Insolvency 2020

Last Updated November 19, 2020

Switzerland

Law and Practice

Authors



Homburger advises and represents enterprises and entrepreneurs in all aspects of commercial law, including transactions, proceedings and complex cases, in both a domestic and an international context. The restructuring and 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 debtors and creditors in insolvency-related matters such as restructurings, bankruptcy proceedings, and pursuing contested claims.

Switzerland has seen a continuous increase in bankruptcy proceedings since 2010, reaching a record of 13,971 in 2018. This number declined slightly in 2019, when 13,840 companies and individuals were 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). 

The total financial losses resulting from ordinary and summary bankruptcy proceedings increased from CHF2,028 billion in 2018 to CHF2,304 billion in 2019. The number of payment orders (Zahlungsbefehle) issued by the debt enforcement authorities increased in 2019 only slightly compared with 2018, but exceeded for the first time the three million mark (3,063,643 in 2019 versus 2,967,555 in 2018).

In 2019, no major changes were experienced in financing, refinancing or restructuring strategies, or in distressed debt investing, debt trading and/or distressed M&A transactions.

Things changed in early 2020. With the outbreak of the COVID-19 crisis, the need for financing and restructuring measures increased considerably. The government reacted fast and enacted various emergency decrees that temporarily amended and replaced the statutory provisions of insolvency and corporate law. In addition, in order to bridge liquidity shortfalls, the government implemented a programme under which government-backed loans could be obtained. In the meantime, however, most of the COVID-19-related reliefs have expired, whereas sector-specific emergency measures may remain in force (eg, in the travel industry).

The legislator has also permanently adapted the insolvency law in relation to specific issues. Most importantly, on 20 October 2020, a revision came into force according to which, the duration of a provisional moratorium may be extended in justified cases by up to four months, to a maximum of eight months.

Liquidations and insolvencies of business entities and partnerships are primarily governed by the Federal Debt Enforcement and Bankruptcy Act (DEBA). 

Further provisions relating to financial restructurings, reorganisations etc (including provisions regarding the duties of directors to notify the authorities in a case of over-indebtedness) are contained in the Swiss Code of Obligations (CO). 

Switzerland's international insolvency law is governed by Chapter 11 of the Swiss Federal Act on Private International Law (PILA). Chapter 11 of the PILA was recently revised and the new rules came into force on 1 January 2019.

Furthermore, there are specific laws governing the insolvency of banks (see 2.6 Specific Statutory Restructuring and Insolvency Regimes).

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) or mismanagement (Article 165 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. In addition, a company may apply for a corporate moratorium under Swiss company law, which achieves similar results to a restructuring, permitting the company to survive.

The board of directors has 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 the 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. 

Bankruptcy proceedings against Swiss companies may also be commenced by creditors of the company who seek to enforce claims against the company. The creditor can initiate such proceedings by filing a debt enforcement application with the competent debt enforcement authority. If the formal requirements are satisfied, the debt enforcement office has to issue a summons to pay and serve it on the debtor immediately. 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 (in particular, if a company has ceased payments), a creditor may apply directly to the court and request the court to open bankruptcy proceedings without prior enforcement proceedings; 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.

A company is over-indebted if the claims of the company's creditors are not covered by the company's assets. To determine 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, and 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 on the part 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;
  • the transfer of the viable parts of its business into a newly incorporated entity; and
  • a merger.

In addition to the measures mentioned in 3.1 Consensual and Other Out-of-Court Workouts and Restructurings, 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, increasing 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 the 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 apply for a moratorium. Accordingly, out-of-court restructurings are possible only if the company is not already over-indebted. 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

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 also perfected by an entry in the land register. In contrast to a mortgage assignment, a mortgage certificate constitutes a negotiable security that can be pledged or transferred for security purposes.

Security over Movable Property

Security over tangible movable 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 immovable and consists, in particular, of shares or other securities embodied in a negotiable instrument, machines, inventory and other valuables. The common forms of 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, the lender can only liquidate the assets and apply the proceeds to the repayment of the claim in accordance with the transfer agreement.

