Foreward by Andrew Chilvers
Insolvency and restructuring legislation changed radically in all jurisdictions in the wake of COVID-19. While governments have tried to delay the number of insolvencies in the short term, most experts agree that distressed businesses will start to fail significantly later this year and into 2021.
For insolvency practitioners and lawyers alike, the pandemic has posed problems that have not been seen on a global scale in more than 100 years. Many businesses have faced sudden and catastrophic closures along with the evaporation of their revenue as emergency lockdowns have been implemented across all jurisdictions in an attempt to control the virus.
And now as lockdown measures have eased around the globe, those companies still functioning may well be tipped over the edge into insolvency by the loss of trade during and post the pandemic. No surprise then that later this year, the number of company insolvencies and liquidations is predicted to soar.
This provides the challenge for insolvency professionals; how to retain value and restructure decent businesses that were robust and profitable before March, while allowing zombie businesses to naturally fail?
Are different governments introducing new legislative or country regimes that allow for restructuring over liquidation? There is no legislation that allows restructuring, so how does it preserve its economic value?
As part of the emergency measures taken by the Swiss Federal Council to counter the negative impact of the COVID-19 pandemic on the Swiss economy, the COVID-19 Solidarity Guarantee on the granting of loans and joint and several guarantees and the COVID-19 Insolvency Ordinance have been enacted with effect as of 25 March respectively 16 April 2020 (the “Insolvency Ordinance”).
On the one hand, the Insolvency Ordinance provides for temporary relief from the obligation of the directors of the debtor to submit a notification of over-indebtedness and, on the other, the possibility of a temporary and unbureaucratic so-called COVID-19 deferral for small and medium-sized enterprises is introduced. What both regulations have in common is that they are only temporary in nature and aim to protect those companies from bankruptcy, which run into liquidity bottlenecks solely as a result of the Corona crisis (The Ordinance expires six months after its enactment).
If there is no concrete prospect of remedying the over-indebtedness, a debt-restructuring moratorium can still be applied for in accordance with the already existing legal regulations. However, the relevant provisions have been temporarily relaxed slightly (in particular the debtor’s ability to reorganize is not examined by the insolvency court when granting the moratorium phase and the total duration of the provisional moratorium phase is six months).
The enacted Insolvency Ordinance should not result in increased risk for insolvency practitioners (in particular in their function as administrators). Insolvency proceedings are still initiated by a provisional moratorium phase, during which administrators can familiarise oneself with the debtor’s financial situation and its business. In general, the debtor may continue his business activities under the supervision of the administrator unless the insolvency court orders otherwise. Consequently, even after insolvency proceedings have been opened, the main risk remains with the directors and not the administrator.
Do “rushed through” insolvency measures address both large enterprises and small and medium-sized companies? Is there legislation pending to address this in your jurisdiction?
For the measures and legislation implemented, see above. As already set out, some of the corona-related insolvency measures are specifically targeted at small and medium-sized companies. In principle, however, Swiss insolvency law makes no distinction between large enterprises and small and medium-sized companies. Certain protective mechanisms are only implemented in larger proceedings, though (e.g. creditors’ committees, restrictions on the realisation of insolvency assets).
It is currently being proposed within the context of a general revision of Swiss corporate law, to amend certain obligations of the directors so as to force them to take restructuring actions at an earlier stage. The current triggering points for the directors to initiate restructuring proceedings are the loss of capital and over-indebtedness. In future (such rules are not currently expected to enter into force before 2022) directors are also obliged to initiate restructuring proceedings if certain liquidity ratios are no longer met. In this context, it is also proposed to extend the maximum term of a silent moratorium (not published) from four to eight months. These amendments are subject to parliamentary discussion and may still change in parts.
With the “light touch administration” processes now being implemented in different jurisdictions, does this give too much power back to directors? What are the potential risks for the office holder?
The measures and legislation implemented or pending in Switzerland do not entail “light touch administration” processes. They aim of the measures implemented is to provide some breathing space to avoid unnecessary insolvency or even bankruptcy proceedings and to simplify certain aspects of the application process for a moratorium.