Companies in difficulty: continuation, bankruptcy and composition moratorium

When a company faces financial difficulties, it is essential to understand the legal mechanisms available to react at the right time. Under Swiss law, a company can be confronted with bankruptcy proceedings for various reasons, and there are tools to overcome them.

This guide outlines the steps of the enforcement procedure, then the possibilities offered by a consensual moratorium.

There are several reasons why a company might go bankrupt in Switzerland. These primarily fall into two categories: financial and operational. **Financial Causes:** * **Lack of Liquidity / Cash Flow Problems:** This is the most common reason. Even profitable companies can go bankrupt if they don't have enough cash to meet their short-term obligations (paying suppliers, salaries, rent, etc.). This can be due to: * **Poor credit management:** Customers paying late or defaulting on payments. * **Excessive debt:** High levels of borrowing that cannot be serviced. * **Insufficient working capital:** Not enough cash to cover day-to-day expenses. * **Unexpected large expenses:** A sudden need for significant capital investment or a major loss. * **Insolvency (Over-indebtedness):** When a company's liabilities exceed its assets. This means that even if all assets were sold, there wouldn't be enough money to pay off all debts. This can be a result of: * **Sustained losses:** Continuous unprofitable operations. * **Devaluation of assets:** A significant drop in the value of company assets. * **Write-offs of bad debts:** Unrecoverable amounts owed by customers. * **Poor Financial Planning and Control:** Lack of accurate financial forecasting, budgeting, and monitoring can lead to unforeseen financial difficulties. * **Investment Failures:** Making poor investment decisions that don't yield the expected returns or result in significant losses. **Operational Causes:** * **Poor Management / Incompetence:** Ineffective leadership, a lack of strategic vision, poor decision-making, and an inability to adapt to market changes can be fatal. * **Market Changes and Competition:** * **Increased competition:** New competitors entering the market or existing ones becoming more aggressive. * **Changes in consumer demand:** A decline in the popularity of the company's products or services. * **Technological obsolescence:** Failure to keep up with new technologies, making products or services outdated. * **Economic downturns:** A general decline in economic activity affecting demand. * **Inefficiency and High Costs:** High operating costs compared to competitors, inefficient production processes, or poor resource management can erode profitability. * **Legal and Regulatory Issues:** * **Fines and penalties:** Sanctions for non-compliance with laws and regulations. * **Lawsuits:** Expensive legal battles that drain resources. * **Fraud or Criminal Activity:** Misappropriation of funds or other fraudulent activities by employees or management. * **External Shocks:** Unforeseen events such as natural disasters, pandemics, or geopolitical crises that disrupt business operations and supply chains. In Switzerland, there are specific legal frameworks (like the Swiss Code of Obligations) that outline procedures and consequences for companies facing financial distress, including insolvency and bankruptcy. Directors have a duty to prevent over-indebtedness and insolvency, and failure to do so can lead to personal liability.

A company's financial difficulties generally do not arise suddenly. They are often the result of an accumulation of internal and external factors that gradually weaken its situation.

1. Internal causes 

There are situations where a company finds itself bankrupt due to reasons inherent in its financial situation. These can include a significant loss of capital, which reduces the company's financial soundness, or a situation of over-indebtedness, where liabilities exceed available assets.

In these cases, the governing bodies, such as the board of directors, have strict legal obligations. They must monitor the financial situation and, if necessary, take rapid action, including informing the court if the situation so requires.

2. External causes

A bankruptcy can also involve the company's creditors. When a company fails to pay its invoices on time, a creditor may decide to initiate enforcement proceedings, which, upon their conclusion, can lead the company to bankruptcy.

This is, moreover, one of the most frequent scenarios in practice: an unpaid debt triggers a reaction from the creditor, who initiates recovery proceedings.

The prosecution procedure in Switzerland, step by step

The prosecution procedure often constitutes the first formal step in dealing with financial difficulties. It is governed by precise rules that it is essential to know, if only to understand the stakes of each stage.

1. The unpaid invoice: the starting point 

Contrary to popular belief, Swiss law does not impose a specific payment deadline. An invoice can be payable immediately, unless otherwise stipulated by contract.

Furthermore, there is generally no legal obligation to send a reminder before initiating legal proceedings. Therefore, a creditor can act quickly as soon as a bill is not paid.

2. The Order to Pay: Commencement of Proceedings 

When the creditor decides to take action, they send a request to the Debt Enforcement Office, which then issues a payment order against the debtor. It is important to highlight that the Office does not verify the validity of the debt. It simply executes the creditor's request. The debtor therefore receives an official document at their home, which marks the beginning of the proceedings.

