Insolvency 2019 Comparisons

Last Updated May 23, 2019

Contributed By Homburger (Zürich)

Law and Practice

Authors



Homburger (Zürich) advises and represents enterprises and entrepreneurs in all aspects of commercial law, including transactions, proceedings and complex cases, in both a domestic and global context. The firm works closely with leading law firms abroad, enabling it to offer optimal solutions to companies with an interest in Switzerland, wherever their business activities take place. The Restructuring & Insolvency Team consists of four partners, a senior of counsel and approximately 16 associates, who collaborate with various teams within the firm to provide comprehensive legal advice and support throughout negotiations and transactions. The team is experienced in advising clients in insolvency-related matters such as bankruptcy proceedings, restructurings, and pursuing contested claims. Homburger also has a strong bank recovery and resolution practice.

Official statistical data show that there has been a continuous increase in bankruptcy proceedings since 2010. The overall number of bankruptcy proceedings commenced each year increased from 13,411 in 2010 to 15,269 proceedings in 2017 (including liquidations of companies due to a defect in the organisation pursuant to Article 731b of the Swiss Code of Obligation as well as bankruptcy proceedings against individual persons). In 2017, the total financial losses resulting from ordinary and summary bankruptcy proceedings decreased from more than CHF2.5 billion in 2016 to CHF1.7 billion in 2017. The number of payment orders ("Zahlungsbefehle") issued by the local debt enforcement authorities remained stable compared with 2016 (2,930,009 in 2017).

Looking at corporate insolvencies only, the number of new bankruptcy proceedings commenced against Swiss companies increased sharply from 2011 (with 5,327 corporate bankruptcies) to 2012 (5,909 corporate bankruptcies) but has since then remained more or less stable at a level of about 6,000 bankruptcy proceedings commenced each year (with the exception of 2014 in which there were only 5,282 corporate bankruptcy proceedings). In 2017, 6,339 bankruptcy proceedings were commenced against Swiss companies.

See above.

Liquidations and insolvencies of business entities and partnerships are primarily governed by the Federal Debt Enforcement and Bankruptcy Act (DEBA). The DEBA governs, among other things, the enforcement of monetary claims in Switzerland and the enforcement of secured monetary claims, as well as bankruptcy proceedings and the effects of bankruptcy. It also contains provisions relating to the attachment of a debtor's assets, avoidance actions and composition agreements/proceedings.

Further provisions relating to financial restructurings, reorganisations and liquidations/insolvencies are contained in the Swiss Code of Obligations (CO). The CO governs the conditions under which the directors and auditors are required to notify the bankruptcy court that a company is over-indebted (Article 725 et seq, CO) and contains provisions relating to the liability of directors, auditors and other involved parties in the event of a failure to make such a notification in a timely manner (Article 745 et seq, CO).

Switzerland's international insolvency law is governed by Chapter 11 of the Swiss Federal Act on Private International Law (PILA) (see below, 8 International/Cross-border Issues and Processes). The PILA contains rules regarding the recognition of foreign bankruptcy decrees in Switzerland and arrangements with creditors. Chapter 11 of the PILA has recently been revised, the new rules entering into force on 1 January 2019.

Furthermore, there are specific laws governing the insolvency of banks, securities dealers and insurance companies, in particular the Federal Banking Act (BankA), the Federal Stock Exchange Act (SESTA) and the Ordinance of the Swiss Financial Market Supervisory Authority (FINMA) on the Insolvency of Banks and Securities Dealers (FINMA Banking Insolvency Ordinance), as well as the Federal Insurance Supervision Act.

The Swiss Criminal Code (SCC) contains provisions regarding bankruptcy and debt collection felonies, such as fraudulent bankruptcy and fraud against seizure (Article 163, SCC), reduction of assets to the prejudice of creditors (Article 164, SCC), disposal of seized assets (Article 169, SCC), mismanagement (Article 165, SCC), failure to keep proper accounts (Article 166, SCC) and undue preference to creditors (Article 167, SCC).

Under Swiss law, there are statutory debt enforcement and bankruptcy proceedings as well as restructuring — notably moratorium and composition proceedings  and insolvency proceedings.

Enforcement and bankruptcy proceedings are primarily (except for specific statutory regimes, as for banks and insurance companies) governed by the DEBA. Broadly speaking, the DEBA provides for three different types of debt enforcement:

  • unsecured claims against individual persons are enforced by way of seizure and realisation of assets belonging to the debtor to the extent necessary to cover the claim (see below, 5 Unsecured Creditor Rights, Remedies and Priorities).
  • unsecured claims against persons and legal entities that are registered in the Swiss registry of commerce are enforced by way of bankruptcy proceedings opened against the debtor. In very limited circumstances, bankruptcy proceedings are available also for individual persons who are not registered in the commercial registry (see below, 5 Unsecured Creditor Rights, Remedies and Priorities and 7 Statutory Insolvency and Liquidation Proceedings).
  • depending on the circumstances, secured claims against individual persons – irrespective of their commercial registration status – and legal entities have to be pursued by way of realisation of the collateral (see below, 4 Secured Creditor Rights and Remedies).

As a rule, all three types of proceedings are preceded by an introductory phase to be initiated with the competent debt enforcement office. However, in extraordinary circumstances, the creditors or the debtor or the statutory auditors can directly submit to the bankruptcy court an application for declaring the debtor bankrupt, or bankruptcy can be declared ex officio by the court.

Furthermore, the DEBA provides for statutory composition proceedings that are available to companies under financial distress. The proceedings allow for a restructuring of the company with a view towards continuing its business on a sounder basis and for liquidation of the company in a manner that is more beneficial to creditors than bankruptcy proceedings. The goal of the composition proceedings is to achieve reorganisation during a moratorium (Konkursaufschub) or a settlement between the debtor and the creditors, a so-called "compensation agreement" (Nachlassvertrag) (see below, 2.6 Statutory Restructurings, Rehabilitations and Reorganisations).

In addition, a company may apply for a corporate moratorium under Swiss company law, which achieves similar results as a restructuring permitting the company to survive (see below, 2.6). Once the request for a moratorium is lodged, the court will ex officio declare the debtor's bankruptcy if: (i) there is manifestly no expectation of restructuring or confirmation of a composition agreement; (ii) if it is necessary to preserve the estate of the debtor; or (iii) if the debtor does not adhere to the instructions of the liquidator or disposes of assets. In addition, the court declares bankruptcy ex officio if the composition agreement is rejected. If the moratorium has been revoked or a composition agreement has been rejected, a creditor may request declaration of bankruptcy within 20 days.

If there is good cause to suspect that a company is over-indebted, the directors of the company are obligated to draw up an interim balance sheet that has to be submitted to a licensed auditor for examination. A company suffers over-indebtedness if the claims of the company's creditors are not covered by the company's assets. For the purpose of determining a potential over-indebtedness, the company's share capital, participation capital, reserves and potential profits carried forward are considered as equity, not as creditors' claims. The interim balance sheet has to be prepared and audited in accordance with Swiss statutory accounting rules on a standalone basis on both a going-concern and liquidation basis. The board of directors is under a legal duty to monitor the financial situation of the company constantly and, if warranted, take specific action.

If the interim balance sheet shows that the company is over-indebted, the board of directors must notify the court immediately. The board of directors must pass a formal resolution on the notification to the judge. There are only two exceptions to the obligation of the board of directors to notify the judge: (i) the board may avoid the notification if creditors of the company subordinate their claims to those of all other company creditors to the extent of insufficient coverage, and (ii) the Federal Supreme Court has accepted that the board of directors may first examine the possibility of financial reorganisation and, if the board of directors concludes that such reorganisation is feasible, postpones the notification. However, there must be a reasonable basis for such an expectation and a clear and concrete prospect of a successful reorganisation within a short time period.

After receiving a notification of over-indebtedness, the bankruptcy court has to commence formal insolvency proceedings.

Upon an application by the board of directors or a creditor, the court may grant a stay of the insolvency proceedings if there is a reasonable prospect of financial restructuring. In such a case the court orders measures to preserve the company's assets.

If the court finds that the company is indeed over-indebted, and provided that no such stay is granted, the court has to declare the company bankrupt and order the dissolution of the company.

No response provided.

Under Swiss law, a company and, in particular, its board of directors are obliged to commence formal insolvency proceedings immediately in the aforementioned circumstances (ie, in the case of over-indebtedness). Failure to comply with the directors' notification duties pursuant to Article 725, CO may give rise to a claim for directors' liability. The members of the board of directors of a Swiss company are jointly and severally liable to the company, its shareholders and creditors for losses incurred as a result of a breach of their statutory duties. An exclusion or limitation of liability by delegating the aforementioned duties is generally not possible.

