Vol 2 (2005) - Issue 2

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Corporate Rescue under Swiss Law

Introduction

For a Swiss company on the verge of a financial collapse, Swiss bankruptcy law provides for restructuring with a view to both continuation of the business and liquidation more beneficial to creditors than bankruptcy. Alternatively, a company may apply for a moratorium under Swiss company law. The purpose of these proceedings is twofold, namely either to enable the distressed company to continue in business on a more slender basis or to optimize the value for the creditors by avoiding formal bankruptcy.

Composition procedure under the Bankruptcy Act

Types of relief available

The goal of composition procedure under the Bankruptcy Act is to achieve a settlement with all creditors, the so-called composition agreement, which may take any of the three forms described below:

- Ordinary composition agreement:
- respite: debtor and creditor agree on a payment plan according to which the debtor will pay its dues in full, but in instalments;
- percentage: the debtor promises the creditors to pay a certain part of its dues; the creditors waive any excess claims they may have;

- Liquidation agreement: the debtor’s business (or parts thereof) is turned over to the creditors for liquidation; the creditors are satisfied out of the proceeds of liquidation and waive any excess claims they may have.

In practice, it is possible to agree on a composition combining elements of the above.

Moratorium

Prerequisites

In order to enter into composition proceedings, the debtor has to apply to the competent court for a moratorium. This application needs to be fully reasoned and needs to be accompanied by documents enabling the court to judge whether it is likely that a composition agreement can be reached.
In case of ordinary composition, the debtor has to show prima facie that such an agreement is in the best interest of the creditors. In case of liquidation proceedings, the debtor will have to show that the creditors will be better off than in ordinary bankruptcy. Given the fact that there is much more flexibility in composition proceedings than in bankruptcy, which will allow the liquidator to obtain better proceeds, it is quite normal that this test can be passed successfully.

Applicants other than debtor

If a creditor has reached the stage where it may apply for an adjudication of involuntary bankruptcy against the debtor, it is also entitled to apply for a moratorium of the debtor. Given that it will not have all the requisite details, it will normally apply for a provisional moratorium only. The right of the creditor to apply for a moratorium has been introduced when the Bankruptcy Act was revised in 1997, but has not become a popular remedy.
Further, if a petition to put the debtor in bankruptcy is filed, the bankruptcy court may stay bankruptcy proceedings and transfer the file to the composition court in order to assess whether a moratorium should be granted.