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26 January 2015
On October 16 2014 the Federal Supreme Court decided an appeal (4A_138/2014) against a Zurich Commercial Court decision and clarified important issues under mandatory Swiss company law.
In the bankruptcy of the Swissair Group (the former Swiss national carrier), the Federal Court upheld PricewaterhouseCoopers' (PwC) personal liability for auditing and approving a dividend payment by Swisscargo (a Swissair indirect subsidiary) to its direct holding company (another Swissair group member) – both of which are now bankrupt. PwC's personal liability resulted from the fact that the profits and losses booked into Swisscargo's accounts failed to reflect that two loans advanced by Swisscargo to two other Swissair Group companies (one, the internal group cash-pooling entity) did not pass the arm's-length test because they were not properly secured and the credit standing of the receiving group companies had not been verified by Swisscargo.
For these reasons, the Federal Court recharacterised the loans as (forbidden) hidden capital repayments under Article 680 II of the Code of Obligations and held that the respective amounts could not be advanced as dividend payments by Swisscargo (ie, Swisscargo would have been entitled to advance only a much lower dividend).
Swiss and foreign companies participating in cash-pooling systems or intra-group loans involving Swiss companies as lenders, and the respective Swiss lenders' boards, management members and auditors, must follow meticulously the strict new limitations on cash pooling and other intra-group loans in order to avoid personal liability under mandatory Swiss company law resulting from the approval of unlawful dividend payments or the advancing of intra-group loans that do not meet the arm's-length test.
The Zurich Commercial Court decided that PwC was liable for violating Swiss law as a result of its approval of dividend payments to Swisscargo's direct parent company, irrespective of the fact that Swisscargo also used funds for these dividend payments out of a loan which the parent had paid back to Swisscargo through the group's cash-pooling system earlier in the business year (for further details please see "New limitations on cash pooling?").
As the parent company went bankrupt a few months later, the creditors of now-insolvent Swisscargo lost a bankruptcy dividend of Sfr4 million from the Swissair Group cash-pooling entity, to which they would have been entitled in the absence of the earlier dividend payment to Swisscargo's parent. According to the Zurich Commercial Court, the auditors should have blocked this dividend payment, as the loan in the Swissair Group should have been recharacterised as an equity repayment and been unavailable for later dividend payments as a result.
The Federal Court mostly upheld the Zurich Commercial Court decision and clarified company law issues in relation to intra-group loans and cash-pooling systems:
For these reasons, the Federal Court held PwC personally liable under Article 755 for allowing the dividend payment by Swisscargo to its parent company, despite the amounts which should have been blocked as a result of the intra-group loans not advanced at arm's-length terms and conditions. The Federal Court remanded the decision to the Zurich Commercial Court for a recalculation of damages due by PwC to Swisscargo, taking into account that dividend payments out of the agio were outside the above limitations.
Although this decision concerned the personal liability of the auditing company (Article 755), it is also applicable to board and management members of the respective Swiss lenders' group companies, which must follow the Federal Supreme Court's strict limitations on cash pooling and other intra-group loans meticulously in order to avoid personal liability under mandatory company law (Article 754) resulting from the approval of unlawful dividend payments or the advancing of intra-group loans that do not meet the arm's-length test.
While the new decision does not prohibit cash-pooling systems in general, it does limit the amount of free reserves which can be paid out as dividends for as long as loan advancements to other group companies exist which are not at arm's length within the Swiss company. In this respect, the new decision specified only why the arm's-length requirement was not met; it did not provide a complete list of all respective requirements. Thus, it is paramount to:
For further information on this topic please contact Markus Dörig or Jeannette Wibmer at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 44 266 20 70) or email (firstname.lastname@example.org and email@example.com). The BADERTSCHER Rechtsanwälte AG website can be accessed at www.b-legal.ch.
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