Further, in the event of obvious over-indebtedness, the company's auditors also have a duty to notify the judge if the board of directors fails to do so. The inactivity of the auditors in such a situation is a breach of duty and the auditors may be held liable for the resulting damages (see below, 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).

Bankruptcy proceedings against Swiss companies may also be commenced by creditors of the company who seek to enforce claims against the company. Such proceedings are preceded by an introductory phase (Einleitungsverfahren). The first step is the filing of a debt enforcement application with the competent debt enforcement authority. The debt enforcement office does not have the power to examine the application on its merits. Rather, if the formal requirements are satisfied, the debt enforcement office has to issue a summons to pay (Zahlungsbefehl) and serve it on the debtor immediately upon receipt of a debt enforcement application. In the summons to pay, the debtor is ordered to pay the debt within 20 days after receipt of the summons, or to file an objection (Rechtsvorschlag) within ten days from the receipt of the summons. If the debtor neither satisfies the claimed amount nor files an objection, the creditor can request the continuation of the debt enforcement proceedings, which may ultimately lead to the seizure of assets or to the opening of bankruptcy.

Furthermore, in certain circumstances, a creditor may directly apply to the court and request the court to open bankruptcy proceedings without prior enforcement proceedings, in particular if a company has ceased payments or if a debtor has acted fraudulently (or is attempting to act fraudulently) to the detriment of his or her creditors or has concealed assets in enforcement proceedings for seizure; see Article 190, DEBA.

No response provided.

As already mentioned, special statutory provisions apply with regard to banks, securities dealers and insurance companies that are insolvent. Furthermore, special rules apply in the case of the recognition of a foreign bankruptcy decree regarding a foreign bank.

In Switzerland, market participants such as banks and other lenders are normally supportive of consensual financial restructuring processes if there is a viable chance of financial recovery of the debtor. The prevalent methods include the restructuring of loans (including agreements between the debtor and its creditors for the rescheduling and/or partial write-off of debts) and the subordination of existing claims (in particular, shareholders' loans). In addition, a financially distressed company has the following basic options to remedy the situation:

  • a re-evaluation of fixed assets;
  • a recapitalisation;
  • a transfer of the viable parts of its business into a newly incorporated entity; and
  • a merger.

Other restructuring measures can be taken into account as well. In particular, a company's level of indebtedness can be reduced by a debt equity swap – ie, the increase of a company's share capital by setting-off part of the company's debt against the issuance of new shares. Such a debt equity swap, however, neither increases the assets of the company nor results in an improvement of the company's liquidity. The only effect of a debt equity swap in respect of the company's financial situation is the decrease of the company's liabilities, resulting, potentially, in an elimination of its over-indebtedness.

However, apart from provisions relating to the amicable private settlement of the debts of a debtor who is not subject to bankruptcy proceedings as well as specific provision regarding banks, there is no statutory framework in Switzerland relating to out-of-court restructuring processes. Rather, once a company is over-indebted or unable to satisfy its debts, the board of directors is obliged to file a bankruptcy petition or to apply for a moratorium. Accordingly, out-of-court restructurings are possible only if the company is not over-indebted already. Furthermore, a company in distress can apply for the declaration of bankruptcy itself or can find itself subject to a bankruptcy request filed by a creditor.

See above, 3.1 Consensual  and Other Out-of-court Workouts or Restructurings.

Under Swiss law, security over real estate is commonly granted by mortgage assignment (Grundpfandverschreibung) or mortgage certificate (Schuldbrief). A mortgage assignment is created by a security agreement in the form of a notarised deed and a corresponding entry of the security in the land register. A mortgage certificate establishes a personal claim against the debtor, secured by a property lien, which is perfected by an entry in the land register as well. As opposed to the mortgage assignment, a mortgage certificate constitutes a negotiable security that can be pledged or transferred for security purposes.

Security over tangible moveable property can be granted as a pledge or outright transfer (shares and financial instruments in particular can also be assigned for security purposes). Tangible property comprises all property that is not classified as immoveable and consists, in particular, of shares or other securities embodied in a negotiable instrument, machines, inventory and other valuables. The common forms for security over claims and receivables are pledge and assignment. A pledge is the most commonly used type of security in relation to shares and other securities, valuables or IP rights. In the case of a pledge, the lender is entitled to liquidate the pledged property if the debtor is in default and to apply the proceeds in repayment of the secured claim. In the case of an outright transfer, the lender acquires full title in the transferred assets. However, he can only liquidate the assets and apply the proceeds to the repayment of the claim in accordance with the transfer agreement.

The conditions under which a secured creditor can enforce the security are determined by general principles of law and the specific provisions of the security agreement. In general, a secured creditor is permitted to enforce security if he has a secured claim and provided that the claim is due. The relevant security agreement may set out further conditions for the enforcement of the security. In practice, security agreements usually refer to the occurrence of an event of default (as specified in the credit agreement) as a condition for enforcing the security. For example, when a secured claim becomes due and is not paid, this typically constitutes an event of default defined under the credit agreement and the security for the claim generally becomes enforceable.

Security contracts typically provide for the right of the secured party to enforce the collateral privately. With respect to the enforcement process, one has to distinguish between the types of securities granted. For example, in the case of pledged assets, there are two main types of enforcement. In the case of a private enforcement – which is, as a rule, only permitted if the parties have agreed to this in advance (for example, in the security agreement) – the enforcement can typically take place by a private sale or by self-appropriation. If private enforcement is not sought for, or not permissible, enforcement of a secured claim must generally be sought in the form of realisation of the collateral (Articles 151 to 158 of the DEBA). In this case, the enforcement procedure of secured claims is preceded by an introductory phase to be initiated with the competent debt collection office. Under the DEBA, the most common form of enforcement is the sale of the pledged assets in a public auction. However, there are special circumstances under which it is possible to sell pledged assets even without public auction (freihändige Verwertung) by the debt enforcement officials. In the case of assets transferred by way of security, enforcement in a strict sense is not necessary, as the ownership has already been transferred to the secured party. Enforcement in this context means that the obligation to return the transferred assets under the security agreement expires and the creditor can liquidate the assets and apply the proceeds in repayment of debt, while any excess enforcement proceeds need to be returned to the security provider.

However, in corporate insolvency proceedings, the creditor will generally lose control over the security if it is a pledge and will no longer be entitled to enforce the pledge by way of private liquidation. Rather, the sale of the security must be carried out by the bankruptcy trustee and the creditor's only prerogative will be on the net proceeds. If the security is a transfer of title for security purposes, insolvency will not affect a creditor's right to enforce outside bankruptcy.

The timeline for enforcing a secured claim heavily depends on the circumstances of the case. In simple cases, the proceedings pursuant to the DEBA may last between four and nine months. Complex cases can be much more time-consuming.

There are no special procedures or impediments that apply to foreign secured creditors. Rather, all creditors (regardless of whether they are domiciled in Switzerland or elsewhere) generally have the same rights to institute enforcement proceedings.

As a rule, proceeds from the enforcement of the security (net enforcement costs) are primarily used to pay down the secured debt. To the extent there is a shortfall, the beneficiary will rank in the appropriate class (ie, usually the third class with all other unsecured and non-privileged creditors), and there is no possibility to contract differently. For real estate, a separate system of ranks may exist. Proceeds will be distributed amongst creditors holding real estate security in the order of their rank. The rank can be agreed, but not to the detriment of pre-existing creditors in a better rank.

Under Swiss law, the enforcement of an unsecured claim by a specific creditor against an individual person who is not registered in the commercial register has to be distinguished from enforcement proceedings against legal entities. The enforcement of unsecured claims against individual persons leads to the seizure and realisation of assets belonging to the debtor to the extent necessary to cover the claim. This type of debt enforcement is commonly referred to as special execution (Spezialexekution). The enforcement of unsecured claims against individual persons and legal entities that are registered in the Swiss registry of commerce will lead to bankruptcy proceedings opened against the debtor. This type of debt enforcement is normally referred to as general execution (Generalexekution).

In the case of a general execution, all the assets owned by the debtor at the time of the opening of the bankruptcy proceedings, irrespective of where they are located, form the bankruptcy estate. This estate is used for settling the creditors' claims. All creditors with claims against the bankrupt company may participate in the bankruptcy proceedings, regardless of their domicile or nationality.

Once bankruptcy has been declared by the court, the bankruptcy authority will commence the bankruptcy proceedings. As a first step, it will draw up an inventory regarding the debtor's assets and take the necessary preliminary measures to preserve the bankrupt estate. Depending on the value of the debtor's assets, it can:

  • immediately terminate the bankruptcy proceedings, if the debtor's assets are insufficient to cover the costs of summary bankruptcy proceedings;
  • request the bankruptcy court to order that bankruptcy proceedings shall be carried out in a summary form, if it appears that the proceeds of the inventoried assets are unlikely to cover the costs of ordinary bankruptcy proceedings or if the case is simple; or
  • commence ordinary bankruptcy proceedings.

