First Aid Kit for Companies

The board of directors as the supreme management body of a corporation has inalienable duties under Art. 716a OR, which it continues to be ultimately responsible for even if such tasks are delegated to management. In financially difficult times, the ultimate direction and supervision of the company, the determination of its organization and management as well as the design of accounting, financial control and financial planning are of the utmost importance. In order to successfully navigate through times of crisis and thus preserve jobs, the board of directors must also safeguard liquidity, strengthen profitability through restructuring, control costs, adjust liabilities and ensure sufficient equity capital.

In addition, the board of directors has a concrete duty to perform restructuring if the company suffers a capital loss, i.e. if the loss exceeds half of the equity capital (consisting of the share capital, the open reserves and the profit carried forward). If the loss exceeds the total equity of the company, the company is overindebted, and the board of directors must immediately notify the bankruptcy judge if no measures can be taken to remedy the overindebtedness immediately.

Below is a list of measures that can be taken to strengthen a company's finances, which can be implemented individually or in combination as required. However, effective 20 April 2020, the Federal Council enacted the COVID-19 Ordinance on Insolvency Law, which modifies the provisions on capital loss and overindebtedness (more on this in our separate newsletter).

Measures Relating to Liabilities and Debt

• Short-time work: Short-time work is intended to compensate for temporary employment slumps and preserve jobs. The short-time work compensation is paid out to employers, who are obliged to advance the compensation and pay their employees' wages on the regular payday. In view of the current extraordinary economic situation, the Swiss Federal Council has taken various measures to enable compensation for short-time work to be processed more quickly. The planned short-time work must be notified in writing to the competent cantonal office (in many cantons this is possible by e-mail). The notification and waiting period for short-time work compensation has been lifted and employees no longer have to use up their accrued overtime hours in advance. Shareholders or other financially involved parties as well as senior executives and their assisting spouses or registered partners are now also entitled to compensation for short-time work. In addition, employers can now request advance payment of wages due – which is particularly important for companies with liquidity problems – in order to be able to pay their employees on time.

• Rent reductions: Whether tenants can demand a reduction of rent due to the current circumstances is a matter of debate. The voices in favor of a reduction argue that the rented property is no longer suitable for the contractually agreed use, while others argue that the measures taken by the Federal Council, which are now causing a reduction in turnover, constitute an operational risk which is within the sphere of the tenant and must therefore also be borne by the tenant. However, since the landlord will have no interest in having a tenant go bankrupt (in particular because rent claims are not privileged in a bankruptcy and there is therefore a high risk of default, and because the property is then threatened with vacancy), the negotiation of an amicable solution between the parties appears to be the best way forward. The Federal Council has therefore set up a task force with various landlord and tenant organizations to clarify such issues in order to avoid a flood of court cases.

• Subordinations and subordination agreements: Corporate creditors can declare that their claim or parts thereof are subordinated to other liabilities of the company. From an economic point of view, subordinated claims are then placed between senior debt and equity. In case of subordination (Rangrücktritt), the creditor declares towards the company that its claim is subordinated to all other claims to the extent of the company's overindebtedness. In this way, the legal obligation to file for bankruptcy without delay can be avoided. In a subordination agreement (Nachrangvereinbarung), on the other hand, subordination is not declared in relation to all other claims, but only in relation to specific claims, often those of a bank as lender. Such subordination agreements are useful for the company to be able to take out further, senior loans.

• Bridge loans: Bridge loans help to solve short-term liquidity problems. The Federal Council, in cooperation with Swiss banks, has drawn up the COVID-19 Solidarity Guarantee Ordinance, which will enter into force on 25 March 2020. The Ordinance creates the framework conditions for simplified and accelerated lending for companies being existing clients of a bank participating in the program. The focus is on a guarantee program worth over CHF 20 billion. Companies with liquidity bottlenecks are to be provided with guaranteed bridge loans of up to 10 percent of their turnover and up to a maximum of CHF 20 million. Loans of up to CHF 500,000 will be granted in a standardized procedure and 100% guaranteed by the Swiss Confederation (COVID-19 credit). Further loans of over CHF 500,000 and up to CHF 19,500,000 can be applied for in a simplified approval procedure and are 85% guaranteed by the Confederation if approved (COVID-19 credit plus). This means that a company can apply for a loan of up to CHF 20,000,000 from the banks in accordance with the provisions of the COVID-19 Solidarity Guarantee Ordinance.

