale to a third party or by calling in the amount owed. Pledged assets are preferably sold by auction or by sale on an open market such as a stock exchange. If the assets are listed or have a market price, the bank may itself act as a counterparty, in which case the assets pass into its ownership.²⁶ It is not admissible, however, to include a cancellation clause providing for the collateral to become the property of a creditor who is not satisfied (Art. 893 Civil Code). Private realization allows the creditor solely to satisfy his demands from the proceeds of the sale. With private realization, therefore, the creditor is obligated to provide settlement details and pay out any surplus.²⁷

Private realization of pledged assets is inadmissible if the debtor is the subject of bankruptcy proceedings, or if execution has been levied on the pledged assets by third-party creditors, or if the pledged assets have been seized.²⁸

Enforcement of Claims Secured by Chattels in the Event of Bankruptcy

Neither of the two modes of realization described above is applied when the debtor of a claim secured by collateral becomes bankrupt. The right to dispose of a pledge by way of special execution procedure can no longer be exercised. A private realization clause is not effective with respect to other creditors in general execution proceedings.²⁹ Pledged chattels belonging to the debtor form part of the bankrupt’s estate under Swiss law³⁰ and are disposed of together with the debtor’s remaining assets.³¹ The pledgee is entitled to a payment from the proceeds of the collateral with priority over the other creditors.³²

If the pledged collateral is held by a third party, it also forms part of the bankrupt’s estate. In case of doubt concerning ownership, the receiver in bankruptcy will base his actions on the statements made by the creditor.³³ If, however, the collateral is the property of a third party, i.e., if collateral deriving from third-party assets has been pledged, the claim is, in the final analysis, to the debit of the debtor’s assets. The debt thus remains undiminished. However, separate debt collection proceedings against the third-party pledgor for the realization of this collateral are admissible.³⁴ The creditor’s claims are transferred to such a third party either because the collateral has been realized or because it has been redeemed by the third party.³⁵

The exact time of pledging is immaterial. However, what may be contested is pledging collateral within the one year prior to the adjudication of bankruptcy for the purpose of delivering collateral at a time when the debtor (pledgor) is already over-indebted.³⁶ In such a case the receiver in bankruptcy may institute proceedings against the person who benefits from the chattel.³⁷

Set-off According to Statutory Law

Under Swiss statutory law, set-off empowers persons to change a legal relationship to which they are a party by unilateral act (einseitige Gestaltungsbefugnis).

If two persons have entered into mutual obligations and owe each other pecuniary debts or claims of equivalent character, either party may unilaterally invoke set-off and so cause the mutual claims to be compensated and thereby extinguished. Compensation operates up to the amount of equality in claims and leaves the remaining part of the higher claim unaffected.

Four conditions are essential for set-off according to statutory law:³⁹

• mutuality of claims and counterclaims between two parties;

• the claim of the party declaring set-off must be due;

• claims must be of equivalent character (which is always the case for pecuniary debts);

• claims to be set off must be suable.⁴⁰

The discharge does not operate automatically, but requires a declaration of the party refusing payment on grounds of setting off its counterclaim.⁴¹

Set-off is not permitted for certain obligations, notably obligations to restore items deposited.⁴²

Set-off According to Agreements Between the Parties

Bank customers may freely dispose of their assets until the time the bank declares set-off.⁴⁵ A bank that relies on its right of set-off cannot be sure whether there will be a credit balance on the customer’s account at the time the set-off declaration is exercised. This situation may be modified to the bank’s advantage through the contractually agreed inclusion of a current account clause in the bank’s favor (Art. 124 para. 3 Code of Obligations): the current account clause contains an agreement between the bank and its customers to defer all claims arising from their mutual business relationship until the settlement date. Debts due are not claimed individually but are merely treated as accounting items for striking the balance. In Swiss banking practice, the claims are set off continuously after each operation and automatically, i.e., without a separate declaration of set-off.⁴⁶/⁴⁷

Set-off Under Swiss International Private Law

If set-off is agreed contractually, the set-off agreement is governed by the law chosen by the parties.⁴⁸ If no jurisdiction is specified, the characteristic performance arising from the set-off agreement between the bank and its customer is logically the activity of the bank that operates the current account.⁴⁹

Compensation by unilateral declaration (not based on a set-off agreement) is subject to the law governing the claim against which set-off is invoked.⁵⁰ If a bank invokes set-off against its client, set-off is subject to the law applicable to the client’s claim against his bank.⁵¹

Set-off in Civil Procedure

If a set-off agreement has been signed, then in the event of litigation this agreement must be judged and enforced by a court of law.

