The New Swiss Insolvency Law | Effective Measures to Facilitate the Restructuring of Companies?
On 1 January 2014, the revised provisions of the Swiss Federal Act on Debt Enforcement and Bankruptcy (“DEBA”) came into force. The revision process was mainly triggered by the collapse of SAirGroup (“Swissair”) in 2001 and other major Swiss companies, as well as the subsequent bankruptcy and composition proceedings, which revealed the gaps and deficiencies in the Swiss insolvency legislation.
Although the Swiss insolvency law, with the moratorium and composition proceedings, has always provided for restructuring schemes, most proceedings “de facto” ended in a liquidation of the debtor rather than in the implementation of restructuring measures. The liquidation of financially distressed companies, however, is quite often detrimental to the creditors’ interests, which usually consist of restoring a company’s solvency. The main reason for this outcome was the debtor’s obligation to submit to the court a draft of a composition agreement in order to initiate the composition proceedings. This provision forced debtors into a negotiation process with its creditors before they could even apply for such proceeding. This meant that the debtor had to reveal their insolvency, thereby putting itself at risk of immediate bankruptcy proceedings. Therefore, unsurprisingly, in practice, financially distressed companies were usually hesitant to enter into formal insolvency proceedings, the consequence frequently being that the restructuring process was initiated too late.
Material Changes to the Restructuring and Composition Proceedings
In light of the legal deficiencies outlined above, revisions to DEBA were made. The material changes are set out below:
- Under the amended law, the debtor can seek a moratorium without necessarily entering into subsequent composition proceedings. If the restructuring is successful, the debtor can file an application with the court for suspension of the moratorium. Furthermore, the debtor is entitled to request the moratorium and to initiate the composition proceedings by (inter alia) submitting a provisional restructuring plan (instead of a draft composition agreement). The court will only do a cursory assessment of such restructuring plan and will refrain from turning it down unless there are obvious indications that it will not work. Finally, the moratorium always commences on a provisional basis with a maximum duration of four months, thus granting the debtor easier access to the proceedings.
- Contrary to the previous rules, the provisional moratorium does not have to be published in the event of good cause and if the creditors’ (and other third parties’) interests are protected. This gives the debtor some time to discreetly prepare the restructuring plan and its publication.
- The effects of the (provisional) moratorium coming into force just after the granting of the moratorium by the court have been expanded considerably to the debtor’s benefit. First of all, enforcement proceedings cannot be initiated or continued, not even those leading to seizure for first class claims (e.g. claims of employees derived from the employment relationship). However, enforcement proceedings for the realisation of collateral secured by a mortgage over property are still excluded from this rule. Furthermore, attachments and other remedies freezing the debtor’s assets will no longer be feasible. Secondly, all litigation against the debtor is suspended (except for urgent cases). Thirdly, the assignment of future receivables is not effective with respect to receivables arising after the court has granted the moratorium.
- Another substantial change to the legislation is the debtor’s entitlement to terminate long-term contracts at any time if the restructuring cannot be achieved without such termination. However, this right of termination is subject to the commissioner’s approval (a commissioner is usually appointed by the court when granting the moratorium) and the other party to the contract must be compensated. It should be noted that such compensation is considered a pre-petition claim and is therefore limited to a dividend.
Rules Facilitating the Sale of Business or Parts thereof Implementing restructuring measures often requires the sale of parts of a company’s business, aimed either at generating liquidity or at ceasing unprofitable activities. The latest revision introduced some provisions facilitating such transactions.
- Under the previous law there was no requirement to consult creditors with regard to such sales. Therefore, the law provided for the voidability of such transactions by the creditors, leading to substantial legal uncertainty. Under the new legal regime, when granting the moratorium, the court can install a creditors’ committee which has to agree to every sale of capital assets by the debtor. As a result, such transactions are no longer voidable (not even in cases where no creditors’ committee was installed by the court). This improves the predictability of legal decisions and hence facilitates the sale of businesses.
- Pursuant to the previous Swiss employment law, the employment relationships and all related rights and obligations automatically passed to the purchaser in the case of a transfer of the company (irrespective of the purchaser’s will or intention). Under the new regime, such transfer during a moratorium (or other specific circumstances) only includes employment relationships if this has been agreed with the purchaser (and if the employee does not object to the transfer). Furthermore, the purchaser will not be jointly and severally liable with the former employer for any pre-transaction claims brought by an employee. However, the new law requires a social plan to be established by medium to large size companies in case of a larger number of redundancies, increasing the complexity and the costs of such transfer.
Rules regarding Fraudulent Transfer
The fraudulent transfer rules challenging transactions between the debtor and third parties have also been amended in order to further facilitate restructuring efforts.
- Transactions at an undervalue can be challenged if they have been carried out within the period of one year prior to the opening of the insolvency proceedings. Under the new law, the counter-party which is related to the insolvent party bears the burden of proof that the transaction was not at an undervalue. Pursuant to the new law, transactions between group companies will be considered as related party transactions.
- Finally, all transactions carried out by the debtor during the five years preceding the opening of the insolvency proceedings with the intention, apparent to the other party, of disadvantaging his creditors or to favour certain of his creditors to the disadvantage of others, are voidable. Again, under the new legal regime, it is presumed that the counterparty which is related to the insolvent party (including affiliated companies) knew or should have known of the insolvent party’s respective intention. Hence the burden of proof is again imposed on the counterparty.
Although the revision of DEBA was not extensive, which may be surprising considering that its underlying legal system has remained unchanged since 1892, it in fact comprises several facilitations with regard to the restructuring of companies in the context of composition proceedings. However, implementation in daily practice will show whether the revision’s purpose of enhancing successful restructurings and reducing liquidations of financially distressed companies will be accomplished.