Lessons for Swiss portfolio companies in distress
Christoph Neeracher, Philippe Seiler, and Raphael Annasohn of Bär & Karrer share lessons learnt that can benefit portfolio companies that find themselves in distress situations in Switzerland
Crisis situations in portfolio companies can arise due to various internal and external reasons. Regardless of the origin, crisis situations call for a shift in competencies, from a company's management up to its board of directors. The board shall ‘take the reins’ and monitor the company's management more closely, as well as implement suitable reporting systems. Swiss corporate law entails a number of duties for the board of directors and lists concrete protection measures to safeguard (oftentimes diverging) stakeholders' interests in the case of a company in distress.
By taking control and intensifying its supervision, the board of directors fulfils its duty to take action. Faced with the threat of a financial downturn, the board should immediately carry out a realistic analysis of the current situation and assess whether the company is capable of a financial turnaround. Therefore, planning, monitoring, and conserving the company's liquidity – as well as implementing appropriate measures – are vitally important and explicitly stipulated in Swiss corporate law. These appropriate measures may include increasing credit limits with banks, delaying planned investments, or seeking the benefits of short-time working (Kurzarbeit), which in particular helped many Swiss companies through the Covid-19 pandemic.
Swiss bankruptcy law
It is important for portfolio companies to note that Swiss bankruptcy law takes a single legal entity view and does not allow for a group perspective in a crisis situation. The board of directors of each group entity must therefore safeguard the interests of the entity (and of its creditors). Accordingly, when assessing the balance sheet, the board must determine whether impairments to equity participation or intra-group receivables are necessary. Existing group relationships and dependencies should be scrutinised closely. Special awareness should be placed on up- and cross-stream payments, and benefits and cash pooling.
In addition to taking action aimed directly at conserving liquidity, the board of directors needs to implement further adequate restructuring steps. These may consist of operational and organisational measures or balance sheet restructuring with or without capital inflow. Or, as is usual in practice, there may be a combination of measures such as cost reduction programmes, the optimisation of processes and internal structures, and consultation with experts. Regardless of the individual case, the board needs to act swiftly and decisively to implement effective restructuring measures.
Based on Swiss fraudulent conveyance laws (Paulianische Anfechtung), creditors must be treated equally if a debtor is in severe financial distress. No payments shall be made to individual creditors in preference over higher or equally ranking creditors. As a general rule, companies in financial distress should avoid:
Paying claims before they are due;
Granting collateral for existing obligations; and
Settling monetary claims by unusual means of payment (such as delivery in kind).
In cases where illiquidity or bankruptcy is threatened, subject to certain exceptions, (non-privileged) claims should no longer be paid (including due claims). However, an assessment of each individual case will be required.
Board of directors' responsibilities
The board of directors needs to observe formal notification duties under credit agreements, directors’ and officers’ liability insurance (D&O insurance), and so on. As an exception to the general rule that only the company is liable for its obligations, directors can ultimately be held liable for unpaid social security contributions in cases where social security provisions are violated. The board should therefore ensure their timely payment.
Despite the fact that a successful restructuring may be highly likely, it is prudent to take time early on to consider and, where appropriate, to prepare a ‘Plan B’. This could include, for example, a hive-off vehicle, composition proceedings, or filing for bankruptcy.
If, despite the measures mentioned above, an out-of-court restructuring appears no longer possible, the board of directors can generally choose between two insolvency proceedings: composition proceedings or bankruptcy. If the company is over-indebted (meaning that its liabilities are no longer covered by assets; known as Überschuldung), the board may be obliged to initiate one of these proceedings.
The choice of the appropriate proceedings depends primarily on whether the future business development is expected to be U-shaped (in which case composition proceedings are preferable) or L-shaped (meaning that bankruptcy proceedings are preferred).
Illiquidity often leads to over-indebtedness, which in turn triggers the duty of the board of directors to file for bankruptcy. Therefore, implementing a monitoring system that allows real-time visibility of the company’s liquidity (actual and generally over the next 12 months) for each group entity and on a consolidated basis is vital for portfolio companies. Based on this, the liquidity plan can be revised on a rolling basis as needed.