Alexander Vogel and Marcel Lustenberger of Meyerlustenberger Lachenal assess the bankruptcy and insolvency regime in Switzerland
Section 1: CREDITORS' RIGHTS
1.1 When may a corporation seek relief from creditors? Must a corporation be insolvent?
A debtor in financial distress – either insolvent or with negative equity – can request a moratorium and initiate composition proceedings by submitting a provisional restructuring plan to the competent composition court. The latter will, upon a summary examination of its merits, grant a provisional moratorium if it comes to the conclusion that a composition plan may be achievable. It will reject the moratorium, if it finds that there are obvious indications that the plan will most likely fail. The moratorium is first granted on a provisional basis with a maximum duration of four months and is not published if the debtor so requests and the interests of the creditors and other third parties, if any, are sufficiently protected. The court can grant a final moratorium of four to six months (which needs to be published), provided it considers the chances of achieving a composition agreement are sufficiently realistic. If the restructuring during the (provisional) moratorium is successful and no composition agreement is necessary, the debtor can file for a suspension of the moratorium and thus no composition proceedings follow.
1.2 Does an automatic stay against creditor action arise upon filing of a bankruptcy case?
Yes, the effects of the (provisional) moratorium include that all attachments and other enforcement proceedings, for privileged creditors aswell, (except for claims secured by security interests over real property) are stayed, and no new such proceedings can be initiated. However, the foreclosure of the real property remains stayed. In addition, except for urgent cases, all litigation proceedings against the debtor are suspended, any applicable statutes of limitations are tolled and interest stopped to accrue (except for secured claims). Only assignments of claims which come into effect after the effective date of the moratorium have no effect.
1.3 Who administers the estate following commencement of a voluntary bankruptcy case?
With the granting of the provisional moratorium, the court in most cases designates a provisional administrator. The latter's task is primarily to supervise: (i) the debtor; and (ii) any restructuring measures to be implemented during the (provisional) moratorium in order to preserve the interests of the creditors. In addition, the court may order the establishment of a creditors' committee.
Section 2: DEBTORS' RIGHTS
2.1 Does the debtor have an exclusive right to propose a reorganisation plan?
No. While moratorium or composition proceedings are typically opened upon the debtor's request filed with the competent composition court, a petition for a moratorium can also be filed by a creditor. In addition, the competent bankruptcy court may also transfer the case without any pending petition by the debtor or creditor to the composition court.
2.2 What are the voting requirements for approval of a plan?
The approval of a composition plan requires the affirmative vote of a majority of the creditors representing two-thirds of the aggregate amount of all claims filed (excluding privileged claims and fully-covered secured claims) or 25% of the creditors representing 75% of the aggregate amount of all claims filed (with the exclusions mentioned above).
2.3 May a plan be approved over the objection of a creditor or a class of creditors (ie does the concept of a cram-down exist)?
The minority creditors have no blocking minority either regarding the aggregate amount of all claims or the number of creditors and thus can not block the approval of the plan and such plan is subsequently approved by the composition court, the dissenting creditors are also bound by its terms, provided, however, that the claims of privileged creditors and creditors with super-priority status (see section 2.4) must be secured under the terms of the plan.
2.4 Is post-petition financing able to receive super-priority status?
Yes, any debts entered into by the debtor with the approval of the administrator will have to be paid before any other claims (even privileged claims) are paid.
2.5 Can the debtor sell all or a portion of its assets through a going concern reorganisation plan or otherwise?
The debtor may continue to run its business under the supervision of the administrator. In its decree, the composition court may: (i) provide that certain actions may require the prior approval of the administrator; or (ii) exceptionally order the administrator to run the business. The debtor is in most cases not allowed to sell (or encumber) assets outside the normal course of its business without the prior authorisation by the creditors' committee or the composition court. Sales of non-current assets made during a moratorium that were approved by the creditors committee (or the court, if applicable) cannot be challenged as a voidable preference.