3. Opposition: A strategic reflex

Upon receipt of a payment order, the debtor has 20 days to object. This step is essential as it temporarily halts the proceedings. In practice, it is often recommended to object, even if you are unsure, in order to give yourself time to analyse the situation and consider an appropriate strategy.

4. Release: a key step for the creditor

When the debtor lodges an objection, the creditor must undertake additional steps to pursue the proceedings. If they possess a valid title, such as a signed acknowledgment of debt or a judgment, they can request the judge to lift the objection. Otherwise, they will have to initiate legal proceedings to have their debt recognised, a step that can prove costly and uncertain, especially in the absence of solid proof.

5. The continuation of the proceedings 

Once the opposition is lifted or in the absence of opposition, the creditor can request the continuation of the proceedings. At this stage, the situation becomes particularly sensitive for the company, as bankruptcy looms.

6. Entry route or bankruptcy route: an essential distinction

The Enforcement Office then determines the applicable procedure according to the nature of the debtor. In essence, the distinction is as follows:

• Natural persons not registered in the commercial register Input method (goods or salary)
• Legal entities and natural persons registered in the RC bankruptcy proceedings

7. Declaration of bankruptcy 

The Insolvency Office notifies the company of a bankruptcy warning: a final demand for payment within 20 days. If payment is not made, the creditor can request bankruptcy from the court no later than 15 months after the warning notice.

8. The bankruptcy hearing

This is the last moment to settle the debt or reach an agreement with the creditor. Depending on the situation, it is possible to propose solutions to the judge, particularly through a moratorium.

The Condoned Arrangement: an alternative to bankruptcy (Art. 293 to 332 LP)

Composition proceedings represent a particularly interesting solution for companies experiencing difficulties. It is a legal procedure that allows a debtor to negotiate an agreement with their creditors with the aim of improving their financial situation.

The concordat procedure is introduced at the request of the debtor, at the request of a creditor entitled to apply for bankruptcy, or if the bankruptcy judge believes a concordat appears possible.

1. The provisional concordat moratorium 

Initially, the judge grants a provisional stay of proceedings for a maximum period of four months, which may be extended by a further four months. It is not made public and a provisional administrator is appointed. During this period, further proceedings are suspended, debts incurred prior to the judgment are frozen, and interest ceases to accrue, except for any debt secured by a pledge. This allows the company to benefit from judicial protection and to continue its business.

The conciliation judge sets the mission of the provisional trustee, who must be independent. They have a duty to monitor day-to-day management and to study restructuring prospects in detail.

It is important to specify that when a moratorium is requested by the debtor, a cash flow forecast must be provided in order to ensure there are sufficient liquidities to meet current expenses.

At the end of the period granted, the administrator lodges their report, which notably includes the proposed agreement, a description of the business activity carried out, and their opinion.

2. Final Insolvency Compromise Stay

If the provisional administrator's report is positive and there are prospects for recovery, a definitive moratorium will be granted for a period of twelve months, extendable up to 24 months in particularly complex cases. The duration of the provisional moratorium will not be counted. The definitive moratorium will be published in the official gazette and the administrator will invite creditors to come forward.

During this period, the company can reorganise its activities and negotiate with its creditors. No legal proceedings can be initiated against the debtor, except for the enforcement of a pledge.

A draft composition proposal will be presented to third-class creditors, on the understanding that first- and second-class creditors are to be paid in full. Debts incurred during the moratorium must also be secured. A creditors’ meeting will be held in the presence of the debtor and chaired by the administrator, in order to explain the draft composition agreement and answer any questions. For the administrator to recommend approval of the composition, it is essential that one of the required majorities (a majority of creditors representing two-thirds of the claims, or a quarter of the creditors representing at least three-quarters of the claims) be achieved. Once approved, the composition is binding on all creditors.

If liquidation occurs before the expiry of the insolvency proceedings, the judge will annul the proceedings ex officio.

3. The different forms of concordat 

The concordat can take several forms, depending on the company's situation.

• The dividend concordat allows creditors to be partially reimbursed while continuing operations.
• The concordat by abandonment of assets, often referred to as «soft bankruptcy,» which involves transferring the company's assets to creditors within an organised framework overseen by a creditors' committee.

4. Concrete impacts for the company

Even though corporate restructuring offers advantages, it also leads to significant consequences. Trade partners may demand advance payments before any new delivery, bank financing becomes difficult to obtain, and tensions can arise within the staff. It is therefore essential to anticipate these effects and implement appropriate communication.

Conclusion

The Act on Proceedings and Bankruptcy deals with all legal procedures in the field of debt recovery and business restructuring. Properly understood and used in a timely manner, they can help to avert the worst and preserve the business. Conversely, poor anticipation can quickly lead to an irreversible situation.

In all cases, it is strongly recommended to enlist the help of professionals to secure the process and maximise the chances of recovery.