Restructuring and insolvency law in Switzerland

1. What is the primary legislation governing restructuring proceedings in your jurisdiction?

The Debt Enforcement and Bankruptcy Act (Bundesgesetz über Schuldbetreibung und Konkurs) is the primary source of legislation governing judicial restructuring proceedings in Switzerland. Further laws such as, among others, the Swiss Code of Obligation (Schweizerisches Obligationenrecht), the Banking Act (Bundesgesetz über die Banken und Sparkassen) and the Insurance Supervision Act (Bundesgesetz betreffend die Aufsicht über Versicherungsunternehmen) contain additional restructuring-related provisions.

As Switzerland is not an EU member state, it is not required to transpose the EU Restructuring Directive of 20 June 2019 (2019/1023) into national law.

As far as the effects of foreign restructuring proceedings on Swiss territory are concerned, the Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht) is applicable.

2. How are restructuring proceedings initiated?

A company that is financially distressed may file a request for moratorium proceedings with the competent court. Such application must include a current balance sheet, an income statement and a liquidity plan or corresponding documents showing the company’s current and future income and as well as a provisional restructuring plan.

Moratorium proceedings may also be initiated at the request of a creditor that is entitled to file a bankruptcy petition.

3. Which different types of restructuring proceedings exist and what are their characteristics?

Moratorium

Swiss law provides for moratorium proceedings with the purpose of restructuring the debtor, or at least saving a profitable business unit of the debtor. Moratorium proceedings start with a provisional moratorium and may be followed by a final moratorium.

Provisional moratorium

The provisional moratorium aims at clarifying whether there is a prospect of restructuring or concluding a composition agreement. Following the granting of a provisional moratorium, a commissioner is generally appointed to assess the feasibility of the debtor’s restructuring or the conclusion of a composition agreement.

The granting of a provisional moratorium (and subsequently the final moratorium, if any) has, among others, the following effects:

• debt enforcement proceedings can be neither initiated nor continued
• civil court proceedings involving claims against the debtor that arose prior to the moratorium are generally stayed
• limitation and forfeiture periods stand still
• applications for freezing of assets regarding claims that arose prior to the moratorium are no longer granted.

Depending on the developments during the provisional moratorium and the outcome of the analysis of the debtor’s financial situation, before the expiry of the provisional moratorium, the commissioner will ask the court to grant a final moratorium or the opening of insolvency proceedings. The commissioner will opt for the request to open bankruptcy proceedings if there is no prospect of debt restructuring or the conclusion of a composition agreement. In the event that the restructuring of the debtor is successful before the expiry of the provisional or final moratorium, the court will revoke the moratorium.

Final moratorium

The final moratorium aims at restructuring the debtor or at its (full or partial) liquidation in a way that is more flexible than liquidation in a bankruptcy. Restructuring the debtor is in particular achieved by the ordinary composition agreement under which the creditors waive parts of their claims. The full or partial liquidation of the debtor is achieved by the composition agreement with the assignment of assets. Under such agreement, the creditors are granted the right to dispose of the debtor’s assets, or the debtor’s assets are assigned in whole or in part to a third party.

Consensual private debt settlement

A debtor that is not subject to bankruptcy proceedings (i.e. in particular natural persons) may apply to the debt restructuring court for a consensual private debt settlement.

4. Are there different types of creditors and what is the significance of the differences between them?

Swiss law differentiates between:

• creditors of secured claims
• creditors of preferential claims, i.e.
  • first class claims, such as wage claims
  • second class claims, such as social security claims
• creditors of non-preferential claims (so-called third class claims)
• creditors of subordinated claims.

Creditors of secured claims are satisfied by the proceeds from the realisation of the security. Such proceeds are solely for the benefit of the secured creditors (save for the costs of the administrator for the realisation of the security). In other words, to the extent the secured claims are covered by the proceeds from the realisation of the security, Swiss law fully prefers creditors of secured claims over all other creditors, including the creditors of preferential claims, such as employees and social security institutions. To the extent the secured claims are not covered by the proceeds from the realisation of the security, they typically qualify as third class claims, unless exceptionally they are first or second class claims.

Among the non-secured claims, subject to the costs of the administrator, which are covered first, creditors of a lower ranking class are only entitled to a dividend if the creditors of the next higher ranking class are fully satisfied. Accordingly:

• the creditors of first class claims are first satisfied
• thereafter, if there is a balance left, the creditors of second class claims are satisfied
• thereafter, if there is still a balance, the creditors of third class claims are satisfied
• finally, should there still be a balance, which is hardly ever the case, such balance would be distributed to the creditors of subordinated claims.

Within one and the same class, the creditors have equal rights (pari passu).

5. Is there any obligation to initiate restructuring/insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

Swiss law imposes certain duties on directors in case of a company’s imminent illiquidity (drohende Zahlungsunfähigkeit), capital loss (Kapitalverlust) or over-indebtedness (Überschuldung).

