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Pre-insolvency restructurings on the rise in Switzerland

By Alessandro Farsaci & Jörg Kilchmann
Posted: 13th March 2015 09:56
The legal framework for corporate restructuring and turnaround situations in Switzerland is expected to undergo further changes.  The preliminary draft bill on the revision of Swiss corporate law of 28 November 2014(1) that is currently in its consultation phase provides for a further strengthening of the early warning system of companies.  It is still early in the process and the draft bill on the revision of Swiss corporate law may undergo further changes but once enacted it will help to identify (di-)stressed situations at an earlier stage of a company crisis.  In combination with the amendments to the Swiss Debt Enforcement and Bankruptcy Law that entered into force on 1 January 2014, the legal framework in Switzerland will provide a significantly improved procedure and it is fair to state that successful pre-insolvency turnarounds are expected to increase.
Strengthening the Early Warning System in the Swiss Corporate Law Reform
The comprehensive reform of the Swiss corporate law was initiated in 2007 and its reform process was deferred due to a federal popular initiative against excessive compensation to board members and company management (“Volksinitiative gegen die Abzockerei”).  Following the approval of this broadly debated initiative, the draft bill on the revision of Swiss corporate law was amended to include the wording of the initiative. 
One of the main goals of the restructuring related amendments in the draft bill is to strengthen the companies’ early crisis detection systems.  According to the current wording in the bill, members of the board of directors (BoD) shall be imposed with the duty to prepare a cash flow forecast for the next 12 months if there is a reasonable doubt, that the entity remains solvent over the next 12 months, i.e. the going-concern of the company is at risk due to potential cash shortfalls.  The cash flow forecast may take into account the restructuring measures elaborated by the BoD.  Where the cash flow forecast leads to a positive outlook (i.e. the company remains solvent), the BoD has to engage a licensed audit expert with the review and assessment of the forecast.  However, if the cash flow forecast indicates a potential cash shortfall or if according to the licensed audit expert’s review the forecast is not plausible, the BoD must convene for a general meeting of the shareholders and propose restructuring measures within due time accordingly.  Pursuant to current law, the only mandatory legal trigger that obliges the BoD to convene a general shareholders assembly and to propose restructuring measures or to declare bankruptcy at the court are capital losses (defined as loss of part of the shareholder’s equity) and over-indebtedness (defined company assets valued on a going-concern basis or at liquidation values are lower than total liabilities).  By experience, balance sheet analysis is usually a weak crisis detection indicator, since a company can generate (cash) losses and still survive by consumption of its assets.  Therefore, by emphasising the liquidity component the proposed mechanism not only enables companies to detect company crises before it is too late but also forces the BoD to elaborate and implement restructuring measures at an earlier stage of a company crisis.  This generally provides more room for manoeuvre and preserves company values for shareholders and lenders. 
Introduction of a chapter 11-like procedure as of 1 January 2014
One of the main amendments to the Swiss Debt Enforcement and Bankruptcy Law that entered into force on 1 January 2014 was the introduction of a proceeding similar to the Chapter 11 proceeding known from the US.  This change represents one of the most important changes of the last years in the legal restructuring framework of Switzerland.  The new procedure allows companies in troubled situations to benefit from a provisional moratorium for the debtor for a period of four months, under which claims against the company cannot be enforced.  For stakeholders that are willing to support the stabilisation of a troubled company and its subsequent potential going-concern, legal certainty is provided regarding agreements that are entered into by the company with its counterparties (e.g. lenders) within such controlled procedure.  In cases where the company chooses to avoid publicity of the proceeding, which in most cases is critical success factor for a turnaround, the debtor can apply to renounce on publication of the proceeding (this is the exception of the rule).  In this case, an external administrator appointed by the court will supervise the overall company.  However, where the company does not apply to renounce on publication the new procedure basically provides a kind of self-administration (management can stay in place).  During the four-month period the final restructuring plan shall be elaborated by the company.  Apart from the “silent moratorium”, the procedure enacted on 1 January 2014 sets forth the possibility to terminate long-term agreements (e.g. lease agreements) if such a termination helps to safe a distressed company.  In addition to that, the new law also allows that only a selection of employees have to be taken over by a new company which are promising and powerful options for many restructuring situations. 
Alessandro Farsaci, CFA
+41 58 249 47 92
Alessandro is a Senior Manager in the Swiss Restructuring Team and joined KPMG in March 2014 after having previously worked for many years in restructuring advisory and in the credit recovery department of a large Swiss bank. 
He has worked on a broad range of national and international restructuring projects from distressed corporate advisory (turnaround), short term cash flow advisory, financial restructuring and stakeholder advisory on distressed suppliers.  He has many years of experience in credit recovery from lender (bank) perspective. 
Jörg Kilchmann
+41 58 249 35 73
Jörg is a Partner and is Head of the Mergers & Acquisitions Legal Practice Group of KPMG.  He has advised Swiss and foreign corporate clients on insolvency and restructuring projects and has coordinated various international engagements.  He has been in charge of advising creditors in debt collection.  Jörg is highly experienced in the management of complex international projects involving foreign jurisdictions and he is at ease working in a multidisciplinary environment along with experts of other disciplines (e.g. tax, audit, transaction services and corporate finance).
Prior to joining KPMG, Jörg worked as a legal counsel for a listed Swiss industry group practicing in Switzerland and New York.  An earlier engagement at a District Court allowed him to gain first experiences with the bankruptcy law in Switzerland.
About KPMG
KPMG is one of the world’s leading providers of audit, tax and advisory services with over 155,000 people in 155 countries.  By combining multidisciplinary teams of experienced advisors from different areas, KPMG provides comprehensive services along all stages of the company lifecycle including turnaround management, financial restructuring, reorganization, performance improvement and in the acquisition of (di-)stressed assets.

(1)(see announcement of the Federal Council in Switzerland dated 28 November 2014:

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