At the Edge of Insolvency

Capital Loss

If the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered by the net asset value (at going concern value) of the company, the board of directors shall without delay call a general meeting of shareholders and propose adequate measures for restructuring. Options for restructuring available shall be discussed upon a better understanding of the financial situation of the individual Swiss companies concerned.

Notification of the Judge in the Case of Over-Indebtedness

A very critical phase is reached once the corporate debtor is actually threatened with over-indebtedness. In case of substantiated concern of over-indebtedness an interim balance sheet must be prepared and submitted to the company’s auditors for examination. If the interim balance sheet shows that the claims of the creditors are neither covered if the assets are appraised at ongoing business values nor at liquidation values, then the board of directors is obliged to notify the bankruptcy or composition court. There are two exceptions to this:

• No notification is required if creditors subordinate their claims to the claims of all other creditors in the amount of the over-indebtedness;

• The board of directors can abstain from notifying the bankruptcy or composition court for a short period of time if it has sufficient reasons to believe that the company can restructure within a short period of time. However, mere hope or a vague expectation of a restructuring does not justify the postponement of the filing for bankruptcy. In addition, the board of directors can also file for composition proceedings (instead of bankruptcy).

In Case of a Bank

A bank that no longer fulfils the licensing requirements or violates its legal obligations risks the withdrawal of its banking licence, which inevitably results in the liquidation of the bank. In these situations, or if the bank is threatened by insolvency, FINMA has the authority under the SFBA, which was revised in several steps to order far-reaching protective measures or the restructuring of the bank. The appointment of an independent expert investigator by FINMA so as to examine certain matters within the bank or to monitor the implementation of measures imposed by FINMA is among those protective measures. In addition, a restructuring administrator can be appointed by FINMA to establish a restructuring plan. In the case of liquidation, FINMA appoints a liquidator.

Balance Sheet Test

Over-indebtedness forms a special cause of bankruptcy for companies. Over-indebtedness means the liabilities of the company are not covered whether the assets are appraised at ongoing business values or at liquidation values. To maintain going-concern value, a sound cash flow plan securing operations for a reasonable period (typically 12 months) will be requested.

If there is substantiated concern of over-indebtedness, an interim balance sheet must be prepared and submitted to the auditors for examination. If the concern is approved, the corporate bodies (board of directors, liquidators, and auditors) are obliged, in the interest of the creditors, to notify the judge. This notification of over-indebtedness is generally referred to as ‘dumping of the balance sheet’. The timeline of the filing is decided on a case-by-case basis; in light of recent court cases, the breathing period tends to be restricted to a couple of weeks.

Notification of over-indebtedness may only be avoided in the following cases:

• No notification is required if creditors subordinate their claims to the claims of all other creditors in the amount of the over-indebtedness;

• The board of directors can abstain from notifying the bankruptcy or composition court for a short period of time if it has sufficient reasons to believe that the company can restructure within a short period of time. However, mere hope or a vague expectation of a restructuring does not justify the postponement of the filing for bankruptcy. In addition, the board of directors can also file for composition proceedings (instead of bankruptcy).

If the notification has been made to the court, the judge adjudicates the bankruptcy ex officio after a summary examination of over-indebtedness. Despite over-indebtedness, the judge may refrain from or postpone adjudicating the bankruptcy in the following cases:

• if there is a possibility of a financial reorganisation, in which case the judge will take appropriate measures to preserve the value of the assets; or

• if there are any indications of accomplishing a composition with creditors.

Restructuring Measures

The Federal Act on Debt Collection and Bankruptcy (DCBA) does not only provide for measures for the enforcement of claims in the context of bankruptcy; in the case of companies in financial distress, it also provides for the possibility of successful restructuring within the framework of composition proceedings in order to preserve company values for the benefit of all parties involved.

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