Source: http://www.inhouselawyer.co.uk/practice-areas/restructuring-and-insolvency-3rd-edition/switzerland-restructuring-insolvency-3rd-edition/
Timestamp: 2019-09-21 13:48:05
Document Index: 76264660

Matched Legal Cases: ['Art. 191', 'Art. 725', 'Art. 725', 'Art. 191', 'Art. 190', 'Art. 50']

This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in Switzerland.
In a bankruptcy context, secured creditors benefitting from a regular pledge type of security interest are under a general obligation to hand in the collateral to the insolvency practitioner who would then sell the relevant asset. This results in a significant delay. Exceptions apply (i) for book-entry / intermediated securities with a value which may be determined objectively and (ii) under insolvency regimes for certain regulated entities (such as banks). Again, the standard enforcement route is a public auction but sales outside of an auction process are permissible with the consent of the relevant parties. No obligation to hand in the collateral exists for secured parties benefitting from a transfer or assignment for security purposes or from an irregular pledge.
Illiquidity (Zahlungsunfähigkeit): A Swiss corporate debtor is illiquid pursuant to Art. 191 of the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) if it is no longer in a position to pay its debts as and when they fall due. Hence, this test focuses on the solvency of the corporation.
Over-indebtedness (Überschuldung): A Swiss corporate debtor is over-indebted within the meaning of Art. 725 para. 2 of the Swiss Code of Obligations (CO) if its assets are no longer sufficient to cover its liabilities. This test is balance sheet based. That said, over-indebtedness may result from illiquidity where, as a result, the going concern assumption is no longer sustainable and, thus, accounting will have to be made at liquidation values.
The highest executive body of a Swiss corporate debtor is generally obliged to file for bankruptcy proceedings in case of over-indebtedness within the meaning of Art. 725 CO. Certain exceptions apply where a deep subordination exists (cf. section 5 below) or where a restructuring can be implemented without delay. The general assembly of a Swiss corporate debtor may further resolve to apply for the liquidation through a bankruptcy proceeding if the company is illiquid pursuant to Art. 191 DEBA but no general obligation to initiate such proceedings in case of illiquidity currently exists under Swiss corporate law. Furthermore, a creditor may directly apply for the opening of bankruptcy proceedings if the corporation has ceased to make payments pursuant to Art. 190 DEBA.
It is currently being proposed within the context of a general revision of Swiss corporate law to extend the duties of the highest executive bodies of a Swiss corporation in case of (looming) illiquidity. Such rules are not currently expected to enter into force before 2021. It is not proposed to make (looming) illiquidity an automatic trigger for insolvency proceedings.
Please refer to section 14 below for the consequences of a breach of obligations by the highest executive body of a Swiss corporation.
Where a mere restructuring moratorium is not sufficient, a debtor may choose to offer a composition agreement to its creditors which may take the form of (i) a debt-rescheduling agreement where the debtor offers the creditors full discharge of claims according to a fixed time schedule or (ii) a dividend agreement where the debtor offers the creditors only a partial payment of their claims. A combination of both elements is possible. Further, it would be conceivable to use a composition agreement with assignment of assets as a restructuring tool where the business as such but not the legal entity is viable. If so, the business would be transferred to an acquirer with the legal entity of the transferor to be liquidated. A composition agreement must be approved by the creditors which requires the affirmative vote by a quorum of either a majority of creditors representing two-thirds of the total debt, or one-fourth of the creditors representing three-fourths of the total debt. Creditors with privileged claims and secured creditors will not be entitled to vote on the composition agreement (and will not be subject to its terms). After approval by the creditors, the composition agreement requires confirmation by the composition court and, with such approval, becomes valid and enforceable on all (approving, rejecting and non-participating) creditors.
Yes, this is possible. The administrator's consent and in case of posting of collateral, court approval will have to be sought and, if granted, the claim for repayment of the financing party is granted a super-priority in the form of an obligation of the estate which will be satisfied ahead of all other claims. Administrators in Switzerland are generally rather cautious to take out new financing, though.
