INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Swiss restructuring and insolvency proceedings are mainly governed by the Swiss Debt Enforcement and Bankruptcy Law (DEBA), which entered into force in 1892.2 A number of other laws and ordinances further regulate special aspects of restructuring and insolvency proceedings, such as specific provisions according to the nature of the debtor (e.g., financial institutions).
The recognition of foreign restructuring and insolvency proceedings is governed by the Swiss Private International Law (PILA), which entered into force in 1989.
The DEBA provides for two main types of insolvency proceedings against corporate debtors:
- bankruptcy proceedings pursuant to Article 197 et seq. DEBA (Konkursverfahren), aimed at the full liquidation of the debtor's assets and the debtor's dissolution by realising the entire estate and distributing the proceeds proportionately to all creditors; and
- composition proceedings pursuant to Article 293 et seq. DEBA (Nachlassverfahren), aimed at enabling the debtor to reach a restructuring agreement with its creditors.
The Swiss Code of Obligations (SCO) entered into force in 1912 and provides for in-court and out-of-court measures supporting the restructuring of a financially distressed debtor, for example, by way of the corporate law moratorium for over-indebted companies pursuant to Article 725a SCO. Further, the SCO requires immediate implementation of restructuring measures, when a company's financial statement shows that half of the share capital and statutory reserves are no longer covered by the company's assets pursuant to Article 725, paragraph 1 SCO.3
The collapse of Switzerland's national airline Swissair in 2001 sparked a public debate over the need to amend Swiss insolvency laws. It was widely criticised that the DEBA failed to deal effectively with the restructuring of financially distressed companies and with insolvencies of large group companies, resulting in the vast majority of restructuring processes ending in liquidation rather than in survival of the companies. Subsequently, the DEBA provisions were discussed in Parliament, and the revised DEBA entered into force on 1 January 2014. The primary objective of the revision was to promote the restructuring of companies over liquidation.
Inspired by the US Bankruptcy Code's Chapter 11 procedure, the revised DEBA facilitates companies' access to protection under a moratorium for mere restructuring purposes. The rules governing the moratorium thus create incentives to apply for a provisional moratorium in a timely manner. Companies shall have enough time to take restructuring measures without the public being aware of their financial difficulties. Changes in employment law in relation to business takeovers should further facilitate the process. In addition, the provisions on terminating long-term agreements were revised. Since 2014, the debtor can extraordinarily terminate long-term agreements other than employment agreements in composition proceedings.4 Thus, debtors can now free themselves from long-term commitments, which may jeopardise the financial stability of the entire company. However, a turnaround from restructurings increasingly leading to company survivals under the revised DEBA remains to be seen.
iii Insolvency procedures
Once a debtor is declared bankrupt by the competent court,5 all of the debtor's creditors take part in the bankruptcy proceedings.
The aim of the proceedings is to satisfy all of the creditors in proportion to their claims against the debtor. This requires the full liquidation of the debtor's estate, including all assets and liabilities. During the bankruptcy proceedings, the debtor remains the beneficial owner of its estate until the estate is realised. However, the debtor loses the right to dispose over its assets. This right is transferred to the bankruptcy estate, which exercises it through the bankruptcy administration.
In a first step, the bankruptcy office prepares an inventory listing all of the debtor's assets. Where the inventory reveals that the proceeds from the assets will cover the costs of bankruptcy proceedings, the bankruptcy office will commence ordinary bankruptcy proceedings. Otherwise, the bankruptcy office will initiate summary proceedings, which generally do not entail creditor's meetings.6
Subsequently, the bankruptcy office publicly announces the opening of bankruptcy proceedings against the debtor and summons the creditors to file their claims within one month, whereby the filing deadline is extended for foreign creditors.
The first creditor's meeting is to be held within 20 days of the public announcement of the bankruptcy proceedings against the debtor. It decides on organisational issues, such as appointing either the public bankruptcy office or a private bankruptcy administrator as the administrator of the estate. It further decides on urgent administrative actions, for example, on the continuation of the debtor's business activities. The first creditor's meeting may elect a creditor's committee. Among other things, the creditor's committee is generally in charge of supervising the bankruptcy administrator, deciding on the continuation of business operations as well as authorising the continuation of court proceedings and the conclusion of settlement agreements. The meeting has a quorum with at least 25 per cent of the known creditors being present or at least 50 per cent of the creditors being present where there are four or fewer known creditors. Decisions in the first creditor's meetings are taken by absolute majority of the represented votes.
The bankruptcy administrator administers the bankruptcy estate's assets and decides on the admission of filed bankruptcy claims in the schedule of claims, as well as the extent and the class in which the claims are admitted. The schedule of claims is open for inspection at the bankruptcy office and can be contested by way of a statement of claim within 20 days before the competent court. Creditors may contest either that their claims were rejected, that their claims were not admitted in the filed amount or that their claims rank in the wrong class of claims. A distinct feature of Swiss insolvency proceedings is that a creditor may also contest the admittance (regarding admitted amount or class of claim) of another creditor's claim, which – if successful – results in a negative declaratory judgement. If this negative Kollokationsklage action is successful, the amount by which the defendant's share of the bankruptcy estate is reduced is used to satisfy the claimant's full claim, including legal fees. Any surplus is distributed among the creditors according to the rectified schedule of claims. The second creditor's meeting is entrusted with further reaching competences than the first creditor's meeting, in particular, the decision on the realisation of the debtor's assets. The bankruptcy administrator realises the assets by way of public auction, private sale or assignment of claims to a creditor.
