Switzerland Update: Federal Act on Combating Abusive Bankruptcy

In this blog article, we present the most important legal amendments in relation to the newly adopted Federal Act on Combating Abusive Bankruptcy.

In March 2022, the Swiss Parliament adopted the Federal Act on Combating Abusive Bankruptcy with the aim of preventing debtors from using bankruptcy proceedings to escape from their financial obligations to the detriment of their creditors or to engage in unfair competition with other companies. For this purpose, various laws and ordinances will be amended and the new law is expected to come into force on January 1, 2024.  

The Problem of Abusive Bankruptcies

The current law allows an entrepreneur threatened with bankruptcy to quickly incorporate a new company. Debtors may sometimes abuse of this right in order to escape debts owed to their employees, suppliers or public authorities. These debts are then often assumed by social security insurances, in particular the unemployment funds. Shortly after the bankruptcy, these entrepreneurs incorporate a new company, rehire their employees and acquire (at low prices) the production tools and stocks that were part of the bankruptcy assets. As a result, these debtors harm their creditors, abuse the social security system, and gain a competitive advantage. Below, we present the main legislative amendments that have been adopted with the aim of directly or indirectly combating such abusive behaviours.

Amendments to the Swiss Code of Obligations (CO)

Under the current law, companies may, with the consent of all shareholders, waive the requirement of a limited audit (opting-out) if they employ a maximum of ten full-time employees on an annual average basis (Art. 727a para. 2 CO). The opting-out declaration is effective immediately and a retroactive opting-out is also allowed. Thus, if the opting-out declaration is made before the end of the six-month period following the end of the financial year and prior to the approval of the annual accounts, the company is no longer subject to the obligation to have the annual accounts of the last financial year audited. Some companies that are subject to a limited audit and have an auditor therefore use the retroactive opting-out when the auditor has raised concerns about the annual accounts or reported that the company is over-indebted in order to ignore those concerns or avoid taking the necessary steps required in the event of over-indebtedness.

The new law provides that the opting-out declaration is only valid for future financial years and that its registration in the Cantonal Commercial Registry Office must be filed prior to the beginning of the financial year (Art. 727a para. 2 nCO). In addition, the application for registration in the Commercial Register must be accompanied by a copy of the annual accounts of the last financial year (Art. 727a para. 2bis nCO). In other words, retroactive opting-out will no longer be possible and companies considering an opting-out for a given financial year will have to make the opting-out declaration in the preceding financial year. However, it will still be possible to make an opting-out declaration at the time of the company’s incorporation. It should be also noted that the Cantonal Commercial Registry Offices will be able to require the company to renew its opting-out declaration if the cantonal tax authorities inform them that the company has not filed annual accounts in accordance with the new Art. 112 para. 4 of the Federal Act on the Federal Direct Tax. The purpose of this provision is to ensure that the company, even if subject to a limited audit, continues to keep accounts and establish annual accounts that allow the company to assess its own economic situation and to take the necessary measures for its restructuring in due time if needed.

The new law provides that the transfer of a shell company (mantelhandel, manteau d’actions) shall be null and void if the company has no business activity or no assets of value and is also over-indebted (Art. 684a and Art. 787a nCO). The Swiss Federal Supreme Court, which has already recognised the nullity of such a transfer, considers the transfer of a shell company to correspond to the sale of shares of a company that has not yet been legally dissolved, but which has been economically liquidated and de facto abandoned by its shareholders. Such a transfer is often used to save the costs of liquidation and to avoid the provisions on deregistration and incorporation of a new company.

The new law also provides that, in the event of a justified suspicion of a transfer of shell company when applying for a registration, the competent Cantonal Commercial Registry Office must require the company to produce its latest signed annual accounts or its latest audited annual accounts, if the company has an auditor (Art. 684a para. 2 CO). Justified suspicion may arise in the case of significant changes that need to be registered in the competent Cantonal Commercial Registry Office, such as a complete change of the board of directors in combination with a change of the registered office, the purpose or the name of the company, or if the sale price of the shares in the transfer deed is very low or even symbolic. The Cantonal Commercial Registry Offices must refuse the registration if the company does not comply with the request to submit its annual accounts or if the annual accounts confirm the suspicion (Art. 684a para. 2 nCO). The new legislation also allows the Cantonal Commercial Register Offices to deregister companies that are no longer in business and do not have assets of value (Art. 684a para. 3 nCO, which refers to Art. 934 CO).

