Debt restructuring moratorium: The path to financial restructuring
The number of companies in crisis is high due to the current economic uncertainties and challenges, such as the after-effects of the COVID-19 pandemic, economic developments and global market fluctuations. The debt restructuring moratorium offers an important opportunity to stabilize and restructure a company. We shed light on the legal basis, the procedure and the practical challenges of debt restructuring moratoriums in Switzerland.
Significance of the debt restructuring moratorium
The debt restructuring moratorium is an instrument of Swiss restructuring law that is intended to avert imminent bankruptcy and secure the long-term economic survival of a company. The legal basis for the debt restructuring moratorium is found in Art. 293 ff. of the Debt Enforcement and Bankruptcy Act (SchKG). Any natural person or legal entity that can be pursued as a debtor for seizure or bankruptcy is entitled to a debt restructuring moratorium.
The debt restructuring moratorium primarily pursues the goal of restructuring and continuing the debtor company and is therefore fundamentally different from bankruptcy proceedings, which are also regulated in the DEBA. In the latter, all of the debtor's assets are liquidated and the proceeds distributed to the creditors, which leads to the break-up of the company and the dissolution of all business activities (Art. 197 et seq. SchKG).
The debt restructuring moratorium offers a preventative solution aimed at avoiding insolvency. The debtor is granted a breathing space (the moratorium) during which enforcement proceedings are suspended. This gives them the opportunity to work out a restructuring plan under the supervision of a trustee in order to stabilize their financial situation while the company's operations can continue.
If successful, the debt-restructuring moratorium averts the company's bankruptcy and at the same time avoids or at least significantly reduces the damage to creditors compared to bankruptcy proceedings. By enabling the continuation of business activities, the debt-restructuring moratorium can also help to save jobs (including in supplier and customer companies), secure financing and continue important business relationships.
In economically difficult times in particular, a debt-restructuring moratorium can therefore be a valuable instrument for stabilizing and restructuring companies in crisis.
When is a debt restructuring moratorium suitable?
If a natural or legal person is over-indebted or is in an acute liquidity crisis and is therefore no longer able to meet their current obligations, they can submit an application for a debt restructuring moratorium to the competent court (Art. 293 SchKG). However, such an application by the debtor only makes sense if certain conditions are met, in particular
Realistic or actual restructuring prospects: One of the key requirements for the granting of a debt restructuring moratorium is the existence of realistic restructuring prospects. The debtor must demonstrate to the court that a restructuring of the company is possible as a result of the deferral.
Willingness to cooperate with creditors: A debt restructuring moratorium is suitable if the debtor is willing to actively cooperate with its creditors. The restructuring plan must take into account the interests of the creditors and be drawn up together with them, and their consent is required in order to conclude a debt restructuring agreement.
Need for protection from enforcement measures: A debt restructuring moratorium is particularly suitable if the debtor needs to be protected from enforcement measures in order to be able to carry out the necessary restructuring measures. During the debt restructuring moratorium, debt enforcement proceedings against the debtor can neither be initiated nor continued (Art. 297 para. 1 DEBA).
The debt restructuring moratorium has particular advantages in the following cases:
Complex corporate structures: Companies with complex structures and a large number of creditors can benefit from a debt restructuring moratorium, as they need time for comprehensive restructuring measures, financing or other transactions and negotiations. This applies in particular if a significant number of jobs are to be safeguarded and a (disorderly) insolvency would have considerable economic, macroeconomic and social consequences.
Preparation of orderly liquidation proceedings: If restructuring is not possible, the debt restructuring moratorium can also be used to prepare a value-preserving liquidation. This can mean that assets are sold in such a way that the creditors are better able to satisfy their claims than in the event of bankruptcy.
How do probate proceedings work?
1. application for provisional debt-restructuring moratorium
The debt restructuring proceedings begin with the submission of an application for a provisional debt restructuring moratorium to the competent court (in most cases the district court at the debtor's domicile). In the application for a debt restructuring moratorium, it must be possible to demonstrate that there is a prospect of restructuring. The best way to do this is to submit a draft restructuring plan (Art. 293 lit. a SchKG).
The application must provide information about the debtor's financial situation and explain how they intend to rectify it. In accordance with Art. 293 lit. a SchKG, a current balance sheet, income statement and liquidity plan as well as a provisional restructuring plan or draft debt restructuring agreement must be submitted to the court. Financing during the debt restructuring moratorium must be secured.
