Switzerland has seen a continuous increase in bankruptcy proceedings since 2010. In 2018, a new record number of 13,971 companies and individuals have been declared bankrupt (not including bankruptcy proceedings initiated due to a defect in the company's organisation pursuant to Article 731b of the Swiss Code of Obligation). This represents an increase of 5.4% compared to the previous year. The total financial losses resulting from ordinary and summary bankruptcy proceedings increased from CHF1.7 billion in 2017 to slightly over CHF2 billion in 2018. The number of payment orders (Zahlungsbefehle) issued by the debt enforcement authorities increased only slightly compared with 2017 (2,967,555 in 2018 versus 2,929,998 in 2017).
In the last year, no major changes have been experienced in financing, refinancing or restructuring strategies, or in distressed debt investing, debt trading and/or distressed M&A transactions.
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.
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 of the 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 of the CO).
Switzerland's international insolvency law is governed by Chapter 11 of the Swiss Federal Act on Private International Law (PILA). 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 entered into force on 1 January 2019.
Furthermore, there are specific laws governing the insolvency of banks (see 2.6 Requirement for Insolvency).
The Swiss Criminal Code (SCC) contains provisions regarding bankruptcy and debt-collection felonies, such as fraudulent bankruptcy and fraud against seizure (Article 163 of the SCC), reduction of assets to the prejudice of creditors (Article 164 of the SCC), disposal of seized assets (Article 169 of the SCC), mismanagement (Article 165 of the SCC), failure to keep proper accounts (Article 166 of the SCC) and undue preference to creditors (Article 167 of the SCC).
Under Swiss law, there are statutory bankruptcy proceedings as well as restructuring proceedings — notably moratorium and composition proceedings. Composition proceedings 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 or a settlement between the debtor and the creditors, a so-called "compensation agreement". 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.
Under Swiss law, 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 there is good cause to suspect that a company is over-indebted, the directors of a company are obliged to draw up an interim balance sheet that has to be submitted to a licensed auditor for examination. 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. 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.
If a company is over-indebted, the board of directors may refrain from notifying the judge only in exceptional circumstances. Namely, 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. Furthermore, there is court practice according to which the board of directors may first examine the possibility of financial reorganisation and, if the board of directors concludes that such a reorganisation is feasible, may postpone the notification, provided that there is a reasonable basis for the board's expectation that a reorganisation is feasible and that there is a clear and concrete prospect of a successful reorganisation within a short time-period.
Bankruptcy proceedings against Swiss companies may also be commenced by creditors of the company who seek to enforce claims against the company. These proceedings are preceded by an introductory phase. 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 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 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 apply directly 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 of the DEBA.
Insolvency is not necessarily a requirement to commence insolvency proceedings. For example, bankruptcy proceedings can also be commenced by a creditor if the debtor has ceased payments (regardless of whether or not the debtor is over-indebted) or in connection with debt enforcement proceedings against a company. However, if a company is over-indebted, the board of directors has a duty to notify the judge – subject to certain exceptions as set forth above in 2.5 Commencing Involuntary Proceedings. A company is over-indebted 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.
Specific insolvency regimes apply to banks, securities dealers and insurance companies. These special statutory regimes are stipulated, in particular, in 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) and in the Federal Insurance Supervision Act.
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:
In addition to the measures mentioned before, other consensual restructuring measures can also be taken into account. 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.
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.
New money is typically injected by way of a loan. The granting of any super-priority liens to new money investors needs to be approved by all secured creditors benefiting from an existing security interest established over the relevant asset(s).
Swiss insolvency laws do not impose specific obligations on creditors in an out-of-court proceeding or consensual workout that go beyond generally applicable principles, such as the duty to act in good faith.
There is no cram-down mechanism available outside a formal restructuring proceeding under Swiss statutory law.
Security over real estate is commonly granted by mortgage assignment or mortgage certificate. 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. In contrast 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 or she 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 or she 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, 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 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 depends heavily 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.
No special procedures or impediments apply to foreign secured creditors. 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. If 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.
The enforcement of an unsecured claim by a specific creditor against an individual person who is not registered in the commercial register must 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. 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.
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:
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).
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 by order of ranking in different priority classes in accordance with Article 219, DEBA. Swiss bankruptcy law provides for three classes of claims:
Claims secured by a collateral are treated separately. As set forth above, a secured creditor has priority over all other creditors to the extent the proceeds of the security cover his or her claim. Where there is a shortfall, the secured creditor will rank as 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. An objection can also be filed 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 of the 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:
Swiss debt enforcement law provides for the following six grounds for obtaining an attachment order against assets located in Switzerland (Article 271 of the DEBA):
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 their rent. Goods that cannot be seized pursuant to Article 92 of the DEBA (basically, goods that are indispensable for the daily existence 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 of the CO and Article 284 of the 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 of the 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.
