Business bankruptcies are on the rise this year. Lawyer Ema Bolomey explains what to do in this situation, and how it affects customers and employees.
Business closures are expected to increase this year in Switzerland. Consultancy firm Dun & Bradstreet calculated 1,916 bankruptcies between January and May 2022, a 17% increase in comparison to the previous year. What should an entrepreneur on the verge of bankruptcy do? Which factors have to be taken into account during the process? What measures can be taken to avoid the definitive closure of your SME? Ema Bolomey, a lawyer from Lausanne and a specialist in this field, explains the key points to consider.
How is bankruptcy legally defined?
Ema Bolomey: Bankruptcy occurs when a company is over-indebted, i.e. when the value of its assets no longer suffices to cover its debts. In concrete terms, there are two main cases that trigger bankruptcy proceedings: when the Board of Directors (BoD) has serious reasons to believe that the company is facing overindebtedness, it must notify the court (Art. 725 CO). Bankruptcy can also be triggered following a lawsuit initiated by an external creditor. Finally, there is a third, rarer bankruptcy scenario due to the company's organizational shortcomings (art. 731b CO).
If bankruptcy is a possibility, what preparations should be made?
Bolomey: It is essential to react as quickly as possible, as soon as a loss of liquidity in the company becomes apparent. Art. 725 para. 1 OR requires the Board of Directors to convene a general meeting immediately and to propose restructuring measures as soon as the last annual balance sheet shows that half of the share capital and legal reserves are no longer covered. The reorganization measures may, for example, concern negotiations with suppliers or customers or, in some cases, postponement agreements for receivables. Sometimes it may also be necessary to consider the termination of employee contracts, in compliance with statutory terms and conditions for collective dismissals.
What steps should be taken to declare your business as bankrupt?
Bolomey: If a company becomes over-indebted, its Board of Directors is obliged to draw up an interim balance sheet and to have it audited by an accredited auditor (Art. 725 para. 2 CO). Should this show that the outstanding debts can no longer be repaid, the BoD must notify the district court judge where the company has its registered office. This applies to corporations (AGs), limited liability companies (GmbHs) and sole proprietorships. It should be noted that if the Board of Directors does not react, it can be held responsible and prosecuted for breach of duty or mismanagement of the company.
Can a business bankruptcy sometimes be averted through a settlement?
Bolomey:There are several means to this end. Postponement of bankruptcy corresponds to the postponement of the pronouncement of bankruptcy by the court, upon request of the BoD or a creditor, should the reorganization of the company still be possible in principle. In concrete terms, it is like pressing a pause button to give the company time to improve its accounting situation.
The composition moratorium is another tool at the disposal of a company in difficulty; it is based on an agreement with the creditors. Through a composition agreement, creditors can decide to waive all or part of their claims, to set payment deadlines or to accept to take over certain company assets or activities in compensation. This is a relatively complex procedure, which must be justified by producing various documents (cash flow, balance sheet) and a viable draft composition agreement.
What consequences does a bankruptcy have on the employer-employee relationship?
Bolomey: Contrary to what many employers assume, a bankruptcy proceeding does not automatically terminate employment contracts. These contracts remain in force and employees should continue to receive remuneration in exchange for their work. Unpaid wages accrue to the company's debts. Once bankruptcy is declared, the bankruptcy administration will be responsible for terminating employment contracts. If the employer is insolvent, employees can immediately terminate their contracts and receive a so-called "insolvency indemnity", which they can claim from the cantonal unemployment fund, subject to a strict procedure.
What are the main challenges of bankruptcy proceedings?
Bolomey: Bankruptcy raises a number of legal issues: Are the claims filed justified or not? Should contracts be revised? What measures should be taken with regard to employees? There are also certain actions that are prohibited before and during the bankruptcy proceedings. For example, a company that is doing poorly is not permitted to give preference to a creditor or sell assets at too low a value. In my opinion, legal advice is therefore essential prior to the bankruptcy proceedings. The same applies to the preparation of an application for an adjournment or a debt-restructuring moratorium, ideally with the support of a trustee for more complex cases.
Anticipation is key to preventing a company's predicament. If you find yourself in a situation of overindebtedness or insolvency, you must continue to be proactive by initiating urgent measures and be sure to document them (minutes of board meetings, contacts with creditors, etc.). Entrepreneurs who find themselves in this situation are often overwhelmed and lack perspective. This is why it is important to call on independent specialists, especially to negotiate the best possible agreements with the company's creditors.