In mid-March 2020, due to rapidly increasing numbers of infections in Switzerland, the Swiss government – the Federal Council – declared the epidemic situation in connection with Covid-19 as "extraordinary" and tightened measures to combat its spread. In particular, the Swiss government imposed restrictions on border crossings and ordered that all schools, shops, restaurants and bars, as well as all entertainment and leisure facilities, be closed. It only eased these measures partially and gradually after May 11 2020.
The Swiss economy was dealt a severe blow. Many companies were forced to restrict or even suspend their activities in the wake of these measures, triggering a sharp fall in GDP. The GDP is expected to plunge by approximately 6% over the year as a whole, while unemployment is expected to hit 3.8% (it was 2.3% in 2019). Yet, not least due to the Swiss government's swift response, the majority of Swiss businesses have so far coped relatively well with the adverse economic environment, with no significant increase of the number of new bankruptcy proceedings so far.
To counteract the negative effects of its public health measures, the Federal Council enacted a wide variety of support initiatives to give troubled businesses a hand. Of these initiatives, three broad responses emerged as the most significant.
In the first, the Federal Council adopted and implemented temporary changes to short-time work compensation, extending the entitlement up to August 31 2020 for the following employees, who were previously not covered: (i) fixed-term contract and temporary employees, apprentices and, under certain conditions, employees on call; (ii) persons who work in the business of their spouse/registered partner; and (iii) employees qualifying as "employer-like", such as shareholders who work as salaried employees.
The application process was also simplified: the waiting period was lifted, the period of authorisation was extended from three to six months and the process in general was facilitated (for instance, with simpler application forms etc.). While certain facilitation measures (such as the prolonged period of authorisation) will gradually be phased out starting on September 1 2020, the simplified application process will remain in place until December 31 2020.
Since short-time work compensation proved an effective instrument to combat the economic impacts of Covid-19, on July 1 2020, the Federal Council prolonged the period of entitlement from 12 months to 18 months, starting from September 1 2020 and lasting until the end of 2021.
A second key initiative was government-backed bridge loans. On March 25 2020, the Federal Council established a secured bridge loan-programme in the aggregate amount to up to CHF20 billion (later upsized to up to CHF40 billion), which was designed to provide secured bridge loans in a rapid and unbureaucratic manner. It consisted of two types of bridge facilities, which could be applied for until July 31 2020:
- Covid-19-Loan: loans up to CHF500,000, 100% (indirectly) secured by the Swiss Confederation by means of a joint surety and granted within a short timeframe, based solely on the information and documentation provided by the applicant and without any further credit checks.
- Covid-19-Loan-Plus: loans exceeding CHF500,000 and up to a maximum of CHF20 million, 85% (indirectly) secured by the Swiss Confederation by means of a joint surety and preceded by a credit check by the relevant lending bank in line with standard industry practice.
The maximum credit amount was limited to 10% of the applicant's turnover in the preceding financial year. Notably, companies (i) with a turnover over CHF500 million or (ii) not being (significantly) economically affected by the pandemic were not eligible.
The interest rate was set at 0.0% per annum, for Covid-19-Loans, whereas Covid-19-Loan-Plus will bear an interest rate of 0.5% per annum on the amount which is (indirectly) secured by the Swiss Confederation.The interest rate on the remaining, unsecured part of the Covid-19-Loan Plus is at the discretion of the parties. The term may extend to up to five years, with the possibility of a hardship-extension for an additional two years with the consent of the government.
Covid-19-Loans and Covid-19-Loans-Plus cannot be used for new investments in fixed assets unless they constitute replacement investments. A borrower is generally no longer permitted to distribute dividends/royalties, reimburse capital contributions, grant or refinance loans or repay intragroup loans (subject to certain exceptions). Non-compliance with these restrictions may trigger civil law liability and criminal law sanctions.
While the relevant ordinance will expire on September 25 2020, it is envisaged that the ordinance will transform it into statutory law in substance. The government has contemplated that certain provisions will be adjusted, for example restrictions (permissibility of new capex), interest, and repayment etc. The Swiss Federal Parliament is set to debate on and enact the relevant statutory law in autumn 2020.
