On 1 January 2025, the "Federal Act on Combating Abusive Bankruptcy" and the corresponding amendment to the Commercial Register Ordinance (HRegV) entered into force, amending certain bankruptcy and criminal law provisions in line with case-law of the Federal Supreme Court on shell companies.
This previous article (here) summarises the new corporate law provisions. Below we discuss how the new rules are to be assessed and what complex issues have arisen.
1. Share transfers in shell companies: new provisions in the CO and the HRegV
The new provisions in the Swiss Code of Obligations are concise (art. 684a and 787a CO):
- The transfer of shares (Aktien or Stammanteile) in a corporation (Aktiengesellschaft) or limited liability company (GmbH) that has no business activities, no realisable assets and is overindebted is null and void.
- If the commercial register office has reasonable grounds to suspect a transfer of shares in connection with an application, the company will be required to submit its current (and, if applicable, audited) annual financial statements. If the company does not comply with the request or if the annual financial statements confirm the suspicion, the commercial register office will refuse the registration application.
At the level of the HRegV, a suspicion of a void transfer of shares in a shell company arises if:
- several registered facts (e.g. the purpose, the registered office, the company name or the members of the board of directors) are changed simultaneously or successively;
- the company has the same legal domicile as a company that has already been refused registration on the basis of the new provisions; or
- persons transferring or acquiring shares have already been involved in a transfer that led to a refusal of registration.
The previous article cited above (found here) explains these requirements in more detail and discusses whether the codification of the ban on transferring shares in a shell company indirectly legitimises "shelf companies".
2. Enforcement of the ban on share transfers in shell companies by the commercial register offices: is it an ineffective tool?
This publication focuses on a critical assessment of the enforcement mechanisms provided for in the statutory provisions. The legislator relies on the control by the commercial register offices. This mechanism, however, appears largely unsuitable.
In particular, it may not be clear to commercial register offices whether or not a transfer of shares in a shell company has taken place. Even the most recent annual financial statements, which can now be requested by the commercial register offices, are unlikely to provide this information, raising the following issues:
- Some scholars rightly point out that the financial statements of companies that could qualify as shell companies will regularly not be properly prepared (as the Federal Council explicitly recognises in its explanatory note as part of the problem to be solved).
- The financial statements will always be out of date at the time of the audit by the commercial register offices, as they naturally relate to the previous financial year.
- The financial statements are unlikely to provide a reliable indication of whether a shell company exists or not:
- As long as the management of the company's own assets is considered as sufficient business activity, even financial statements with no or negligible income or expense items should not be sufficient to prove of a lack of business activity.
- Thus, in order to prove that there are no realisable assets, the financial statements must not show any assets. For example, in the case of a balance sheet that includes only cash and cash equivalents on the assets side of the balance sheet, it is disputed whether or not these qualify as "realisable assets".
- In addition, it will generally not be possible to determine whether the company had (but no longer has) realisable assets and business activities in the past. As a result, it will not always be possible to determine reliably whether the company is a shell company or a shelf company.
- The most that could be deduced from the last annual financial statements was the existence of a shell company, but this does not also confirm the suspicion of a void transfer of shares in such a shell company. The latter is (rightly) required by the new statutory provision in order to reject an application for registration. The Swiss Federal commercial register office (EHRA) has also confirmed in its Practice Note 2/24 that the "reasonable suspicion", which must be examined and confirmed by the commercial register offices in order to refuse registration, also relates to the transfer of shares in a shell company. Fortunately, this point is not based on the excessive wording of the HRegV. According to this provision, registration must already be refused if the commercial register office establishes a shell company on the basis of the annual financial statements. (Unfortunately, the Federal Council's explanatory note also states that registration must be refused if the company exists only as a shell company).
The contradiction mentioned in the previous paragraph has led some scholars to limit the scope of application of the new legislation. They argue that they should only apply to registrations that implement the transfer of shares in a shell company. It must be countered that such a limitation can hardly be inferred from the wording of the new legal provisions. Furthermore, it is argued that only "constitutive" registrations (i.e. registrations that become effective only upon registration) should be refused. In our view, this restriction cannot be justified. In particular, it would mean that the transfer of shares in a limited liability company that is a shell company would not be covered by the new statutory provisions, which would clearly not have been the intention of the legislator in this case.
Further questions arise with regard to the examination powers (Kognition) of the commercial register offices. While they are supposed to fully examine the requirements under commercial register law, their examination of substantive requirements is generally limited to examining whether there is an obvious and unambiguous breach of mandatory provisions that have been enacted in the public interest or for the protection of third parties. This limitation of powers is intended to ensure that disputed questions of substantive law are decided by the civil courts and not by the commercial register offices. Exceptionally, however, the full examination power (volle Kognition) of the commercial register offices can also be extended to certain questions of substantive law by means of particular statutory provisions. This is the case, for example, for regulations on company names. It remains to be seen whether a similar extension of cognisance will also be confirmed regarding the new provisions on shell companies.
Against this background, it is unclear how the commercial register offices will deal with their new obligation to implement the new provisions. In any case, this does not appear to be an appropriate means of enforcing the ban on transfer of shares in shell companies. The companies concerned could be obliged to file their annual financial statements to the commercial register office. At least, these are not subject to the publicity of the commercial register (i.e. they are not accessible to third parties).
In addition, the EHRA points out an applicant has a duty to cooperate in establishing the relevant facts, which could lead to the commercial register offices requesting further documents or explanations. This would be understandable in view of the above since only then can a meaningful examination be carried out whether share transfers in shell companies are taking place.In view of the wording of the new statutory and regulatory provisions, however, it deliberately only provides for the submission of the annual financial statements and expressly rejects a more extensive obligation, such as regarding the share register (Explanatory Report of the Federal Department of Justice and Police on the Amendment to the Commercial Register Ordinance and the Ordinance on the Criminal Records Information System VOSTRA of 25 October 2023). Even if this makes enforcement by the commercial register offices largely impossible, the commercial register offices should limit themselves to requesting the annual financial statements.
3. The reservation of art. 934 CO remains unclear
Implementation is further complicated by the fact that art. 934 CO is expressly reserved. According to this provision, the commercial register office must delete a legal entity from the commercial register if it no longer has business activities and realisable assets (subject to proof of an interest in maintaining the entry in the commercial register by the company concerned or by other affected parties).
The scope of application of art. 934 CO fully covers the new provision on shell companies and goes further, namely in the case of companies with no business activities and assets but are not overindebted. Consequently, in the cases covered by Art. 684a CO, an assessment in accordance with Art. 934 CO is also appropriate. In contrast to the new provision on shell companies, no transfer of shares is required.
Art. 934 CO provides for a legal consequence for shell companies and not "only" for share transfers involving such shell companies. This is justified because most shell companies come into existence through a de facto or silent liquidation. Such a de facto or silent liquidation is a liquidation without complying with the pertinent legal provisions. Thus, the very existence of the shell company, and not just the transfer of its shares, constitutes a violation of the law.
The main purpose of this reservation is probably to clarify that art. 934 CO continues to apply if its criteria are met. Some authors also want the reservation to apply if the company is not deleted from the commercial register in the proceedings pursuant to art. 934 CO following a proof of interest in maintaining the entry in the commercial register. They argue, contrary to the new provisions, the requested registration must be carried out to ensure the completeness and accuracy of the commercial register, but in this case the new provisions would then be of no practical significance.
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