• Deferred payment of social security contributions: Social security contributions (OASI/DI/EL/ALV) can now be deferred without interest. In addition, companies have the option of adjusting the amount of contributions on account to the OASI/DI/EL/ALV if the total of their wages decreases.

• Deferred payment of taxes: Between 1 March 2020 and 31 December 2020, no default interest will be charged on all federal taxes, levies and customs duties, which includes direct federal taxes, VAT, withholding tax, customs duties and levies. The deferral of payment only applies to federal taxes. However, we expect that many cantons will also grant an interest-free deferral for state and municipal taxes. Most cantons have already announced that they will treat requests for deferral and payment by instalments generously.

• Deferral of debts under private law or waiver of claims: If a company suffers from low liquidity, negotiations can be launched with its creditors in view of a temporary deferral of debts or even a full or partial waiver of claims. In return, creditors can be offered, for example, debtor warrants, profit participation certificates (Genussscheine) or the option to invest in the company ("equity kicker"). Profit participation certificates (Genussscheine), for example, entitle the holder to a share of future profits without the holder having voting rights. Companies are largely free to decide how profit participation certificates should be structured and therefore have a great deal of freedom.

• Debt restructuring: In groups of companies, debts can be restructured in such a way that profitable or financially better off group companies take over the liabilities of struggling companies.

• COVID-19 deferral for SMEs: The Federal Council introduced the new COVID-19 deferral as of 20 April 2020. SMEs can submit an application to the competent court for a simplified debt-restructuring deferral procedure in order to protect themselves from debt enforcement and other actions by their creditors while they implement restructuring measures. The prerequisite is that the SME in question was not over-indebted as of 31 December 2019 or that creditors had subordinated their claims to the extent of the capital deficit. The COVID-19 deferral lasts for three months and can be extended one time for another three months. During the COVID-19 deferral, the company can continue its business activities provided that the legitimate interests of creditors are not affected. However, whether the COVID-19 deferral makes sense for an SME depends on many factors, especially since the deferral is made public by the court and can therefore have a negative impact on business activities.

Measures relating to equity:

• Capital increase: A capital increase provides the company with new equity and can be carried out with cash, with a contribution in kind or by converting debt into equity ("debt/equity swap"). The last variant, the conversion of debt capital into equity capital, does not provide the company with new funds, but frees it from debts and strengthens its equity capital. In the case of capital increases, preferred shares can also be created, which give the new shareholders advantages such as preferential dividend or liquidation rights, and thus provide the necessary incentives for providers of equity capital.

• Capital reduction: A capital reduction can lead to an improved balance sheet and thus also facilitate the raising of new equity. On its own, however, a capital reduction is not enough and is only useful in conjunction with other measures.

• Capital cut: In a capital cut, the share capital is reduced and immediately increased again. Thus, already used up share capital is replaced by new capital. If the share capital is increased again to the same amount as the original share capital, the company can take advantage of a simplified procedure under company law.

• Contribution to the reserves: By means of a contribution to the capital contribution reserves, shareholders inject new equity into the company without having to carry out a capital increase. Capital contribution reserves that have been confirmed for tax purposes can be repaid to shareholders tax-free. Like profits, these reserves are to be paid out to all shareholders in proportion to their holdings in the company. If the company is held by more than one shareholder, each shareholder would in principle have to make a contribution to the capital contribution reserves to the extent of his or her previous capital participation, otherwise the shareholders who do not contribute would be enriched by the contributions of shareholders who do. This problem is irrelevant in the case of companies held by a sole shareholder.

• Participation capital (Partizipationskapital): The creation of participation capital provides the company with new equity. However, the holders of participation certificates (Partizipationsscheine) have no voting rights. This enables the company to recapitalize without changing the structure of shareholders' voting rights.

• Restructuring merger: In a restructuring merger, a struggling company is merged with a financially healthy company. The acquiring company must have sufficient freely disposable equity capital to cover the capital loss or overindebtedness of the company it acquires. This can be an efficient restructuring measure especially in the case of group restructurings.

• Revaluation of assets and revaluation reserve: If the company shows a capital loss, land or investments whose real value has risen above the acquisition or production cost may be revalued. In return, the corresponding amount must be booked as a revaluation reserve in the company's equity. The auditor must then confirm to the general meeting of shareholders that the legal provisions governing revaluation have been complied with.

This list is not exhaustive, and there are other measures available in the first-aid kit of a company. The obligations mentioned at the beginning also apply to the managing directors of a limited liability company, and the measures listed can also be applied to limited liability companies to a large extent.