Illiquidity

If the company is threatened with illiquidity, the board of directors shall take measures to ensure its solvency. It shall take, where necessary, further measures to restructure the company or shall request the convening of a general meeting to approve such measures if they fall within the competence of the general meeting. If necessary, the board of directors shall request moratorium proceedings.

Capital loss

If the company has a capital loss, i.e. if more than half of the sum of the share capital, the non-repayable statutory capital reserve and the statutory reserves are lost, the board of directors shall take measures to rectify such loss of capital. It shall take, where necessary, further measures to restructure the company or shall request the general meeting to approve such measures if they fall within the competence of the general meeting. If necessary, the board of directors shall request moratorium proceedings.

Over-indebtedness

Where there is a justified concern that the company is over-indebted, i.e. if its liabilities are no longer covered by its assets, the board of directors shall immediately prepare an interim statement at going concern values and liquidation values. An interim statement at liquidation values is not required if it is assumed that the company will continue to operate and the interim statement at going concern values does not indicate an over-indebtedness. If it is assumed that the company will not continue to operate, an interim statement at liquidation values is sufficient.

If the company is over-indebted according to the two interim statements, the board of directors shall notify the court, which generally leads to the opening of bankruptcy proceedings. The board of directors may also request moratorium proceedings.

The board of directors may refrain from notifying the court:

• if the company’s creditors subordinate their claims to those of all other company creditors to the extent of the over-indebtedness, provided the subordination of the amount due and the interest claims apply for the duration of the over-indebtedness, or
• provided there is a reasonable prospect that the over-indebtedness can be remedied within a reasonable period, but no later than 90 days after submission of the audited interim statements, and that the claims of the creditors are not additionally jeopardised.

Amongst others, the board of directors is liable to both shareholders and creditors for any losses or damage arising from an intentional or negligent breach of its duties. Thus, delay in the implementation of measures to ensure the company’s solvency, measures to rectify a company’s capital loss or restructuring measures or filing the necessary requests with the competent court in case of the company’s imminent insolvency, capital loss or over-indebtedness, may lead to the liability of the board of directors (and management) for the damage that occurred as a result of the delay.

If a company is obviously over-indebted and the board of directors fails to notify the court, the external auditors have the duty to notify the court. Otherwise, the external auditors become liable for a delayed notification of the court.

In addition, delayed notification may also lead to criminal liability for mismanagement. The Swiss Criminal Code provides for further criminal offences.

Board members remain liable for certain contributions to social security institutions and tax payments, should the debtor, due to illiquidity, be unable to make such payments.

6. What are the main duties of the representative bodies in connection with restructuring proceedings?

See the answer to Q5 above.

7. What are the main duties of shareholders in connection with restructuring proceedings?

The shareholders have to vote on restructuring measures which fall in their competence and which have been proposed to them by the board of directors. Moreover, if, during moratorium proceedings, an ordinary composition agreement is concluded and subsequently approved, the shareholders are obliged to provide an adequate contribution to the restructuring of the company. Apart from the aforesaid, the shareholders have no duties in connection with restructuring proceedings, except for shareholders of limited liability companies whose articles of association provide that the shareholders (partners) must make additional financial contributions in case of restructuring proceedings.

1. What is the primary legislation governing insolvency proceedings in your jurisdiction?

The Debt Enforcement and Bankruptcy Act (Bundesgesetz über Schuldbetreibung und Konkurs) is the primary source of legislation governing insolvency proceedings in Switzerland. Further laws such as, among others, the Swiss Code of Obligation (Schweizerisches Obligationenrecht), the Banking Act (Bundesgesetz über die Banken und Sparkassen) and the Insurance Supervision Act (Bundesgesetz betreffend die Aufsicht über Versicherungsunternehmen) contain additional insolvency- and restructuring-related provisions.

As Switzerland is not an EU member state, the European Regulation on Insolvency Proceedings (2015/848) is – from a Swiss perspective – neither applicable to insolvency proceedings initiated in Switzerland nor to the recognition of insolvency proceedings initiated abroad.

As far as the effects of foreign insolvency proceedings on Swiss territory are concerned, the Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht) is applicable.

2. How are insolvency proceedings initiated?

A creditor may file a request for debt collection. In the event the debt is not paid following the request for debt collection and a potential opposition filed by the debtor is lifted by the court, the creditor is entitled to request the opening of insolvency proceedings with the competent court provided that the debtor is registered in the commercial register. In addition, a creditor may request the initiation of insolvency proceedings without prior debt collection proceedings under certain circumstances including, among others, if the debtor has ceased payments.

The debtor may initiate insolvency proceedings by declaring either its over-indebtedness or its illiquidity with the competent court.