2. granting of the provisional debt-restructuring moratorium
Upon receipt of the application, the probate court checks whether the application is not obviously futile. Hopelessness means that there is clearly no prospect of restructuring or confirmation of a debt restructuring agreement. In such cases, the application is rejected and the probate court opens bankruptcy proceedings ex officio (Art. 293a para. 3 SchKG). If the application is not obviously hopeless, the court grants a provisional debt restructuring moratorium for a maximum period of four months (Art. 293a para. 2 SchKG). This provisional debt restructuring moratorium can be extended to a maximum of eight months.
A provisional administrator is appointed to review the debtor's financial situation and the prospects of success of the restructuring and report on this to the probate court. In order for the provisional administrator to obtain a detailed and comprehensive picture of the debtor's current and expected future financial situation, the debtor is obliged to provide him with full information. Clarifications with the main creditors (e.g. regarding their willingness to cooperate in the debt restructuring) or with third parties (shareholders, parties interested in acquiring assets, etc.) are also carried out during this phase.
The administrator must submit a report to the court by the end of the provisional debt restructuring moratorium at the latest, in which he provides an assessment of the chances of restructuring.
In the provisional debt restructuring moratorium phase, it is crucial that a liquidity plan can be used to monitor that the financing of the proceedings is secured. If the debtor's liquid assets are not sufficient, a bridging loan, e.g. from a related creditor or a shareholder, may be required.
The granting of a provisional debt restructuring moratorium is not published for the time being (i.e. until its conclusion) upon application (so-called silent debt restructuring moratorium), provided that the protection of third parties is guaranteed (Art. 293c para. 2 SchKG). This allows the debtor to negotiate a debt restructuring agreement during the provisional debt restructuring moratorium without financial loss. If the debt restructuring proceedings are successful, a viable solution that has been confirmed by the court (e.g. company takeover) can be presented at the same time as the publication of the debt restructuring proceedings, which significantly reduces the economic damage.
3. application for a definitive debt restructuring moratorium
If there is still a prospect of restructuring or confirmation of a debt restructuring agreement during the provisional moratorium, or if the administrator's report confirms this, the probate court will grant the moratorium definitively at the debtor's request (Art. 294 para. 1 SchKG). To this end, the probate court holds a hearing before the provisional debt restructuring moratorium expires, at which it decides whether a definitive debt restructuring moratorium can be granted or whether bankruptcy proceedings should be opened against the debtor. The debtor is summoned to this hearing for questioning and the trustee for reporting (Art. 294 para. 2 SchKG).
This definitive debt restructuring moratorium of four to six months can be extended to a maximum of 24 months at the request of the administrator in particularly complex cases (Art. 295b para. 1 DEBA). During this period, the effects of the provisional debt-restructuring moratorium continue. This gives the company several months to implement the restructuring plan.
The definitive debt restructuring moratorium, unlike the provisional debt restructuring moratorium, must always be published (Art. 296 SchKG).
4. preparation of the composition agreement
The composition agreement is an agreement between the debtor and their creditors. The aim of this agreement is to facilitate an orderly debt settlement without forcing the debtor into bankruptcy.
The trustee assists with the drafting of the composition agreement by, among other things, recording and evaluating the debtor's assets and liabilities and drawing up a list of creditors. The list of creditors is the complete list of all creditors and claims and serves as the basis for further negotiations.
The actual debt restructuring agreement or the underlying restructuring concept is drawn up in close cooperation with the administrator (see below).
5. end of the probate proceedings
The debt restructuring proceedings can come to an end in various ways: Through successful reorganization, through the conclusion of a debt restructuring agreement or through bankruptcy.
a. Successful restructuring
If the debtor was able to overcome the liquidity crisis and satisfy all creditors in full, he or the administrator can apply to the probate court for the debt restructuring moratorium to be lifted. The debt restructuring proceedings then serve as a time extension for the debtor to restructure on their own.
The probate court will grant the application to set aside the debtor's estate if the over-indebtedness or inability to pay has been eliminated and this can be proven by the debtor.
b. Confirmation of the estate agreement
The probate court must confirm the probate agreement. This is subject to the mandatory requirement that all mass debts and privileged claims have been demonstrably covered and that the necessary number of approvals (known as the quorum) has been reached. The composition agreement must also correspond to the debtor's actual possibilities for approval.
