Corporate Restructuring and Insolvency under Revised Swiss Corporate Law

On 19 June 2020, the Swiss Parliament adopted the most important revision of Swiss corporate law in years, thus concluding a process started almost two decades ago. The revision also comes with a number of changes which, in particular, aim at clarifying certain aspects relating to insolvency triggers and bankruptcy filing obligations. Such clarification complements the major revision of Swiss insolvency law (Sanierungsrechtsrevision) which entered into force in 2014 and had introduced a new, facilitated debt moratorium regime. 

By Tanja Luginbühl / Anja Affolter Marino (Reference: CapLaw-2020-58)

1) Legal Framework prior to Revision

a) Limited and Fragmentary Statutory Rules

The statutory corporate insolvency regime pursuant to Swiss corporate law as currently in force is rather fragmentary. It is, essentially, limited to two provisions, articles 725 and 725a CO (as well pertaining references thereto for legal entities other than stock corporations). Consequently, there are numerous issues not addressed in statutory law, some of which have been answered by case law, whereas others are disputed in legal doctrine. The uncertainty arising as a result thereof is a major burden for the board of directors, given the increased risk of potential personal liability in a financial distress situation and the pertaining pitfalls members of the board face in such a scenario. Some (but not all) of these open questions have been addressed and answered in the revised CO, as outlined in more detail in Section 2 below.

b) Balance-sheet Based Test for Filing Obligations in Financial
Distress Scenario

The corporate restructuring provisions of the “old” CO provide for certain obligations of the board of directors of a company in financial difficulties. Such obligations are triggered if certain thresholds in the company’s capital and liability structures are exceeded, i.e. determined based on a pure balance sheet test. Specifically, the board of a Swiss company must act if the relevant balance sheet shows (i) the persistence of a so-called capital loss (hälftiger Kapitalverlust) or (ii) that the company’s liabilities are no longer covered by its assets (over-indebtedness, Überschuldung). In the latter case, the board is obliged to file for bankruptcy, except only for where there are deeply subordinated loans (Rangrücktritte) in an amount sufficient to cover the over-indebtedness plus foreseeable losses or (ii) there are good prospects that a financial restructuring of the company can be achieved in a reasonably short period (stille Sanierung).

c) No Specific Regime in Case of Liquidity Issues

While the CO in its current form provides for certain balance-sheet based insolvency tests, liquidity aspects (e.g. cash flow issues, difficulties to pay debts when due) are not directly taken into account for such purposes. That said, over-indebtedness may result from illiquidity where, as a result, the going concern assumption is no longer sustainable and, thus, accounting will have to be made at liquidation values.

2) Corporate Restructuring and Insolvency Filing Rules under the Revised CO

The revision has introduced a number of amendments relating to the obligations of the board of a company in financial distress. The most relevant changes are outlined below.

a) Illiquidity (Zahlungsunfähigkeit)

In view of the absence of any direct actions related to liquidity issues under the current regime, one of the goals of the revision of articles 725 et seq. CO aimed at expanding board duties relating to the “early warning system” in case of illiquidity and impending insolvency. A first draft proposed by the Federal Council included rather extensive obligations in case of illiquidity (Zahlungsunfähigkeit), e.g. the preparation and audit of a liquidity plan. However, such intention faced a considerable amount of scepticism during the legislative process and has, ultimately, been implemented only in part. 

The final provision adopted by the Swiss Parliament, article 725 revCO, now provides that the board has to monitor the company’s solvency and must adopt measures to ensure liquidity in case there is a risk of imminent illiquidity (drohende Zahlungsunfähigkeit) or propose such measures to the shareholders’ meeting if within the latter’s competence (e.g. capital increase). The term “illiquidity” is used for the first time in articles 725 et seq. CO. Unfortunately, the revised CO does not provide for a definition of such term, something that would have been helpful in practice. There is, however, at least some guidance in the explanatory statement (Botschaft) of the Swiss Federal Council, pursuant to which illiquidity shall persist if a company is no longer able to meet its liabilities as they fall due (on a continuous basis, not as a one-time incident) or obtain the means necessary to cover its debts.

At first glance, the new article 725 revCO could be seen as an actual novelty as there is no equivalent provision in the previous law. However, on further review, it ultimately only expressly spells out what is generally considered to form part of the directors’ non-transferable and inalienable duty of financial control and overview. The same holds true for the note in article 725 (3) revCO providing that directors shall act “without delay” which, in substance, codifies what is generally covered by the directors’ duty of care.

b) Capital Loss

Pursuant to the new article 725a (1) revCO, if the last (audited) annual financial statements show that half of the sum of (i) the share capital and (ii) the legal capital and profit reserves of the company which are blocked for shareholder distribution are no longer covered by the net assets – thus that there is a so-called capital loss (hälftiger Kapitalverlust) – the directors must adopt measures in order to eliminate such capital loss or allow for a restructuring of the company. To the extent necessary, the directors submit a request to the shareholders’ meeting for any measures within the shareholder meeting’s competence.  

The wording of the new article 725a (1) revCO as set out above brings some helpful changes and clarifications, in concreto

– Calculation of capital loss: The current wording of the CO does not specify to what extent the legal reserves must be taken into account for purposes of the calculation of the capital loss. In particular, it was disputed in legal doctrine whether such calculation shall include the entirety of the reserves or whether only the “blocked” part – i.e. the amount exceeding 50% of the nominal share capital (20% for holding companies) – shall be considered. The revised provision now answers this question as it clearly states that only the reserves which cannot be distributed to the shareholders shall be taken into account when calculating whether the balance sheet shows a capital loss. 