If set-off is based on statute, the party that wishes to refuse payment must declare a set-off (Art. 124 para. 1 Code of Obligations). Set-off has the simultaneous effect of cancelling the claim and counterclaim in question. The claims lapse retroactively: the law stipulates that set-off take effect from the time when the claim and counterclaim can be offset against each other (Art. 124 para. 2 Code of Obligations).⁵²

If the set-off declaration is declined by the party toward which it is proposed, this party need not file an objection to the declaration. It is sufficient for this party to enforce its own claims through the usual legal channels and to contest the validity of the set-off in this way.⁵³

In civil proceedings, set-off generally serves as the defendant’s instrument of defence. The defendant raises his objection against set-off with the plaintiff and the question of set-off thereby becomes the object of the proceedings. In the eyes of the law, however, the objection to set-off is not identical to the set-off declaration: the latter must be submitted to the counterparty, whereas the objection must be lodged with the court.⁵⁴

Set-off in Bankruptcy

Statutory law not only permits set-off in bankruptcy but even favors it: first, the adjudication of bankruptcy facilitates the fulfillment of the statutory requirements that the claims must be both of equal character and due: it makes all obligations of the debtor become due (Art. 208 para. 1 Federal Law on Debt Collection and Bankruptcy) and converts claims not relating to a sum of money into monetary claims (Art. 211 para. 1 Federal Law on Debt Collection and Bankruptcy). Second, set-off is in principle permissible against the bankrupt’s estate.⁵⁵ The set-off option is of advantage to the creditor who is at the same time a debtor in respect of the bankrupt’s estate, as his claim is satisfied in full and not merely to the extent of the bankruptcy dividend.⁵⁶

Set-off is not permitted in bankruptcy if used in an abusive manner. Set-off is ruled out if the counterparty of the bankrupt debtor becomes a party to the offsetting contract only after the adjudication of bankruptcy,⁵⁷ or if the counterparty of the bankrupt debtor entered into the contract making set-off possible with the intention to deceive.⁵⁸

Comparison of Pledge and Set-off

For modern cross-border banking operations, the institution of the pledge is no longer of practical use. Its inflexibility becomes apparent, for example, in the need to transfer possession of the pledged chattels to the creditor (publicity rule), in the burdensome procedures for enforcement in bankruptcy, and in the difficulties of finding a simple solution to the questions of international private law.

Pledging of chattels does not seem to be an area in which the legal harmonization for cross-border transactions can be easily established on a voluntary basis, i.e., without the need for governmental action. This statement may be illustrated with the following chart comparing pledge and set-off.

PLEDGE	SET-OFF
Security interest in goods.	Grounds for extinction of claims.
The right of lien gives the creditor priority over all other creditors.	First, set-off is a means of simplifying payment transactions between two parties. Second, it is also an instrument for securing a claim, as the set-off option allows the creditor to use his own debt for satisfying his own claims. The offsetting party has a “right of lien on his own debt.”59
Given the possibility of future insolvency, right of realization is granted to the creditor in respect of certain assets.	Uncertainty whether, at the time set-off is exercised, the debtor is also the creditor towards the party declaring set-off. Clearly defined security—such as when chattels are pledged—exists only where this is contractually agreed by a current account clause.
The publicity rule requires the pledgor to renounce physical control over the pledged chattels; pledging is thus evident to third parties and deprives the pledgor of the use of the goods.	The option of set-off is not evident to third parties.
The pledging of claims requires a written pledge agreement. Pledging of securities requires a transfer of ownership.	Set-off declarations and agreements are not subject to formalities.
Realization is subject to enforcement procedures defined by law and involving authorities; free disposal of assets may be contractually agreed.	No complex or laborious realization procedures involving authorities: set-off may be exercised by unilateral declaration or contractual agreement.
In the event of bankruptcy: can no longer be enforced privately but requires involvement of authorities.	Still applicable and enforceable privately even in the event of bankruptcy.
Only the legally approved types of pledge are admissible (numerus clausus).	Statutory provisions are nonmandatory.
Legal situation is complex in cross-border business.	Clear-cut legal situation can be created in cross-border business by stipulating applicable jurisdiction in a contractual agreement.