The quorum can be achieved in two different ways: Approval of the majority of the creditors who simultaneously represent two thirds of the claim amount or approval of a quarter of the creditors who simultaneously represent three quarters of the claim amount.
The law provides for two variants of estate agreements, whereby mixed variants and modified variants (e.g. combined with a deferral) are also possible:
a) Ordinary debt restructuring agreement (Art. 314-316 SchKG)
As part of an ordinary composition agreement, all privileged creditors are satisfied in full and the remaining creditors are partially satisfied. For the latter, this means that by agreeing to the composition agreement, they accept a partial loss or only partial coverage of their claim (so-called debt haircut). For the debtor, this means that he or she is released from all composition claims upon conclusion of the composition agreement and is thus restructured.
b) Debt restructuring agreement with assignment of assets (Art. 317-331 DEBA)
If the debtor cannot be rescued or if the debt burden is too high in relation to the available funds to achieve a restructuring, the composition agreement with assignment of assets can be used. The debtor then transfers all assets to the creditors. In such cases, a liquidator chosen by the creditors takes over the silvering of all assets. The proceeds are then distributed among the creditors in the same way as in bankruptcy. The debtor is liquidated in this procedure.
c. Bankruptcy
If there is no longer any prospect of restructuring, the administrator must notify the court, which will then open bankruptcy proceedings against the debtor. The same applies if no composition agreement has been concluded due to a lack of consent from the creditors or if this could not be confirmed by the court (Art. 309 SchKG).
Effects on creditors
The debt-restructuring moratorium does not cause all of the debt or's debt obligations to fall due, and there is no conversion of claims that are not for monetary payment into monetary claims.
Civil and administrative proceedings initiated against the debtor are suspended by law during the debt restructuring moratorium; no new proceedings may be initiated (Art. 293c para. 1 DEBA in conjunction with Art. 297 para. 5 DEBA). Enforcement proceedings against the debtor can neither be initiated nor continued (Art. 297 para. 1 SchKG); attachment and other security measures are excluded (Art. 297 para. 3 SchKG). The other legal effects of the debt restructuring moratorium on claims against the debtor are governed by Art. 297 et seq. of the DEBA. In particular, the limitation and forfeiture periods are suspended and interest ceases to accrue on claims not secured by a lien.
The statutory provisions on the right of set-off (Art. 213 para. 2 in conjunction with Art. 293 para. 1 SchKG) are important, in particular the prohibition of offsetting against debts or claims acquired by a creditor after the opening date: If a creditor (e.g. by assignment or assumption of debt) acquires claims against the company after the opening date (i) as a debtor of the company or (ii) as a creditor of the company liabilities towards the company, the offsetting of these debts/claims is excluded. Only claims and debts that were acquired before the date on which the debt-restructuring moratorium was granted may be offset by a creditor.
Particular attention should be paid to continuing obligations, i.e. contracts (orders, employment contracts, rental contracts, contracts for work and services, etc.) in the estate. Liabilities arising from continuing obligations that arose prior to the debt restructuring moratorium are deemed to be so-called debts of the estate (i.e. debts that are covered by the moratorium), and claims for benefits that arise after the debt restructuring moratorium with the consent of the administrator are deemed to be so-called mass debts (or claims against the estate). They enjoy the privilege under Art. 310 para. 2 SchKG that they are paid on an ongoing basis during the debt restructuring moratorium.
Creditors are well advised to use the duration of the provisional debt-restructuring moratorium to properly document their claims against the company and clarify any ambiguities with the company. The administrator is also available for this purpose. Creditors are then equipped to register clarified claims as part of the preparation of a debt restructuring agreement. Creditors can expect the administrator to provide periodic updates on the status and progress of the debt restructuring proceedings.
The role of the trustee
As can be seen from the above, the administrator plays a central role in probate proceedings as a neutral link between the debtor, creditors and the probate court.
Supervisor and supporter: The administrator monitors and controls the debtor's activities and issues instructions (e.g. restrictions on the right to dispose of the assets). The debtor continues to run the business during the debt restructuring moratorium under the supervision of the administrator.
The administrator acts as a supporter of the debtor in the development of a restructuring concept and conducts or moderates the negotiations with the creditors in this context.
Organizer and information office: The administrator publishes and sends out the debt call, draws up the inventory and the debtor's asset status.
In particular, the preparation of a detailed inventory of the debtor's assets and debts, i.e. a complete list of all creditors and their claims(list of creditors) is one of the main organizational tasks of the administrator. This may also include a summary review and, if necessary, adjustment of the claims asserted if their existence is not clear or undisputed.