Unofficial statistical data show that in approximately two-thirds of all bankruptcy cases, the proceedings are terminated due to a lack of assets (ie, because the debtor's assets are insufficient to cover the costs of summary bankruptcy proceedings). The numbers differ from canton to canton, but there are cantons (such as the canton of Ticino) where nearly 90% of all bankruptcy cases are terminated due to a lack of assets.

In the case of summary and ordinary bankruptcy proceedings, the bankruptcy administrator has to ascertain the claims of the creditors. If a claim is admitted to participate in the bankruptcy proceedings, the bankruptcy administrator has to include the claim in a schedule of claims (Kollokationsplan) by order of ranking in different priority classes in accordance with Article 219, DEBA. Swiss bankruptcy law provides for three classes of claims:

  • first-class privilege is granted, inter alia, to certain employment-related claims;
  • second-class privilege is granted, inter alia, to claims relating to social security as well as family-related claims; and
  • all other claims are third-class claims without any priority rights, which are satisfied from the bankruptcy proceeds only if and to the extent there is a surplus after satisfaction of the privileged creditors (ie, creditors of secured claims as well as first and second-class creditors).

Claims secured by a collateral are treated separately (see below, 4 Secured Creditor Rights and Remedies). As set forth above, a secured creditor has priority over all other creditors to the extent the proceeds of the security cover his claim. To the extent there is a shortfall, the secured creditor will rank third class with all other unsecured and non-privileged creditors.

Unsecured trade creditors are treated in the manner described above – ie, their claims are included in the schedule of claims in accordance with the aforementioned priority classes.

Creditors can file an objection with the bankruptcy court if their claims are not admitted to the schedule of claims or not included in the correct class. Objection is also possible against the admission of other creditors. In both cases, the deadline for filing a reasoned statement is 20 days from the notification of the schedule of claims (Article 250, DEBA). In complex cases, this deadline is tight. Creditors anticipating that their claim may not be admitted in full or in the correct class are, therefore, well-advised to prepare the statement of claim in a timely fashion.

Under Swiss law, creditors of an unsecured claim may apply for a pre- or post-judgment attachment order by filing a corresponding attachment application with the competent court.

An attachment order will be granted, in general, if the creditor can credibly show that: (i) he or she has a claim against the debtor, which needs to be unsecured and due; (ii) a ground for attachment as defined by the applicable law exists; and (iii) assets belonging to the debtor are located in Switzerland. These general requirements must not be strictly proven by the creditor; it is sufficient if the creditor provides prima facie evidence in support of his or her allegations.

Swiss debt enforcement law provides for the following six grounds for obtaining an attachment order against assets located in Switzerland (Article 271, DEBA):

  • if the debtor has no permanent place of residence in Switzerland;
  • if the creditor is concealing his or her assets, absconding or making preparations to abscond so as to evade the fulfilment of his or jer obligations;
  • if the debtor is passing through Switzerland or belongs to the category of persons who visit fairs and markets, but only for claims that by their nature must be fulfilled at once;
  • if the debtor does not live in Switzerland and no other ground for an attachment order is fulfilled, provided that the claim has a sufficient connection with Switzerland or is based on a written recognition of debt pursuant to the DEBA;
  • if the creditor holds a provisional or definitive certificate of shortfall against the debtor; or
  • if the creditor holds a definite title to set aside an objection in debt enforcement proceedings (definitiver Rechtsöffnungstitel), particularly an enforceable (domestic or foreign) state court judgment or a domestic or international arbitral award.

If the requirements for an attachment are fulfilled, an attachment order is issued by the competent court and sent to the debt enforcement authority for execution (usually the debt collection office at the place where the debtor's assets are located).

The timeline for enforcing an unsecured claim largely depends on the type of enforcement proceedings applicable in any given case and the circumstances of the case. In simple cases with a limited number of creditors, bankruptcy proceedings can be completed in approximately six months from the date of the bankruptcy declaration, provided that no actions and objections are filed by creditors or third parties during the course of the bankruptcy proceedings (for example, objections against the admission or non-admission of certain claims in the schedule of claims).

As a security for the rent for the past year and the current six-month period, a landlord of commercial premises has a special lien on chattels located on the leased premises and used as fixtures or required for the use of the premises (Article 268 of the CO). The landlord's special lien also extends to property brought onto the premises by a sub-tenant to the extent that he or she has not paid his rent. Goods that cannot be seized pursuant to Article 92, DEBA (basically, goods that are indispensable for the living of the debtor) are not subject to the lien. Where the tenant wishes to vacate the premises or intends to remove the objects located thereon, the landlord may, with the assistance of the competent authority, retain such objects as are required to secure his or her claim. Items removed secretly or by force may, with the assistance of the police, be brought back onto the premises within ten days of their removal (see Article 268b, CO and Article 284, DEBA).

Even if no enforcement proceedings have been instituted, landlords of business premises may request the help of the enforcement authority to protect their right of retention provisionally (Article 283, DEBA). The enforcement office draws up an inventory of the assets that are subject to retention and sets a deadline for the creditor to commence enforcement proceedings for the realisation of the collateral.

There are no special procedures or impediments that apply to foreign secured creditors. All creditors (regardless of whether they are domiciled in Switzerland or elsewhere) have to be treated equally. While there is no positive rule in Swiss law requiring equal treatment of creditors, acts that are to the detriment of certain creditors may be challenged pursuant to Swiss fraudulent conveyance rules.

Swiss law provides statutory tools to companies under financial distress to restructure the company or optimise the prospects for recovery of the company's creditors by avoiding bankruptcy proceedings. There are, however, no specific rules regarding the restructuring or reorganisation of a group of companies.

Statutory Moratorium and Composition Agreement

Swiss bankruptcy law provides for a statutory moratorium. The goal of this restructuring procedure under the DEBA is to achieve reorganisation during the moratorium or a settlement between the debtor (the failing company) and all creditors, a so-called "composition agreement". The composition proceeding allows for a restructuring of the company with a view towards continuing its business on a sounder basis and for liquidation of the company in a manner that is more beneficial to creditors than bankruptcy proceedings.

In addition, a company may still apply for a moratorium under Swiss company law; this achieves similar results as a restructuring, permitting the company to survive.

A composition agreement may take any of the following three forms or any combination thereof:

  • the debtor and the creditors agree on a payment plan according to which the former will pay its debts in full, but in instalments or with a delay;
  • the debtor promises to pay the creditors a certain percentage of its debts and the creditors waive any excess claim they may have; or
  • the debtor's business or parts thereof are turned over to the creditors for liquidation. The creditors are satisfied out of the proceeds of liquidation and waive any excess claim they may have. If the composition agreement provides for liquidation, the agreement will propose a liquidator and a creditors' committee.

Provisional and Definitive Moratorium

In order to enter into composition proceedings, the debtor has to apply to the court for a moratorium (the moratorium will always be provisional initially). The application needs to be sufficiently reasoned and has to be accompanied by documents enabling the court to judge whether reaching a restructuring appears feasible. An important document the debtor will have to file is the restructuring plan, explaining whether a restructuring during the moratorium or a composition agreement is sought and how this should be achieved. The threshold for granting a moratorium is not particularly high. Generally, it can be assumed that an application for a moratorium will be denied only if there is obviously no prospect of restructuring the company. In any case, however, the debtor has to establish that sufficient cash is available or can be generated for operating its business for the period of the moratorium and for satisfying the first-class creditors.

Moreover, creditors that have reached the stage where they could apply for an adjudication of bankruptcy of the debtor are also entitled to apply for a moratorium. If a petition to put the debtor into bankruptcy has been filed, the debtor may still file a petition for a moratorium or the bankruptcy judge may stay bankruptcy proceedings ex officio and transfer the file to the competent authority to assess whether a moratorium should be granted.

If the prerequisites for restructuring are met, the composition court will grant the debtor a provisional moratorium for a period of up to four months. The court will have to install an administrator (with only limited exceptions applying to this rule) whose role will be tailor-made, but will mainly be a supervisory role. Towards the end of the provisional moratorium, the court will have to rule on granting the definitive moratorium based on the administrator's report. Further, the court may in its decision on the definitive moratorium (but not for the provisional moratorium) instal a creditors' committee fairly representing the different categories of creditors, which will supervise the administrator and may give directions to the administrator.

The definitive moratorium may be granted for a period of up to 12 months and can be extended up to 24 months. However, it is normally granted for a shorter period, such as six months, and extended if necessary. If the extension exceeds 12 months, a creditors' meeting will have to be held. While the meeting may not veto the extension, it may remove the administrator or the creditors' committee. The debtor and the creditors can appeal the court's decision regarding the definitive moratorium.

