Alexander Vogel, Urs Boller and Samuel Ljubicic of Meyerlustenberger Lachenal assess the bankruptcy and insolvency regime in Switzerland
Section 1: PROCESSES AND PROCEDURES
1.1 What reorganisation and insolvency processes are available for debtors in your jurisdiction?
In 2014, the revised provisions of the Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) came into force. Under the amended provisions, a debtor in financial distress 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 requests so, 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 Is a stay on creditor enforcement action available?
The effects of the (provisional) moratorium include that all attachments and other enforcement proceedings also for privileged creditors, except for claims secured by security interests over real property, are stayed and no new proceedings can be initiated. The foreclosure of the real property, however, 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 stops accruing except for secured claims. Assignments of claims which come into effect only after the effective date of the moratorium have no effect.
1.3 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?
With the granting of the provisional moratorium, in most cases the court designates a provisional administrator. The latter's task is primarily to supervise: (i) the debtor; and, (ii) any restructuring measures implemented during the (provisional) moratorium to preserve the interests of the creditors. In addition, the court may order the establishment of a creditors' committee.
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 advance 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 advance authorisation of 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.
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 a quarter of the creditors representing three-quarters of the aggregate amount of all claims filed (with the exclusions mentioned above).
1.4 How can a creditor or a class of creditors be crammed-down?
To the extent that the minority creditors have no blocking minority, either regarding the aggregate amount of all claims or the number of creditors, and thus cannot block the approval of the plan; and if that plan is subsequently approved by the composition court, dissenting creditors are also bound by its terms, provided that the claims of privileged creditors and creditors with super-priority status (see below) are secured under the terms of the plan.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
Any sale of a distressed debtor's assets occurring shortly before the opening of insolvency proceedings is at risk of being challenged as voidable preference (especially if the sale has not occurred at arm's length).
Any sale of a bankrupt debtor's assets requires the consent of the administrator. Generally, the administrator will not sell any of the debtor's assets before the second creditors' meeting (ordinary proceedings) or the date the creditors lodge their claims with the administrator. However, a sale may occur before those dates if the relevant assets are subject to rapid depreciation, require costly maintenance, or incur disproportionately high storage costs. The Swiss Federal Supreme Court has ruled that an expedited sale of the debtor's entire business may be permissible under article 243 paragraph 2 of the DEBA in certain cases.
1.6 What are the duties of directors of a company in financial difficulty?
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.
The directors of a corporation are liable for damages caused by wilful or negligent violation of their duties. Those damages include the increase of losses to the corporation's creditors that occurs between the time at which the directors should have been aware of the corporation's distressed situation but failed to implement the actions described above, and the moment the bankruptcy was actually declared. Further, certain provisions of the Swiss Criminal Code may apply to the directors of a corporation at the brink of bankruptcy who continue doing business rather than filing for bankruptcy.
1.7 How can any of a debtor's transactions be challenged on insolvency?
Swiss bankruptcy law includes provisions with regard to voidable preferences in article 285 and following articles of the DEBA. In particular, the following principles apply:
(i) firstly, the granting of collateral for existing obligations which the debtor was not bound to secure is voidable if the debtor who granted that collateral during the year before the seizure of assets or the opening of bankruptcy was at the time of the act already insolvent. According to Swiss law, the secured party is deemed to have knowledge of the security provider's over-indebtedness. Hence, the secured party bears the burden of proof that it has acted in good faith;
(ii) secondly, all transactions carried out by the debtor during the five years before the seizure of assets or the opening of bankruptcy proceedings with the intention, apparent to the other party, of disadvantaging its creditors or of favouring certain of its creditors to the disadvantage of others, are voidable;
(iii) thirdly, any disposal of assets for free, or for inadequate consideration (not at arm's length), during the 12 months preceding the adjudication of bankruptcy, or any equivalent event, constitutes a voidable preference.
1.8 What priority claims are there and is protection available for post-petition credit?
Yes, any debts entered into by the debtor with the approval of the administrator must be paid before any other claims (even privileged claims) are paid.
1.9 Is there a different regime for credit institutions and investment firms?
The revised Banking Act (BA) includes restructuring provisions which provide a basis for maintaining systemically critical functions in the event of a crisis by obliging owners and creditors to share in losses and by accelerating the procedure. However, the detailed provisions applicable to restructuring and bankruptcy proceedings for banks, securities dealers and central mortgage bond institutions are contained in the Banking Insolvency Ordinance issued by the Swiss Financial Market Supervisory Authority (FINMA) that entered into force on November 1 2012 (BIO-FINMA). The BIO-FINMA details public notices, communications and the venue of insolvency. It authorises FINMA to coordinate insolvency procedures in Switzerland with foreign authorities and governing bodies and to recognise the bankruptcy decrees and insolvency measures of other countries, even without reciprocity.
The BIO-FINMA also contains provisions on bank restructuring.
Section 2: INTERNATIONAL/CROSS-BORDER ISSUES
2.1 Can reorganisation or insolvency proceedings be opened in respect of a foreign debtor?
As a general rule, bankruptcy or reorganisation proceedings against legal entities registered in the Register of Commerce are to be initiated at the entity's seat. Only if a legal entity is not registered in the Register of Commerce, are proceedings to be initiated at the place where the entity carries out its main administration.
