Authors: Andreas Hünerwadel, Alessa Waibel
Subject Area: Financing
Emergency Loans According to the COVID-19 Ordinance on Joint and Several Guarantees
On 25 March 2020, the Swiss Federal Council issued the COVID-19 ordinance on joint and several guarantees (COVID-19-Solidarbürgschaftsverordnung). The ordinance is part of a set of different measures to minimize the economic impact of coronavirus. Companies domiciled in Switzerland that are economically affected by the coronavirus can apply for financial support in the form of emergency bank loans. Borrowers however have to take into account certain restrictions regarding the use of such funds.
Companies can apply for the emergency loans from the banks in a relatively fast and unbureaucratic process. The easiest way is to apply for a loan directly with the house bank.
An interest rate of 0% applies to emergency loans of up to CHF 500,000. When applying for a loan, the company only has to prove that it:
- has started its business activities before 1 March 2020;
- is not in bankruptcy, composition or liquidation proceedings at the time the application is submitted;
- is economically affected by the COVID-19 pandemic; and
- has not already received liquidity protection based on other federal emergency regulations in the areas of sport and culture.
Emergency loans of more than CHF 500,000 are interest-bearing. In addition to the above-mentioned requirements, the company must prove that it has a Swiss company identification number (Unternehmensidentifikationsnummer) and undergo a credit assessment by the lending bank. The loans are granted up to an amount of 10% of the turnover of the company or a maximum of CHF 20 million.
The emergency loans are secured by the Swiss Confederation. Emergency loans of up to CHF 500,000 are 100% secured, those above CHF 500,000 are 85% secured. The lending banks receive collateral in the form of joint and several guarantees.
The loans are granted solely for the purpose of bridging liquidity problems caused by corona-related losses. Thus, companies are not free in how they can use the emergency funds. They must adhere to the restrictions set out in the COVID-19 ordinance on joint and several guarantees.
According to article 6 paragraph 3 of the COVID-19 ordinance on joint and several guarantees the following is prohibited:
- new investments in fixed assets which are not replacement investments;
- distribution of dividends and bonuses and the reimbursement of capital contributions;
- granting of loans;
- refinancing of private loans and shareholder loans;
- repayment of group loans; and
- passing on of credit funds to foreign group companies (e.g. as part of a cash pooling system).
These restrictions serve to prevent the emergency loans from being misappropriated. The funds are not to be discharged or used as collateral for existing or new financial liabilities unless they are required to maintain the operational business of the company. Ordinary amortisations and interest payments on existing bank loans in accordance with the respective loan agreement are however permitted. The granting of loans and the repayment of loans to other Swiss group companies is only permitted to the extent necessary to allow the Swiss group entities to meet their pre-existing interest payment obligations and, from 1.1.2021, pre-existing ordinary amortisation obligations. Furthermore, it is not permitted to pledge bank accounts or assign bank account receivables in connection with the emergency funds. Companies should use the funds only to cover their current fixed costs (e.g. rent and material costs). Personnel costs should be covered mostly by the COVID measures in the areas of short-time work (Kurzarbeit) and compensation for loss of earnings.
According to article 23 of the COVID-19 ordinance on joint and several guarantees, a fine of up to CHF 100,000 is imposed on anyone who intentionally uses the credit funds in deviation from article 6 paragraph 3. To ensure that the funds are used to cover operational costs only, it is recommended to settle the credit funds through a separate account.
According to article 24 of the COVID-19 ordinance on joint and several guarantees, emergency loans of up to CHF 500,000 are not considered as debt capital for the calculation of a capital loss (article 725 paragraph 1 CO) or for the calculation of an over-indebtedness (article 725 paragraph 2 CO) until 31 March 2022. Therefore, a company does not run the risk of incurring a capital loss or over-indebtedness by simply taking out an emergency loan of up to CHF 500,000. Nevertheless, the emergency loan is not a "free pass" and companies must have their financial situation and their obligations according to article 725 CO under control at all times. Emergency loans above CHF 500,000 are considered as regular debt capital for accounting purposes.
Although an applicant for an emergency loan generally has an interest that the funds are paid-out as soon as possible, the limitations of the ordinance as well as the following questions should be carefully assessed before submitting the loan application:
- Does the application for an emergency loan potentially lead to a breach of contract under existing loan agreements or other contracts?
- Are further approvals/resolutions (e.g. resolution of the board of directors or the management board) required before taking up an emergency loan?
- Do the emergency funds fall under a collateralisation of an existing loan (e.g. assignment of receivables or bank account pledge)?
- Does the taking up of an emergency loan impact any intra-group payment flows and are there any payments to group companies which can no longer be made?
Many Swiss companies are currently severely affected by the corona pandemic and are suffering massive economic losses. An application for an emergency loan under the COVID-19 ordinance on joint and several guarantees is one way for companies to bridge liquidity problems. Companies can apply for the emergency loans relatively quickly and easily. Nevertheless, companies applying for emergency loans should carefully analyse the restrictions regarding the use of such funds. A company must further ensure that the taking up of such a loan does not violate any obligations under existing loan agreements and that any necessary approvals/resolutions have been obtained.
Disclaimer: The information contained in this article is for general information purposes only and does not constitute legal or tax advice. The present content cannot replace individual advice from competent persons in particular cases.