View Table

PLEDGE	SET-OFF
Security interest in goods.	Grounds for extinction of claims.
The right of lien gives the creditor priority over all other creditors.	First, set-off is a means of simplifying payment transactions between two parties. Second, it is also an instrument for securing a claim, as the set-off option allows the creditor to use his own debt for satisfying his own claims. The offsetting party has a “right of lien on his own debt.”59
Given the possibility of future insolvency, right of realization is granted to the creditor in respect of certain assets.	Uncertainty whether, at the time set-off is exercised, the debtor is also the creditor towards the party declaring set-off. Clearly defined security—such as when chattels are pledged—exists only where this is contractually agreed by a current account clause.
The publicity rule requires the pledgor to renounce physical control over the pledged chattels; pledging is thus evident to third parties and deprives the pledgor of the use of the goods.	The option of set-off is not evident to third parties.
The pledging of claims requires a written pledge agreement. Pledging of securities requires a transfer of ownership.	Set-off declarations and agreements are not subject to formalities.
Realization is subject to enforcement procedures defined by law and involving authorities; free disposal of assets may be contractually agreed.	No complex or laborious realization procedures involving authorities: set-off may be exercised by unilateral declaration or contractual agreement.
In the event of bankruptcy: can no longer be enforced privately but requires involvement of authorities.	Still applicable and enforceable privately even in the event of bankruptcy.
Only the legally approved types of pledge are admissible (numerus clausus).	Statutory provisions are nonmandatory.
Legal situation is complex in cross-border business.	Clear-cut legal situation can be created in cross-border business by stipulating applicable jurisdiction in a contractual agreement.

Collective Custody and Dematerialisation of Securities

These days, securities are mostly held in collective custody in order to improve the efficiency of securities trading and pledging. In some countries, legislation has resulted in physical securities being superseded by book entries.⁶⁰

In Swiss banking practice, the securities are held in collective deposits. The immediate possessor is the central securities depository SEGA. The investors’ banks have first-rank intermediate copossession of the securities deposited while the investors themselves only have second-rank intermediate copossession. This form of possession is not outwardly apparent. Transfer of ownership or pledging is executed simply by making entries in the books of the central depository. It is not apparent at first sight why the rules governing in rem rights are applicable, since with regard to the investors, i.e., the owners of the securities, at least the immediacy of possession—evidence of an in rem right (publicity rule)—is lacking.⁶¹ The transactions are executed in much the same way as debit and credit entries on bank accounts.⁶²

With the creation of the European economic and monetary union on January 1, 1999, a new payment system known as TARGET (Trans-European Automated Real-Time Gross-Settlement Express Transfer System) will be introduced. In TARGET, payment instructions will only be processed if sufficient funds are available.⁶³ The European Monetary Institute and the central banks of the individual countries have agreed among themselves on the cross-border utilization of collateral within Target. This means that chattels may be pledged on a pan-European basis, regardless of their physical location.⁶⁴ The European Monetary Institute requires that securities settlement systems and procedures ensure speedy, smooth, and reliable transactions.⁶⁵ On a European level, only collective custody or book-entry securities will allow the necessary rationalization and centralization regarding pledging of chattels. Among the various procedures available, the European Monetary Institute is particularly in favor of a Real Time System that settles transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final transfer of securities at the same time as final transfers of funds. In the German version of the European Monetary Institute’s report, “delivery” of securities is translated as “Wertpapierverrechnung,” or “set-off of securities,”⁶⁶ suggesting that physical possession is replaced by a book entry similar to a claim against the registrar. Offsetting of bonds and shares—this wording might be an erroneous translation or used on purpose. In any case it gives the impression that the practical handling of the claim against the central depository seems more similar to an in personam right than to an in rem right, by this avoiding the need for a fictitious transfer of possession.