See 5.1 Differing Rights and Priorities. In a liquidation, creditors' claims are ranked in the order of priority pursuant to Article 219 of the DEBA. Each class of claims must be paid fully before creditors in the subsequent class are paid. Creditors in the same class rank equally. Secured creditors are treated separately.
See 5.1 Differing Rights and Priorities.Unsecured claims are ranked in one of three priority classes in accordance with Article 219 of the DEBA. Claims secured by a collateral are treated separately. A secured creditor has priority over all other creditors to the extent the proceeds of the security cover his or her claim. To the extent there is a shortfall, the secured creditor will rank third class with all other unsecured and non-privileged creditors.
Swiss law provides statutory tools to companies under financial distress to restructure a 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.
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) install a creditors' committee that represents fairly 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.
Since long-term contracts can pose a threat to a successful restructuring, the debtor in a moratorium may terminate any 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 similarly 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 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.
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 with 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, however, 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 as having 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. The filing must occur within the period of the moratorium, which will otherwise 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 will come 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. 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.
Generally, 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:
The roles of creditors are described in 5 Unsecured Creditor Rights, Remedies and Priorities, in particular in 5.1 Differing Rights and Priorities.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation. Once approved and finally ratified by the court, a composition agreement will be effective also in relation to dissenting creditors, or a dissenting class of creditors. The composition agreement may stipulate, for example, that the debtor has to satisfy the creditors' claims only partially or that the creditors are satisfied out of the proceeds of liquidation and waive any excess claim they may have.
As a rule, claims against a company undergoing such a procedure may be traded. There are no special requirements with regard to such claims, other than those that apply to any trading of claims. The assignment of claims needs to be executed in writing and duly signed under Swiss contract law.
Swiss law does not provide for a statutory procedure to reorganise a group of companies.
This issue is dealt with in 6.1Statutory Process for a Financial Restructuring/Reorganisation.
This issue is dealt with in 6.1Statutory Process for a Financial Restructuring/Reorganisation.
Issues related to liens and security arrangements are dealt with in 4 Secured Creditor Rights and Remedies.
There is no general debtor-in-possession concept under Swiss law. However, obligations under agreements (including loan agreements) concluded between a company and a creditor or third party following the opening of restructuring proceedings and with the permission of the administrator will take precedence over pre-existing senior unsecured claims of the company. The granting of any super-priority liens to new money investors would need to be approved by the administrator and all secured creditors benefiting from an existing security interest established over the relevant asset(s).
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
The issue of restructuring or reorganisation agreements has been dealt with in 6.1Statutory Process for a Financial Restructuring/Reorganisation.
A composition agreement may alter the rights and obligations among the debtor and its creditors, but will not release non-debtor parties from their liabilities.
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:
The set-off is voidable if a debtor of the insolvent company acquires a claim against the latter prior to the moratorium, but is aware 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.
If the composition agreement is not fulfilled in relation to a creditor, that creditor may apply to the court and request the cancellation of the composition agreement for its claim without losing its rights arising therefrom.
The rights of existing equity owners will generally not be affected by a composition agreement. However, the composition plan may provide for assets to be transferred to a new company, the shares of which may be allocated to creditors of the insolvent entity (debt-equity swap).
Declaration of Bankruptcy and Alternatives
After being notified that the company is over-indebted, the court must declare bankruptcy unless the board of directors or a creditor moves for a stay of bankruptcy under Article 725a of the 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 will 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 as a result of the moratorium be put in a worse position 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 that 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 of the 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 compile an inventory of 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 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 will 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.
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:
As a rule, the assets of the bankrupt may be realised only after 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. If their claims exceed the amount realised, secured creditors participate as unsecured creditors in the appropriate class.
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 of the DEBA).
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.
There is no restructuring plan in a pure liquidation (bankruptcy) proceeding.
The purpose of a liquidation proceeding (bankruptcy) is to liquidate the bankrupt entity's assets. Hence, an injection of new money would be unusual. However, the liquidation process may involve a sale of certain operations of the bankrupt entity to a third party.
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.
In the ordinary proceedings (as opposed to summary proceedings), the creditors are organised in creditors' meetings. Furthermore, it is also possible to appoint a creditors' committee, which, among other things, must supervise the management activities of the bankruptcy administration.
