Newsletter 3/2020: COVID-19 Ordinance on Insolvency Law

With the aim of completing the arsenal of emergency measures to combat the coronavirus and its economic consequences, on 16 April 2020, the Federal Council published an ordinance on insolvency measures relating to the coronavirus crisis (COVID-19 Ordinance on Insolvency Law). The ordinance contains regulations with respect to the adjustment of notification duties resulting from over-indebtedness, for all legal forms, with the exception of financial service providers and banks (cf. art. 725 CO: public limited company; 820 CO: limited liability company; 903 CO: cooperative; art. 84a CC: foundations), as well as adjustments to the law on composition agreements (art. 293 to 332 Debt Collection and Bankruptcy Act). These measures apply for a period of six months as of 20 April 2020 (art. 23).

I. Adjustment of the Duty to Notify of Over-indebtedness

Article 1 of the ordinance in principle provides for a suspension of the duty to notify the judge, even if the undertaking is over-indebted. However, the board of directors remains obliged to draw up an interim balance sheet if there are justified concerns of over-indebtedness (art. 725 para. 2 CO), also in connection with the emergency measures decided by the Federal Council on 13 March. Over-indebtedness continues to exist if the company's debts are not covered at either when appraised at going concern or liquidation values. COVID bridging loans amounting up to CHF 500,000 are not taken into account for the calculation (art. 24 COVID-19 Several Guarantee Ordinance). So-called "COVID-19 Plus" bridging loans (over CHF 500,000) within the meaning of art. 4 of the Several Guarantee Ordinance are, by contrast, taken into account in the calculation of over-indebtedness.

In the event of over-indebtedness, the duty to notify the judge is suspended provided that (1) the company was not over-indebted on 31 December 2019 and (2) there is a prospect that over-indebtedness can be remedied by 31 December 2020.

 

1. First Condition: No Over-indebtedness on 31 December 2019

In order to qualify, the company must prove that it was not over-indebted on 31 December 2019. This date of reference, even though it was before the outbreak of the health crisis in Switzerland, has been chosen so that only those companies, which were effectively affected by the pandemic in their financial situation may benefit from the measures. It has the advantage that for many companies it coincides with the closing date of the financial year. It thus spares them the requirement to prove or make plausible a causal link between the pandemic and over-indebtedness.

The ordinance also excludes exemptions for companies, which were over-indebted on 31 December 2019 although sufficient subordination of debt was granted by the creditors (postponement of priority). The reason for this is that such subordination is not a "restructuring measure". We regret this decision: Subordination of debt is a measure which exempts the company from the duty to notify the judge, independently of its prospects of proceeding to a restructuration. This rule may well mean that companies (especially start-ups, which often benefit from such subordinations, e.g. from convertible loans) will have to notify the judge in the event of an increase in over-indebtedness, solely caused by the pandemic, even though they were not in that position before the pandemic occurred. In our opinion, it would be desirable that existing subordinated debt also be taken into account in the forecast for 31 December 2020.

 

2. Second Condition: Prospect that Over-indebtedness may be Remedied before 31 December 2020

The board of directors bears the responsibility to analyze the situation of the company in detail and, based on appropriate measures and assumptions, to make a forecast of the company's balance sheet recovery by the end of 2020.

It should be appreciated that the Federal Council has set the clear deadline of 31 December 2020 for the forecast of balance sheet recovery. However, such a forecast will undoubtedly be difficult to make under the current circumstances, which are characterized by the uncertainty of the economic environment and the risk that emergency and containment measures change during the course of the pandemic. In contrast to the preliminary draft, the project no longer requires the prospects to be "justified". So, in our opinion, it shall likely be sufficient to determine that the situation of overindebtedness will have ceased by 31 December 2020, in order to meet the condition. If, in retrospect, the forecast proves not to have been correct, this decision shall have to be assessed retrospectively in accordance with the principles of the Business Judgment Rule: the decision shall be deemed appropriate, if it was reasonable, not affected by conflicts of interest and based on the most complete information available at the time.

The decision of the board of directors must be documented (art. 1 para. 2 of the ordinance) and should therefore be formalized in a sufficiently explicit report, which clearly reflects the basis of the decision not to notify over-indebtedness and should be accompanied by the corresponding supporting documents, i.e. in principle an interim balance sheet, a budget (or a pro forma balance sheet as of 31 December 2020) and a liquidity plan up to 31 December 2020 (and, if applicable, a description of the assumptions made and planned measures).

To make the system more flexible and not to create unnecessary costs, the ordinance waives the obligation for the auditors to examine the interim balance sheet, thus avoiding a burdensome demand of audit services. This exemption is accompanied by a suspension of the auditor's duty to notify the court in the event of obvious over-indebtedness (Art. 728c and 729c CO).