Effects of the Moratorium

In general, the main effect of the moratorium is that the debtor is protected from certain actions of its creditors. In particular, the (provisional and the definitive) moratorium have the following effects:

  • no further debt collection actions within the meaning of DEBA — in particular, being put into bankruptcy — may be commenced or continued against the debtor;
  • attachments or other protective measures will no longer be possible;
  • final and enforceable judgments cannot be enforced against the debtor and all litigations (except in cases of urgency) have to be stayed;
  • claims for performance other than monetary claims against the debtor may be converted into monetary claims if the administrator so decides and notifies (such monetary claims may, as a rule, be traded);
  • the granting of the moratorium limits the possibility of set-off (see below);
  • except in special circumstances, claims of the creditor will no longer bear interest; and
  • assignments of claims of the debtor entered pre-petition will not affect claims coming into existence after the moratorium has been granted, which will belong to the estate.

A creditor may set-off his or her claims against a claim that the debtor has against him or her. However, set-off is not permissible: (i) if a debtor of the insolvent company became his or her creditor only after the moratorium, except in the case of fulfilment of a pre-existing obligation or redemption of a pledged object of which he or she is owner or over which he or she has a restricted right in rem; and (ii) if a creditor of the insolvent company did not become debtor of the insolvent company until after the moratorium. The set-off is voidable if a debtor of the insolvent company acquires a claim against the latter prior to the moratorium, but in awareness of the company's financial distress, in order by set-off to gain an advantage for him or herself or a third party to the detriment of other creditors.

Since long-term contracts can pose a threat to a successful restructuring, the debtor in a moratorium may terminate such contracts on an extraordinary basis if the termination is deemed to be necessary to enable the restructuring and provided that the administrator agrees with the termination. If a long-term contract is terminated, the counterparty is entitled to damages, which are treated similar to any other pre-petition claim.

Appointment of an Administrator

During the moratorium, the debtor's activities are restricted. In conjunction with the moratorium, the court will appoint an administrator. It is left to the application of the debtor and the court's discretion to determine the authority of the administrator, which will range from mere supervision of the debtor's activities to full management of the company. Even if the administrator only has to supervise the running of the debtor's business, this will lead to an involvement of the administrator in the debtor's day-to-day affairs due to a provision of Swiss bankruptcy law under which only claims to which the administrator has agreed will become liabilities of the estate, which are to be paid out of the estate with priority over pre-moratorium claims. All claims created after the publication of the moratorium, but without the administrator's consent, will be treated the same as pre-moratorium claims. Creditors will therefore only do further business with the debtor if they are sure that the administrator has agreed to the liabilities the debtor thereby enters into.

Preparation of the Restructuring and Conclusion of a Composition Agreement

A main function of the administrator is to prepare the restructuring, which can consist of a reorganisation to be achieved during the moratorium or the conclusion of a composition agreement. While the former may take virtually whatever form fits the purpose, in the latter the administrator, together with the debtor, will have to draft a composition agreement providing for a stay, a haircut, liquidation or a combination of the three. The DEBA expressly provides that the creditors may be satisfied in full or in part by shares in an SPV that has been set up for the purpose of restructuring (Auffanggesellschaft).

The administrator also issues a creditor's call, requesting creditors to file their claims – such claims may, as a rule, be traded; unless otherwise provided, claims may be assigned to any third party. Further, the administrator has to establish an inventory of the debtor's assets. At this stage, the filing of claims is only important in connection with the voting on the composition agreement. A creditor that does not file his or her claim at this stage does not have to fear any material effect on its claim, such as an implied waiver, but will merely be excluded from voting on the composition agreement. The composition agreement accepted by the creditors participating in the vote will still apply to the claim of a creditor who does not participate in reaching the composition agreement.

Further, before the creditors will decide whether to accept the proposed composition agreement or not, the administrator has to decide on the admissibility of claims filed together with the debtor. Again, the decision will only be relevant for the voting on the composition agreement. If the creditor concerned does not agree with the administrator's decision, it may take the matter to the composition court. The court, when ratifying the composition agreement, will finally determine the question. In addition, if the claim is not admitted at this stage, this only means that the claim will not be counted when calculating whether the composition agreement has reached the required majority approval. The validity of the claim itself will be determined at a later stage.

The administrator subsequently invites all creditors who have filed claims to a creditors' meeting. All relevant documents – such as the composition agreement or a draft thereof and the underlying documentation showing the capabilities of the debtor, the proceeds available to the creditors, etc – must be available for inspection 20 days prior to that meeting. Especially in larger cases, it has become standard that creditors are provided documentation and websites are established where creditors and other interested parties can review information prior to the creditors' meeting.

At the meeting itself, the creditors negotiate the composition agreement. There is no formal voting. Rather, each creditor is invited to indicate its consent or disagreement with the composition agreement. The respective declarations can also be submitted later, up to the confirmatory court hearing described below. In order for the composition agreement to be accepted, a simple majority of creditors representing two thirds of all claims admitted needs to approve. If that majority cannot be reached, the second test is whether one quarter of all creditors have approved if they represent at least three quarters of all claims admitted. For this calculation, creditors having privileged or secured claims will not count, as they will not be permitted to approve or disapprove of the composition agreement. With respect to the latter, this only holds true, though, to the extent the security is expected to satisfy the claim (a decision made by the administrator). For the remainder, the respective creditor will be regarded to have an unsecured claim that will participate in the approval process like any other unsecured claim.

Court Approval of the Composition Agreement

After the creditors' hearing, the administrator must file his or her report with the court. Such filing must occur within the period of the moratorium, which otherwise will expire. The report of the administrator advises the court of consents already given and makes a recommendation to the court whether to ratify the composition agreement.

The approval of the composition agreement is subject to the following conditions:

  • the payments offered to the creditors must be in sound relation to the debtor's financial capacities – in the case of liquidation, the proceeds must likely be higher than could be realised through bankruptcy proceedings;
  • the payment of privileged claims and obligations incurred during the moratorium with the administrator's consent has to be reasonably certain; and
  • in the case of an ordinary composition agreement (ie, not a liquidation agreement), shareholders must reasonably contribute to the restructuring.

The court has to verify whether these conditions are met. The main reason for a court to refuse the ratification of a composition agreement is that not enough creditors have consented to it. In such a case, the debtor company will be adjudicated bankrupt ex officio. Upon request of a creditor, the same will happen if it turns out that the debtor has used dishonest means to get creditors to approve the composition agreement. Finally, the court may withdraw a moratorium following application of the administrator, in particular if it is obvious that no composition agreement can be reached or if the debtor refuses to co-operate with the administrator. This again will lead to ex officio bankruptcy adjudication.

The court also has to decide whether claims that are disputed will be admitted for the purpose of voting on the composition agreement. Any creditor holding a disputed claim, whether admitted for the purpose of voting or not, will be granted a period of 20 days to sue the debtor by filing a reasoned statement of claim to get the claim finally confirmed or denied.

Once approved and finally ratified by the court, the composition agreement will not only be effective for creditors who filed claims; it will be effective for every pre-moratorium creditor or creditor with a claim that was not approved by the administrator during the moratorium. Should the debtor not comply with the composition agreement, a creditor concerned may apply to the court to lift the composition agreement. This will only have effect with respect to the specific claim of the applying creditor and will not put the debtor into bankruptcy.

If a restructuring other than a composition agreement can be achieved during the moratorium, the court would so rule and the moratorium comes to an end.

Liquidation of the Company after the Approval of the Composition Agreement

If the composition agreement provides for liquidation, the agreement will propose a liquidator and a creditors' committee. The liquidator will manage the actual liquidation and very often is the same person who served as the administrator during the moratorium. The creditors' committee supervises the process of liquidation.

In liquidation proceedings, an important issue in which the administrator and the court will be involved is the disposal of the debtor's assets. Experience of corporate restructuring in Switzerland in recent large cases has shown that the debtor will normally have to dispose of assets prior to the conclusion of the composition agreement. Often, such disposals are necessary to maintain the value of the businesses that are sold, which will be able to survive under new ownership, but would have risked failing together with their parent company if they had not been sold. The outcome of such transactions is important to a company's creditors, because the proceeds generated will in the end determine the liquidation dividend that can be distributed among them.

However, creditors are not a party in the moratorium and therefore do not have the opportunity to vote on or otherwise influence such transactions. To grant additional security to creditors, the DEBA provides that such transactions require the consent of the creditors' committee or, in its absence, of the court. While this adds a level of complexity to the M&A transactions required to dispose of the assets, Swiss courts in the past have been quite responsive in this respect and have dealt with these cases at short notice to avoid delaying the closing of such transactions. With the possibility of appointing a creditors' committee, matters should be further simplified. Additionally, and quite importantly, what has been abandoned under the revised rules that entered into force in 2014 is the former rule that such transactions, even if approved by the court, would remain subject to a challenge for fraudulent transfer. This obviously provides additional deal security to transactions with an insolvent counterparty.