The proceeds resulting from the realisation of the debtor's estate are then used to satisfy the bankruptcy claims. The distribution of the proceeds to the creditors follows the principle of equal treatment. However, certain creditor claims are privileged and are satisfied prior to other claims:
Claims of pledgees are satisfied before all other three claim classes under the DEBA. Where the proceeds exceed the claims of the pledgees, the surplus is used to cover claims that are not asset-backed. These unsecured claims are divided into three creditor classes. The creditors in a subsequent class will only be satisfied if and to the extent the creditors of the previous class have received full coverage of their claims. If the proceeds from the realised assets do not fully suffice to cover all claims in one class, the proceeds are distributed to the creditors on a pro rata basis according to the amounts of the claims (the bankruptcy dividends). The first class of creditors mainly comprises claims arising from employment relationships with the debtor, accrued within the six months prior to the opening of the bankruptcy proceedings. The second class of claims encompasses claims from social security, health and unemployment institutions. All other types of claims against the debtor accrued before the opening of the bankruptcy proceedings fall into the third creditor class.
After the distribution of the bankruptcy estate among the creditors, the bankruptcy administration files a concluding report to the bankruptcy court. If the bankruptcy court finds the bankruptcy proceedings to have been fully completed, it declares the bankruptcy proceedings closed.
Bankruptcy proceedings necessarily lead to the dissolution of a bankrupt corporation. During the proceedings, 'in liquidation' is added to the company name in the register of commerce. Upon conclusion of the bankruptcy proceedings, the company is deleted from the register of commerce, whereby it seizes to legally exist.
Composition proceedings aim at protecting a debtor from bankruptcy proceedings and alleviating financial distress. At the end of the composition proceedings, the debtor should reach a composition agreement with its creditors, which either provides for a genuine restructuring of the debtor (Prozentvergleich, Dividendenvergleich) or for the (partial) realisation of the debtor's assets outside of bankruptcy proceedings (Nachlassvertrag mit Vermögensabtretung, Liquidationsvergleich). Both of these types of composition agreements can be achieved either by assistance of a court or extrajudicially.
Out-of-court composition agreements are based on private transactions, which the debtor concludes with each creditor individually. By way of contrast, judicial composition agreements are the result of proceedings regulated by law, by which the debtor can settle its debts with the approval of a majority of its creditors with judicial assistance. Such an agreement then has a binding effect towards all of the debtor's creditors.
Composition proceedings begin with the provisorische Nachlassstundung, a provisional composition moratorium, pursuant to Article 293a et seq. DEBA, a period of up to four months granted by the composition judge upon request of the debtor, a creditor or upon transfer from a bankruptcy court where the debtor or a creditor submitted a proposal for a composition agreement. The composition court appoints a composition administrator to assess the prospects of restructuring or approval of the composition agreement. If such prospects exist, the composition court will grant a definitive composition moratorium (definitive Nachlassstundung) of an additional four to six months, pursuant to Article 294 et seq. DEBA. In particularly complex cases, the moratorium may be extended to up to 24 months. In the absence of such prospects, the composition court will open bankruptcy proceedings ex officio.
Upon granting of the definitive composition moratorium, the court appoints a composition administrator (Sachwalter). In contrast to bankruptcy proceedings, the right to dispose over the debtor's assets remains – with some limitations – with the debtor. The debtor's daily business runs under supervision of the court appointed composition administrator. The composition court will appoint a creditor's committee when necessary. The disposal of certain assets by the debtor may require the approval of the composition judge or the creditor's committee, respectively.
The provisional and the definitive composition moratorium protect the debtor from further financial distress, insofar that no enforcement proceedings may be initiated or continued during the moratoriums.
There are two principal types of judicial composition agreements:
- the dividend agreement pursuant to Article 314 et seq. DEBA, which aims at payment of a certain percentile of the claims and at a waiver of the residual amounts. This allows the debtor to eventually resume his or her business operations and regain the right to fully dispose of its assets; and
- the agreement with assignment of the assets to the creditors pursuant to Article 317 et seq. DEBA,7 whereby the debtor assigns its assets fully or partially to the creditors, and a court-appointed and creditor-elected liquidator realises the assets.8 As opposed to bankruptcy proceedings, composition proceedings allow for more flexibility in realising the assets. The proceeds of the realisation are distributed among the creditors proportionally to their filed claim amounts and in accordance with the hierarchy of claim classes set out by the DEBA. To this end, the appointed administrator prepares a schedule of claims that can be contested by creditors as in bankruptcy proceedings. In case of assignment of all of the debtor's assets to its creditors, the composition agreement leads to the dissolution and liquidation of the debtor.
Both types of judicial composition agreements require approval by a majority of the creditors and the composition court.
The revised DEBA is focused on facilitating access to restructuring procedures by, inter alia, granting longer moratorium time periods (four instead of previously two months) and allowing a distressed company to sell parts of its business to generate funds with the approval of the composition judge or the creditor's committee.
1 Daniel Hayek is a partner and a member of the management committee and Laura Oegerli is a junior associate at Prager Dreifuss AG.
2 The latest DEBA revision entered into force in January 2014.
3 Failing to implement such measures promptly may open up the directors to liability suits according to Article 754, paragraph 1 SCO, see Section I.viii
4 The right to termination by the debtor exists only during the moratorium and only if refraining from terminating the long-term agreement would make the restructuring aim impossible and the liquidator has consented to the termination.
5 In Switzerland, insolvencies are handled by insolvency courts, which are in most cantons a special section at the district court. Therefore, district court judges, in certain cantons single judges, may have to deal with complex finance-based insolvency litigation without having the same level of expertise as commercial courts.
6 The below remarks on Swiss bankruptcy proceedings relate to ordinary bankruptcy proceedings
7 Notable examples of composition proceedings with assignment of the assets are SAirGroup AG, Swissair Schweizerische Luftverkehr AG,Petroplus Marketing AG and Unifina Holding.
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