Swiss company A concluded in December 2008 a loan agreement with Swiss company B over CHF 200'000. Company B used the first CHF 100'000 for a loan to be granted unsecured to Swiss company C so that Company C was able to pay its debts of appr. CHF 100'000 vis à vis various of its creditors, in particular Swiss company D (CHF 20'000). In August 2011, Company B was declared bankrupt. Subsequently, Company A filed a court action against an individual who was at the same time board member of Companies B and D, requesting under various legal titles the repayment of around CHF 130'000.
"The highest court in Switzerland recalled that duties of Swiss corporate board should be reviewed under the "business judgement rule."
Both the District and the Supreme Court of the Canton of Schwyz dismissed the court action filed for repayment of appr. CHF 130'000 made under the loan granted by Company B to Company C. The Swiss Supreme Court reviewed both cantonal court decisions applying a very limited so-called "arbitrary test". In other words, the highest court in Switzerland reminded the parties in court that duties of Swiss corporate board members continue to be reviewed under the "business judgement rule", which means that corporate boards in Switzerland - when questioned about failed business projects - must only demonstrate in court or elsewhere that their decision making process was reasonable based on the knowledge of facts at the time when the decision took place, what includes reasonable business assumptions for the future.
"In light of this common and mutual interest in Project X, the unsecured loan granting by Company B towards Company C was reasonable."
Companies A, B and C were all mutually involved in certain real estate development projects, whereby Company C was owner of a variety of land parcels on which all three companies wanted to realize a further real estate project (a hotel compound; Project X). In light of this common and mutual interest of all three parties in Project X, the unsecured loan granting by Company B towards Company C was reasonable according to the Swiss Supreme Court as the bankruptcy of Company C in the year 2008/9 could be avoided, whereby local competitors would have probably picked up the land parcels under the envisaged Project X to realized their own hotel project. At the same time, it was acknowledged by all court parties that the monies under the unsecured loan were used to pay debts of Company C that were unrelated to Project X.
"The Swiss Supreme Court dismissed the analogical application of Swiss banking regulations, under which a lump risk had clearly been given."
The Swiss Supreme Court did not share Company A's allegation, that the unsecured loan from Company B to Company C constituted a lump risk. Firstly, the Swiss Supreme Court dismissed the analogical application of Swiss banking regulations - under which a lump risk had clearly been given - to a Swiss real estate developing company (i.e. Company B). The highest court in Switzerland compared the overall assets of Company B in the amount of CHF 430'000 in August 2008 with the initial loan amount of CHF 100'000 at that time w/o saying as to whether a 25 percent lump risk is acceptable.
"The Swiss Supreme Court held that real estate developing companies are often engaged in just a few projects, so lump risk considerations should be applied against this background."
It held, however, that Company B was at the time not only engaged in the development of Project X, but in two other projects as well. The Swiss Supreme Court further held that real estate developing companies are quite often engaged in just a few projects, thereby implying that lump risk considerations should be applied against this business background. Finally, it argued that the loan served Company C to avoid bankruptcy proceedings for almost two years (December 2008 to August 2011; see above), and it confirmed the claimant's view that the defending board member had a conflict of interest when acting as a board member of both Companies B and D in terms of the CHF 20'000 granted by Company B to Company D (see again above).
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