– Shareholders’ Meeting: The current article 725 (1) CO obliges the board of directors to convene a so-called restructuring shareholders’ meeting (Sanierungsversammlung) in case of a capital loss. In practice, such meetings rarely provided any benefit and, on the contrary, constituted an unnecessary complexity. Such circumstance has been accounted for in the context of the revision, with the convening of a restructuring shareholders’ meeting no longer being mandatory pursuant to the new article 725a CO. 

– Audit requirement: Article 725a (2) revCO requires that the balance sheet forming the basis of the capital loss calculation be audited prior to its approval by the shareholders’ meeting, even if an opting-out has been declared for the company. Such audit requirement does not apply if the board of directors files a request for a debt restructuring moratorium with the competent court (article 725a (3) revCO).

c) Over-Indebtedness

While the revised law does not alter the substantive concept of the obligations of the board in case of over-indebtedness, it provides for certain clarifications and, formally, includes a new, separate article for such topic (art. 725b revCO). The most notable changes can be summarized as follows: 

– Interim Financial Statements: Under the law as currently in force, in case of reasoned concern of an over-indebtedness (begründete Besorgnis der Überschuldung), the board has to draw up a balance sheet at both going concern and liquidation values. Under the revised law, a balance sheet alone will no longer suffice and the board will have to prepare full financial interim statements, i.e. not only a balance sheet but also a profit and loss statement and notes. Furthermore, article 725b (1) revCO now expressly refers to the going concern assumption (Fortführungsannahme) and states that if such assumption persists and there is no over-indebtedness at going concern values, no interim statements at liquidation values are required. In contrast, in case the going concern assumption can no longer be sustained, it is sufficient to draw up interim statements at liquidation values. 

– Deep Subordination: If the (audited) interim financial statements show that the company is over-indebted at both going concern and liquidation values, the directors must file for bankruptcy without delay. There are two exceptions to such obligation, with the one most used in practice consisting in the deep subordination of creditor claims (Rangrücktritt). The revised CO brings some clarifications in this context and, in particular, provides that interest payments must also be included in a deep subordination (which was not specifically addressed under the previous law). 

– Deep Subordinations and Directors’ Liability: As a result of a decision of the Swiss Federal Supreme Court some years ago, a creditor who declares a deep subordination typically waives the claim in case of a bankruptcy or a composition liquidation as such claims would otherwise be included in the calculation of the damage caused by the delay of bankruptcy (Konkursverschleppung) for directors’ liability purposes. The new law has introduced a much welcomed clarification for board members, expressly stating in article 757 (4) revCO that any claims for deep subordination declared by creditors shall not be taken into account when calculating the damage in a directors’ liability claim. 

– Silent Restructuring: The second exception to the board’s notification obligation consists in a so-called silent restructuring within a “reasonably short period”. Such exception is not defined in the CO as currently in force and has been developed in case law and legal doctrine. While there is no uniform practice regarding the term “reasonably short period”, it is typically interpreted as being somewhere between four and six weeks but ultimately needs to be assessed on a case-by-case basis. The revised law now expressly mentions the silent restructuring in article 725b (4) (2) revCO which states that the board may abstain from notifying the court in case (i) there is well-founded prospect that the over-indebtedness will be eliminated within due course, however by no later than 90 days as of the date on which audited financial statements are available, and (ii) creditors’ claims are not jeopardized any further. Such provision has been heavily disputed during parliamentary hearings, with the 90-days-period considered as being too short. It remains to be seen to what extent the now codified “silent restructuring” exception will have an impact in practice.

3) Abolition of Postponement of Bankruptcy

The pre-revision legal framework allows the board of an over-indebted company to ask the competent court to postpone the opening of bankruptcy proceedings if there is a prospect of restructuring (Aussicht auf Sanierung). Such possibility – very rarely used in most parts of Switzerland – has been abolished in the context of the revision. Consequently, the debt restructuring moratorium will constitute the only court-sanctioned restructuring procedure. In order to account for this circumstance, the minimum term for the provisional debt-restructuring moratorium has been extended from four to eight months. During such period, companies will be able to carry out the moratorium on a silent basis, i.e. with no publication in the relevant official gazettes. 

4) Entry into Force

The revised CO as adopted by the Swiss Parliament on 19 June 2020 was subject to a so-called voluntary referendum which has expired unused on 8 October 2020. It is expected that the new law will enter into force in early 2022. As an exception thereof, the Swiss Federal Council anticipated the entry into force of the extension of the maximum duration of the provisional debt restructuring moratorium from four to eight months, enacting the provision with effect as of 20 October 2020. Such earlier date is a consequence of the ongoing COVID-19 pandemic and the expiry of the emergency law provisions which had, under certain circumstances, temporarily exempted executive bodies of Swiss companies from their notification obligations in case of over-indebtedness. 

5) Conclusion

In summary, while the revision of the Swiss corporate insolvency and restructuring regime will not lead to any groundbreaking changes, it comes with some clarifications and a more distinct structuring of the various scenarios of relevance. It does, however, not answer all open questions for which there have been legal uncertainties based on case law and legal doctrine. 

On a more general level, the revision of articles 725 et seq. CO has the potential to complete and enhance the revision of the in-court restructuring instruments of Swiss insolvency law. Finally, while not being a major change in itself, the new corporate restructuring and insolvency law rules form part of a comprehensive revision of Swiss corporate law which, from an overall perspective, will bring a welcomed clean-up and modernization of the corporate law provisions of the CO.

Tanja Luginbühl (
Anja Affolter Marino (