A creditor committee can be formed already during a composition moratorium (i.e. at the outset of composition proceedings). In practice, however, this is quite exceptional. If established, the main duties of a creditor committee in moratorium proceedings are to supervise the administrator and to approve (in place of the composition court), inter alia, the sale of assets and the posting of new collateral (cf. section 12 below). If restructuring is achieved through a composition agreement with assignment of assets (cf. section 8 above), a creditor committee is mandatory.
There is no specific legal basis for a creditor committee to retain advisers. On this basis and in our practical experience, creditor committees rarely seek external advice. It is, however, possible for the administrator to retain advisers and share their findings with the creditor committee.
In bankruptcy proceedings, the requirements for the sale of assets depend on the type of proceedings. While in ordinary proceedings the receiver in bankruptcy must generally follow more strict rules with regard to the realization of assets, in particular where it is envisaged to realize an asset of the insolvent debtor by means of a bilateral sale outside of an auction process, there is larger discretion in case of summary bankruptcy proceedings. In each case and with the exception of emergency sales, the secured creditors must consent to such asset not being sold by public auction and all creditors must be given the possibility to submit a higher offer for real estate property or other assets of high value. Sales generally occur on an 'as is where is' basis and, thus, the acquired asset would not necessarily be free of claims and liabilities. No representations and warranties are typically given by the receiver in bankruptcy. Upon completion of the sale, the security will be released. Credit-bidding is available to a secured creditor only.
In composition proceedings, the insolvent debtor typically requires both the consent from the administrator and the competent court (or, if one has been formed, the creditor committee) if it wishes to sell its assets or even the entire business during the moratorium phase. The administrator's consent is sufficient for the sale of current assets, though. Court approval can also be sought at the outset of the proceedings which allows a pre-packaged restructuring (including a pre-packaged sale to an independent third party) under Swiss law. The consent of a secured creditor will be required for a release of a security interest. The terms of the disposal, including representations and warranties, will have to be negotiated between the seller and the purchaser. Again, credit-bidding is only available to a secured creditor and subject to contract.
Main Swiss restructuring or insolvency proceedings would not be available to a debtor incorporated elsewhere. Where a foreign debtor is undergoing restructuring or insolvency proceedings outside of Switzerland, a foreign insolvency official would not be authorized to take possession of, or otherwise seek enforcement in, any Swiss assets of the debtor. This notwithstanding, in case a debtor incorporated outside of Switzerland operates a branch in Switzerland, Swiss insolvency proceedings may be opened against such debtor at the place where the Swiss branch is located (Niederlassungskonkurs). Such proceedings, however, are limited to obligations incurred by the branch as direct counterparty (Art. 50 DEBA). For the sake of completeness, it should further be noted that there are discussions in Swiss legal doctrine as to whether main Swiss proceedings should be available for a non-Swiss incorporated entity in exceptional circumstances where main insolvency proceedings in the jurisdiction at the registered seat are either not available or impracticable (high threshold) and there is a at the same time a close nexus to Switzerland (such as a debtor's COMI in Switzerland). We are, however, not aware of any precedents where main proceedings were opened in Switzerland in application of this theory.
As a consequence of the principle of territoriality, insolvency proceedings in relation to a debtor having its registered seat outside of Switzerland have no effect (in particular with regard to Swiss-located assets of such debtor) unless they have been recognized in Switzerland. Foreign insolvency proceedings can be recognized in Switzerland if the following requirements are fulfilled: (i) the insolvency decree must have been rendered in the state of the debtor's domicile or where the debtor has its COMI outside of Switzerland; (ii) the petition for recognition was made by the insolvency administrator, by the debtor itself or by a creditor; (iii) the insolvency decree must be enforceable in the state where it was rendered; and (iv) the foreign insolvency proceedings must not violate Swiss public policy and the fundamental principles of Swiss procedural law. Since 1 January 2019, such recognition requirements no longer include reciprocity (which previously often constituted a recognition obstacle).
