Avoiding Bankruptcies as a Result of COVID-19: New Provisions on Bankruptcy Filings and Debt Moratoria
The Ordinance on Insolvency Measures to Overcome the Corona Crisis (COVID-19 Ordinance on Insolvency Law) introduces two main measures: 1. Suspension of the obligation for over-indebted companies to file for bankruptcy and 2. A simplified COVID-19 moratorium for SMEs. The COVID-19 Ordinance on Insolvency Law came into force on 20 April 2020 and will remain in force for six months.
In our March 2020 newsletter "First Aid Kit for Companies", we listed measures that can secure a company's existence during the COVID-19 crisis. The provisions of the COVID-19 Ordinance on Insolvency Law contain further measures to help financially ailing companies.
Suspension of the obligation for over-indebted companies to file for bankruptcy
If justified concerns of over-indebtedness exist – i.e. if a company's loss exceeds its equity and the equity (retained earnings and reserves) is thus negative – the board of directors of a limited company (Aktiengesellschaft/société anonyme/società anonima) must prepare an interim balance sheet at going concern and liquidation values (Art. 725 para. 2 CO). If the balance sheet shows that the company is over-indebted, the board of directors must immediately notify the bankruptcy court, unless creditors of the company subordinate their claims to the extent of the capital deficit.
According to the COVID-19 Ordinance on Insolvency Law, the obligation to file for bankruptcy pursuant to Art. 725 para. 2 CO is suspended if the over-indebtedness is a direct result of the COVID-19 pandemic.
- The company was not over-indebted as at 31 December 2019; and
- There are good prospects of eliminating the over-indebtedness by 31 December 2020.
The following should be kept in mind:
- The board of directors is not exempt from the obligation to convene a general meeting of shareholders in the event of a capital loss prior to over-indebtedness pursuant to Art. 725 para. 1 CO – i.e. if the loss exceeds half of the shareholders' equity – and to submit restructuring proposals to that meeting.
- The interim balance sheet does not have to be reviewed by an auditor. If the interim balance sheet is nevertheless reviewed by an auditor and shows over-indebtedness as per Art. 725 para. 2 CO, the auditor is not obliged to notify the bankruptcy court if the board of directors fails to do so.
- The decision of the board of directors not to notify the bankruptcy court must be documented and justified in writing.
- For the purpose of calculating over-indebtedness, COVID loans of up to CHF 500,000 are not considered as debt until 31 March 2022 (Art. 24 of the Ordinance on the Granting of Loans and Securities as a Result of the Coronavirus). COVID loans of over CHF 500,000, on the other hand, are considered as debt and must therefore be taken into account when assessing a capital loss or over-indebtedness.
- According to the Federal Office of Justice's explanations on the COVID-19 Ordinance on Insolvency Law, in contrast to Art. 725 para. 2 CO, subordinated claims are not to be taken into account when assessing whether a bankruptcy filing can be waived. In other words, if a company was over-indebted on 31 December 2019, but was able to avoid filing for bankruptcy due to sufficient subordination of debt by its creditors, the company cannot take advantage of the waiver of the obligation to file for bankruptcy under the COVID-19 Ordinance on Insolvency Law (this is different for the COVID-19 deferral, see below). However, this explanation by the Federal Office of Justice does not appear logical, since it means that companies that obtained subordinations before 31 December 2019 and whose financial situation has further deteriorated as a result of the pandemic are prevented from taking advantage of the measures in the COVID-19 Ordinance on Insolvency Law. Therefore, they can only avoid notifying the bankruptcy court by means of further subordination of debt.
- The decision not to file for bankruptcy and the prospects for eliminating over-indebtedness by the end of 2020 should be justified as soundly and concretely as possible. This will ensure that the board of directors avoids, as far as possible, the risk of liability in connection with the question of whether or not the prospects for eliminating over-indebtedness were concrete and realistic enough. The business judgement rule should guide the board of directors when justifying the decision. Documents such as the interim balance sheet, an adjusted budget for 2020, liquidity planning and any subordination agreements should be appended to the board of directors' decision, which should be carefully reasoned, discussed in oral deliberations and recorded in detail in the minutes.
