Struggling Mergers and Acquisitions: Swiss Companies May Use ‘Composition Procedures’ to Stay in Business During Crisis and Save Profitable Business Parties


The COVID-19 crisis is causing financial hardship for many businesses. Often times, bankruptcy seems to be the only way out. Based on the characteristics of US Chapter 11 procedures, the Swiss restructuring law was revised in 2014 in order to make judicial composition procedures more efficient.

The composition procedure allows companies to continue their activities and is a preferable alternative to the bankruptcy procedure, which can lead to the destructive breakdown of an entire company. Particularly in the current crisis, where financially healthy companies find themselves in economic difficulty without having anything to do with it, the composition procedure can be a promising alternative which makes it possible to preserve many jobs.

Unfortunately, despite the considerable advantages it offers, restructuring by way of composition is still little used.

The legal basis for the composition procedure is found in art. 293 and following. of the Federal Debt and Bankruptcy Law (Bundesgesetz über Schuldbetreibung und Konkurs). Companies in financial difficulty initiate composition proceedings by filing petitions with a competent court. Along with a request, the company concerned must present its income and assets. He must also submit a restructuring plan, which describes the restructuring measures envisaged (for example, the sale of profitable parts of the business).

Above all, neither the over-indebtedness nor the insolvency of the company is a prerequisite for such a request. Debtors are encouraged to initiate composition proceedings as soon as possible, as early opening increases the chances of a successful restructuring. Experience shows, however, that most debtors are reluctant and wait until the company is over-indebted or insolvent before initiating composition proceedings.

After the opening of the procedure and provided that the legal conditions are met, the court grants a provisional moratorium (Provisional Nachlassstundung). Since a company’s restructuring efforts may be jeopardized if its need for restructuring is revealed, there may be no public announcement during the interim moratorium in justified cases.

In most composition procedures, a provisional moratorium is accompanied by the appointment of a administrator (Sachwalter) who will conduct the moratorium procedure and assess the prospects for restructuring. The administrator also monitors the actions of the debtor.

As a restructuring measure, the administrator has the right to agree to the extraordinary termination of long-term contracts, such as leases. This measure reduces the company’s high fixed costs.

During the second phase of the moratorium – the the final moratorium procedure (Definitive Nachlassstundung) – the administrator prepares in most cases the composition (Nachlassvertrag), which is subject to approval by creditors. A composition agreement will directly restructure the business (often associated with a waiver or partial waiver of creditors’ claims) or initiate the liquidation of the business, especially after a profitable part of the business has been transferred and thus “saved. “of insolvency.

Rescue profitable commercial parts

Profitable parts of a financially troubled business can be transferred to a salvage business or to a third party. Often these sales take place during the interim moratorium by means of a asset agreement, which covers, among other things, the transfer of goods, financial assets and intellectual property rights. In addition, the Company’s contractual agreements with third parties (eg rental and service contracts) may also be subject to such transfer.

Special rules apply to employees: with regard to transfers of businesses outside of insolvency proceedings, labor relations are transferred to the purchaser. ex lege. In order to facilitate the restructuring and the continuation of profitable parts of the company, when business transfers are carried out during a composition procedure, the law allows the purchaser to take over only part of the employees ( what is called “cherry picking”). Likewise, the joint and several liability of the purchaser for employee receivables due before the transfer does not apply in asset transactions during a moratorium period.

In principle, the parties to an asset transfer are free to negotiate the purchase price. However, in practice, the determination of the purchase price is often results-oriented. With the proceeds of the sale and the existing assets of the business, the privileged claims (eg employee claims) must be fully covered. In addition, when determining a purchase price, the administrator should ensure that non-privileged creditors receive a higher dividend than in bankruptcy proceedings. The corresponding dividend in composition procedures is generally between 10% and 20%.

A number of approvals are required for the completion of the asset transaction. In addition to the approval of the management bodies of the parties, the approval of the shareholders may also be required if the sale of the company (or part of the company) leads to the de facto liquidation of the company in difficulty. financial. For the transfer of company contracts to third parties, the consent of the respective contract counterparty is required, although in practice explicit consent is only obtained for large contracts.

If fixed assets (Anlagevermögen) are to be transferred under the transfer of assets, the approval of the competent court or the creditors’ committee is required. While obtaining such approval may take time, the advantage to the acquirer is that the purchase price can no longer be claimed back on the grounds that it is allegedly too low.

Uncertainty regarding VAT obligations

A recent decision by the Federal Supreme Court has created uncertainty in the restructuring industry. The Federal Supreme Court has considerably extended the tax succession for VAT debts in connection with the acquisition of companies. According to the case law of the Federal Court, the buyer is responsible for outstanding VAT debts in the event of a business transfer. The decision in question was not rendered in the context of judicial restructuring proceedings. For this reason, it remains uncertain whether liability for VAT debts also applies to business transfers in the context of a composition procedure. If this were the case, tax succession could significantly jeopardize any restructuring enterprise.

As explained above, profitable parts of a business can be saved by selling them during a composition process. It would be regrettable if the case law of the Federal Court on fiscal succession for VAT obligations undermines such commitments. An immediate clarification of the legal uncertainty created by the Federal Court is essential. The Swiss Tax Administration is currently evaluating an interpretation guideline for the applicability of the new case law of the Federal Court to business transfers.

This publication is based on an article recently published in German in the Swiss newspaper ‘Neue Zürcher Zeitung’.


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