Finally, the new legislation provides for the possibility to search for persons in the Commercial Register (Art. 928b nCO). Such data will be available free of charge on the Internet, in particular on the websites of the Cantonal Commercial Registry Office. However, the new law will not be fully effective until the cantons have updated the central database of persons. The public will then be able to obtain an overview of a person’s economic history in the context of his/her activities subject to registration in the Commercial Register. It will thus be possible to identify the function(s) that the person exercises or has exercised, the legal entity(ies) in which he/she is or has been involved, and whether bankruptcy proceedings have been initiated against him/her. These searching possibilities will also serve the authorities in the performance of their duties. On the basis of available information, criminal judges will thus be able to issue a more precise prohibition for the exercise of an activity within the meaning of Art. 67 SCC (see below regarding the amendments to the Swiss Criminal Code).

Amendments to the Federal Debt Enforcement and Bankruptcy Act (DEBA)

Under the current law, if the debtor is subject to bankruptcy proceedings pursuant to Art. 39 DEBA, public law creditors are in principle not entitled to request the opening of bankruptcy proceedings but can only enforce their claims by way of a seizure of assets (Art. 43 ch. 1 and ch. 1bis DEBA). Cases of abuse show that this special feature encourages over-indebted companies not to pay public law debts (such as taxes or compulsory accident insurance contributions) and to settle only private law debts. As a result, these companies can continue to exist, and their bankruptcy is delayed or simply never occurs, even though they are insolvent. The new law provides for the abolition of Art. 43 ch. 1 and ch. 1bis DEBA. Consequently, public law claims will also be subject to bankruptcy proceedings.

The new legislation also contains provisions to strengthen cooperation between authorities. According to Art. 11 nDEBA, the officials of the bankruptcy offices will be obliged to report to the criminal prosecution authorities all crimes and offences prosecuted ex officio (i.e. without requiring a complaint) that they or their subordinates discover in the course of their duties or that are reported to them. In addition, any person acting on behalf of the bankruptcy offices will be entitled to report to the criminal prosecution authorities any offence discovered that should be prosecuted ex officio (Art. 11 para. 3 nDEBA). The criminal offences that may be reported are, for example, offences against property, such as criminal mismanagement (Art. 158 SCC), fraudulent bankruptcy (Art. 163 SCC), reduction of assets to the detriment of creditors (Art. 164 SCC) or failure to keep proper accounts (Art. 166 SCC).

Amendments to the Swiss Criminal Code (SCC)

Under the current law, a judge may prohibit a person who has committed a crime or an offence while performing a professional activity or an organised non-professional activity from exercising that activity or similar activities totally or partially (Art. 67 SCC). The new law provides for a broadening of the scope of application of the prohibition from exercising an activity. Currently, this prohibition applies only to activities that the offender engages in on a self-employed basis, as an officer of a legal entity or commercial enterprise, or as an agent or representative of a third party. According to the new law, the prohibition will be extended to any activity in a function that should be registered in the Commercial Register, which includes also de facto organs. In other words, a person acting as a de facto organ may be prohibited from exercising an activity and, consequently, be denied registration as a formal organ.

Provisions to strengthen the enforcement of this prohibition have also been introduced. Under the new law, the Federal Commercial Registry Office (FCRO) shall ensure that the central database of persons does not contain any registration that breaches the prohibition to exercise an activity in accordance with Art. 67 SCC (Art. 928a para. 2bis nCO). For this purpose, the FRCO must be informed of any prohibition measure ordered by cantonal criminal justice authorities, which will be required to notify the FCRO of their decisions without delay (art. 942 al. 3 CO). The FCRO will also have online access to required data of the criminal records (art. 47 let. e of the new Criminal Records Act). Finally, if the FCRO discovers any incompatibility, it must inform the competent Cantonal Commercial Registry Office (Art. 928a para. 2ter nCO), which must then order the legal entity to take any necessary measure (Art. 928a para. 2quater nCO).

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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