Alternatively: Corporate Law Moratorium

Additionally, Swiss company law provides for a moratorium. As set forth above, the board of directors of an over-indebted company has to file for bankruptcy immediately. To verify whether the company is over-indebted, the board has to obtain from the company's auditors a balance sheet on a going concern basis and a liquidity basis (see below, 7 Statutory Insolvency and Liquidation Proceedings). The board may, when filing for bankruptcy, apply to the judge for a corporate moratorium if there are reasons to believe that the company can be reorganised. It must appear feasible that the long-term survival of the company can be achieved and that the company's current distress can be removed on a permanent basis. To this end, the board has to file a restructuring plan and underlying documents supporting the measures and the timeline shown in the plan. Given that the purpose of the corporate moratorium is to restructure the company as a whole, the general view is that the corporate law moratorium is not available if a company is to be liquidated or if, to achieve the goal of the moratorium, essential parts of the company need to be divested. In such a case, the option to choose is the composition moratorium. If a company has been granted a corporate law moratorium, but it turns out that substantial divestments are required to keep it afloat, it may apply to the bankruptcy court for a composition moratorium, if the prerequisites as described above are met. The law does not contain provisions on the duration of a corporate law moratorium. Consequently, the judge applies his or her discretion and typically co-ordinates the duration of the moratorium with the timeline provided in the restructuring plan.

The effects of the corporate law moratorium are less far reaching than the effects of the bankruptcy moratorium, but it will prevent creditors putting the debtor into bankruptcy. Corporate law moratoriums do not have to be published in official publications. This is often regarded as a major advantage over statutory bankruptcy moratoriums, which are usually published, even though publication is not mandatory. The main disadvantages of a corporate moratorium compared to a bankruptcy moratorium are that it is time-consuming and expensive, because the board has to obtain audited accounts based on both going concern and liquidation values, and that it does not have the relatively far-reaching restrictions on the creditors that the insolvency moratorium provides.

Duties of the Board of Directors in the Event of the Company's Financial Distress

Under Swiss law, in particular the CO, a company is obliged to commence formal insolvency proceedings in particular circumstances. Insolvency (or illiquidity) is generally described as the inability of a debtor to pay its debts when they fall due.

The board of directors is under a legal duty to monitor the financial situation of the company constantly and, if warranted, take specific action. To comply with this duty, the board of directors must acquaint itself with the company's status in the specific economic conditions. The analysis regularly involves an analysis of the company's liquidity.

In addition, the relevant provision sets forth two special duties. First, the board of directors has to call a special shareholders' meeting and propose a financial reorganisation if the last annual balance sheet shows that half the nominal share capital including statutory reserves is no longer covered by the company's assets. Second, if there is reasonable concern of a loss of capital, the board of directors has to prepare an interim balance sheet accounted for on a going concern basis (Zwischenbilanz zu Fortführungswerten). If, according to the interim balance sheet, the company's net assets no longer cover half the share capital including statutory reserves, the board of directors again has to call a shareholders' meeting immediately and propose a financial reorganisation. Further, the board of directors must prepare an interim balance sheet on a liquidation basis (Zwischenbilanz zu Veräusserungswerten) since the lack of going concern automatically triggers concerns of over-indebtedness. Both interim balance sheets must be audited to ensure that they do not overstate the financial situation of the company.

At the general meeting, the board of directors must provide information to the shareholders on the critical financial situation of the company and propose reorganisation measures to prevent the loss of capital.

Moreover, if both audited interim balance sheets show that the claims of the company’s creditors are not covered by its assets then the board of directors must notify the competent bankruptcy court. The board of directors must pass a formal resolution on the notification to the judge, which is a non-transferable and inalienable duty of the board of the directors. Failure to comply with the directors' duties to notify the judge in the event of the company's over-indebtedness may give rise to a claim for directors' liability (see below, 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).

There are, however, two exceptions to this obligation of the board of directors to notify the judge. Firstly, the board of directors may avoid the notification if creditors of the company subordinate their claims to those of all other company creditors to the extent of insufficient coverage. Secondly, the Swiss Federal Supreme Court has accepted that the board of directors may first examine the possibility of financial reorganisation and – if the board of directors concludes that such reorganisation is feasible – postpone the notification. Mere hope for, or a vague expectation of, a successful reorganisation does not justify a postponement. Rather, there must be a reasonable basis for such an expectation and clear and concrete prospect of a successful reorganisation within a relatively short period.

Declaration of Bankruptcy and Alternatives

After being notified that the company is over-indebted, the court has to declare bankruptcy unless the board of directors or a creditor moves for a stay of bankruptcy under Article 725a, CO or if a moratorium is requested.

The bankruptcy court may order a stay of bankruptcy if the board of directors or a creditor makes a request to this effect and if there is a prospect of financial restructuring. In this case, the judge shall take appropriate measures to preserve the value of the assets of the company. The bankruptcy court may appoint a trustee and deprive the board of directors of its power to dispose of assets or make the board's decisions subject to the approval of the trustee. Further, the bankruptcy court will approve a bankruptcy postponement petition of the board of directors to the extent that there is a reasonable prospect of a successful reorganisation. Finally, the bankruptcy court must conclude that the creditors will not by the moratorium be put in a position worse than they would be in if the bankruptcy were immediately adjudicated. There is, however, no requirement that the measures must provide for all outstanding debts to be fully paid by the company and for all creditors to be fully satisfied.

Upon a corresponding request by the board of directors or a creditor, the competent bankruptcy court may initiate composition proceedings, which allows for restructuring the company with a view towards continuing its business on a sounder basis and for liquidation of the company in a manner that is more beneficial to creditors than a bankruptcy.

There are other grounds that give rise to an immediate declaration of bankruptcy, which are generally of minor relevance. It is worthwhile to note, though, that the creditor may request declaration of bankruptcy within 20 days if a moratorium has been revoked or a composition agreement has been rejected.

The court's bankruptcy decree marks the conclusion of the debt collection proceedings and results in bankruptcy – ie, the general compulsory execution against the debtor's assets and the winding-up of the debtor company.

Effects of the Bankruptcy Declaration

Upon declaration of bankruptcy, all assets owned by the debtor at the time of the opening of the bankruptcy proceedings, regardless of where they are located, form the bankruptcy estate to be used for settling the creditors' claims. Upon declaration of bankruptcy, the debtor ceases to have any right to disposal over its assets. The bankruptcy office is the sole institution to control the bankrupt debtor. All creditors with claims against the bankrupt company may participate in the bankruptcy proceedings, irrespective of their domicile or nationality. All claims against the debtor become due immediately upon declaration of bankruptcy. At the same time, interest on claims against the debtor ceases to accrue from such date except on claims secured by a mortgage. The DEBA also provides for specific rules with respect to claims arising out of continued obligations, which apply if the impact of bankruptcy on the continued obligations is not determined by contract or statutory provisions of substantive law (Article 211a, DEBA). As a rule, claims against the insolvent debtor can be traded. Unless the law or the corresponding contract provide otherwise, they may be assigned to a third party.

Available Types of Bankruptcy Proceedings

Once bankruptcy has been declared by the court, the bankruptcy authority will commence the bankruptcy proceedings. As a first step, it will inventory the debtor's assets and take the necessary preliminary measures to preserve the bankruptcy estate. Depending on the value of the debtor's assets, the bankruptcy authority has three options to proceed, which are described in further detail below.

Termination of the bankruptcy proceedings due to insufficient assets

If the debtor's assets are insufficient to cover the costs even of summary bankruptcy proceedings, the bankruptcy authority requests that the court terminate the bankruptcy proceedings. As set forth above, about two-thirds of all bankruptcy cases are terminated in that manner. In such a case, the bankruptcy authority issues a public notification of the termination order, noting that the termination of the proceedings becomes final and binding unless a creditor requests within ten days that the bankruptcy proceedings be carried out and posts a bond to secure the uncovered costs of the proceedings. Upon termination of the proceedings, creditors can, within two years, seek special execution of their claims against the debtor's assets provided that the debtor is an individual. Legal entities are deregistered from the commercial registry and cease to exist.

Summary bankruptcy proceedings

If it appears that the proceeds of the inventoried assets are unlikely to cover the cost of ordinary bankruptcy proceedings or, if the case is simple, the bankruptcy authority may request the bankruptcy court to order that bankruptcy proceedings shall be carried out in a summary form. Summary bankruptcy proceedings follow the same rules as ordinary bankruptcy proceedings, albeit in a simplified and expedited manner. The bankruptcy authority will publish a creditors' call, informally realise the assets and distribute the proceeds among the creditors. As a rule, no creditors' meetings will be called for and the distribution schedule will not be published. Creditors can request that ordinary bankruptcy proceedings be carried out provided that they provide security for potentially uncovered costs.