As the information office, the administrator is in continuous communication with the creditors about the status of the implementation of the restructuring concept.
The administrator also convenes the creditors' meeting. This is an orientation meeting at which the administrator provides information on the status and progress of the debt restructuring moratorium, the debtor's financial situation and the intended debt restructuring agreement. In the case of a debt restructuring agreement with assignment of assets, the liquidation bodies (liquidator and creditors' committee) are elected at the creditors' meeting. A creditors' meeting is not used to hold a vote for or against the debt restructuring agreement. The creditors give their consent to the composition agreement in writing after the creditors' meeting.
Rapporteur: As already mentioned, it is also the duty of the administrator to draw up a report for the probate court at the end of the debt restructuring moratorium. The so-called administrator's report serves to inform the probate court about the progress of the debt restructuring moratorium and to present the debtor's financial situation. The administrator also informs the court about the intended debt restructuring agreement and the creditors' approvals of the debt restructuring agreement. The administrator's report serves as the basis for the probate court's decision to confirm or reject the debt restructuring agreement.
With his or her various roles, the administrator is an important player in probate proceedings. The requirements for the professional and personal qualities of an administrator are therefore high, as their work is crucial to the success of the probate proceedings.
A trustee must have in-depth knowledge of debt collection and bankruptcy law as well as contract law. At the same time, sound knowledge of finance and accounting as well as business administration is required. These skills enable the administrator to evaluate and develop economic restructuring concepts. They must be able to precisely analyze the debtor's financial situation and draw up realistic restructuring plans.
In addition to professional skills, certain personal qualities are essential for a successful trustee. Negotiating skills and the ability to resolve conflicts are essential, as the administrator often has to mediate between the different interests of debtors and creditors. A trustee must be able to act independently and objectively in order to make decisions in the best interests of all parties involved. This impartiality is crucial to gaining and maintaining the trust of all parties.
Diligence and accuracy in documentation and reporting are also of great importance. The administrator is obliged to prepare detailed reports on the progress of the proceedings and the debtor's financial situation. These reports serve as the basis for the decisions of the probate court and the creditors.
In addition, the administrator must have empathy and assertiveness. They must be able to respond to the concerns of the creditors and the debtor, while also ensuring that the necessary measures are implemented. This balance between understanding and determination is often the key to the creditors' trust in the debt restructuring proceedings and therefore also to the success of the restructuring.
Debt restructuring moratorium as an underused instrument?
As explained above, the debt restructuring moratorium in Switzerland is a valuable instrument for overcoming crises and the economic restructuring of companies that have fallen into a financial crisis. It enables the companies concerned to work out a restructuring plan together with a trustee by providing temporary protection against foreclosures.
A successful debt restructuring moratorium can avert bankruptcy, secure the economic survival of the company and minimize the damage to creditors. It therefore not only helps to stabilize the company, but also to safeguard jobs and business relationships. In this process, the trustee assists the parties in all phases as a supervisor, supporter, organizer and reporter.
However, a debt restructuring moratorium only makes sense if there are realistic prospects of restructuring and the debtor is willing to actively cooperate with their creditors. Furthermore, the debt restructuring moratorium procedure is complex and requires extensive knowledge and resources. Uncertainty about the success of a restructuring can reduce the willingness of creditors to participate in a debt restructuring moratorium.
Despite the challenges and complexities associated with the implementation of a debt restructuring moratorium, the debt restructuring moratorium is a valuable instrument of Swiss insolvency law.
On the one hand, creditors' interests are better protected, as the debt restructuring moratorium offers the opportunity to realize the company's assets in an orderly manner instead of having to sell them below value in a forced sale. This can increase the overall value of the liquidation and thus enable creditors to recover more of their claims.
On the other hand, the debt restructuring moratorium offers a unique opportunity to take the necessary restructuring measures to optimize the company with the aim of becoming and remaining competitive again in the long term. A successful restructuring through the debt restructuring moratorium can offer the company a long-term perspective. This creates trust among customers, suppliers and investors and enables the company to emerge stronger from the crisis.
In view of these advantages, a debt-restructuring moratorium should always be considered early enough if there are realistic prospects of restructuring. in our experience, this effective measure is usually considered too late by many boards of directors.
Balthasar Wicki and Vivien Keiser will be happy to answer any questions you may have on this topic.