Switzerland Temporarily Modifies the Duty to Trigger Insolvency Proceedings During the Covid-19 Pandemic

The current restrictions in public life have affected large parts of the economy. In this blog, numerous authors have discussed adjustments to insolvency law during the Covid-19 pandemic in different jurisdictions (eg in India, Australia, Colombia). Aurelio Gurrea Martínez recommended that legislators suspend the obligation to file for bankruptcy. To cushion the economic consequences of the pandemic for businesses and avoid bankruptcies, the Swiss Federal Council has created the possibility of special bridging loans and issued the COVID-19 Insolvency Law Ordinance. Since Switzerland has introduced such a regulation, this article is intended to contribute to the international discussion by describing the Swiss approach and the problems associated with it.

Under the Swiss Code of Obligations (CO), the board of directors must notify the court if an interim balance sheet shows that the creditors' claims are not covered either at going concern or liquidation values (Art 725 CO), whereby going-concern values may only be taken as a basis if the going-concern assumption can be justified for the next twelve months (Art 958a CO). The notification may exceptionally be omitted if (i) creditors subordinate their claims to those of all other company creditors to the extent of the capital deficit or (ii) there is a reasonable prospect of financial restructuring within a reasonably short period of time (generally 4-6 weeks). Late notification to the court can be characterised as delay in bankruptcy and lead to personal liability of the executive bodies (Art 754 CO).

The Swiss COVID-19 Insolvency Law Ordinance (available in German, French and Italian) temporarily modifies the obligation to notify the court under certain conditions. If there is good cause to suspect overindebtedness, the board of directors is still obliged to prepare an interim balance sheet. The crucial modification is that the board of directors is now temporarily released from its duty to notify the court if the company (i) was not overindebted on December 31, 2019 and (ii) there is a prospect that the subsequent overindebtedness can be remedied by December 31, 2020. If the board of directors decides not to notify the court because of this exception, this also releases the auditors from their notification duties pursuant to Art 728c and Art 729c CO.

Condition (ii) involves a positive forecast for the rest of 2020. Specifically, there must be the prospect that the overindebtedness identified after the end of 2019 can be eliminated by December 31, 2020. To this end, the board of directors must have a comprehensive picture of the company's economic situation and derive a positive forecast from it.

The assessment of the lack of overindebtedness at the end of 2019 is solely based on the balance sheet as of December 31, 2019. In this regard, the Swiss Federal Council resolved that any subordination declarations existing at that time will not be taken into account. As a result, companies that were not overindebted as of December 31, 2019 solely due to subordination declarations of certain creditors, do not meet this requirement. The Swiss Federal Council justified this resolution by stating that subordinations are not genuine restructuring measures and that only those companies that have become overindebted as a result of the COVID-19 crisis should benefit from this special regulation. This aspect of the regulation is particularly problematic for start-ups, as in their early stages they can often only refrain from notifying the court on the basis of substantial declarations of subordination. If such start-ups suffer losses due to the COVID-19 crisis, they cannot benefit from the derogation, as the subordinations granted in the context of the establishment must be excluded when assessing the first condition.

Luca Kenel is Research Assistant and PhD Candidate at the University of Basel, Switzerland and former Junior Academic Visitor at the Commercial Law Centre, Harris Manchester College, University of Oxford (Michaelmas term 2019).