Compared with these developments, the legal situation in Switzerland seems outdated. The legal character of collective custody is complex under Swiss law: by analogously applying statutory provisions tailored to different legal relationships, it is possible to establish on a contractual basis co-ownership of securities held in collective custody. However, this is not entirely co-ownership within the meaning of the law.⁶⁷ Only theoretical legal relationships exist between the investors, who represent a fortuitous community of interest brought together by banks. As a result of banking secrecy, it is impossible to disclose the identity of the investors and to constitute a community of co-owners as provided for by the law. Moreover, the termination of co-ownership in the event of the withdrawal of one investor does not take place as legally provided for with the participation of all co-owners. The bank takes the place of the community of co-owners. According to traditional legal doctrine these deviations from the provisions of the law contradict the principle of a numerus clausus of rights in rem: the Civil Code recognizes only the three forms of ownership governed by law (sole ownership, joint ownership, and co-ownership), which are the only forms that may be legally entered into.⁶⁸ Legal doctrine regards the provisions concerning deposits of fungible goods as the basis for this kind of co-ownership and sees Art. 484 paras. 2 and 3 Code of Obligations as applying also to rights in rem; this provision takes precedence as a lex specialis over the regulation of co-ownership in the Civil Code.⁶⁹

The definition of securities in the Swiss Federal Act on Stock Exchanges and Securities Trading is clearly a step forward: securities are defined as “standardised certificates which are suitable for mass trading, rights not represented by a certificate with similar functions (book-entry securities) and derivative instruments.”⁷⁰ For the purposes of capital markets, securities in tangible form and book-entry securities are treated identically. The same should apply also to legal issues falling under private law like the transfer of ownership or pledging.⁷¹ Swiss private law must in my eyes be amended regarding book-entry securities and value rights in order to fit into the fast developing European financial market.⁷² In particular, the new legislation should make explicit that any securities held in a central depository operated from Switzerland are deemed to be sited in Switzerland and that Swiss law governs the settlement and pledging of such securities, irrespective of the actual place of custody of these securities. Further, the new legislation should allow that book-entry securities and value rights can be purchased in good faith from a person who is not the owner and, in case of bankruptcy of the central depository, ownership in book-entry securities and value rights allows demanding these securities and rights back from the bankrupt’s estate, similar to the vindicatio for goods.⁷³

The Example of Netting

Netting agreements are widely used for interbank payment orders and financial contracts that involve reciprocal commitments for future payments in the same or different currencies. Netting agreements are risk-reduction tools based on private law contracts. The concept of netting is not precisely defined in law, but it widely uses set-off as a means, first, of reducing the numbers of payments to be made (payment netting) and, second, as a means of calculating replacement values in case of premature termination of nonperformed contracts (close-out netting).⁷⁴

Netting agreements have been widely recognized as enforceable in insolvency procedures and as a valid method for reducing equity capital requirements for off-balance-sheet assets and liabilities.⁷⁵

The Example of Cash Pooling

At multinational groups, cash management is difficult to perform at an international level owing to the global nature of these companies’ activities. Depending on their business, the national subsidiaries of a multinational holding company may have either a shortage or an overabundance of liquidity. This is why banks offer cash pooling services to such multinational companies.

One way to establish cash pooling is to set up a special purpose vehicle (SPV). The sole objective of such SPVs is to smooth out intra-group financing flows. Based on a master agreement with the SPV, group companies lend surplus capital to the SPV, which the SPV then lends to group companies requiring additional liquidity. The payments are executed by the bank offering the cash pooling facility. This bank has to keep a separate current account for each group company and each currency. Implementation of cash pooling inevitably results in debit balances in one currency whereas in other currencies the SPV has a credit balance towards the bank.

In principle, the debit balances count as unsecured claims and need to be backed by equity with a risk weighting of 100 percent.⁷⁶ This weighting could be reduced to 0 percent by way of pledging assets: under the Swiss capital adequacy rules, claims of banks that are backed by cash deposits that are pledged to the bank or at least equally well secured have a risk weighting of 0 percent.⁷⁷

Pledging of the SPV’s claims to the bank as security for loans granted in other currencies is generally impossible in practice. When raising funds, multinationals usually exclude any pledging of their assets by way of negative pledges in which they promise to the creditor not to burden any assets with pledges in favor of third parties.