Security Agreements

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 they have 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.

Enforcement of the Collateral

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 – the enforcement can typically take place by private sale or by self-appropriation. If private enforcement is not sought, or is not permissible, enforcement of a secured claim must generally be sought in the form of realisation of the collateral (Articles 151–158 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 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 the 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.

As a rule, proceeds from the enforcement of the security (net enforcement costs) are primarily used to pay 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.

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 that 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. A secured creditor has priority over all other creditors to the extent that the proceeds of the security cover their 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 in 5.1 Differing Rights and Priorities – 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 would, therefore, be well advised to prepare the statement of claim in a timely fashion.

Swiss law provides for pre and post-judgment attachments. An attachment order is granted, in general, if the creditor can credibly show that: 

  • they have a claim against the debtor, which needs to be unsecured and due; 
  • a ground for attachment, as defined by the applicable law, exists; and 
  • assets belonging to the debtor are located in Switzerland. 

The grounds for attachment are set out in Article 271 of the DEBA: 

  • if the debtor has no permanent place of residence in Switzerland;
  • if the creditor is concealing their assets, absconding or making preparations to abscond so as to evade the fulfilment of their 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 definite title to set aside an objection in debt enforcement proceedings, particularly an enforceable (domestic or foreign) state court judgment or a domestic or international arbitral award.

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 collateral are treated separately. A secured creditor has priority over all other creditors to the extent that the proceeds of the security cover their claim. Where 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 for 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 would be.

In addition, a company may still apply for a moratorium under Swiss company law; this achieves similar results to 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 the 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 agreement appears feasible (including a restructuring plan). The threshold for granting a moratorium is not particularly high. Normally, an application for a moratorium is denied only if there is obviously no prospect of restructuring the company. 

Moreover, creditors that have reached the stage where they could apply for an adjudication of the 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. Since 20 October 2020, it has been possible to extend this period by up to another four months in justified cases. The court has to install an administrator (with only limited exceptions applying to this rule) whose role will be tailor-made, but will mainly be supervisory. Towards the end of the provisional moratorium, the court has to rule on granting the definitive moratorium based on the administrator's report. Furthermore, the court may in its decision on the definitive moratorium (but not for the provisional moratorium) install a creditors' committee 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 a period of 24 months. 

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, the administrator is normally involved in the debtor's day-to-day affairs because 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. Creditors will therefore only do further business with the debtor if the administrator has agreed to the liabilities the debtor is entering 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 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. Furthermore, the administrator must establish an inventory of the debtor's assets. 

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. In order for the composition agreement to be accepted, a simple majority of creditors representing two thirds of all claims admitted needs to approve the agreement. If that majority cannot be reached, the second test is whether one quarter of all creditors approve the agreement, if they represent at least three quarters of all claims admitted. 

Court Approval of the Composition Agreement

After the creditors' hearing, the administrator must file his or her report with the court. 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 capacity – in the case of liquidation, the proceeds must 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 must 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. 

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, the 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 will 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 will very often be 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 may 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 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, the court. While this adds a level of complexity to the M&A transactions required to dispose of the assets, Swiss courts have in the past 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. 

Alternatively: Corporate Law Moratorium

Additionally, Swiss company law provides for a moratorium. The board of directors of an over-indebted company has to file for bankruptcy immediately. 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. 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. The law does not contain provisions regarding the duration of a corporate law moratorium. Consequently, the judge applies their discretion and typically co-ordinates the duration of the moratorium with the timeline provided in the restructuring plan.

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.

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) moratoriums have the following effects:

  • no further debt collection actions within the meaning of the 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 (any 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 that come into existence after the moratorium has been granted, which will belong to the estate.