The first meeting of creditors is presided over by the bankruptcy official. It is duly constituted if at least one quarter of the known creditors is present. Resolutions are passed with the absolute majority of the voting creditors. During the first meeting, the bankruptcy office reports on the inventory and the extent of the bankruptcy estate and the creditors have to decide whether to replace the bankruptcy authority with a private trustee in bankruptcy. In addition, the creditors may appoint a creditors' committee.
After publication of the schedule of claims, the creditors are summoned to a second meeting. 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. During this second meeting, the method of realisation of assets is determined.
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. Except for emergency sales, assets of the debtor may be realised only after the second creditors' meeting.
The PILA sets forth legal provisions regarding the recognition and enforcement of foreign bankruptcies and other insolvencies. The relevant Chapter 11 of the PILA (Articles 166 et seq of the PILA) has recently been revised and the revised rules entered 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 action, unless and until the foreign proceedings have been recognised in Switzerland pursuant to the PILA.
A foreign bankruptcy/composition decree may be recognised in Switzerland if it is enforceable in the state where it has been issued. Furthermore, for the foreign decree to be recognised in Switzerland, it must have been issued in the state of the domicile of the debtor or 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 (centre of main interests (COMI) approach). Under the revised law, recognition of a foreign bankruptcy decree is no longer subject to reciprocity granted by the foreign state.
Especially in cross-border restructuring proceedings, the competent Swiss liquidator/administrator and courts may co-ordinate the actions taken with foreign administrative agencies and courts in proceedings that have a factual connection.
As set forth above, the recognition of a foreign bankruptcy decree is governed by the 11th Chapter of the PILA. Generally, the bankruptcy decree must be issued either in the state of the domicile of the debtor or 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 COMI approach).
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.
The bankruptcy authority has 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 compile an inventory of 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.
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 (eg, a specialised bankruptcy trustee, an accounting firm or an attorney), 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 made by 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.
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.
These advisers are typically employed and compensated by the creditors. However, as set forth above, restructuring professionals may also be appointed as private trustees by the creditors of the debtor, in which case they are compensated from the proceeds of the estate. In complex cases, their compensation is fixed by the supervisory authority.
This does not apply in Switzerland.
Professional advisers owe duties to their principal.
Arbitration proceedings or other types of ADR mechanisms are usually not used in insolvency matters in Switzerland.
Swiss courts do not order mandatory arbitration in insolvency or restructuring proceedings.
Swiss law does not affect the validity of an arbitration agreement that was entered into by the debtor prior to the commencement of the insolvency proceedings. Moreover, under Swiss law, a debtor subject to insolvency proceedings is not deprived of the capacity to be a party and to act as a party in proceedings, including arbitral proceedings. The right to represent the insolvent debtor in the proceedings is transferred to the insolvency estate, which is represented by the administrator.
Pursuant to Swiss Federal Supreme Court case law, a foreign insolvent party may be a party to arbitral proceedings if, pursuant to its lex incorporationis,it still has the ability to hold rights and duties – even if it is for the administrator, as the insolvent party's legal representative, to exercise those rights and perform those duties.
There are no statutory rules and there is no clear case law with respect to the issue of whether insolvency-related disputes may be covered by an agreement to arbitrate. At any rate, purely insolvency-related actions are not arbitrable, whereas purely substantive actions are. It is controversial whether actions of a mixed nature, combining insolvency and substantive law matters, are arbitrable.
Final and binding arbitral awards against a Swiss insolvent party are only enforceable in the context of the insolvency procedure if the award was rendered before the insolvency proceedings were initiated. If the award was rendered after the initiation of the insolvency proceedings, it is not binding on the Swiss courts dealing with claims that were filed against the insolvent debtor in the context of the insolvency proceedings.
Domestic arbitration is governed by the Swiss Civil Procedure Code. International commercial arbitration proceedings are governed by the PILA. However, as set forth in 11.1 Utilisation of Mediation/Arbitration, arbitration proceedings are generally not used in the context of involuntary insolvency proceedings.
As set forth in 11.1 Utilisation of Mediation/Arbitration, arbitration proceedings are generally not used in the context of involuntary insolvency proceedings.
As a rule, 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. 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 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, it has been held in Swiss court practice that, under certain circumstances, 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 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 is later declared bankrupt or concludes a composition agreement. These 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 this 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 where those decisions (or the failure to make those 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 of the 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:
In addition to the DEBA, certain provisions of the Swiss Civil Code (CC) also preserve the rights of creditors in enforcement proceedings. Article 193 of the CC preserves the rights of creditors in the case of changes to the matrimonial regime. Articles 497, 578 et seq of the 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 of the 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) of the 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 to liquidate 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 of the DEBA).
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.
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.
There is only scarce jurisprudence on valuation issues in insolvency.