The regime regarding the recognition of foreign insolvency proceedings has been revised with effect as of 1 January 2019 (cf. section 16 above). Prior to such revision, the opening of Swiss ancillary proceedings was mandatory in case of bankruptcy. In contrast, under certain circumstances, no ancillary Swiss proceedings were necessary in case of restructuring-type of proceedings. Under the revised laws, Swiss courts may now waive the opening of ancillary proceedings also in case of a recognition of a foreign bankruptcy decree, provided that (i) a request to this effect is made by the foreign bankruptcy administration, (ii) there are no privileged Swiss creditors or creditors which are secured by collateral located in Switzerland and (iii) the claims of non-privileged and unsecured creditors in Switzerland are adequately taken into account in the foreign proceedings and such creditors were granted an opportunity to be heard. In case ancillary proceedings are waived, the foreign insolvency administration is authorized to carry out all actions falling in its competence pursuant to the applicable foreign law in Switzerland, including, most notably, the transfer of assets of the foreign debtor located in Switzerland to the foreign insolvency estate. In this context, the foreign insolvency administration must ensure that it is at all times compliant with all applicable Swiss laws. In particular, it must not perform any official acts, use any means of coercion or adjudicate on any disputes.
If, on the other hand, ancillary proceedings are opened, only certain claims may be included in the schedule of admitted debts, i.e. (i) claims secured by collateral located in Switzerland, (ii) the unsecured but privileged claims of creditors having their domicile in Switzerland and (iii) claims for liabilities on account of a branch of the debtor recorded in the commercial register in Switzerland. Any remaining balance after the satisfaction of such claims is remitted to the foreign bankruptcy estate. Such transfer, however, requires the prior recognition of the foreign schedule of claims in Switzerland whereby the Swiss courts verify, in particular, whether the creditors domiciled in Switzerland were fairly treated in the (foreign) procedure and granted an opportunity to be heard.
On balance, as a result of the amendments made to the DEBA in 2014, the role of the debtor was strengthened and composition proceedings have become a more attractive tool for restructurings from a debtor's perspective. In particular, the availability of a silent (not published) provisional moratorium and the new statutory rule regarding an exit from a composition moratorium without the need for a composition agreement aim at facilitating in-court restructurings. That said, creditors are still adequately protected in various ways so that, from an overall perspective, the DEBA strikes a fair balance between the interests of the involved parties. Active creditors may exercise a significant influence on the proceedings (broad information access rights, consent requirements, participation rights at court hearings etc.) and passive creditors are protected by the supervision of the proceedings by an administrator (which is regularly appointed although not mandatory for all types of proceedings) and the court. Still, in our perception, the majority of restructurings is pursued outside of formal restructuring proceedings. This route is typically faster but involves additional risks, namely for executive bodies of the debtor.
A silent (non-public) moratorium is currently only available for four months. This is a rather short window to achieve a consensual restructuring. It is proposed to extend the maximum duration of a silent moratorium to eight months in the context of the more general amendment to Swiss corporate law referred to above (cf. section 3 above).
For out-of-court restructurings, there has been much debate (and uncertainty) for how long a debtor may attempt to restructure in the state of over-indebtedness on the basis of a viable restructuring plan. This is an uncomfortable situation for the members of the highest executive body of a Swiss corporation in view of the daunting liability risks (cf. section 14 above). It is currently proposed to set the relevant period to ninety days and to clarify the starting point.
Finally, some scholars hold that the mandatory equal treatment of the disparate and large group of third class creditors (cf. section 5 above) creates a meaningful barrier to successful restructurings in Switzerland as no tailored cram-down is available. There is some truth to this but we consider it unrealistic that this fundamental principle of Swiss insolvency laws will be changed in the near future. Also, experience shows that a further distinction may be achieved contractually (although, of course, without the cram-down feature).
Tanja Luginbühl, Partner
tanja.luginbuhl
Dr. Roland Fischer, Partner
roland.fischer