2.6 What are the duties of directors of an insolvent corporation?
If the last annual balance sheet shows that the losses suffered by the corporation have exceeded 50% of the stated share capital and the legal reserves, the directors must without delay convene a shareholders' meeting and propose reorganisation measures. If the directors have reason to assume that the corporation is over-indebted, they must prepare interim accounts and have them audited. If the audited interim accounts indicate that the liabilities are not covered by assets (either at going concern or liquidation values) and no creditors are willing to subordinate their claims to the extent necessary to cover the amount of negative equity, the directors must file for bankruptcy or apply for a postponement of bankruptcy. In the latter case, they must show that there are well-founded reasons to believe that the company may be restructured within a reasonable period of time. The directors of a corporation are liable for damages caused by wilful or negligent violation of their duties. Such damages include the increase of loss of the corporation's creditors occurring between the moment the directors should have been aware of the corporation's distressed situation and failed to implement the actions described above and the moment the bankruptcy was actually declared. Further, certain provisions of the Swiss Criminal Code may also apply to the directors of a corporation on the brink of bankruptcy that continues doing business rather than filing for bankruptcy, in particular if specific acts of mismanagement have led to the corporation's bankruptcy, or if advantages have been granted to certain creditors by repaying their debts while not repaying others before being declared bankrupt.
Section 3: CONTRACTS AND SUBORDINATION
3.1 How are executory contracts treated?
After the granting of a moratorium, the debtor may generally assume or reject executory contracts. That is, they may elect, in case of a rejection, that contractual claims under executory contracts should be converted into monetary claims (which are treated and ranked like pre-petition claims) or in case of an assumption, that such claims should be fulfilled against delivery of the consideration by the counterparty. In addition, the debtor can, with the approval of the administrator, terminate long-term contracts at any time if the success of the restructuring is jeopardised without such termination. The counterparty's right to be compensated for the early termination is treated and ranked like a pre-petition claim. As a result, the debtor can be released from long-term or legacy commitments and onerous contracts, in order to facilitate a successful restructuring.
3.2 Is contractual subordination enforceable?
Contractual subordination (an agreement between the debtor and the subordinated creditor in which the creditor's claims are subordinated to certain other claims) is possible and in general enforceable under Swiss law, provided the subordinating creditor is in good financial standing. In order to protect the directors against potential liability suits, it is advisable to include in such agreement a conditional waiver providing that in case of a bankruptcy or a composition agreement with assignment of assets, the creditor's claim is waived (to the extent subordinated).
Section 4: OTHER MATERIAL CONSIDERATIONS
4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
As indicated, in most cases the composition court will appoint an administrator to supervise the actions of the debtor during the moratorium and the implementation of the composition agreement. Further, after the affirmative vote of the creditors, the composition agreement needs to be approved by the composition court.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Alexander Vogel was admitted to the bar in Switzerland in 1992 and to the New York Bar in 1994. He holds a degree from the University of St Gallen Law School and a Master from Northwestern University School of Law. He practises corporate law and M&A, leveraged transactions, corporate finance and banking, bankruptcy law, capital markets and real estate. He has recently been involved in various national and cross-border acquisitions and acquisition financing structures for Swiss and international clients; he has advised clients and creditors on work-out negotiations and cross-border insolvency procedure; and, he has advised companies and groups in financial distress on defence strategies. Vogel is a member of the board of directors of several Swiss companies, and is involved in several research projects with the Swiss National Research Fund in the area of national and international corporate law. He speaks German, English and French.
About the author
Marcel Lustenberger was admitted to the bar in Switzerland in 1987. He holds a degree from the University of Zurich. He has been a partner with Meyerlustenberger Lachenal since 1994. He leads the firm’s litigation and arbitration department and practices litigation, bankruptcy law and arbitration. He has advised clients and creditors on work-out negotiations and cross border insolvency procedure, and has advised companies and groups in financial distress on defence strategies. He speaks German, English and French.