In the case of cash pooling, the bank may offset its claims arising from loans denominated in one currency against the SPV claims arising from this vehicle’s cash deposits in other currencies, provided such an option is explicitly allowed for in a set-off agreement. In Switzerland, banks are in principle not permitted to offset on-balance-sheet assets and liabilities.⁷⁸ The accounting regulations of the Swiss Federal Banking Commission do allow exceptions to this rule, but only when the assets and liabilities concerned are denominated in the same currency.⁷⁹ This restrictive attitude is based on the assumption that a bank is exposed to the exchange rate risk as long as set-off has not been declared or executed on a contractual basis.⁸⁰

In off-balance-sheet business, it is permissible to set off the positive and negative replacement values of derivative instruments based on an enforceable netting agreement.⁸¹ The Swiss Federal Banking Commission shared the view expressed by a bank that a set-off agreement for a cash pooling facility should be placed on an equal footing with the netting of off-balance-sheet assets and liabilities.⁸² By this, set-off replaces the pledging of assets for the purpose of assessing equity requirements for loans.

However, the Basle Committee on Banking Supervision has just launched a consultation on the principles that should govern on-balance-sheet netting. One of the conditions under which on-balance-sheet netting of loans and deposits of a bank to or from its customer should be permitted is the denomination of the claim and counterclaim in the same currency; the modalities of permitting cross-currency netting still have to be explored.⁸³ This proposal has already been criticised as a step backwards.⁸⁴

Debtor Resident Abroad

The assets in Switzerland of a debtor without domicile in Switzerland can be attached (Art. 271 no. 4 Federal Law on Debt Collection and Bankruptcy). Debtors without domicile in Switzerland are debtors whose place of residence or registered office is abroad. The debtor’s nationality is not decisive. The sole relevant factor is that the debtor does not have a place of debt enforcement in Switzerland.¹⁴⁴

In international dealings, the concept of “place of residence” or “registered office” is defined according to Arts. 20 and 21 Federal Law on International Private Law.¹⁴⁵ The domicile stated in a company’s articles of incorporation and bylaws is regarded as its registered office (Art. 21 para. 2 Federal Law on International Private Law).

Claim for Which Attachment Is Requested

The claim to be secured by attachment must be a claim for a monetary payment or for the rendering of monetary security (Art. 272 para. 1 no. 1 Federal Law on Debt Collection and Bankruptcy). It must not be backed by pledge (Art. 271 para. 1 introductory clause Federal Law on Debt Collection and Bankruptcy). As a rule, the claim must have fallen due (Art. 271 para. 1 introductory clause Federal Law on Debt Collection and Bankruptcy)¹⁴⁶ and be enforceable.¹⁴⁷

The existence of a claim and its legal basis must be made plausible by prima facie evidence to the judge.¹⁴⁸ In the case of attachment of assets belonging to persons resident abroad, at least the debtor has his place of residence outside Switzerland, which means that the case is necessarily an international one. Consequently, the legal foundation of the claim can only be judged on the basis of the jurisdiction applicable to the claim relationship. Evidence must be produced to substantiate the existence of the alleged claim under the applicable jurisdiction. No detailed information on the foreign law is required¹⁴⁹ in the attachment procedure.¹⁵⁰

Subject of Attachment

Only realizable assets of the debtor may be the subject of an attachment order (Art. 272 para. 1 no. 3 Federal Law on Debt Collection and Bankruptcy), i.e., those assets that can be seized. Items belonging to third parties and, for example, “assets of a foreign state or of a foreign central bank serving sovereign purposes” cannot be seized.¹⁵¹

The creditor must substantiate by prima facie evidence first the existence of the assets and second the attached debtor’s ownership of these assets. This makes it difficult to effect a “fishing expedition” request for attachment, i.e., a request for seizure without concrete evidence that the debtor holds assets with third parties to be attached,¹⁵² and increases the protection of third parties against unwarranted involvement in another party’s attachment procedure.¹⁵³ The seizure of assets made out to a third party (e.g. assets held for the debtor by a third-party on a fiduciary basis) is admissible provided the creditor can show that the third-party assets to be attached are actually the debtor’s property.¹⁵⁴

With the attachment of bank accounts, the prima facie evidence requested for making the assertion plausible consists in naming the bank considered as third-party debtor and specifying its link with the debtor. Credit balances constitute a claim by the customer against his bank. Such credit balances in favor of the debtor will be subject to attachment at the bank (as third-party debtor) if the debtor does not have a fixed place of residence in Switzerland.¹⁵⁵ Attachment is effected at the location of the bank branch if the claim is based on business dealings with that branch.¹⁵⁶

If the individual items subject to attachment cannot be precisely specified, it is admissible to describe them in a generic way rather than naming them individually. However, the location of the items and the custodian must be specified.¹⁵⁷

An attempt to attach a foreign central bank’s currency reserves held in Switzerland would then probably be regarded as an inadmissible “fishing expedition” request if the creditor requests an identical attachment for a large number of banks because he has no indication as to where the reserves are deposited.¹⁵⁸ It is doubtful and left to the court’s discretion whether an identical application for the attachment of a foreign central bank’s assets described only in a generic way at all three of the big Swiss banks (CS, SBC, and UBS) would be admissible.

