Restructuring and insolvency law in Switzerland

1. What is the primary legislation governing insolvency and restructuring 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) 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 Private International Law Act (Bundesgesetz über das Internationale Privatrecht) applies.

2. How are insolvency proceedings or restructuring 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. 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. 

Moratorium proceedings are initiated with the competent court upon request by the debtor or a creditor. 

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. 

The law does not require a specific legal reason for a debtor’s request for the granting of moratorium proceedings and a (provisional) moratorium is granted unless there is clearly no prospect of a restructuring. The debtor should initiate moratorium proceedings as early as possible, since the chances for a successful restructuring increase if proceedings are initiated at an early stage. However, the court may not grant a moratorium based on a request that is filed by the debtor with malicious intent (for example if the debtor is not financially distressed and the request for the granting of moratorium proceedings is filed with the sole purpose to optimise the debtor’s financial situation to the detriment of the creditors). 

A creditor that is entitled to request the initiation of insolvency proceedings may also request the granting of moratorium proceedings. However, creditors’ requests for the granting of moratorium proceedings have hardly any practical relevance.

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

Swiss law provides for insolvency and moratorium proceedings.

Insolvency proceedings

The aim of insolvency proceedings is the liquidation of the debtor/company. 
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 right of disposal is 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 which are not for a sum of money are, as a principle, converted into a monetary claim of corresponding value. 

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

Moratorium proceedings

Moratorium proceedings aim at the restructuring of the debtor, or at least the rescue of a profitable operating part of the debtor.

Moratorium proceedings start with a provisional moratorium and may be followed by a final moratorium. 

Provisional moratorium

The provisional moratorium aims to clarify whether there is a prospect of restructuring or the conclusion of a composition agreement. Accordingly, as a principle, following the granting of a provisional moratorium, a commissioner is appointed to assess the feasibility of the debtor’s restructuring or the conclusion of a composition agreement.

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

  • enforcement proceedings can neither be initiated nor continued
  • civil court proceedings in which the company is a party are, as a principle, stayed
  • limitation and forfeiture periods stand still, and
  • no applications for freezing of assets may be 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 requests either the granting of a final moratorium or the opening of insolvency proceedings. The commissioner will opt for the request to open insolvency proceedings if it comes to the conclusion that there is no prospect of debt restructuring or the conclusion of a composition agreement. In the event the restructuring of the debtor is successful before the expiry of the provisional or final moratorium, the court revokes the moratorium.

Final moratorium

The final moratorium aims at the restructuring of the company or the conclusion of a composition agreement. The law provides for two types of composition agreements:

  • an ordinary composition agreement is an agreement under which the creditors in particular waive parts of their claims; the conclusion and approval of an ordinary composition agreement leads to the restructuring of the debtor
  • by way of a composition agreement with the assignment of assets, creditors are granted the right to dispose of the debtor’s assets, or such assets are assigned in whole or in part to a third party. The conclusion and approval of a composition agreement with the assignment of assets leads to the full or partial liquidation of the debtor’s assets.

5. Are there several types of creditors and what is the effect of a difference?

Swiss law differentiates between:

  • creditors of claims secured by a pledge
  • creditors of preferential claims, i.e. either: 
    • first class claims (such as, among others, wage claims), or 
    • second class claims (such as, among others, social security claims)
  • creditors of non-preferential claims (so-called third class claims), and
  • creditors of subordinated claims.

Creditors of claims secured by a pledge are satisfied by the proceeds of the pledge. If the proceeds of the pledge are not sufficient to fully cover the creditor’s claim, the uncovered claim remains a first, second or third class claim, depending on the type of claim. 

Second class claims only receive proceeds if all preceding first class claims are fully covered. The same mechanism applies with regard to third class claims, which accordingly only receive a dividend if all preceding first and second class claims are fully covered. Creditors of subordinated claims would only receive coverage in the event all preceding claims are fully satisfied, which is hardly ever the case.

6. 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?

With regard to corporations, where there is good cause to suspect the debtor’s over-indebtedness, an interim balance must be drawn up and submitted to a licensed auditor for examination. If such interim balance sheet shows that the claims of the debtor’s creditors are no longer covered by its assets, based on neither going concern nor liquidation values, the debtor’s board of directors must notify the court. Such notification leads, as a principle, to the opening of insolvency proceedings over the debtor.

According to doctrine and jurisprudence, following the detection of the debtor’s over-indebtedness, the board of directors is given 4 to 6 weeks to consider and implement restructuring measures. In the event that the board of directors comes to the conclusion that restructuring measures will not be expedient, the court must be notified by 4 to 6 weeks at the latest after the over-indebtedness was detected. However, the board of directors is obliged to notify the court immediately if from the outset there is no chance for the debtor’s restructuring.

