A short guide to leveraging Pre-Packs in Switzerland

What situations call for a Pre-Pack?

Imagine the following scenario: a debtor, in our case a company, is facing severe financial distress. The company, however, still has certain business units that are profitable. In this situation, it may be sensible for the company to sell only these profitable business units. This proactive approach, if implemented quickly, could preserve business value and jobs while minimising disruption to operations and employees.

The questions are: can a Swiss pre-pack achieve this and if so, how?

The Swiss Pre-Pack – timely just on the verge of composition proceedings

In addition to bankruptcy proceedings, which in almost all cases result in the immediate suspension of the company's activities, business may be continued within the framework of composition proceedings (Nachlassverfahren). Composition proceedings are generally aimed at restructuring a company. The proceedings provide, among other things, temporary relief from creditor actions in the form of enforcement measures against the debtor. The proceedings are structured in two stages. The first stage is a provisional debt moratorium lasting a maximum of eight months, followed by the second stage, a final debt moratorium, lasting a maximum of 24 months. During these proceedings, the court will typically appoint a commissioner, but the financially distressed company generally retains its authority to act. At the end of composition proceedings, the company will in most cases seek the creditors' approval of a composition agreement.

The pre-pack comes into play before the company applies for the granting of composition proceedings. Instead, the company opts for a pre-pack. For this purpose, the company identifies a suitable party who is interested in acquiring certain business units, mostly by way of an asset deal. Typically, the profitable business units will be transferred to a newly created company, which is established to hold and manage the purchased assets. The company and the purchaser will negotiate the terms leading to the conclusion of an asset purchase agreement.

This agreement will not simply be signed and executed, but is typically subject to several suspensive conditions, which are as follows:

• the court grants the provisional debt moratorium;
• the court authorises the debtor to conclude and implement the asset purchase agreement;
• possibly, the debtor does not disclose the fact that a moratorium has been granted (i.e. "silent moratorium");
• possibly, the investor retains the right to rescind the agreement if the requested court approval is not granted within a specified period of time.

Once the asset purchase agreement has been concluded, the commissioner or the company will proceed to seek the following relief from the court:

1. to be granted a provisional debt moratorium;
2. to be authorised to enter into the asset purchase agreement;
3. possibly, to appoint a specific commissioner, or not to appoint a commissioner.

The advantages of a Swiss Pre-Pack

The main advantage of a pre-pack is that it allows to structure and sign an asset deal even before the company applies for composition proceedings, so that the deal can be executed quickly once the application has been approved. Another notable benefit is that it can be carried out in complete confidentiality (i.e. without being published in the Swiss Commercial Gazette, SHAB). Creditors are only informed of the deal after it has been executed. And compared to a transaction outside of composition proceedings, the court approval makes the deal immune from challenges such as avoidance actions.

In essence, the pre-pack offers confidentiality and legal certainty to distressed companies and to potential purchasers, while ensuring a seamless transfer: a win-win solution for all parties?

Admissibility of Pre-Packs under Swiss law

Pre-pack transactions are not regulated by Swiss law and there is only limited case-law. The Swiss Supreme Court confirmed that creditors have no right to appeal a court's decision authorising a debtor to enter into a takeover agreement. Creditors lack even the right to be heard prior to the conclusion of the takeover agreement. The pre-pack may therefore be carried out completely "silent" (i.e. without any publication in the SHAB). Equally, creditors do not have the right to submit a higher bid in the takeover process.

However, the Supreme Court did acknowledge that an authorisation decision could be void if it had serious flaws. The court did not specify when such serious defects existed, but found the takeover agreement at issue to be admissible based on the following findings:

1. the purchaser had offered CHF 1.3 million in cash for the transfer with the offer expiring only ten days after the commissioner's application to the court;
2. one week's notice was sufficient for the court to obtain a reliable picture of the transaction;
3. the purchaser's offer was the result of several bids and a specialist was appointed to assist with the bidding process;
4. according to the commissioner, an immediate bankruptcy would have resulted in a lower sale price as the goodwill of the specific business unit could not have been realised;
5. the commissioner was professionally qualified.

It follows that there are no clear criteria for the approval of a pre-pack transaction. However, the company will presumably have to demonstrate to the court that the pre-pack will provide a satisfactory return (i.e. that the expected proceeds will be higher than those expected from bankruptcy proceedings). The court will also be more likely to approve a pre-pack if it meets certain social criteria, such as preserving jobs. In addition, the deal chosen would ideally be the result of some form of selection between several bids. The involvement of experts, such as an experienced commissioner, may further increase the likelihood of approval. On the other hand, if the company presents the facts to the court in a clear and unambiguous manner, the court may be given only a few days to decide on the transaction, allowing for a speedy takeover.

Practical conclusions on Pre-Packs in Switzerland

In summary, the above decision establishes the admissibility of (conditional) pre-pack deals. While the conditions may seem strict, the trend in practice suggests that pre-pack deals are more likely to be approved than rejected. A pre-pack offers creditors quick and possibly higher liquidity compared to lengthy bankruptcy proceedings. Therefore, pre-packs have been and will continue to be of considerable importance in Swiss practice.

Remark:

As Switzerland is not a member of the EU, the proposed directive on the harmonisation of certain aspects of insolvency law ( https://www.cmshs-bloggt.de/insolvenzrecht/pre-pack-verfahren-ein-neues-sanierungsinstrument/) will not apply to Switzerland.

This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.