Ordinary bankruptcy proceedings

If there are sufficient assets to cover the costs of such proceedings, the bankruptcy authority can proceed with ordinary bankruptcy proceedings. In such a case, a meeting of creditors is convened no later than 20 days after the date of publication of the bankruptcy decree. At this first creditors' meeting, the creditors have to decide whether to replace the bankruptcy authority (a public body) with a private trustee in bankruptcy (in most instances, an accounting firm). The private trustee in bankruptcy is to a large extent subject to the same statutory rules as the bankruptcy authority. If no such private trustee in bankruptcy is elected, the bankruptcy authority shall continue to administer the bankruptcy estate. The bankruptcy administrator (ie, the bankruptcy authority or a private trustee in bankruptcy) conducts all business relating to the assets in bankruptcy and represents the assets before the court. The bankruptcy administrator is authorised to collect undisputed receivables that are due and to sell all assets that have a market value.

Assessment of Claims, Set-off, Realisation of Assets and Distribution of Proceeds

The creditors' claims are ascertained by the bankruptcy administrator and (if admitted) included in a schedule of claims by order of ranking in different priority classes in accordance with Article 219, DEBA. Creditors are granted access to the file of the bankruptcy administrator; in particular, they have access to the schedule of claims and the inventory. With regard to the different classes of claims see above, 4 Secured Creditor Rights and Remedies, and 5 Unsecured Creditor Rights, Remedies and Priorities.

A creditor may set-off his or her claim against a claim that the debtor has against him or her. Set-off is, however, not admissible if: (i) a debtor of the bankrupt became his or her creditor only after the opening of the bankruptcy proceedings (except in the case of fulfilment of a pre-existing obligation or redemption of a pledged object of which he or she is the owner or over which he or she has a restricted right in rem); and (ii) a creditor of the bankrupt did not become a debtor of the bankrupt or the bankrupt estate until after the opening of the bankruptcy proceedings.

Except for emergency sales, the assets of the bankrupt may only be realised once a second meeting of creditors has been held at which the method of realisation of assets has been determined. The second meeting of creditors will be summoned after the publication of the schedule of claims. All creditors who are admitted to the schedule of claims or whose objection against the non-admittance has not been validly and finally rejected are entitled to participate. Tangibles are realised by way of public auction unless the second meeting of creditors decides to have them realised by private sales (Article 256, DEBA). Realisation of real property is subject to special provisions. The realisation of assets and the distribution of the proceeds is the responsibility of the bankruptcy administrator. Claims that cannot be collected easily, in particular disputed claims, can be assigned to individual creditors if the creditors' meeting decides that it shall not be for the bankruptcy administrator to pursue such claims. If no creditor requests assignment, the bankruptcy administrator can auction off the claims.

The liquidation proceeds are used in the first place to cover the costs properly incurred for the administration of the bankruptcy proceedings. The remainder represents the net proceeds available for distribution to the creditors. The distribution is based on the schedule of claims in its final and legally binding form – ie, after any objections have been finally settled and, as the case may be, the required amendments to the schedule have been made. Preliminary distributions are possible in specific circumstances.

Creditors with a claim secured by a pledge have a preferential right to be paid out of the proceeds of the pledge. To the extent their claims exceed the amount realised, secured creditors participate as unsecured creditors in the appropriate class (see above, section 4).

Creditors whose claims are not fully covered are provided with a certificate of loss that facilitates later enforcement of their claims if the bankrupt debtor is an individual person.

Formal Termination of Bankruptcy Proceedings

All bankruptcy proceedings, whether ordinary or summary, must be formally declared terminated in a formal termination order of the bankruptcy court. The termination of the bankruptcy proceeding is published and notified to the register of commerce for deletion of the debtor therein.

If, during the bankruptcy proceedings, the debtor succeeds in achieving a composition agreement with the creditors or in persuading the creditors to withdraw their claims, the court shall revoke the bankruptcy. Revocation leads to termination of the bankruptcy proceedings (Article 195, DEBA).

No Specific Rules on Liquidation of Groups of Companies

In Switzerland, there are no specific rules regarding the liquidation of a group of companies. There is neither a group corporate law nor a group insolvency law. Therefore, Swiss law does not provide for joint proceedings in the case of an insolvency of a group of companies. From a purely legal perspective, the insolvency of one member of the group of companies does not normally affect the other group companies, also in the case of the insolvency of the parent group company. In practice, however, the insolvency of one group entity often does have an impact on the entire group of companies – for example, as a result of group guarantees, cross pledges or cross-default clauses.

The PILA sets forth legal provisions regarding the recognition and enforcement of foreign bankruptcies and other insolvencies. As set forth above, the relevant Chapter 11 of the PILA has recently been revised, the revised rules entering into force on 1 January 2019.

As a general rule, in the event that bankruptcy, composition or similar proceedings are initiated with respect to a debtor domiciled outside Switzerland, the assets of the debtor located in Switzerland cannot be handed over to the foreign proceedings and the foreign insolvency administrator is not allowed to collect assets located in Switzerland or take legal actions, unless and until the foreign proceedings have been recognised in Switzerland pursuant to Articles 166 to 175 PILA. The procedure to be initiated in Switzerland pursuant to the PILA comprises the following steps.

  • The foreign insolvency administrator or a creditor needs to request recognition of the foreign bankruptcy or composition decree. The request will be granted, if the conditions set out in Article 166 PILA are met.
  • If the competent Swiss court grants recognition of a foreign bankruptcy decree (and potentially also in case of recognition of a foreign composition decree), the court opens bankruptcy proceedings in Switzerland with respect to the assets of the debtor that are located in Switzerland (so-called secondary bankruptcy proceedings).
  • Following liquidation of the assets located in Switzerland, the proceeds are used to pay down collateralised claims and privileged claims of creditors domiciled in Switzerland. In case of a surplus, its distribution depends on how the other claims of the creditors domiciled in Switzerland are treated in the schedule of accepted claims in the foreign bankruptcy (or, if applicable, composition proceedings). Only if the other claims of the creditors domiciled in Switzerland are adequately included in the foreign schedule of accepted claims will the surplus be handed over to the foreign bankruptcy/composition proceedings. Otherwise, the surplus will be paid out to the creditors domiciled in Switzerland.

Pursuant to the aforementioned amendment to the PILA, a number of important changes will be made to the existing Swiss international insolvency law. Most importantly, the amendments made to the PILA are expected to facilitate the recognition of foreign bankruptcy and composition decrees in various ways.

  • With respect to the formal requirements, the amended law states that not only the foreign insolvency administrator and the creditors but also the debtor himself will be entitled to submit an application for recognition, which may be of relevance for composition and similar proceedings.
  • As far as the substantive requirements are concerned, there are two significant changes. The first refers to the place where the relevant foreign bankruptcy/composition decree was issued. According to the current law, a foreign bankruptcy/composition decree may only be recognised in Switzerland if it has been issued in the state of the domicile of the debtor. In future, a foreign bankruptcy/composition decree will also be recognised in Switzerland if it has been issued in the state in which the centre of the debtor's main interests is situated, provided that the debtor did not have its domicile in Switzerland when the bankruptcy/composition proceedings were opened abroad. The new rules specifically aim to ensure that bankruptcy and composition proceedings initiated in accordance with Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 in the state where the centre of the debtor's main interests is situated ('COMI' approach) can be recognised in Switzerland. The second change relates to reciprocity. In contrast to the current law, the revised law no longer requires that the state where the decree was entered grants reciprocity. This prerequisite in the past has turned out to complicate the procedure of recognition of bankruptcy and composition decrees without bringing any benefit to the creditors.

Generally, Swiss courts do not enter into protocols or other arrangements with foreign courts to co-ordinate bankruptcy proceedings.

No response provided.

In general, foreign creditors are not treated in a different way in Swiss proceedings. However, there are specific legal provisions for the recognition of foreign bankruptcy decisions concerning financial institutions, such as banks. The applicable rules deviate in many respects from those of the PILA, although the latter can be regarded as applicable by default. According to the BankA, it is at FINMA's discretion whether to recognise foreign bankruptcy decrees and insolvency measures regarding foreign banks. Under specific conditions, FINMA may put assets located in Switzerland at the disposal of a foreign bankruptcy estate without any previous domestic legal procedure

Under Swiss bankruptcy law, statutory officers dealing with bankruptcy proceedings are the bankruptcy authority (a public body) or a private trustee in bankruptcy, most commonly an accounting firm specialised in bankruptcy proceedings. For restructuring proceedings, the statutory officer is the administrator (see above, 6 Statutory Restructurings, Rehabilitations and Reorganisations).