Contrary to the laws of other countries, a debtor’s illiquidity does not trigger, as a principle, the board of directors’ duty to notify the court. However, if insufficient liquidity makes it unlikely that the debtor will be able to continue its operations for the upcoming 12 months, the board of directors is not allowed to further draw the balance sheet based on going concern values, but is required to apply liquidation values. In the majority of cases, the change to liquidation values causes a detrimental loss of values, which will eventually result in the debtor’s over-indebtedness. 

The board of directors and all persons engaged in the management of the debtor are liable to both shareholders and creditors for any losses or damage arising from an intentional or negligent breach of their duties. Thus, delay in the notification of a debtor’s over-indebtedness to the court may lead to the liability of the board of directors (and management) for the damage that occurred as a result of the delay.

In addition, delayed notification may also lead to criminal charges 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 company, due to insolvency, not be able to make such payments.

In the event of a capital loss, restructuring measures must be proposed by the board of directors to the shareholders’ meeting without delay. A capital loss is given if (besides the liabilities) 50% of the share capital and the statutory reserves are no longer covered by assets.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

In the event of a capital loss, restructuring measures must be proposed by the board of directors to the shareholders’ meeting without delay (cf. also in detail the answer to point 6 above). 

Where there is good cause to suspect the company’s over-indebtedness, an interim balance sheet must be drawn up and submitted to a licensed auditor for examination. If such interim balance sheet shows that the claims of the company’s creditors are no longer covered by its assets, based on neither going concern nor liquidation values, the board of directors must notify the judge, i.e. deposit the balance sheet at the competent court, which leads, as a principle, to the opening of bankruptcy proceedings (cf. also in detail the answer to point 6 above).

The representative bodies of a legal entity have a duty of disclosure and information to the bankruptcy administration. 
After insolvency proceedings are initiated, the debtor’s board of directors and management are no longer entitled to represent or act for the company. Accordingly, these persons and their representation power vis-à-vis the company are deleted from the commercial register.

In moratorium proceedings, the court granting the moratorium decides on whether and to which extent the board of directors and management remain competent to represent and act for the debtor. As a principle, the debtor’s board of directors and management continue the business activities under the supervision of the commissioner. For some actions, the board of directors and management require the approval of the commissioner and/or the court. The court may, however, direct that additional acts shall require the commissioner’s consent in order to be legally valid, or even authorise the commissioner to take over management of the debtor. 

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders do not have any duties in connection with insolvency proceedings.

If, during moratorium proceedings, an ordinary composition agreement (cf. also in detail the answer to point 4 above) is concluded and approved, the shareholders are obliged to provide an adequate contribution to the restructuring of the company.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

Prior to the initiation of insolvency proceedings, the debtor’s shareholders must approve if the company files for insolvency based on its illiquidity. However, the shareholders are not involved in the insolvency proceedings over the company.

In moratorium proceedings the shareholders may be involved on several levels: 

  • as long as the debtor’s power of disposal is neither restricted nor its power of management withdrawn, the debtor remains responsible for the decision on the sale of the company, respectively its profitable operating part. Accordingly, the general meeting of shareholders decides on the sale. (If fixed assets are sold, the sale requires further approval by the court.)
  • the law provides for the possibility that a moratorium dividend consists of shares or membership rights in the debtor. If existing shares or membership rights in the debtor are transferred to the creditors, the shareholders of the shares to be transferred are involved in such transfer 
  • in the event of the conclusion and approval of an ordinary composition agreement, the shareholders are obliged to provide an adequate contribution to the restructuring of the company. 

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

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

Swiss law does not provide for a legal framework for preventive restructuring. However, judicial moratorium proceedings as foreseen by the Debt Enforcement and Bankruptcy Act aim at the restructuring of the debtor, and the respective provisions in many aspects contain similar regulations and mechanisms as provided by the Directive on Preventive Restructuring Frameworks (2017/1132).

13. What is the average success rate after completed restructuring / insolvency proceedings?

The creditors have to register their claims against the debtor with the insolvency administrator (in insolvency proceedings) or the commissioner (in moratorium proceedings). In insolvency proceedings, the average dividend amounts to 1-10%, whereas in moratorium proceedings, the average dividend is in the range of 10-25%.

Picture of Marjolaine Jakob
Dr Marjolaine Jakob, ArbP
Associate
Zurich
Reto Hunsperger, LL.M.
Partner
Zurich