Bankruptcy and insolvency: the procedure in brief

Bankruptcy is the procedure by which the assets of an insolvent debtor are liquidated collectively for the benefit of all creditors. In Switzerland it is governed by the Federal Act on Debt Enforcement and Bankruptcy (DEBA) and typically concerns businesses entered in the commercial register: AGs, GmbHs and commercial firms. For anyone managing a company, knowing the warning signs of insolvency and the duties that follow is not theory: acting too late exposes you to personal liability. Here is the procedure in brief.

Insolvency, over-indebtedness and the alarm

Two situations must be distinguished. Illiquidity is the inability to meet payments as they fall due. Over-indebtedness (Überschuldung) is instead the situation in which liabilities exceed assets, measured both at going-concern and at liquidation values. AG law imposes a duty of oversight on the board of directors:

in the event of an imminent risk of insolvency, the board must act with due urgency to safeguard solvency;
in the event of a loss of capital, it must take restructuring measures;
in the event of well-founded concern of over-indebtedness, it must draw up interim financial statements at going-concern and liquidation values and, if confirmed, notify the court.

Notifying the court is not optional: delaying it is one of the most frequent sources of personal liability of directors towards the company, shareholders and creditors.

How bankruptcy is opened

Bankruptcy can be declared by the court in several situations:

at the end of debt enforcement by way of bankruptcy, when the formal warning is not followed by payment;
upon the debtor’s own declaration of insolvency;
upon notice of over-indebtedness by the board of directors or the auditors;
in the cases of bankruptcy without prior enforcement provided for by law (for example, suspension of payments).

With the bankruptcy judgment the debtor loses the power to dispose of its own assets, which pass to the bankruptcy estate managed by the bankruptcy administration.

How the procedure unfolds

Once bankruptcy is opened, the office proceeds to draw up the inventory of assets and to issue the call to creditors, who must file their claims within the set deadline. The administration verifies the claims and draws up the schedule of claims (Kollokationsplan), which establishes which claims are admitted and in what order they will be satisfied. The procedure may be conducted in ordinary or summary form, where the assets are modest. If there are not even sufficient assets to cover the costs, the procedure is suspended for lack of assets and, unless the costs are advanced, the company is ultimately struck from the commercial register.

The order in which creditors are satisfied

Not all creditors are on the same footing. The DEBA provides for:

creditors secured by a pledge, satisfied out of the proceeds of the encumbered asset;
unsecured creditors divided into classes: the first comprises, in particular, certain employee claims; the second, certain claims of social security institutions and the like; the third, all other claims;
distribution takes place by class: the next class is reached only after the previous one has been satisfied in full.

Those who are not satisfied receive a certificate of shortfall, which documents the portion of the claim that remains uncovered.

The alternatives to bankruptcy

Bankruptcy is not the only route. A business in difficulty but still capable of being restructured can resort to a composition agreement (composition moratorium): under the supervision of a commissioner, the company obtains a stay of enforcement and negotiates a restructuring plan or an orderly liquidation with its creditors. It is a tool that can save the business or at least maximise recovery, but it must be activated before the situation becomes irreversible. Here too, timing is decisive.

The crux of directors’ liability

The practical message for those who manage a company: the critical threshold is not bankruptcy, it is the moment at which action should have been taken. Timely interim financial statements, documented restructuring measures and, where necessary, notification to the court are what distinguish a diligent director from one who is personally exposed. Documenting the decisions taken, and when they were taken, is the best defence.

How we work at SIH ONE

We support directors and shareholders through periods of financial strain: preparing interim financial statements, assessing over-indebtedness, restructuring measures and, when needed, handling the notice to the court or the composition agreement. We work to protect the residual value of the business and limit personal exposure.

Do you fear your company is sliding towards insolvency? Discover the services of our tax-legal division and act while the options are still open.