Preliminary Remarks

Since Switzerland is not a member of the EU, Annex A and B to the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency and winding-up proceedings, respectively, are not applicable. Thus, the proceedings outlined in this overview are based purely on provisions of Swiss law.

Further, this overview is limited to winding-up proceedings for legal entities and, therefore, does not encompass comparable issues involving individuals.

Winding-up proceedings

1. Bankruptcy proceedings
Conditions for opening

In Switzerland, both creditors and debtors are entitled to request the initiation of bankruptcy proceedings. Pursuant to Swiss bankruptcy law, only entities and individuals registered in the commercial register are subject to bankruptcy proceedings (individuals not registered in the commercial register are subject to ordinary debt enforcement proceedings).

A creditor may request the initiation of bankruptcy proceedings within the scope of an ordinary debt enforcement proceeding (i.e., as an ultimate measure of a creditor whose claim has not been settled but upheld within the course of the debt enforcement proceeding). The court will approve the creditor’s request and open bankruptcy proceedings, unless the statutory requirements for a dismissal are satisfied (e.g., the request for a composition proceeding is pending or indications for a prospective composition proceeding exist). Further, a creditor may also request the opening of a bankruptcy proceeding directly (i.e., without carrying out an ordinary debt enforcement proceeding), provided: (i) a debtor subject to enforcement proceedings by bankruptcy ceased to pay its debts or (ii.a) a debtor’s residence is unknown; (ii.b) a debtor has gone on the run in order to avoid fulfilling his obligations; or (ii.c) a debtor has acted fraudulently, is attempting to act fraudulently, or has concealed assets in enforcement proceedings.

In addition, the debtor, regardless whether or not qualifying for bankruptcy proceedings, may request the initiation of bankruptcy proceedings by declaring its insolvency. Insolvency means persistently not being able to pay due debts. The bankruptcy court will approve a debtor’s request if there are no prospects for debtor’s recovery.

Restructuring methods

As under regular composition proceedings (cf. below), the debtor, after having been declared bankrupt, but also a creditor, has the opportunity to propose a composition. In contrast to regular composition proceedings, the granting of a moratorium is not necessary, as the opening of bankruptcy proceedings suspends all other enforcement proceedings against the debtor and prevents creditors from initiating new enforcement proceedings for claims arising prior to the opening of bankruptcy proceedings (except for the enforcement of third party pledges). Further, during the time period between the vote of the creditors concerning the approval or dismissal of the composition agreement and the composition court’s decision, the realisation of the debtor’s assets is suspended.

If a debtor, against whom bankruptcy proceedings have been opened (but final distribution of the bankruptcy proceeds has not yet taken place) or one of its creditors, proposes a composition agreement, the bankruptcy administration assesses the proposal on behalf of the creditors and submits the assessed proposal for creditors’ approval. Creditors’ approval requires the same quorums as those within the scope of regular composition proceedings (cf. below). Subsequently, assuming creditors’ approval, the bankruptcy administration forwards the composition agreement to the composition court for confirmation. Provided the composition agreement meets the statutory requirements (cf. below), the composition court will confirm the agreement. If confirmed, the bankruptcy administration must file a bankruptcy revocation request with the bankruptcy court. If the composition agreement is rejected by the creditors or by the composition court, the bankruptcy proceedings will continue.

Success rate

In practice, the submission of composition agreements by debtors subject to an ongoing bankruptcy proceeding are rare. If there are any prospects for a composition, a composition agreement is concluded prior to the opening of bankruptcy proceedings.

Pros and cons

Pros: The debtor’s right to submit a composition agreement after the opening of bankruptcy proceedings allows a debtor to strive for its financial restructuring, thereby avoiding its liquidation.

Also from a creditor’s point of view, a composition agreement with assignment of assets is more favourable than a regular bankruptcy proceeding, since the court may approve such agreement only provided that the proceeds generated through the composition agreement exceed the proceeds which might be generated in a bankruptcy proceeding. In addition, a composition agreement with assignment of assets allows for a more flexible form of realization than regular bankruptcy proceedings (i.e. allowing to keep costs low and await proper time to realize).

Other proceedings

1. Composition Proceedings

Composition proceedings are the alternative to bankruptcy proceedings for companies in financial difficulty that cannot pay their debts, but are capable of being financially restructured. The aim of composition proceedings is the preservation of remediable companies by helping them to (partially) settle their debts and avoid liquidation.

Composition agreements may be concluded in judicial or extrajudicial proceedings. Extrajudicial proceedings are based on private legal acts and are composed of many individual composition agreements generally bilaterally negotiated with each creditor (i.e., unlike in judicial proceedings, no creditor may be forced to agree on a settlement of its claim). The judicial composition proceedings are carried out under supervision of the composition authorities and the agreement reached is binding on all creditors whose claims arose prior to the granting of the moratorium and subsequently without the consent of the administrator, respectively.