Swiss law does not provide for proceedings to be initiated at the centre of main interests (COMI). However, if the debtor is incorporated abroad but has a business establishment in Switzerland, proceedings may be initiated at the debtor's business establishment in Switzerland, if the debt has been entered into by the debtor with regard to its business establishment.
Furthermore, debtors residing abroad may agree contractually to a so-called special domicile within Switzerland with regard to specified obligations. In this case, proceedings against the debtor may be initiated at that special domicile.
In addition, as long as no insolvency proceedings have been initiated (and/or recognised in Switzerland, see 2.2 below), creditors may request a court to order a (provisional) seizure of a foreign entity's assets located in Switzerland (including bank accounts held with a Swiss bank). Following this seizure, certain proceedings may be initiated at the place where the debtor's attached assets are held, subject to any treaties to the contrary.
2.2 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?
If a foreign person or entity goes bankrupt and there are assets situated in Switzerland, the foreign administrator may apply for recognition of the foreign bankruptcy adjudication. Under the prevailing laws in Switzerland, the underlying concept of the recognition of foreign insolvency proceedings and foreign administrators in Switzerland is merely a concept of so-called judicial assistance, which is subject to certain prerequisites which tend to create issues in cross-border insolvencies. This means that the foreign administrator does not get (direct) access to the assets located in Switzerland, but that the estate will be administered only by the Swiss authorities and only according to Swiss law. Secured creditors and all privileged Swiss creditors are able to file claims in Switzerland and any proceeds resulting from the assets located there will be distributed among them in mini-bankruptcy proceedings. Any surplus from the mini-bankruptcy proceedings will be paid to the foreign administrator.
Section 3: OTHER MATERIAL CONSIDERATIONS
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
In most cases, the composition court will appoint an administrator to supervise the actions of the debtor during the moratorium and/or the implementation of the composition agreement. Further, the composition agreement needs to be approved, after the affirmative vote of the creditors, by the composition court.
Section 4: CURRENT TRENDS
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction
In 2015, 13,016 bankruptcy proceedings were commenced in Switzerland, which constitutes an increase of 9.9% in relation to the previous year. In addition to these bankruptcy proceedings due to over-indebtedness and/or illiquidity, there were 1,528 court-ordered dissolutions under article 731b of the Swiss Code of Obligations (-12.2% compared with 2014). This provision entitles the court to initiate the liquidation within the provisions of Swiss bankruptcy law of a company incorporated in Switzerland that has a deficiency in its organisation. A total of 13,082 companies were dissolved in 2015 (12,881 in 2014). The losses resulting from liquidations in 2015 amounted to 2.9 billion Swiss Francs ($3 billion), an increase of 14.6% compared with 2014. Most of the liquidations in 2015 occurred in the region of Geneva (3,061), followed by the Bern/midland region (2,900) and then the canton of Zurich (1,956). In contrast to the involuntary liquidation of companies, there is no official data available for moratoria or in-court composition agreements.
The revised bankruptcy law provides that transactions (such as the sale of a business or certain assets) that have been approved by the composition judge or the creditors' committee during a composition moratorium can no longer be challenged as a voidable preference. However, this increased legal certainty and facilitation of the sale of businesses or individual assets to third parties or hive-off vehicles during a composition moratorium has not yet led to a considerable increase in transactions of this type.
The most prominent recent moratorium in Switzerland was the case of Valartis Group.
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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's from Northwestern University School of Law. He practises corporate law and M&A, leveraged transactions, corporate finance/banking, work-out/restructuring, 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 also advised clients and creditors in work-out negotiations and cross-border insolvency procedures and provided advice on defence strategies for companies and groups in financial distress.
He has particular expertise advising boards of directors on corporate governance and related issues, including compensation issues, incentive schemes, listing rules, corporate law and other corporate governance questions. He is a regular speaker at conferences and seminars on matters such as distressed companies, M&A and finance-related topics.
He is consistently highly-ranked in legal directories such as Chambers, Legal 500 and IFLR 1000 for corporate/M&A, banking/finance and real estate. Chambers Europe describes him as an expert in his fields with a high level of experience and careful attention to detail. Other directories describe him as "client-focused, practical and commercial" and "highly responsive, productive and co-operative."
He speaks German, English and French.
About the author
Urs Boller was admitted to the bar in Switzerland in 2007. He holds a degree from the University of Zurich and a master's from Queen Mary University of London in comparative and international dispute resolution. His principal areas of work include insolvency and bankruptcy procedures, arbitration and litigation. He has particular expertise in the field of recognition and enforcement of foreign judgments and arbitral awards.
He speaks German and English.
About the author
Samuel Ljubicic was admitted to the bar in Switzerland in 2010. He holds a degree from the University of Lucerne and a master's from King's College London in international financial law. His principal areas of work include M&A, banking & finance, capital market, as well as real estate development and transactions. He has recently been involved in various national and cross-border financing transactions, restructurings and acquisitions for Swiss and international clients.
He speaks German and English.