A third key pillar of the government's response was the modified insolvency regime. In mid-March 2020 the Federal Council ordered a stay of enforcement from March 19 to April 4 2020 (prolonged by the statutory enforcement holidays until April 19 2020) and a standstill or extension of the deadlines in court proceedings from March 21 until April 19 2020. On April 16 2020, the Federal Council enacted substantive, temporary measures in relation to the Swiss insolvency regime that are set to remain in force until October 20 2020 and include the following:
- A suspension of the duty of the board of directors to notify the bankruptcy court in case of over-indebtedness in certain circumstances (see below under 'Directors' duties').
- A new Covid-19-Moratorium for small and medium-sized enterprises, which provides such companies with a simple and straightforward procedure to obtain a temporary deferral of their payment obligations in order to reorganize and prepare for the time after the crisis.
- Certain other amendments such as facilitations to enter into a moratorium and an extension of the provisional moratorium to six months.
Under Swiss insolvency laws, there is no group insolvency concept, so each entity must be dealt with separately. However, sector-specific rules may apply. In particular, insolvencies of banks, securities firms, insurance companies, collective investment schemes and fund managers are subject to special insolvency regimes.
Enforcement proceedings are generally not initiated ex officio, but rather require a petition. The debtor itself must initiate insolvency proceedings in the event of overindebtedness (i.e., when its liabilities exceed the value of its assets (see below under 'Directors' duties')). If a creditor seeks to initiate insolvency proceedings, it must file an enforcement request with the competent debt collection office and pass through an introductory phase. As a rule, this introductory phase is mandatory; in extraordinary circumstances, however, the debtor, a creditor or the statutory auditors can directly apply for declaration of bankruptcy to the bankruptcy court.
Broadly, the Swiss Federal Debt Enforcement and Bankruptcy Act (DEBA) provides for three types of debt enforcement:
1. Enforcement of unsecured claims against individuals will, subject to the below, be pursued by way of seizure and realisation of assets belonging to the debtor to the extent necessary to cover the claim.
2. Enforcement of unsecured claims against individuals and legal entities registered in the Swiss commercial register will lead to bankruptcy proceedings opened against the debtor. In limited circumstances, bankruptcy proceedings are available also for individuals not registered in the commercial register. Once bankruptcy proceedings have been opened, all the debtor's assets form an estate over which the debtor can no longer dispose. The estate is then realised, and the proceeds are distributed among the creditors, taking into account their claims' value and priority.
3. Enforcement of secured claims both against natural persons and against legal entities might have to be pursued by way of realisation of the collateral.
To avoid bankruptcy, debtors facing financial distress may be able to apply for a Covid-19 Moratorium or a moratorium under Swiss corporate law. In addition, as an alternative to bankruptcy proceedings, the DEBA provides for statutory composition proceedings, which allow for a restructuring of the company with a view to continuing its business on a sounder basis and for liquidation of the company in a manner that is more beneficial to creditors than bankruptcy proceedings. Composition proceedings provide for the ability to achieve reorganisation during a moratorium by way of a composition agreement between the debtor and its creditors. Eventually, any composition agreement needs to be approved by the competent court and thereafter becomes binding on all creditors.
In case of a substantiated concern of over-indebtedness, the board of directors of the relevant company has to procure that an (audited) interim balance sheet be drawn up based on (i) liquidation values and (ii) going concern values. For purposes of this calculation, unlike Covid-19-Loans-Plus, any Covid-19-Loans will temporarily not be taken into account until at least March 31 2022, and the interim balance sheet must not be audited for the period until October 20 2020. If such interim balance sheets show over-indebtedness, the board of directors must notify the bankruptcy court without delay. Non-compliance with this obligation may expose the board of directors to both civil law liability and criminal law sanctions and the statutory auditors have the obligation to notify the competent court in such case.
The board of directors need, however, not file for bankruptcy if: (i) creditors with claims in an aggregate amount not lower than the amount of the over-indebtedness subordinate their claims against the claims of all other creditors; (ii) if there is a substantiated likelihood for an informal workout within a relatively short period of time; or (iii) under the Covid-19 modified insolvency regime, if there is a prospect that the over-indebtedness will be eliminated by December 31 2020, provided that the debtor was not already over-indebted on December 31 2019. Despite the Covid-19 modified insolvency regime expiring on October 20 2020, we believe that companies may continue to rely on this exemption until the end of the year under the conditions specified therein.