Conditions for opening

Composition proceedings can be requested by the debtor or its creditors (to the extent entitled to apply for the opening of a bankruptcy proceeding). A request for composition proceedings is filed with the composition court.

The debtor requesting composition proceedings must submit a reasoned application outlining (i) its current and future financial situation (e.g. by submitting underlying documents such as balance sheets, profit and loss statements, liquidity plans, etc.) and (ii) a provisional restructuring plan. Unless the court comes to the conclusion that there is obviously no prospect for either a restructuring or the confirmation of a composition agreement, it will grant a provisional moratorium for a duration of up to four months and take asset preservation measures. Further, a provisional administrator might be appointed in order to examine the prospects of a restructuring or of an approval of a composition agreement. Under certain conditions, a provisional moratorium will not be published (for a certain time). Once the examination is concluded, the composition court decides whether to approve the moratorium definitely, taking into particular consideration the prospects of recovery and the creditors’ approval of the composition agreement.

Restructuring methods

Provided that the composition court determines that the corresponding requirements are met, the court grants a definitive moratorium for another four to six months (i.e. up to ten months in total; renewable up to 12 months or, in complex circumstances, 24 months upon request by the administrator) and appoints one or several administrators. During this period, the administrator (i) drafts the composition agreement, if necessary; (ii) supervises the debtor; (iii) establishes an inventory and values the assets; (iv) requests the creditors to register their claims; and (v) strives to negotiate the composition agreement with the creditors.

In order to facilitate the progress of the composition proceedings, creditors not holding claims secured by real estate are deprived from commencing or continuing debt enforcement proceedings against the debtor. However, the moratorium also limits the debtor’s ability to dispose of assets and its power to deliberately manage the company’s affairs. The debtor is under constant supervision of the administrator, in addition, it might require the consent of the administrator to carry out certain operations or it might be deprived of its management competences.

As soon as the draft composition agreement is completed, the administrator convenes a creditors’ meeting which votes on approval of the proposed composition agreement. The agreement is approved provided, (i) approval of the majority of the creditors representing two-thirds of the total amount of claims, or (ii) approval of one-fourth of the creditors representing three-fourths of the total amounts of claims is obtained. Privileged and secured creditors are not entitled to participate in the votes. After creditors’ approval, the composition agreement requires confirmation by the composition court in order to become valid and binding upon all creditors of claims subject to the composition agreement, regardless of the creditors’ participation in the composition proceedings.

Composition proceedings may result in the conclusion of an ordinary composition agreement (Dividendenvergleich/Stundungsvertrag) or a composition agreement with assignment of assets (Nachlassvertrag mit Vermögensabtretung).

Within the scope of an ordinary composition agreement the creditors agree to (i) forgo a certain percentage of their debts or (ii) defer payments (i.e., without foregoing the claim or part of it). In either alternative, the debtor may continue its business activities and resume full authority to dispose of assets. The confirmed composition agreement is binding on all creditors whose claims arose prior to the granting of the moratorium and subsequently without the consent of the administrator, respectively. However, secured creditors regain their right to request the realization of granted pledges. Thus, after a successful composition proceeding almost all existing debts are settled, and the debtor is allowed to continue its activities on an almost debt-free basis.

To the contrary, a composition agreement with assignment of assets leads – as in bankruptcy proceedings – to the dissolution and liquidation of the debtor company. The debtor assigns its assets to (i) a hive-off vehicle (which is to be realized, instead of the single assets) or (ii) all creditors for realization by a creditor-elected and court-appointed liquidator. The liquidation is similar to that in bankruptcy proceedings, but is more flexible. The proceeds are distributed proportionally to the creditors once the liquidator has assessed their claims. The distribution is effected according to the hierarchy of creditors provided by Swiss insolvency law.

Success rate

The use of ordinary composition agreements seems to be limited given that such agreements are rarely used to restructure large corporate debtors.

Pros and cons

In contrast to regular bankruptcy proceedings, an ordinary composition agreement allows the debtor to regain full authority to dispose of assets and to continue its business. This is not the case when a composition agreement with assignment of assets is approved and confirmed by the creditors and the court. However, the liquidation of the related assets are subject to far more flexible rules than in ordinary bankruptcy proceedings as the assets are not limited in the mode of realization, thereby, taking into consideration the state of the assets, the development of their value and the current market conditions (to the extent possible).

2. Restructuring measures in case of loss of capital

Conditions of opening

Article 725 para. 1 of the Swiss Code of Obligations requires the executive boards of stock corporations and limited liability companies to convene an extraordinary shareholders’ meeting and to propose appropriate restructuring measures as soon as there is a loss of capital. A loss of capital means that the assets reflected in the balance sheet of the company no longer cover one-half of its share capital and the legal reserves. At the beginning of the extraordinary shareholders’ meeting, the executive board informs the shareholders about the company’s financial situation and proposes restructuring measures. Subsequently, the shareholders decide whether to approve, reject, or alter the proposed restructuring measures.