 

II. Options for Companies in Crisis

A company, which may be in difficulty and unable to pay its debts, has the following four options:

a) Private restructuring
b) Debt-restructuring moratorium
c) COVID 19 deferral
d) Liquidation or bankruptcy

a) Private Restructuring

The company may attempt to convene a deferral and/or remission of claims through negotiations with its creditors. In this case, the relevant negotiations must be conducted individually with each creditor. There is no protection against debt collection. The corresponding negotiations and their result are not published and the public is not informed thereof.

b) Debt Restructuring Moratorium

The debtrestructuring moratorium granted by the courts protects the debtor from debt collection, allows for debtor assignments to lapse, stops interest from running and gives the debtor the possibility of prematurely terminating contracts for the performance of continuing obligations (e.g. rental or leasing contracts, but not employment contracts).

In principle, the proceedings for such moratorium are open to all debtors, natural and legal persons respectively, but in practice it is more suitable for larger companies.

The procedure is initiated by the submission of a request, which includes the following appendixes: a current balance sheet, an income statement and a liquidity plan or equivalent documents showing the debtor's current and future financial situation, earnings or income. A reorganization plan does not have to be submitted for the time being.

On the basis of this request, the court then grants a provisional debt-restructuring moratorium and appoints a trustee. In cases where justified, the appointment of a trustee may be waived. If justified, publication may be dispensed with until the end of the provisional deferment as well, however, in this case, the appointment of a trustee is mandatory. The provisional moratorium may last up to 6 months. After this period, the final debt-restructuring moratorium is granted and is in any case published.

The debtrestructuring moratorium ends either when the debtor has recovered or when it has been able to conclude a composition agreement with its creditors. In a composition agreement, either the creditors waive part of their claims (ordinary composition agreement dividend settlement) or the debtor transfers its assets to the creditors in the context of a liquidation (composition agreement with assignment of assets). The composition agreement is concluded, if a qualified majority of creditors agrees to it and if it is then approved by the court. Then, it is also valid in relation to those creditors who have not agreed to it.

 

c) COVID 19 Deferral

For smaller companies, the emergency law now provides for a simplified judicial deferment procedure.

A COVID 19 deferral is available to any sole proprietorship, partnership or legal entity that was not over-indebted on 31 December 2019 or that was over-indebted but had subordinated debts. However, it has not been made available to public companies and other larger companies, which are subject to ordinary audit pursuant to art. 727 para. 1 item 2 CO.

Deferment may be requested for a maximum of three months and may be extended once thereafter for an additional maximum period of three months. No trustee is usually appointed in this context. This deferment is published.

In its application to the court, the debtor must credibly demonstrate its financial situation and substantiate it as best as possible. The balance sheet and income statement for the year 2019 can be submitted as evidence that the company was not over-indebted on 31 December 2019. They may be provisional and need not be audited. If these documents are not yet available, the financial situation must be presented otherwise.

During the deferment, the debtor does not have to pay the debts, which were incurred before the deferment was granted. Alimony claims and claims by employees are not included. The effects of the deferral are similar to, but not as far-reaching as, those of a usual debt-restructuring moratorium. The claims subject to the deferral cannot be pursued and debtor assignments are cancelled, however continuing obligations may not be dismissed. The debtor may continue its business activities, but must treat its creditors equally in doing so. During the deferral period, the debtor may not sell or encumber fixed assets without the court's consent.

In contrast to the ordinary debt-restructuring moratorium, the COVID-19 deferral ends after the expiry of the period without further ado. The end of the COVID-19 deferral is neither subject to a successful restructuring nor to the conclusion of a composition agreement. The deferral does not rule out the possibility that an application for a normal provisional debt-restructuring moratorium may be filed during or after the expiry of the COVID-19 deferral.

 

Authors:

Prof. Dr. Jean-Luc Chenaux
Jean-Luc.Chenaux@kellerhals-carrard.ch

Prof. Dr. Thomas Nösberger
Thomas.Noesberger@kellerhals-carrard.ch

Ivan Paparelli
Ivan.Paparelli@kellerhals-carrard.ch

Prof. Dr. Henry Peter
Henry.Peter@kellerhals-carrard.ch

Prof. Dr. Edgar Philippin
Edgar.Philippin@kellerhals-carrard.ch

Ines Pöschel
Ines.Poeschel@kellerhals-carrard.ch

Prof. Dr. Daniel Staehelin
Daniel.Stahelin@kellerhals-carrard.ch

Dr. Lukas Bopp
Lukas.Bopp@kellerhals-carrard.ch

 

Disclaimer: The above exposé is meant as general information only and cannot replace an analysis based on the concrete circumstances.

 

 

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