As a result of the coronavirus disease (COVID-19) pandemic (SARS-CoV-2), many companies will find themselves in financial difficulties. The Swiss government has already taken various measures to ease the burden on companies, including a financial assistance program of up to CHF 40 billion, and is considering further measures. From 1 to 3 April 2020, the Federal Office of Justice conducted a public consultation on a proposal to suspend the duty of companies to notify the judge in the event of over-indebtedness, which would then normally open insolvency proceedings, and to make amendments to the debt-restructuring proceedings. The project includes a new simplified "COVID-19 moratorium" for small and medium-sized enterprises (SMEs). The proposed measures are aimed at replacing the stay of all debt collection proceedings in place until 19 April 2020 (see our Newsflash of 20 March 2020).
1. Suspension of duty to notify the judge in case of over-indebtedness
Pursuant to Article 725 of the Swiss Code of Obligations, the board of directors shall notify the judge if the interim balance sheet shows that the claims of the company's creditors are neither covered if the assets are appraised at on-going business values nor at liquidation values. Such an interim balance sheet must be prepared and submitted to the auditors for examination "if there is reasoned concern of over-indebtedness". Upon being notified, the judge adjudicates the bankruptcy or grants either an adjournment of bankruptcy or a restructuring moratorium. If the board of directors fails to notify the judge, the auditors are required to do it.
Under the current COVID-19 situation and, specifically, the lockdown in place since mid-March 2020, the financial situation of more and more companies in Switzerland is getting increasingly difficult. To prevent that the boards of directors of these companies, in order to fulfill their legal duties and thus to prevent personal liability, have to file for insolvency, the Swiss government proposes that the notification of the judge can be omitted if there is a reasonable prospect that the over-indebtedness will be eliminated within six months after the end of the lockdown and other special measures under COVID-19 Regulation 2 of 13 March 2020, provided that the company was not over-indebted on 31 December 2019.
2. New COVID-19 moratorium for small and medium-sized enterprises
The existing restructuring proceedings in Articles 293 et seq. of the Swiss Debt Enforcement and Bankruptcy Act are generally considered to be too cumbersome and expensive for many SMEs. The proposed COVID-19 moratorium is intended to provide a simple procedure for debtors in distress to obtain a temporary stay of their payment obligations in order to allow them to reorganize and prepare for the time after the crisis. The procedure shall be open to companies not being publicly traded companies and a) with a balance sum of less than CHF 20 million, b) a turnover of less than CHF 40 million, c) less than 250 full-time employees (two of the criteria must have been fulfilled in two consecutive financial years), provided that such company was not already over-indebted on 31 December 2019.
The project provides that debtors may request the court to grant a moratorium of a maximum of three months, which may be extended by another three months. In principle no administrator will be appointed, but the court, ex officio or upon request by the debtor or a creditor, may appoint one if the circumstances so require. The moratorium shall prohibit the repayment of all claims against the debtor which have arisen until 30 May 2020, which may thus also include debts after the granting of the moratorium. Apart from this, the effects of the proposed COVID-19 moratorium shall largely correspond to those of the ordinary debt-restructuring moratorium. Receivables arising after the moratorium are not concerned, which allows the debtor to continue his business operations after the moratorium has been granted.
3. Other amendments to the debt-restructuring moratorium proceedings
For companies which do not qualify for the newly proposed COVID-19 moratorium, a few amendments to the existing debt-restructuring procedure are proposed, including the following:
- Extension of the maximum duration of the provisional moratorium from four to six months.
- Although this would actually be necessary to preserve the debtor's assets, the debtor should not be declared bankrupt before 30 May 2020 if the company was not over-indebted on 31 December 2019.
- The debtor shall be allowed, with the consent of the administrator, to terminate long-term agreements (such as lease agreements, but not employment contracts) at any point in time without the need to show, as under current law, that the purpose of the restructuring would otherwise be frustrated. The elimination of this requirement appears to be the most controversial of the proposed measures.
The proposals of the Swiss government appear to have been largely welcomed in the public consultation. Naturally, some participants expressed various concerns and suggested a number of changes, at times contradictory in nature. It will now be up to the Federal Office of Justice to consider these suggestions and to submit a final proposal to the Swiss government, with the aim of enacting the amendments as soon as possible.