While the criterion of over-indebtedness is based on a balance sheet test (rather than a liquidity test), the loss of the going concern assumption leads to an obligation to account for liquidation values, which will, in turn, typically result in over-indebtedness. Under Swiss law, such going concern assumption is lost if it is intended or probably inevitable that all or some activities of the company will cease in the next 12 months. To that effect, the board of directors must examine the current economic situation and future business development with a budget and a liquidity plan, taking into account the order book, the situation vis-à-vis lenders, the procurement of liquidity through the sale of assets, etc. As as soon as the debtor loses such going concern assumption for accounting purposes, going concern values become irrelevant and the test is exclusively based on liquidation values. In times of financial distress, the board of directors must therefore intensify its supervision and monitoring activities in general and place enhanced scrutiny on the ongoing assessment of the going concern assumption.
The board of directors generally has a fiduciary duty to safeguard the interest of the company and, as such, in times of financial distress, must convene regularly and prepare restructuring and/or refinancing strategies as well as contingency plans. If the prospects of successful restructuring and/or refinancing fade, its fiduciary duty shifts, however, towards safeguarding the interests of the creditors.
Challenging a debtor's transactions
The insolvency administration and certain creditors may, under certain conditions, void transactions. A transaction that is detrimental to the debtor's creditors may be voided in the following cases:
- The debtor has made a gift or a disposal of assets without any or with a disproportionate consideration, provided that the debtor made such transaction within the last year prior to the seizure, the opening of bankruptcy proceedings or the granting of a moratorium.
- In addition, certain actions are voidable if performed by the debtor within the last year prior to the seizure, the opening of bankruptcy proceedings or the granting of a moratorium, provided that the debtor was already (recognizably) overindebted at that time: (i) granting of security for already existing claims, provided that the debtor was not previously obliged to grant such security, (ii) payment of a monetary obligation in any way other than by payment in cash or other customary means of payment, and (iii) the payment of a debt not due.
- Any acts performed within the last five years prior to the seizure, the opening of bankruptcy proceedings or the granting of a moratorium performed by the debtor with the (perceptible) intention to disadvantage its creditors, discriminate some creditors against others or to favor some creditors to others are voidable.
Switzerland's international insolvency law is governed by the Swiss Federal Act on Private International Law (PILA). In the event that bankruptcy, composition or similar proceedings are initiated outside Switzerland, the debtor's assets located in Switzerland cannot directly be handed over to the foreign administrator. The foreign administrator is generally not allowed to collect assets located in Switzerland or take any legal actions unless and until the foreign proceedings have been recognised in Switzerland pursuant to articles 166 et seq. PILA.
The relevant procedure can be summarised as follows: The foreign administrator or creditor needs to request recognition of the foreign bankruptcy or composition decree. Recognition is only granted if certain conditions are met (for example, competence of the relevant non-Swiss court, no violation of Swiss public policy etc.). If recognition is granted, the court opens auxiliary proceedings with respect to the assets of the debtor located in Switzerland (secondary proceedings). Following liquidation, the proceeds are used to pay down the collateralised claims and privileged claims of Swiss creditors. Where there is a surplus, its distribution depends on how the other Swiss creditors' claims are treated in the schedule of accepted claims in the foreign proceeding. The surplus is transmitted to the foreign proceedings only where such claims are adequately addressed. Otherwise, the surplus is paid out to the Swiss creditors.
Under certain circumstances, however, a dispensation from secondary proceedings may be granted. If this happens, the foreign administrator will be conferred the same powers in Switzerland as it has under the laws of the main proceedings. Also, if the foreign debtor has a branch in Switzerland, the law allows for the initiation of separate bankruptcy proceedings with regards to that branch. Such proceedings will be governed by the DEBA.
So far, Swiss businesses have generally coped well with the challenges they are facing in connection with Covid-19. A wave of bankruptcies has – for the time being – failed to materialise, not least because of the governmental support measures which have proved effective, notably in respect of securing liquidity. A second wave of Covid-19 infections may, however, affect the continuous good state of Swiss businesses more seriously. It also remains to be seen how swiftly Swiss businesses can recoup their pre-crisis turnover.
Stefan Kramer is a partner and head of Homburger's restructuring & insolvency team. He regularly works on insolvency-related matters, including recovery and resolution planning and cross-border recognition of insolvency measures. He also advises on all regulatory aspects, including banking and stock exchange regulations and derivatives market regulations.
Stefan Bindschedler's practice focuses on finance and capital markets law. He regularly advises on syndicated debt financings, buyout financings and financial restructurings. He also advises on regulatory aspects, including banking and stock exchange regulations.