Restructuring methods

The aim of the restructuring measures is to overcome a current financial crisis, avoid liquidation proceedings, and secure the company’s continued existence.

Before implementing appropriate restructuring measures, the executive board of a stock corporation or a limited liability company has to precisely assess to what extent the stock corporation or the limited liability company may be financially restructured. Provided there are prospects for a successful financial restructuring, the executive board is obligated to propose all appropriate measures to restore the company’s financial position.

The starting point for restructuring measures pursuant to article 725 para. 1 of the Swiss Code of Obligations is the evaluation of balance sheet measures (i.e., realization of reserves and/or provisions, revaluation of assets, etc.). If the measures are not sufficient to eliminate the balance sheet loss, the executive board often strives to implement one or several of the following measures:

  • Capital reduction with immediate capital increase (Kapitalschnitt)
  • Capital increase without capital reduction (Kapitalerhöhung ohne Kapitalschnitt)
  • À fonds perdu contributions (À fonds-perdu-Zuschüsse)
  • Subordination of claims (Rangrücktritt)
  • Partial waiver of debt (Partieller Forderungsverzicht)
  • Sale of assets (Aktivenverkauf)
  • Rescue merger (Sanierungsfusion)
Success rate

Considering that the above restructuring measures depend largely on the willingness of the company’s creditors and/or the involvement of third party investors, no general statement as to the success rate of this technique can be made.

Pros and cons

Pros: On the one hand, the related restructuring measures may be resolved without involvement of a court or the debtor’s creditors.

Cons: On the other hand, despite implementation of restructuring measures, creditors may not be forced to make any concessions vis-à-vis the debtor.

3. Restructuring measures in case of over-indebtedness

Conditions for opening

Swiss stock corporations, limited liability companies and cooperatives are subject to an additional regime that applies in cases of over-indebtedness. Over-indebtedness means that the assets reflected in the balance sheet of a company no longer cover the claims of the company’s creditors. As a consequence, the executive boards of the aforementioned companies must notify the court of over-indebtedness.

The bankruptcy court then opens bankruptcy proceedings (cf. winding-up proceedings above), unless there are prospects for recovery and the executive board or a creditor of the company requested the postponement of the adjudication of bankruptcy. If a postponement is granted, the bankruptcy court may appoint an administrator and deprive the executive board of its power of disposal or make its resolutions conditional upon the consent of the administrator (to preserve the company’s assets).

With regard to licensees involved in collective investment schemes, an even stricter regime applies, entitling the Swiss Financial Market Supervisory Authority to open bankruptcy proceedings where there is good cause to suspect over-indebtedness or liquidity problems and no prospects for recovery subsist or related measures failed.

Restructuring methods

A postponement of the adjudication of bankruptcy allows the company to implement restructuring measures ensuring its permanent financial recovery and its continued existence. In comparison to the restructuring measures in case of a loss of capital, restructuring measures pursuant to article 725a of the Swiss Code of Obligations have to be (indirectly) approved by a court that decides whether the proposed measures are appropriate. Therefore higher requirements must be met and corrections of the balance sheet and purely financial improvements are insufficient. Operational and structural measures must be implemented as well.

To obtain this court approval, a restructuring plan has to be established, outlining the restructuring concept. The court must approve the request if all of the following conditions are met: (i) there are justified prospects for sustainable restructuring; (ii) the creditors’ are not disadvantaged due to the adjournment of bankruptcy (i.e. in comparison to the instant opening of bankruptcy) and the principle of equal treatment is ensured; and (iii) the restructuring concept is plausible and credible.

In practice, a restructuring concept is composed of one or several of the following measures:

  • Corrections of the balance sheet and financial measures (cf. restructuring measures in case of loss of capital as discussed above)
  • Operational and structural measures:
    • Cost reductions (Kosteneinsparungen)
    • Staff reduction (Personalabbau)
    • Inventory reduction (Lagerabbau)
    • Entry into new markets (Erschliessung neuer Märkte)
    • Diversification (Veränderung des Angebots)
    • Merger with a financially stable company (Übernahme durch eine gesunde Gesellschaft)
Success rate

In practice, postponements of the adjudication of bankruptcy are extremely rare because of the restrictive judicial requirements. Often, the assessment of creditors’ interests prevents the court from approving postponement requests.

Pros and cons

Pros: Postponements of the adjudication of bankruptcy prevent the opening of bankruptcy, other bankruptcy requests, and liquidation acts and grant a period of time to improve the company’s financial situation. In addition, the adjournment of bankruptcy is normally not published (at least in the beginning and providing that third party interests do not require a publication).

Cons: As outlined above, the court is obliged to impose measures ensuring the preservation of the company’s assets. Therefore, the company is not able to decide and act as flexibly as it could prior to the adjudication of bankruptcy. Further, despite the judicial approval, creditors may not be forced to make any concessions vis-à-vis the debtor.