3. What are the legal reasons for insolvency in your country?

A creditor may request the initiation of insolvency proceedings without prior debt collection proceedings under certain circumstances including, among others, if the debtor has ceased payments. However, in the majority of cases, prior to a creditor’s request for the initiation of insolvency proceedings, debt collection proceedings are pursued without receiving any proceeds. If the creditor’s claim is not satisfied by the debtor following the initiation of debt collection proceedings and the statutory prerequisites are fulfilled, the creditor may request the opening of insolvency proceedings with the competent court.

The debtor may request the initiation of insolvency proceedings based on its over-indebtedness or illiquidity. A company is over-indebted if its liabilities are no longer covered by its assets, whereas illiquidity is the inability to settle due debts due to a permanent lack of funds.

4. Which different types of insolvency proceedings exist and what are their characteristics?

In general, the aim of insolvency proceedings is the liquidation of the debtor. Upon the opening of insolvency proceedings, the insolvency administration will draw up an inventory of the assets belonging to the insolvency estate. In the event the inventory reveals that the insolvency estate contains sufficient assets to cover the costs of insolvency proceedings, and in particular depending on the amount of assets and the circumstances, the insolvency administration will either opt for ordinary or summary insolvency proceedings. A call to creditors for filing claims is publicly announced. 

The insolvency administration draws up the schedule of claims, which may be subject to actions by creditors. As soon as the schedule of claims is final, the distribution plan is drawn up, which reveals the proportion and resulting net proceeds for each admitted claim, followed by the distribution of the proceeds and the issuance of the certificates of shortfall.

The opening of insolvency proceedings has, among others, the following effects: 

• the debtor’s asset disposition rights are transferred to the insolvency administration
• all obligations of the company/debtor become due, with the exception of those which are secured by mortgages on its real estate, and
• claims that are not denominated in a monetary amount are, in principle, converted into a monetary claim of corresponding value. 

However, the opening of insolvency proceedings does not result in the automatic termination of contracts and the insolvency administration may opt for a fulfilment of contractual obligations.

5. Are there different types of creditors and what is the significance of the differences between them?

See the reply to Q3 under Restructuring.

6. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

A company may only be liquidated within a solvent liquidation when the company has sufficient assets to cover all of the company’s (acknowledged) liabilities. Should over-indebtedness be determined during the solvent liquidation of the company, the liquidator has the duty to notify the court, which opens insolvency proceedings over the company.

1. If a lender wants to monitor the company very closely (i.e. more closely than the usual information covenants in the credit agreement require), what options are there?

The lender would have to negotiate additional information covenants. Save for listed companies and (most) banks, Swiss companies do not have to make financial information available to the public. Theoretically, it would be possible to regularly order excerpts from the debt enforcement register where certain debt enforcement actions against a debtor are listed. However, this would not be sufficient for a close monitoring.

2. What issues arise if a creditor extends credit facilities or offers support conditional on additional or extended guarantees to a company in financial difficulties and/or takes asset security?

Granting loans to, or taking security from, a company in financial difficulties is subject to an increased avoidance (“clawback”) risk. This is particularly true where security is taken for a pre-existing, originally unsecured loan. For new money, it needs to be carefully checked whether the (high) prerequisites for a so-called restructuring loan (Sanierungsdarlehen) are fulfilled. According to the Swiss Federal Supreme Court, a restructuring loan is safe from avoidance. However, so far, there has been only one case where the court regarded the prerequisites as fulfilled.

1. How does a lender sell a loan?

The undertaking to sell the loan is typically set out in a sales agreement. The sale is completed by means of an assignment of the loan. Generally speaking, the law governing the assignment should follow the law governing the loan. Accordingly, if the loan is governed by Swiss law, it is advisable to enter into a Swiss law-governed assignment (while Swiss or a foreign law can be chosen as the law governing the sales agreement). A Swiss law-governed assignment needs to be signed by the assignor by wet-ink signature or Swiss qualified electronic signature.

2. If the underlying credit agreement prohibits transfer or assignment (i.e. a change in the lender of record), how else  – if at all – can a lender transfer the economic risk and/or benefit in the loan? For instance, are sub-participation agreements allowed under the law of your jurisdiction?

A prohibition of transfer or assignment prevents the assignment (or any other transfer) of the loan. Unless in other jurisdictions, there is no exemption from this rule for transactions among business enterprises. Typically, the mere transfer of the economic risk and benefit in the loan by means of a sub-participation agreement should be possible in spite of the prohibition of transfer or assignment. However, this needs to be separately checked for each case based on the wording of the prohibition and the surrounding circumstances.

3. Regulatory issues: is any form of licence or prior authorisation from any regulatory authority required for the purchase, sale and/or transfer of loans? Does it fall within the definition of providing banking or financial services in the territory of the assignor or the borrower?

Purchasing, selling or transferring loans is not a regulated activity in Switzerland. Accordingly, no licence or authorisation from a regulatory authority is required for such activity.