It is the role of the bankruptcy authority to conduct the bankruptcy proceeding. Upon declaration of bankruptcy, the debtor ceases to have any right to disposal over its assets; the bankruptcy authority is the sole institution to control the bankrupt debtor. Once bankruptcy has been declared by the court, the bankruptcy office will commence the bankruptcy proceedings. As a first step, it will inventory the debtor's assets and take the necessary preliminary measures to preserve the bankruptcy estate and decide on the applicable bankruptcy proceedings (ordinary or summary proceedings) or request the court to terminate the proceedings if the assets are insufficient to cover the costs of the summary bankruptcy proceedings.

If a bankruptcy authority decides to undertake an ordinary bankruptcy procedure, its main responsibilities are the ascertainment and administration of the assets in bankruptcy as well as the realisation of assets and the distribution of proceeds.

In general, the bankruptcy administrator (ie, the bankruptcy office or a private trustee in bankruptcy) conducts all business relating to the assets in bankruptcy and represents the assets before the court. The bankruptcy administrator is authorised to collect undisputed receivables that are due and to sell all assets that have a market value. Further, the realisation of assets and the distribution of the proceeds are the responsibility of the bankruptcy administrator.

Costs properly incurred for the administration of the bankruptcy proceedings are – before the distribution of proceeds – covered by the liquidation proceeds. The remainder represents the net proceeds available for distribution to the creditors.

No later than 20 days after the date of publication of the bankruptcy decree by the bankruptcy court, a meeting of creditors is convened. This creditors' meeting will decide whether to replace the bankruptcy office with a private trustee in bankruptcy (in most instances, an accounting firm), which is to a large extent subject to the same statutory rules as the bankruptcy office. If no such private trustee in bankruptcy is elected, the bankruptcy office shall continue to administer the bankruptcy estate.

Whenever the debtor undertakes composition proceedings and the competent court grants the debtor a provisional moratorium according to Swiss bankruptcy law, the court will have to install an administrator whose role will be tailor-made, but will mainly be supervisory. Towards the end of the provisional moratorium, the administrator will provide a report based on which the court will have to rule on granting the definitive moratorium. The creditors have no right to appeal against the granting of the provisional moratorium or the appointment of the provisional administrator.

In connection with the (definitive) moratorium, the court also has to appoint an administrator. It is left to the application of the debtor and the court's discretion to determine the authority of the administrator, which will range from mere supervision of the debtor's activities to full management of the company. Even if the administrator only has to supervise the running of the debtor's business, this will lead to an involvement of the administrator in the debtor's day-to-day affairs. In principle, the main function of the administrator is to prepare the restructuring, which can consist of a reorganisation to be achieved during the moratorium or the conclusion of a composition agreement.

Since the composition agreement is subject to an approval of the competent court, the administrator must file a report with the court within the period of the moratorium. The report of the administrator advises the court of consents already given and makes a recommendation to the court whether to ratify the composition agreement. If the composition agreement provides for liquidation, the agreement will propose a liquidator and a creditors' committee. The liquidator will manage the actual liquidation and is often the same person who served as the administrator during the moratorium.

As a rule, upon declaration of bankruptcy by the court, the debtor and its management cease to have any right to disposal over its assets. The bankruptcy authority is the sole institution to control the bankrupt debtor.

However, the creditors' committee may authorise the debtor to continue to run his business or trade and determine under what conditions.

Unless the creditors decide otherwise, the bankruptcy administrator (a public body) shall administer the bankruptcy proceedings.

The creditors may, however, decide to replace the bankruptcy authority with a private trustee in bankruptcy. If the bankruptcy authority is replaced with a private trustee, in most instances an accounting firm or a law firm/lawyer is appointed. Generally, anybody can be appointed as a private trustee. A private trustee in bankruptcy is to a large extent subject to the same statutory rules as the bankruptcy office.

In either case, the creditors may appoint some of its number to form a creditors' committee. Unless the creditors decide otherwise, the committee shall, among other things, supervise the management activities of the (statutory or private) bankruptcy administrator, address questions submitted by the latter and object to any measures that contravene the creditors' interests. The creditors' committee may also object to claims in the bankruptcy that the bankruptcy administration has admitted. Furthermore, it may order payments on account to be made to the creditors during the course of the bankruptcy proceedings and approve the conclusion of settlement and arbitration proceedings.

In Switzerland, any type of professional restructuring adviser can be involved in restructuring and insolvency processes, in particular lawyers, accountants, financial advisers, investment bankers, representatives of the lenders and management consultants.

In Switzerland, arbitration proceedings or other types of ADR mechanisms are usually not used in insolvency matters.

Under Swiss law, in particular the CO, a company is obliged to take action or commence formal insolvency proceedings in particular circumstances: if the last annual balance sheet shows that half the share capital and the legal reserves are no longer covered by its assets (loss of capital), or if the balance sheet shows that the claims of the company's creditors are no longer covered by its assets (so-called "over-indebtedness"). Over-indebtedness is a more critical situation than loss of capital. In the case of loss of capital, the interests of the shareholders (ie, the share capital and the reserves) are affected; in the case of over-indebtedness, the claims of the creditors of the company are also jeopardised.

The board of directors is under a legal duty to monitor the financial situation of the company constantly and, if warranted, take specific action. To comply with this duty, the board of directors must acquaint itself with the company's status in the specific economic conditions. Such analysis regularly involves an analysis of the company's liquidity. In addition, the relevant legal provision sets forth two special duties. Firstly, the board of directors has to call a special shareholders' meeting and propose a financial reorganisation if the last annual balance sheet shows that half the nominal share capital including statutory reserves is no longer covered by the company's assets. Secondly, if during the fiscal year there is reasonable concern of a loss of capital, the board of directors has to prepare an interim balance sheet accounted for on a going concern basis (Zwischenbilanz zu Fortführungswerten). If, according to the interim balance sheet, the company's net assets no longer cover half the share capital (including statutory reserves), the board of directors has to call a shareholders' meeting immediately and propose a financial reorganisation. Further, the board of directors must prepare an interim balance sheet on a liquidation basis (Zwischenbilanz zu Veräusserungswerten) since the lack of going concern automatically triggers concerns of over-indebtedness. Both interim balance sheets must be audited to ensure that they do not overstate the financial situation of the company. At the general meeting, the board of directors must (i) provide information to the shareholders on the critical financial situation of the company, and (ii) propose reorganisation measures to prevent the loss of capital.

Moreover, if both audited interim balance sheets show that the claims of the company’s creditors are not covered by its assets, the board of directors must notify the competent bankruptcy court. The board of directors must pass a formal resolution on the notification to the judge, which is a non-transferable and inalienable duty of the board of the directors. However, there are two exceptions to this obligation of the board of directors to notify the judge. Firstly, the law provides that the board of directors may avoid the notification if creditors of the company subordinate their claims to those of all other company creditors to the extent of insufficient coverage. Secondly, the Swiss Federal Supreme Court has accepted that the board of directors may first examine the possibility of financial reorganisation and – if the board of directors concludes that the reorganisation is feasible – postpone the notification. Mere hope for, or a vague expectation of, a successful reorganisation does not justify a postponement. There must be a reasonable basis for such an expectation and a clear and concrete prospect of a successful reorganisation within a short time period.

Failure to comply with the directors' duties to notify the judge in the case of the company's over-indebtedness (see above, 7 Statutory Insolvency and Liquidation Proceedings) may give rise to a claim for directors' liability. Swiss law provides that the members of the board of directors of a company are jointly and severally liable to the company, its shareholders and creditors for losses incurred as a result of a breach of their statutory duties. Therefore, bankruptcy trade creditors and other creditors who extend credits to an over-indebted company frequently sue the directors of the company, claiming that they breached their duty to notify the bankruptcy judge in a timely fashion. An exclusion of liability by delegation of the above-mentioned tasks is generally not possible.

Further, the company's auditors have a duty to notify the judge if the board of directors fails to do so. The inactivity of the auditors in such a situation is a breach of duty and the auditors may be held liable for the resulting damages.

Directors' duties are owed to the company, not to the company's creditors. However, if there is a specific concern that the company is insolvent or over-indebted, the directors have to ascertain that all creditors are treated equally. Transactions that disadvantage creditors or prefer certain creditors to the disadvantage of others may be reversed if the company later is declared bankrupt or concludes a composition agreement. Such transactions may also cause the directors' civil and criminal liability.

Swiss companies do not normally appoint chief restructuring officers.

Under Swiss company law, the directors of a company and all persons engaged in the management or liquidation thereof are liable not only to the company, but also to each shareholder and creditor for the damage caused by an intentional or negligent violation of their duties. It is established case law that not only elected directors but also shadow directors (de facto directors) are subject to such liability. As a rule, any person who assumes tasks that are normally reserved to formal directors of a company can be deemed de facto directors.

If a shadow directorship is assumed, the de facto director will become responsible for any decisions made by the company's board or management in wilful or negligent violation of their duties to the extent such decisions (or the failure to make such decisions) have been unduly influenced by the de facto director.