Special Preconditions for the Attachment of Assets Belonging to Persons Resident Abroad

The statutes specify four special preconditions for the attachment of assets belonging to persons resident abroad. One of them is restrictive (absence of other grounds for attachment—discussed under point (1), below), while the other three—sufficient connection to Switzerland, enforceable court decision, acknowledgement of indebtedness—are alternative conditions (discussed under points 2–4).¹⁵⁹

1. Absence of Other Grounds for Attachment

Attachment of assets belonging to persons resident abroad is subsidiary to the other four grounds for attachment. If one of the other four grounds as stated in Art. 271 para. 1 Federal Law on Debt Collection and Bankruptcy is present (see above III. B. 1.), attachment against a debtor not resident in Switzerland can be instituted even if the special preconditions for attachment of assets belonging to persons resident abroad (sufficient connection to Switzerland, enforceable court decision, acknowledgment of indebtedness) are not met.¹⁶⁰

2. Sufficient Connection Between the Claim and Switzerland

The draft legislation originally specified that the claim subject to an attachment order must have a “close connection” to Switzerland.¹⁶¹ The revised Federal Law on Debt Collection and Bankruptcy was supposed to prevent unjustified attachment orders that had nothing to do with Switzerland.¹⁶² Parliament, however, sought to assist creditors seeking attachment and changed the wording to the less restrictive “sufficient connection.”¹⁶³ When the legislation was being drafted, repeated reference had been made to the requirement of a “domestic connection” developed by judicial practice in matters relating to the immunity of foreign states.¹⁶⁴ Such a link is not justified, as the reason for desisting from measures of constraint is based on the sovereignty of foreign states and is thus not relevant to private relationships.¹⁶⁵

The formulation “sufficient connection” is naturally very loose. Legal doctrine and court practice favor a lenient interpretation of the concept, i.e., they do not subject the prima facie evidence for the existence of “sufficient connection” to overly strict criteria.¹⁶⁶ In the following situations, a claim would be seen as having a sufficiently close connection:

• creditor resident in Switzerland, whereby the Swiss place of residence must be closely connected with the creditor’s claim and must not merely be established retrospectively as a way of facilitating enforcement;¹⁶⁷

• conclusion of a contract (after prior negotiations) in Switzerland;¹⁶⁸

• applicability of Swiss law to the claim, based on the agreed place of jurisdiction or the law applicable to claims arising from contracts;¹⁶⁹

• Switzerland as the place of performance for at least one of the principal obligations in the contract (particularly the place of payment);¹⁷⁰ this covers the settlement of payments through banks in Switzerland, which open and confirm letters of credit, as well as the issuing of a guarantee by a Swiss bank;¹⁷¹

• a tort has been committed or has taken effect in Switzerland;¹⁷²

• Switzerland as the designated place of jurisdiction;¹⁷³

• appointment of a court of arbitration based in Switzerland.¹⁷⁴

The mere existence of assets in Switzerland, the claim being denominated in Swiss francs or the assets being insured by a Swiss company does not constitute a “sufficient connection.”¹⁷⁵

3. Enforceable Court Decision

An “enforceable court decision” refers primarily to the decision of a court or arbitrator in Switzerland.

To satisfy the requirements for attachment, a foreign decision must be enforceable in Switzerland. An “enforceable court decision” is a ruling of an ordinary court of law or arbitrator abroad that is capable of having the effect of being executed in the context of exequatur proceedings. The preconditions for enforcement of foreign decisions are based on Art. 25–31 Federal Law on International Private Law. Any foreign decision against which no further appeal can be lodged shall be recognized in Switzerland if the judicial or administrative authorities of the state in which the decision was rendered had jurisdiction (Art. 25 Federal Law on International Private Law). Furthermore, recognition is excluded because of manifest incompatibility with Swiss law (Art. 27 Federal Law on International Private Law).

