The new company reorganisation law

Basic reorganisation process

The objective of reorganisation law (referred to as “debt restructuring proceedings” in the law) is to protect debtors experiencing financial difficulties from foreclosure, enable them to restructure their business operations, and facilitate the advancement of their business. The aim of debt restructuring proceedings is therefore the reorganisation rather than the liquidation of the business operations of a debtor. Debt restructuring proceedings are interesting to creditors because such a procedure often gives them better cover for their claims than foreclosure proceedings (such as bankruptcy) that require the fastest possible liquidation of a debtor’s available assets.

Debt restructuring proceedings start with an application to the competent bankruptcy court. If a debtor meets the requirements, the bankruptcy court will grant a moratorium. During the moratorium, no debt collection orders may be filed or continued against the debtor, interest payment stops on claims that are not secured by a pledge, and the running of the period of limitations and peremptory time limits is interrupted. This should give the debtor the time needed to negotiate a reorganisation with its creditors, in particular by way of a composition agreement.

Debtors who intend concluding a composition agreement with their creditors have to negotiate such an agreement and make the creditors a realistic offer regarding the settlement of their claims. Debtors can offer their creditors full settlement of all claims in accordance with a specific time schedule (moratorium composition) or they can offer to pay only part of the claims at the same percentage for all creditors (dividend composition). During the negotiations, the debtor is supported as well as supervised by a legally appointed creditors’ trustee. For a composition agreement to be established, the majority of creditors have to accept the debtor’s offer and the bankruptcy court has to approve the composition agreement. The court in particular makes sure that the debtor’s offer is commensurate with its resources. Once the court has approved the composition agreement it becomes binding on all creditors, including those creditors who previously refused the debtor’s offer. Therefore, during debt restructuring proceedings debtors can force the dissenting minority group of creditors to accept a composition agreement.

Changes to reorganisation law effective from 1 January 2014

Introduction of provisional composition moratorium

The law now divides debt restructuring proceedings into two phases, i.e. the provisional and final composition moratoriums. All debt restructuring proceedings now start with a provisional composition moratorium that gives the debtor a “period of peace” during which its ability to restructure in particular should be investigated. It is now considerably easier to obtain a provisional composition moratorium than under the old law. The bankruptcy court always grants the debtor a provisional moratorium on application, unless it is very obvious that there is no chance of successful reorganisation or a confirmed composition agreement. By introducing the provisional moratorium and making it easier to obtain one, Swiss law is coming closer to the US concept of “Chapter 11”, under which a debtor’s application for a moratorium already triggers protection from its creditors.

The debtor has to file an up-to-date balance sheet and income statement, liquidity plan and restructuring plan, if any, with the bankruptcy court so that the court can review the prospect of a reorganisation or a confirmed composition agreement. If the investigation during the provisional composition period of maximum four months returns a positive result for the debtor and its ability to restructure is confirmed, debt restructuring proceedings continue and the debtor is granted a final composition moratorium during which it can negotiate a solution with its creditors with the support and under the supervision of the creditors’ trustee. However, if it is clear that there is no chance of a reorganisation or a confirmed composition agreement, the debtor is barred from continuing the debt restructuring proceedings and bankruptcy proceedings are opened against the debtor by the court. The bankruptcy court will come to the same decision if it is not given sufficient information and documentation to determine the debtor’s ability to restructure. Debtors should therefore make sure that they properly substantiate their application for a provisional composition moratorium and in particular file complete copies of all the documents prescribed by law. If they fail to do this, the bankruptcy court could immediately open bankruptcy proceedings.

Debt restructuring proceedings as a tool to gain time

Under the old law, debt restructuring proceedings that were initiated could only end in one of two ways: either with a confirmed composition agreement with the creditors and successful reorganisation, or the creditors could apply for bankruptcy proceedings to be opened against the debtor. In other words, the composition agreement in debt restructuring proceedings was the debtor’s only chance for reorganisation. This has changed under the revised reorganisation law. The law no longer tells the debtor how it should reorganise itself, but allows the debtor and its creditors to choose the method of reorganisation. The bankruptcy court can cancel a provisional or final composition moratorium granted previously if reorganisation is successful before expiry of the composition moratorium. Hence, the debtor can now simply use the debt restructuring proceedings as a moratorium to provide the time needed to implement its reorganisation plans.

Under the new reorganisation law there are thus three possible outcomes: (1) A composition agreement is concluded, (2) the reorganisation process is successfully effected in another manner and the moratorium is cancelled again, (3) bankruptcy proceedings are opened against the debtor.

Non-publication of moratorium decision possible in justified cases

While the composition moratorium always had to be published under the old law, a decision can now be taken in justified cases not to publish the composition moratorium. This change was motivated by the argument that public confidence in the debtor should not be eroded during the composition moratorium as this could have a negative impact on the debtor’s future business operations and jeopardise the reorganisation. The option of non-publication is of central importance to debtors in cases where the moratorium does not end with a composition agreement with all creditors but the reorganisation should be effected in another manner. However, this justified interest of the debtor is in direct opposition to the rights of third parties. Non-publication could harm such third parties as they would be barred from being informed that their potential contracting partner is in financial straits. The law handles this conflict by stating that the publication of the moratorium should be the rule while non-publication should be the exception. The non-publication option is also limited in time as it only applies to provisional composition moratoriums but not to final composition moratoriums. The bankruptcy court also always appoints a creditors’ trustee for a composition moratorium that is not published, who is instructed to protect the interests of the creditors, among others.

Debtors who do not wish to have their composition moratorium published must file a substantiated application with the bankruptcy court.

Premature dissolution of continuing obligations

One of the main changes of the revised reorganisation law is the new art. 297a SchKG. Under this article, the debtor may, with the consent of the creditors’ trustee, give notice of termination with compensation of a continuing obligation at any time for any date if otherwise the reorganisation objective would be jeopardised. This means, for example, that a rental contract that can normally only be terminated for the first time after five years can be terminated prematurely at any time if the prerequisites are met. The same applies for lease and loan contracts, which are also continuing obligations. This new rule seriously encroaches upon existing contracts as well as substantive law. The debtor is given the opportunity to get rid of current or unfavourable obligations.

The reasons for the introduction of this new rule are clear: continuing obligations could seriously hinder or even sabotage a successful reorganisation as they tie up capital of the debtor for the long term that may be needed to settle other claims. If reorganisation is unsuccessful, usually the only alternative is the debtor’s bankruptcy, which will not serve the interests of the creditors either. Such a rule is therefore crucial for an effective reorganisation law.

Of course, art. 297a SchKG brings huge disadvantages for the creditors under a continuing obligation. Although the law makes provision for compensation to the creditors, it is not yet clear how this compensation should be calculated. Depending on the circumstances, the claim to compensation is likely to be smaller than the creditor’s original claim under the continuing obligation. In addition, the creditor’s claim for compensation is a non-privileged claim in debt restructuring proceedings. It is therefore equal to the claims of all other creditors and in most cases the creditor will only receive part of the outstanding payment under a composition agreement.

To prevent abuse, the law also states that a continuing obligation may only be terminated at any date if failure to allow this would jeopardise the reorganisation objective. Notice of termination can also only be given with the consent of the creditors’ trustee. There must therefore be a good chance that the debtor’s reorganisation will be successful. If not, the creditors’ trustee may not approve the termination of the continuing obligation.

It should be noted that art. 297a SchKG does not apply to employment contracts.