As a rule, the owners/shareholders of a company are not liable to the company's creditors. Exceptions may exist, particularly where the shareholder of a company is deemed to be a de facto director of the company.

Swiss bankruptcy law is based on the concept that all of a debtor's assets shall serve to cover the claims of creditors and may thus be liquidated and the proceeds distributed to the creditors. The DEBA also grants equal treatment to creditors; in the event of bankruptcy, all creditors of the same class are treated equally. In the event of a seizure of assets, creditors of the same class are treated equally if they participate in the same seizure.

In order to preserve the creditors' rights, the law seeks to prevent the disposal of assets of the debtor to the detriment of creditors. The main body of law dealing with this issue can be found in Articles 285 et seq, DEBA. Based on these provisions, transactions may be declared void to enable the assets to be added to the bankrupt estate.

A transaction may be voidable if:

  • a debtor disposes of assets for free or without receiving adequate consideration (voidability of gifts, Article 286, DEBA);
  • an over-indebted company repays debts early or grants collateral of any type for previously unsecured liabilities or settles a debt of money other than by cash or by other normal means of payment (voidability for over-indebtedness, Article 287, DEBA); or
  • a debtor intentionally prefers some creditors over others (voidability for intent, Article 288, DEBA).

In addition to the DEBA, certain provisions of the Swiss Civil Code (CC) also preserve the rights of creditors in enforcement proceedings. Article 193, CC preserves the rights of creditors in the case of changes to the matrimonial regime. Articles 497, 578 et seq, CC grant rights to creditors of the deceased, of the heirs or of the deceased's estate. In basic terms, these provisions allow the creditors to hold a renouncing heir liable for the debt and to challenge a renunciation.

Under Swiss law, transactions may only be declared void if they took place within a specific time limit, the so-called suspect period.

The suspect period is one year in the case of voidability of gifts or voidability in the case of over-indebtedness. In the case of voidability for intent, the suspect period is five years.

A transaction may only be challenged if it was perfected within the suspect period. The suspect period is calculated backwards in time for any of the following events: seizure of assets, a court's bankruptcy order, or, in the case of a composition, the order granting a stay of bankruptcy proceedings or a composition moratorium. In calculating such a deadline, the duration of preceding composition proceedings and the duration of the proceedings leading up to the opening of bankruptcy do not count. Accordingly, the effective suspect period can be considerably longer than one or five years respectively.

In addition, according to Article 292, DEBA, the avoidance action becomes time-barred if it is not initiated within two years after the service of a certificate of shortfall, the opening of a bankruptcy proceeding or the confirmation of a composition agreement by the court. The running of the limitation period can be interrupted by, inter alia, the commencement of debt enforcement proceedings against the respondent, an application for conciliation, the submission of a statement of claim, or the filing of a petition for bankruptcy (Article 135(2), CO).

The avoidance action may be initiated by a creditor who holds a provisional or definitive certificate of shortfall resulting from previous enforcement proceedings. In the case of bankruptcy, the action can be filed by the bankruptcy administrator or, upon assignment, by one or several creditors. The avoidance action is also available in the case of a composition agreement that aims at the liquidation of the assets of the debtor. However, transactions that took place during a moratorium are not voidable, provided that they were approved by the composition court or by a creditors' committee.

The respondent to an avoidance action is the third party with whom the debtor concluded the transaction in question. An avoidance action may also be brought against a person who was favoured by the debtor in a voidable manner (Article 290, DEBA).

As a rule, intercompany claims are not treated differently in Switzerland than any other claims (ie, they are not generally subordinated by law). However, as a matter of Swiss corporate law, the validity and enforceability of: (i) any security, guarantee, joint and several liability, indemnity or other instrument of any Swiss borrower or security provider for, or with respect to, any obligation of any affiliate (except for any affiliate that is a direct or indirect subsidiary of such Swiss borrower or guarantor), and (ii) any other up-stream or cross-stream benefit granted by any Swiss borrower or security provider may be limited to the freely disposable equity capital of such Swiss borrower or security provider at the relevant time. The freely disposable equity capital will be determined on the basis of a standalone audited balance sheet of the Swiss borrower or security provider in accordance with Swiss law and Swiss accounting principles.

With regard to set-off of claims, see 7 Statutory Insolvency and Liquidation Proceedings, above.

Since Swiss law does not provide for any form of joint insolvency proceedings, there is no pooling of assets and liabilities of members of a corporate group in Swiss insolvency proceedings. Consequently, in the case of an insolvency of a group of companies, separate insolvency proceedings have to be commenced for each member of the group. The (bankruptcy) administrators of the various group companies may on an informal basis co-ordinate the proceedings and the procedural steps; however, each administrator is obliged by law to safeguard the interests of the creditors of the individual entity and not of the group as a whole. Accordingly, they are normally required to enforce intra-group claims, including claims for directors' liability.

Only in extraordinary circumstances (for example, in the case of an abuse of rights or a trust-based liability) are creditors of one group entity allowed to pierce the corporate veil (Durchgriff), thereby trying to obtain access to the assets of another group company. Further, a group company (or a group company's director) that acted as a de facto director of another group company may become liable pursuant to the rules regarding the liability of directory (see above, 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).

Swiss borrowers regularly use Loan Market Association (LMA) standards or a Swiss-style LMA ("LMA light") for obtaining financing in the form of a syndicated loan. From a Swiss withholding tax law point of view, it is advisable (and established market practice) for a syndicate not to include more than ten so-called non-bank lenders, if one of the borrowers is an entity incorporated in Switzerland and/or if the funds drawn under such credit arrangement may be used in Switzerland. The reason being that for purposes of Swiss withholding tax, a loan is considered (or qualifies) as a bond if a borrower borrows money exceeding CHF500,000 from more than ten non-bank lenders under identical conditions. Interest payments made by a Swiss tax resident borrower under an individual loan agreement are generally not subject to Swiss withholding tax, whereas interest payments on a bond issued by a Swiss issuer are subject to a 35% Swiss withholding tax. To avoid the consequences of unwanted withholding tax, transfers, assignments, sub-participations and other risk exposure transfers by the lenders are usually restricted at least for as long as no event of default has occurred and is continuing. Once such an event of default has occurred, however, the restrictions usually fall away and the lenders are free to assign or transfer their commitments to any party they wish, including to non-banks. If the syndicate becomes populated with more than ten non-banks after an event of default, Swiss federal withholding tax of 35% may be required to be deducted from any interest or related payment by a Swiss borrower or guarantor.

According to Swiss corporate law, the test to determine whether a Swiss company must file for insolvency proceedings is fully balance-sheet driven. If at any time there is a substantiated concern that the company is over-indebted, an interim balance sheet on a going-concern and liquidation basis must be prepared by the board of directors and submitted to the auditors for examination. If both audited interim balance sheets show that the claims of the company’s creditors are not covered by its assets, the board of directors must notify the competent bankruptcy court (see above, 7 Statutory Insolvency and Liquidation Proceedings).

The interim balance sheet on a going-concern basis must be prepared on the basis of the last annual balance sheet and include all business circumstances until the date of awareness of substantiated concern of over-indebtedness. For the purpose of this interim balance sheet on a going-concern basis, the claims that are due in the near future must also be taken into consideration. Therefore, the going-concern valuation is basically subject to the company having enough liquidity to carry on its business until the next shareholders' meeting. If the interim balance sheet on a going-concern basis shows over-indebtedness, the board of directors must prepare an interim balance sheet on a liquidation basis. In other words, the lack of going concern automatically triggers concerns of over-indebtedness. For the purpose of the interim balance sheet on a liquidation basis, the liquidation value of all assets must be estimated. Both interim balance sheets must be audited to ensure that they do not overstate the financial situation of the company.

Valuation is initiated by the company itself (ie, by the board of directors) and, if a company has been declared bankrupt or if a moratorium has been granted, in certain cases also by the (bankruptcy) administrator. There are quite a few experienced valuation experts in Switzerland who are also able to provide sophisticated valuation reports on large groups of companies.

No response provided.

Homburger

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CH-8005 Zürich
Switzerland

+41 43 222 1000

+41 43 222 1500

lawyers@homburger.ch www.homburger.ch
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Law and Practice

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Homburger (Zürich) advises and represents enterprises and entrepreneurs in all aspects of commercial law, including transactions, proceedings and complex cases, in both a domestic and global context. The firm works closely with leading law firms abroad, enabling it to offer optimal solutions to companies with an interest in Switzerland, wherever their business activities take place. The Restructuring & Insolvency Team consists of four partners, a senior of counsel and approximately 16 associates, who collaborate with various teams within the firm to provide comprehensive legal advice and support throughout negotiations and transactions. The team is experienced in advising clients in insolvency-related matters such as bankruptcy proceedings, restructurings, and pursuing contested claims. Homburger also has a strong bank recovery and resolution practice.

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