The roles of creditors are described in 5 Unsecured Creditor Rights, Remedies and Priorities, in particular in 5.1 Differing Rights and Priorities, and in 6 Statutory Restructuring, Rehabilitation and Reorganisation Proceedings, in particular in 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation. Once approved and finally ratified by the court, a composition agreement will also be effective in relation to dissenting creditors, or a dissenting class of creditors. 

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 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

This issue is dealt with in 6.1 Statutory Process for a Financial Restructuring/Reorganisation

Issues related to liens and security arrangements are dealt with in 4.2 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 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

A composition agreement may alter rights and obligations among a 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 the creditor. However, set-off is not permissible: 

  • 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 the owner or over which he or she has a restricted right in rem; and 
  • if a creditor of the insolvent company did not become a 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, while aware of the company's financial distress, in order to gain an advantage for himself or herself or a third party by set-off, 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 not generally 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. 

Stay of bankruptcy

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. Furthermore, 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.

Composition proceedings

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

Other grounds that give rise to an immediate declaration of bankruptcy are generally of minor relevance. It is worthwhile to note, however, that bankruptcy proceedings will be opened ex officio if a moratorium has been revoked or a composition agreement has been rejected.

The court's bankruptcy decree results in 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 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 provides 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 terminates the bankruptcy proceedings. About two thirds of all bankruptcy cases are terminated in this 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 unless a creditor requests that the bankruptcy proceedings be carried out and posts a bond to secure the uncovered costs of the proceedings. 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, bankruptcy proceedings may 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 and the distribution schedule will not be published. 

Ordinary bankruptcy proceedings

If there are sufficient assets to cover the costs of 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 of the 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, but with the same restrictions as in composition proceedings (see 6.14 Rights of Set-Off).

Realisation of assets

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. All creditors who are admitted to the schedule of claims or whose objection against their 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 of the 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 the bankruptcy administrator should not pursue such claims. If no creditor requests assignment, the bankruptcy administrator can auction off the claims.

Distribution of proceeds

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 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 in the register. 

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.

In 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 are 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 their 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.

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) was recently revised and the revised rules came 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 to 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 was issued. Furthermore, for the foreign decree to be recognised in Switzerland, it must have been issued in the state of 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 being 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.

Generally, the bankruptcy decree must be issued either in the state of 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. 

The 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 proceedings. 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 ascertaining and administering the assets in bankruptcy as well as the realisation of the assets and the distribution of the 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. Furthermore, the realisation of the assets and the distribution of the proceeds are the responsibility of the bankruptcy administrator.

Bankruptcy Office or Private Trustee

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.

Appointment of an Administrator

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 a definitive moratorium. 

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. 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.

Appointment of a Liquidator

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.

To Commence Formal Insolvency Proceedings

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.

To Monitor the Financial Situation

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. This involves regular analysis of the company's liquidity.

To call a shareholders' meeting

In addition, 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.

To prepare interim balance sheets

Furthermore, if during the fiscal year there is reasonable concern over 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. The board of directors must prepare an interim balance sheet on a liquidation basis since the assessment that the company is not a 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. 

To notify the bankruptcy court

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 directors.

Liablility

Directors

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. An exclusion of liability by delegation of the above-mentioned tasks is generally not possible.

Auditors

Furthermore, 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 owe duties 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 give preference to 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 to face civil and criminal liability.

Based on Articles 285 et seq of the DEBA, historical transactions may be declared void to enable assets to be added to the bankrupt estate. A transaction may be voidable if: 

  • a debtor disposes of assets free of charge or without receiving adequate consideration (voidability of gifts, Article 286 of the 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 of the DEBA); or
  • a debtor intentionally prefers some creditors over others (voidability for intent, Article 288 of the DEBA).

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.

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.

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. 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).

Homburger

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8005 Zurich
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+41 43 222 10 00

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Law and Practice

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Homburger advises and represents enterprises and entrepreneurs in all aspects of commercial law, including transactions, proceedings and complex cases, in both a domestic and an international context. The restructuring and 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 debtors and creditors in insolvency-related matters such as restructurings, bankruptcy proceedings, and pursuing contested claims.

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