The attachment creditor must be able to substantiate the decision and those facts that, by reason of the law, have to be documented for the judge as part of the proceedings leading to a subsequent exequatur decision.¹⁷⁶ The attachment creditor must therefore examine, on the basis of the applicable laws regarding the recognition and enforcement, which facts he must be able to prove fully in the procedures leading subsequently to enforcement, and that he must substantiate by prima facie evidence in the attachment procedures.¹⁷⁷

4. Acknowledgement of Indebtedness

An acknowledgement of indebtedness is a document signed by the debtor in which he declares that he owes a particular sum to a specified person at a particular time (see Art. 82 para. 1 Federal Law on Debt Collection and Bankruptcy).¹⁷⁸ The existence of an acknowledgement of indebtedness is judged according to Swiss law regardless of the law applicable to the claim.¹⁷⁹

It is not clear as yet whether the existence of an acknowledgement of indebtedness needs to be proved absolutely to the judge competent for granting attachment or only needs to be made plausible to him by prima facie evidence. As a rule, legal doctrine favors merely a provisional investigation by the judge, as a decision on the quality of a document as an acknowledgement of indebtedness will be made later as part of the standard debt-collection proceedings.¹⁸⁰ Consequently, it is sufficient here to make the existence of the acknowledgement of indebtedness plausible rather than providing documentary proof.

Procedures

If the judge¹⁸¹ denies authorization for the attachment, the creditor may—depending on the applicable code of procedure—appeal against this decision.¹⁸²

If the judge authorizes the attachment, he forwards the attachment order to the enforcement office at the debtor’s place of residence or at the third-party debtor’s place of business (Art. 274 Federal Law on Debt Collection and Bankruptcy). The enforcement office must not examine the attachment order materially but must simply execute it.¹⁸³

The debtor has the option of objecting against the attachment order (Art. 278 Federal Law on Debt Collection and Bankruptcy). This objection gives the attachment debtor an initial opportunity to be heard¹⁸⁴ and can thus be seen as a continuation of the attachment authorization procedure. Consequently, appeal does not have any effect of deferral (Art. 278 para. 4 Federal Law on Debt Collection and Bankruptcy).

An appeal must be lodged within ten days (Art. 278 para. 4 Federal Law on Debt Collection and Bankruptcy).

Any party whose legal position is affected by the attachment is entitled to lodge an objection, regardless of whether this legal position is based on property ownership or on a contractual relationship with the debtor; such parties thus include both the debtor and third-party custodians of the debtors such as banks.¹⁸⁵ The creditor requesting attachment is not entitled to appeal.¹⁸⁶

Admissible grounds for objection include any circumstance that casts doubt upon the legitimacy of the attachment—all of the preconditions for authorizing attachment can be challenged in the objection procedure.¹⁸⁷ A sovereign purpose of the central bank assets can also be asserted.¹⁸⁸

The judge confirms, modifies, or reverses his decision. The decision may be challenged by appeal to a higher cantonal authority. New facts may be brought to the attention of this higher authority (Art. 278 para. 3 Federal Law on Debt Collection and Bankruptcy).

The only way to appeal against the decision of this higher authority is to lodge a constitutional complaint with the Federal Court on the grounds that the decision of the cantonal authority was so manifestly wrong as to be arbitrary and therefore in violation of the principle of equality before the law (as laid down in Art. 4 Swiss Constitution).¹⁸⁹

In the event of an inadmissible attachment of the assets of a foreign state, the state in question needs not go through the cantonal courts but can appeal directly to the Federal Court by lodging a constitutional complaint on the grounds of an arbitrary decision (Art. 86 para. 2 Federal Law on the Organisation of the Federal Juridical Procedures).¹⁹⁰ The availability of this option to a foreign central bank in respect of assets serving sovereign purposes is—to the best of my knowledge—without prejudice.

Within ten days of the granting of the attachment, the creditor must pursue his claim by initiating legal proceedings against the debtor to validate the attachment (Art. 279 Federal Law on Debt Collection and Bankruptcy). The pursuit must be made either by debt collection proceedings or by filing a lawsuit in validation of the attachment, both at the Swiss place of attachment (Art. 4 Federal Law on International Private Law).