- Under these conditions, the board of directors may thus choose to waive the obligation to file for bankruptcy. However, it can, of course, choose to notify the bankruptcy court instead.
The explanations above apply to all forms of companies that are subject to obligations in connection with capital loss and over-indebtedness, i.e. in addition to limited companies, they also apply to limited liability companies, cooperatives and foundations.
COVID-19 moratorium for SMEs
The COVID-19 Ordinance on Insolvency Law provides for a temporary, simplified debt moratorium regime for SMEs in the form of sole proprietorships, partnerships or legal entities.
The aim of the Federal Council was to provide SMEs with a standardized and simplified procedure with which they can protect themselves from debt enforcement and other action by their creditors while they take restructuring measures, so that they can resume their business activities fully after the end of the moratorium.
The conditions for granting of a COVID-19 moratorium are:
- The debtor is an SME; and
- The debtor was not over-indebted on 31 December 2019 or creditors had subordinated their debt within the meaning of Art. 725 para. 2 CO to the extent of the over-indebtedness.
The main elements of the COVID-19 moratorium are:
- Definition of SMEs: SMEs are defined as companies which are not public companies and which are not subject to ordinary audit under the Swiss Code of Obligations.
- Procedure: The company must submit an application for a COVID-19 moratorium to the competent court. In doing so, it must substantiate the company's poor financial situation and provide as much evidence for it as possible (such as the annual financial statements as at 31 December 2019 and interim financial statements). However, no prospects for restructuring need to be presented. The COVID-19 moratorium is made public by the court.
- Effects: The effects of a COVID-19 moratorium essentially correspond to those of the ordinary debt moratorium as per Art. 297 and 298 of the Debt Enforcement and Bankruptcy Act (DEBA). In particular, debt collection proceedings can no longer be initiated or continued against the debtor, and civil and administrative proceedings concerning claims under the moratorium are temporarily suspended. Only claims against the debtor that arose before the moratorium was granted fall under the COVID-19 moratorium, and the debtor may not settle such claims, under threat of bankruptcy proceedings being launched against it. First-priority claims under the DEBA (for example, claims for wages by employees) are excluded from the moratorium.
- Duration: The COVID-19 moratorium lasts three months and be extended once for three additional months.
- Receiver: In order to keep the process simple, normally, no official receiver will be appointed. However, a receiver may be appointed upon request by the debtor or a creditor, or ex officio.
- Continuation of business activity: The debtor may continue its business activity during the COVID-19 moratorium provided that no legitimate interests of creditors are affected.
- Transfer to provisional debt moratorium: The COVID-19 moratorium can be converted into a provisional debt moratorium at the request of the debtor. They maximum duration of the provisional moratorium is reduced by half of the effectively elapsed duration of the COVID-19 moratorium.
Adjustments to provisions on debt moratoria
In addition to the introduction of the COVID-19 moratorium for SMEs, the existing instrument of the debt moratorium (Art. 293 et seq. DEBA), which is available to all debtors, has been adjusted and simplified for the duration of the COVID-19 Ordinance on Insolvency Law:
- With the application for a provisional debt moratorium, there is now no need to submit a restructuring plan to the court.
- The duration of the provisional debt moratorium will be extended from four to six months in order to take account of the longer time needed for restructuring in view of the ongoing COVID-19 pandemic.
- A waiting period until the end of May 2020 applies for the declaration of bankruptcy for the purpose of preserving the debtor's assets or because there is no prospect of restructuring. After expiry of the waiting period, the receiver checks the debtor's ability to restructure and, if the result is negative, must submit a corresponding petition to the court for the opening of bankruptcy proceedings.